ISDA Whitepaper on Market Infrastructure
On September 15, 2016, the International Swaps and Derivatives Association, Inc. (ISDA) published a paper, The Future of Derivatives Processing and Market Infrastructure in order to address the need for greater automation and streamlining of the reporting, trading, clearing and collateral management processes.
In this paper, ISDA first describes the infrastructure challenges facing the derivatives industry at the pre-trade, trade execution (validation, trader-routing and trade maintenance), post-trade stages and in relation to collateral management and reporting. Through this description, ISDA shows that greater standardization, collaboration and technology could benefit the current infrastructures and enhance overall efficiency.
ISDA identifies a number of opportunities for greater standardization and automation and particularly highlights three areas where further standardization can be achieved: documentation, data and processes.
On documentation, ISDA believes that greater standardization can be achieved and offers its help to market participants in reaching agreement on more appropriate levels of standardization and incorporate revised, more standardized documents, into new versions of relationship documentation, such as Master Agreements and Credit Support Annexes.
On data, the whitepaper further recommends the adoption of a standard, multi-use derivatives product identifier as a key requirement for reducing duplication and inconsistency, as well as unique trade identifiers (UTIs), that are used consistently. ISDA previously published a number of principles papers that call for consistent reporting standards across borders and the adoption of globally consistent product and trade identifiers as well as a paper that sets out principles for the creation of a global product identifier, in addition to its work to establish standard derivatives taxonomies and develop the Financial products Markup Language (FpML) messaging standard.
On processes, ISDA focuses on the need to develop more efficient market operating models, that could be encoded as common domain models (CDMs) that would systematically reflect how the market operated, from pre-trade to books and records. The paper calls on the industry to collaborate to agree on standards, processes and data elements for certain common processing tasks. As a first step, ISDA will draw up a development plan for the creation of these common domain models, and will work with regulators and the industry to identify and prioritize use cases.
ISDA emphasizes that greater collaboration, such as mutualizing the build of common requirements or the use of cloud technology, may also drive operating efficiency and allow firms to focus on their core market facilitation and risk management roles.
Finally, ISDA focuses on the use of technology and provides examples of areas where there is an opportunity for improvement: regulatory technology (Regtech) and the use of financial technology (or Fintech), notably distributed ledger technology (or “blockchain”).
The paper defines Regtech as « common technical artefacts that provide mutual benefit to both regulators and market participants in complying with regulations» that can be divided in software and standards. ISDA notes that Regtech could develop software that could be run as traditional utilities or managed services using cloud technology. For example, software could help firms source and scrub data in an uniform manner so that the eligibility models, reference data and transaction data inputs be consistent. In turn, such consistency would increase greatly the regulators’ capacity to analyze the resulting data.
In relation to Fintech and in addition to highlighting the potential uses of distributed ledger technology, the paper identifies opportunities to modernize ISDA’s standard documentation by developing ‘smart contracts’ that can automatically execute intended lifecycle events. Smart contracts are agreements whose execution is automatable, mainly by computer and enforceable by legal enforcement or tamper-proof execution. In this respect, ISDA proposes to leverage its role as a publisher of industry agreed standards for derivatives products to play a role in the development and publication of standard smart contracts for derivatives.
 You can refer to our article RegTech Stepping Forward: UK Financial Services Regulator Publishes Results on RegTech Consultation for further information.