The International Swaps and Derivatives Association (ISDA) announced launch of digital regulatory reporting (DRR 1.0) model, conducted a survey on climate risk and scenario analysis in the trading book, published a report on sustainability-linked derivatives, and submitted its response to the UK consultation on digital assets.
Below are the key highlights of the recent updates:
- ISDA launched the full open-source version of the Digital Regulatory Reporting (DRR 1.0) model and opened access to ISDA members and non-members to support compliance with the US Commodity Futures Trading Commission’s (CFTC) amended swap data reporting rules. The Digital Regulatory Reporting tool provides market participants with a mutualized industry interpretation of the rules in human-readable, machine-executable code that firms can use as the basis for implementation or to check their own interpretation of the rules is consistent with the peer-reviewed industry version. The launch of DRR 1.0 follows the successful implementation and testing of the initiative by BNP Paribas, which used the DRR in a real-world, production-level environment to submit data required under the revised CFTC rules to the Depository Trust & Clearing Corporation’s swap data repository testing simulator. CFTC is the first regulator to amend its swap data reporting framework to incorporate new international data standards, with the initial round of changes due to come into effect on December 05, 2022. ISDA estimates that approximately 70% of the coded CFTC rules can be transferred directly to the DRR that is being developed for Europe, while 90% of the combined coded US and European rules could be applied for rule changes in Asia-Pacific.
- ISDA and EY conducted a survey of ISDA members to provide a better understanding of the maturity of firms’ approaches to climate risk and scenario analysis in the trading book. The survey reflects responses from 18 banks that have a global footprint across nine countries and five regions, including fourteen global systemically important banks and three domestic systemically important banks. The survey results show that most banks are completing climate risk scenario analysis and intend to develop their capability this year and into 2023, with focus on the trading book. The assessment of climate risks in the trading book is expected to evolve alongside scenario analysis capabilities. Climate risk is not viewed as a new type of risk for the trading book, but mostly as a driver of existing risks. The scope of trading book inclusion in regulatory exercises has so far been limited, which has resulted in a variety of approaches to the categorization of portfolios and application of shocks. Thus, banks highlight a need for greater standardization and data availability and see regulators playing a key role.
- ISDA published a report on sustainability-linked derivatives, which summarizes information related to sustainability-linked derivatives structure and defining key performance indicators for environmental, social and governance (ESG) targets, achieving the ESG target, including payment, sustainability premium and non-payment, early termination of the underlying derivatives transaction, contractual provisions involving third-party verification entities, and contractual provisions related to ESG rating entities. The report also proposes a path forward for standard sustainability-linked derivatives documentation that aims to strike an appropriate balance between enhancing trading efficiency and maintaining the ability to tailor transactions to meet specific sustainability objectives. ISDA also published a whitepaper that analyses two categories of sustainability-linked derivatives in the context of the derivatives regulatory framework in Japan. The paper considers whether sustainability-linked derivatives would be classified as over-the-counter (OTC) derivatives transactions or as OTC commodity derivatives transactions, how OTC derivatives are regulated, and what compliance issues market participants should consider when executing sustainability-linked derivatives.
- ISDA submitted its response to the UK Law Commission’s consultation on digital assets, which notes the importance of achieving greater legal certainty and offers feedback on the Law Commission’s proposal for the law of England and Wales to recognize “data objects” as a third category of personal property. The response highlights certain boundary issues that should be considered when developing the precise criteria for this new category, including in relation to voluntary carbon credits. The response also provides feedback on certain other questions relating specifically to the transfer and custody of digital assets.
- Press Release on Digital Regulatory Reporting
- ISDA and BNP Paribas DRR Implementation
- Digital Approach to Reporting
- Survey on Climate Risk Scenario Analysis
- Report on Sustainability-Linked Derivatives
- Sustainability-Linked Derivatives: Japan Analysis
- ISDA Response to Consultation on Digital Assets
Keywords: International, Japan, Asia Pacific, Banking, Securities, ESG, Climate Change Risk, Reporting, Scenario Analysis, Sustainability Linked Derivatives, Digital Assets, Digital Regulatory Reporting, Trading Book, OTC Derivatives, Carbon Credit, CFTC, BNP Paribas, ISDA
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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