ISDA’s Vision for a Smart Future

ISDA has a long history of creating solutions for the derivatives industry. The Master Agreement and countless protocols and definitions have contributed to a safer, more efficient market for derivatives users.

Now we face perhaps our biggest challenge to date. Due to tactical regulatory drivers and a lack of historic planning, many basic, vital processes in our market have become unbearably complex and inefficient. This needs to change – and ISDA is focused on working with the industry to produce new standards and ensure the derivatives market is building firm foundations for the future.

In my remarks at ISDA’s recent annual general meeting, I outlined a vision for a derivatives market structure that is more efficient, driven by common data, processes, legal standards and automation. This won’t happen overnight, so the industry needs to start planning for the longer term now. We need a wholesale rethink of the way the market is connected, how trade flows are managed, and how data is created and shared between participants. ISDA is committed to helping in this task, and we will do what we have always done – bring the industry together, find consensus and hammer out solutions.

The root of the problem can be traced back to the succession of requirements introduced as part of the post-crisis reform agenda. The industry has been focused intensely on meeting successive deadlines for clearing, trade execution, reporting, compression and collateral exchange. There has been little time to think about how all of this can best work together. As a result, processes and workflows are over-complex, duplicative and costly to maintain. The absence of a common approach means counterparties need to constantly reconcile details of a trade to reduce the potential for inconsistencies. This is sapping the energy and resources of all concerned.

Technology is the key to greater efficiency and creating value for our members – an issue on which there was broad consensus during our annual general meeting. For the potential of fintech to be fully realized, a strong foundation of common standards and processes must be constructed. Only then can innovators and entrepreneurs take new technologies forward with the confidence they will be interoperable.

In an ISDA white paper published in September, we set out the steps we think are needed to create those strong foundations. A critical aspect is the development and implementation of common data standards to ensure everyone can communicate the economic terms of a trade consistently across the lifecycle. ISDA has published principles governing product standards, and we have begun work to define appropriate product taxonomies. We’ve also been working with regulators to develop a suitable trade identifier framework, and will continue to feed into this process.

In addition, we need standards for processes – an agreed set of definitions for specific lifecycle events or actions, which could be encoded as common domain models that are available to everyone. This would not only aid interoperability; it would also provide a transparent and consistent view of how each step in the process works. This would help oversight and rule-making and simplify regulatory implementation, as specific changes to an affected common domain model could be recommended in order to comply.

Once that’s complete, we can develop smart contracts that provide an automated legal framework for derivatives, based on the standardized data and processing hierarchy. Here, the existing Financial products Markup Language framework could be leveraged and extended to support self-executing transactions – in fact, we’ve already rolled out a proof of concept of this.

Finally, we can’t ignore all the good work that ISDA and its members have contributed on the legal front. ISDA will work to future-proof our legal documentation by developing solutions to update and automate our product definitions, as well as exploring various smart contract applications.

These aren’t just ideas. We’re working with the industry – sell side, buy side, technology firms and lawyers – to put them into practice today. There are a lot of opinions out there, but achieving consensus on new standards is something ISDA has plenty of experience in, dating back to the development of the ISDA Master Agreement 30 years ago.

The goal we have set is a fundamental overhaul of the derivatives markets. This will bring increased automation, make it more cost efficient, and enable opportunities for innovation. This goal is ambitious, but ISDA and its members have the desire to bring about the necessary change to ensure the vitality of these markets in the future.

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