2020 Looming Large
It has sometimes felt like there’s barely been time to pause and take a breath over the past 12 months given the size and importance of the issues the industry faces. Well, get used to it, because 2020 will be the year the rubber really hits the road for some of these issues. Whether benchmark reform, initial margin requirements or local implementation of revised Basel rules, industry efforts will have to step up a gear – and ISDA will be working hard to develop and roll out solutions to help implementation in 2020.
ISDA will shortly finalize amendments to the ISDA Definitions to incorporate robust fallbacks for nine key interbank offered rates (IBORs), following several industry consultations to develop a consensus methodology for adjustments to the fallback rate. An ISDA protocol will also be published to enable market participants to include fallbacks within legacy IBOR contracts if they choose to. Both will be published in the first quarter of 2020, and will take effect three months later. This will mark a big step in efforts to mitigate the systemic risk posed by continued exposure to IBORs.
We’ve also just launched a new consultation on the spread and term adjustments that would apply to fallbacks for derivatives referencing euro LIBOR and EURIBOR in the event those benchmarks are permanently discontinued. If the feedback is consistent with the earlier consultations, we expect to implement these fallbacks at the same time as the others, in the first half of 2020.
Benchmark reform will remain a key priority, and ISDA will continue to support industry efforts to shift from IBORs to risk-free rates in the run-up to end-2021, the date the UK Financial Conduct Authority has said it will no longer persuade or compel banks to make LIBOR submissions.
ISDA spent a large part of this year flagging the risk of a compliance bottleneck in September 2020, as a result of a large number of small entities coming into scope of the initial margin (IM) rules. The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (BCBS/IOSCO) subsequently announced two important changes to the IM framework this year, including an extension of the phase-in schedule for the smallest firms until 2021.
That will help, but the September 2020 phase-in will still pose a significant challenge for market participants, with an estimated 3,616 counterparty relationships coming into scope, more than 28% of which will have to comply with the full gamut of documentation and custodial requirements. ISDA will focus on advocating for consistent implementation of the BCBS/IOSCO changes across jurisdictions, as well as helping members with implementation. As part of this, we continue to maintain and enhance the ISDA Standard Initial Margin Model and ISDA Create, an online platform for the negotiation and execution of documentation.
A number of important changes were made to the capital framework in 2019, including targeted fixes to the Fundamental Review of the Trading Book (FRTB) and the leverage ratio, the finalization of the standardized approach to counterparty credit risk by US agencies and the launch of a new consultation on credit valuation adjustment. In 2020, ISDA will monitor how the Basel III rules are applied in each jurisdiction, and will focus on implementation solutions. For example, we are working on an initiative to support accurate, efficient and consistent implementation of the FRTB’s standardized approach.
With the timing of Brexit now a little more certain after the UK election, ISDA will continue to identify issues that market participants need to consider, and will work to mitigate the impact on the derivatives market to the extent possible. An important part of that will be advocating for continuity in clearing and trading – for instance, via equivalence determinations between the EU and UK, and recognition of each other’s central counterparties and trading venues. More broadly, we will also continue to highlight the need for closer cross-border cooperation and harmonization globally to prevent fragmentation of markets, while encouraging regulatory interest in finding technical solutions if political circumstances are challenging.
We want to make all our definitions and legal documents digital to create efficiencies and drive automation – and 2020 will see a big step in that direction. Work is already under way to develop a taxonomy and clause library related to the ISDA Master Agreement, which will introduce greater standardization in the way firms negotiate and agree certain contractual terms. We are also working to update our 2006 ISDA Definitions, with the ultimate aim of creating a digital version.
The backbone for this work is the Common Domain Model (CDM), which establishes a standard set of digital representations for events and processes that occur throughout the lifecycle of a trade. Combined with the Financial products Markup Language standard, we have all the ingredients to make this digital vision a reality. In addition, with the launch of ISDA Create earlier this year, we have a platform up and running that enables online negotiation and execution of that documentation.
The past 12 months have been busy. Next year promises to be more so. As always, we will work hard to represent our members by advocating for appropriate and risk-sensitive rules, promoting standardization, and developing mutualized solutions to help with implementation.
Learn more about trading and hedging risk-free rates and implementing fallbacks at the ISDA/SIFMA AMG Benchmark Strategies Forum on February 12 in New York and February 28 in London. Click here for more details.