Featured Product

    ISDA Publishes Guidelines for Smart Derivatives Contracts

    January 30, 2019

    ISDA published the first in a series of "legal" guidelines for smart derivatives contracts. The guidelines outline some potential smart derivatives contract models, set out principles for the development of smart derivatives contracts, and identify contractual and documentation issues that may be relevant in the development and implementation of new technology platforms, products, and solutions for use within the derivatives industry.

    The guidelines are not intended to specify or recommend any particular approach, or address any particular technological application or project. Rather, they are intended to provide high-level guidance on the legal documentation and framework that governs derivatives trading and to point out certain issues that may need to be considered by technology developers when introducing technology into that framework. The guidelines establish that smart derivatives contracts do not necessarily need distributed ledger technology (DLT) to function and the adoption of smart derivatives contracts could be facilitated through other technology solutions. However, DLT is well-suited to the implementation of smart contract technology. These guidelines, therefore, assume that many smart derivatives contract models and applications may make use of DLT in some form.The paper establishes the following four principles in the development of smart derivatives contracts:

    • Smart derivatives contracts should be compatible with existing standards.
    • Only those parts of a derivatives contract that are capable of being automated should be considered.
    • Effective automation should be based on legal validation.
    • Only those parts of a derivatives contract where there exists sufficient benefit in automating should be considered for automation.

    The guidelines also outline the considerations for technology developers. The application of technology solutions to ISDA documentation raises some interesting questions about the precise boundaries of the single agreement architecture. One of the most fundamental questions is whether computer code might ultimately form part of the single agreement. The single agreement approach ensures that each party has a single legal relationship and financial exposure to its counterparty. Where the technology application is designed to record transaction data, it will be important to consider whether this data or any data outputs (for example, settlement records) should be considered part of the single agreement. A potential consequence of data sitting outside the single agreement construct is that it may not be admissible for construction of the overall legal and contractual relationship in the event of a dispute or close out. ISDA guidelines specify that, in designing technology enabled solutions for the trading or processing of derivatives, technology developers should work with their legal advisers to understand the various points of connection between each of the documents, take account of legal relationships created with any third parties, and consider how the solution may impact upon the entirety of the contractual relationship.

     

    Related Links

    Keywords: International, Banking, Securities, Regtech, Derivatives Contracts, Smart Contracts, Distributed Ledger Technology, Guideline, ISDA

    Related Articles
    News

    HKMA Consults on Supervisory Policy for OTC Derivatives Transactions

    HKMA is consulting on revisions to the Supervisory Policy Manual module CR-G-14 on margin and other risk mitigation standards for non-centrally cleared over-the-counter (OTC) derivatives transactions.

    May 25, 2020 WebPage Regulatory News
    News

    PRA on Regulatory Capital and IFRS 9 Requirements for Payment Holidays

    PRA provided further information on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges arising from COVID-19 outbreak.

    May 22, 2020 WebPage Regulatory News
    News

    HKMA on Fintech Adoption and Innovation by Banks in Hong Kong

    HKMA announced the publication of a report on fintech adoption and innovation in the banking industry in Hong Kong.

    May 20, 2020 WebPage Regulatory News
    News

    BIS on Impact of Increasing Use of Cloud Technology on Cyber Risk

    BIS published a working paper that examines the drivers of cyber risk, especially in context of the cloud services.

    May 20, 2020 WebPage Regulatory News
    News

    ECB Consults on Guide for Managing Climate and Environmental Risks

    ECB launched consultation on a guide specifying how the Banking Supervision expects banks to consider climate-related and environmental risks in their governance and risk management frameworks and when formulating and implementing their business strategy.

    May 20, 2020 WebPage Regulatory News
    News

    ECB Issues Opinion on Revisions to CRR in Response to COVID Crisis

    ECB published an opinion (CON/2020/16) on amendments to the prudential framework in EU in response to the COVID-19 pandemic.

    May 20, 2020 WebPage Regulatory News
    News

    EBA Assesses Interlinkages Between Recovery and Resolution Planning

    EBA published a report that examines the interlinkages between recovery and resolution planning under the Bank Recovery and Resolution Directive (BRRD).

    May 20, 2020 WebPage Regulatory News
    News

    SRB Publishes Final MREL Policy Under the Banking Package

    SRB published the final Minimum Requirements for Own Funds and Eligible Liabilities (MREL) policy under the Banking Package.

    May 20, 2020 WebPage Regulatory News
    News

    US Agencies Amend Interim Final Rule on Transition Period for CECL

    US Agencies (FDIC, FED, and OCC) published a final rule that makes technical changes to the March 31, 2020 interim final rule that provides a five-year transition period for the impact of the current expected credit loss (CECL) methodology on regulatory capital.

    May 19, 2020 WebPage Regulatory News
    News

    ECB Releases Results of March Survey on Credit Terms and Conditions

    ECB published results of the March 2020 survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.

    May 19, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 5208