Those of you who made the trip to Lisbon last week for our 32nd annual general meeting – or followed our updates and live streaming on Twitter – will know that several key themes dominated the event. But most can be grouped under a single word: efficiency.
This plays directly to ISDA’s mission statement to promote safe and efficient markets – a mission that is driving our focus on the future and our commitment to develop innovative new solutions. Attention from regulators and the industry in recent years has understandably been on the first of those – safety – but efficiency is just as important. Without it, costs rise and access to risk management tools diminishes.
There’s no doubt the financial system is now safer, more transparent and more resilient as a result of the post-crisis Group of 20 reforms. We think that progress is important and must be maintained. But we also think the regulatory framework can be made to work better by cutting complexity, eliminating duplication and removing unnecessary compliance burdens. As I pointed out in my AGM opening remarks, and as discussed in our panel discussion on public policy, there are many examples of complexity in the rules that result in higher costs for derivatives users and ultimately discourage trading, investment and hedging.
The reporting rules are a case in point. Most jurisdictions now have reporting rules in place, but the data that’s required to be reported and the form it has to be sent can differ significantly. In the US, for instance, Commodity Futures Trading Commission and Securities and Exchange Commission rules diverge on required data fields and the format of submission. This creates unnecessary duplication and inconsistency, without having any obvious benefit from a systemic risk-reduction perspective.
Fortunately, both European and US regulators are now reviewing their rules with an eye to making refinements where necessary. We welcome these initiatives, and believe eliminating pointless complexity and duplication is an important requisite for efficiency. Achieving greater cross-border harmonization and conducting thorough impact studies before all the rules come into force to understand their effect on the entire derivatives ecosystem are also important.
Looking at the regulatory framework is just one element of the drive for efficiency, though. We also need to remould the derivatives data and processing infrastructure to ensure it is fit for the future. The regulatory reform of derivatives markets has resulted in an array of new requirements and infrastructures – clearing houses, trading platforms and trade repositories – but the succession of deadlines has caused firms to take a tactical approach to compliance. The tight time frames haven’t given participants much time to think about the bigger picture.
The result is a lack of common standards and processes, and the need for constant reconciliation between counterparties. This inefficiency increases the cost and complexity of running a derivatives business.
A vital part of the answer is to develop a consistent data and process hierarchy. By using common data standards for products and trades, and agreeing standard processes that are encoded as common domain models, the industry can ensure the foundations for future growth are on a firm footing – as well as pave the way for the use of innovative new technologies like smart contacts.
ISDA published a white paper last September that set out the improvements in data and processes that are needed, and we’re committed to leading that effort. We’re keen to work with all participants – traders, technology firms and lawyers – to make this a reality, in the same way ISDA worked with the industry 30 years ago to achieve consensus on the ISDA Master Agreement.
As discussed on our technology panel at the AGM, the challenges are significant. But we need to be bold in developing a re-ordered, more efficient workflow. The continued efficiency of the derivatives market depends on it.
At ISDA, we have our eyes firmly fixed on the future, and we’ll look to bring the industry together to forge a consensus on the path forward. By drawing on our legal, data and technology expertise, the aim is to create the standards and processes needed for the market to function efficiently for the next 30 years.
Thanks to the 750 or so members who joined us in Lisbon and helped make the event a great success. Thanks also to the financial media who attended. We especially appreciate the global policy-makers – Svein Andresen (Financial Stability Board), J. Christopher Giancarlo (Commodity Futures Trading Commission), Steven Maijoor (European Securities and Markets Authority) and Kay Swinburne (European Parliament), among others – who provided their perspectives on key regulatory issues in the global derivatives markets.