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

EBA Report Assesses Regulatory Framework for Fintech Activities

EBA published the findings of its analysis on the regulatory framework applicable to fintech firms when accessing the market.

July 18, 2019 WebPage Regulatory News
News

OSFI Revises Capital Requirements for Operational Risk for Banks

OSFI is revising its capital requirements for operational risk, in line with the final Basel III revisions published by BCBS in December 2017.

July 18, 2019 WebPage Regulatory News
News

OSFI Consults on Revised Principles for Management of Liquidity Risk

OSFI proposed revisions to Guideline B-6 on the principles for the management of liquidity risk.

July 18, 2019 WebPage Regulatory News
News

ESMA Guidance on Disclosures for Credit Rating Sustainability Issues

ESMA published the technical advice on sustainability considerations in the credit rating market, along with the final guidelines on disclosure requirements applicable to credit ratings.

July 18, 2019 WebPage Regulatory News
News

FASB Issues Q&A on Estimation of Expected Credit Losses by Firms

FASB issued a second question-and-answer (Q&A) document that addresses more than a dozen frequently asked questions related to the Accounting Standards Update No. 2016-13 titled “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

July 17, 2019 WebPage Regulatory News
News

US Agencies Delay Enforcing Volcker Rule Restrictions on Foreign Funds

US Agencies (FDIC, FED, and OCC) announced that they will not take action related to restrictions under the Volcker Rule for certain foreign funds for an additional two years.

July 17, 2019 WebPage Regulatory News
News

SRB Announces SRF Receives Cash Injection, Grows to EUR 33 billion

SRB announced that the Single Resolution Fund (SRF or the Fund) received a cash injection of EUR 7.8 billion from 3,186 institutions in 2019, bringing the total amount in the Fund to about EUR 33 billion.

July 17, 2019 WebPage Regulatory News
News

FASB to Propose to Delay CECL Compliance Deadline for Certain Entities

FASB published a summary of the tentative decisions taken at its Board meeting in July 2019.

July 17, 2019 WebPage Regulatory News
News

IMF Publishes Report on 2019 Article IV Consultation with Vietnam

IMF published its staff report in context of the 2019 Article IV consultation with Vietnam.

July 16, 2019 WebPage Regulatory News
News

European Parliament Elects Next President of European Commission

European Parliament elected Ursula von der Leyen from Germany as the first female President of the next European Commission for a five-year term from November 01, 2019.

July 16, 2019 WebPage Regulatory News
RESULTS 1 - 10 OF 3476