ISDA sets out the case for a stronger cross-industry response to change | The OTC Space Calls For Industry Captains to Join A Discussion Forum

Briefing Note

ISDA sent out a briefing note (announcement below, paper over here and also attached below) which is an unusual beast. It seems to be an appeal for the entire market to work harder to solve the multiplying complexity of the OTC market infrastructure. The ISDA Market Infrastructure and Technology Oversight Committee (MITOC) have authored the paper, and explained how many firms in the market have to design and implement components of the emerging OTC workflow from execution to settlement, but that greater efforts for the common good could avoid duplication.  

The areas ISDA want help with are data formats, standardised legal documentation and workflow processes. The paper explains why each of these areas is ripe for improvement, by developing common solutions. The approach ISDA will pursue includes an assessment of the current post-trade infrastructure, new data models, a new open source library of useful stuff, and working closely with other trade associations to publicly manage change.

ISDA hope to reap these benefits:

• Greater operating efficiency for all market participants through mutualizing common technical builds, increased standardization and process simplification;
• More consistent compliance through a common understanding of data and decision models between regulators and market participants;
• Increased quality of data for regulatory and non-regulatory purposes by using models containing semantics that restrict use of certain data  elds based on inherent criteria;
• More effective transparency of data, helping to achieve some of the core aims of regulations such as MIFID II;
• An environment that encourages innovation and competition and promotes the use of technology, lowering barriers to entry for FinTech and RegTech;
• A potential for a shorter time to market between rule  nalization and technical compliance;
• Removal and consolidation of redundant and duplicative processes. 

Having read the paper I immediately wondered who the audience is for this material. In my career I've seen many ISDA working groups tackle specific problems and projects, usually with input from the tier 1 dealers. In this case the call for help seems to be across the industry and implies that either ISDA members aren't stepping up, or that vendors need to get more involved.

Private Roundtable

Last week the OTC Space and one of our sponsors ran a private roundtable with an invited group of people to discuss one of the infrastructure areas causing great concern. The meeting and discussions are not for publication but the attendees enjoyed the chance to talk in private about the need for more investment in common solutions using the best and brightest expertise in the market. In my whole career I've seen that almost all the banks have to solve similar infrastructure challenges, and like never before the technology options available could allow banks to pool resources, if the right forum can be found, and investment of time and money is forthcoming.

The OTC Space Industry Infrastructure Forum

I would like to see a group of firms develop an industry infrastructure architecture giving a long term framework to improve the way OTC products are processed. Deliverables would be:

• A holistic workflow design, showing how the entire process chain should work from execution to reporting
• The creation of workflow packages, pieces of the entire picture that could be automated by a neutral third party as a common solution
• A prioritised 'shopping list' of industry infrastructure solutions that the group would publish to vendors
• A gap analysis on data standards, what exists now, and what needs to be created
• A time plan showing the timing of new industry requirements, generally from regulation. The plan should show how and when the industry architecture should be updated
• Partnering with ISDA to avoid overlaps

Here is an open invitation: anyone who would like to participate in starting that group, which would be neutral and private initially, get in touch. We will facilitate the meetings, recording the discussions, producing the materials, and driving the agenda. There are plenty of smart people around who could take on the development of these materials, we just need a willing group of industry captains to turn up and sponsor the discussions. 

Bill.

New ISDA Whitepaper Urges Greater Standardization and Efficiency in Derivatives Market Infrastructures

NEW YORK, September 15, 2016 – A new whitepaper published today by the International Swaps and Derivatives Association, Inc. (ISDA) has identified a number of opportunities for greater standardization and automation of derivatives trade processes, in order to achieve improved efficiency, reduced complexity and lower costs for market participants.

The new paper, The Future of Derivatives Processing and Market Infrastructure, comes in response to growing demand from market participants for new solutions to automate and streamline the significant reporting, trading, clearing and collateral management requirements that have emerged as a result of regulatory changes.

The paper highlights a number of challenges with existing structures and processes, and recommends several steps the industry can take to create efficiencies – in particular, by embracing opportunities for further standardization. To support members address existing operational challenges, ISDA is working with stakeholders to develop a common view of an efficient market infrastructure and associated processes, which will enable the design of effective solutions. Furthermore, ISDA will work with its members to explore opportunities to leverage advances in technology, as well as facilitate collaboration and communication between market participants.  

“The derivatives industry has become reliant on legacy infrastructures and processes that have been layered on top of each other over time. That might be the result of historical acquisitions, where the respective systems haven’t been fully integrated. More recently, the sheer pace of regulatory change has meant firms have been under pressure to tackle the next pressing deadline. The result is a derivatives infrastructure that is duplicative and based on incompatible operating standards, and this isn’t sustainable,” said Scott O’Malia, ISDA’s Chief Executive.

“Our members are looking for more effective, less costly and less complex processes, using technology where possible to cut down on manual processes. ISDA is helping to respond to these issues, and our whitepaper highlights a number of areas where the Association can work with the industry and regulators to improve trade processing through the lifecycle. Our work on the implementation of non-cleared derivatives margin requirements is a good example of where industry standards have and will continue to improve operating efficiency, and there is further room for improvement in the collateral management space,” said Mr. O’Malia.

The paper highlights three areas where further standardization can be achieved: documentation, data and processes.

ISDA has played a leading role in developing and promoting standard documentation, from the ISDA Master Agreement and the Credit Support Annex (CSA) to standard definitions and confirmation templates. These documents have typically allowed counterparties to negotiate various terms to reflect their differing needs and preferences, but the whitepaper recommends further standardization to reduce complexity and operational challenges. ISDA will work with members to identify areas where there is a consensus for additional standard terms within the existing documentation.

The paper also identifies opportunities to transform ISDA’s legal documentation by developing ‘smart contracts’ that can automatically execute intended lifecycle events.  

The whitepaper further recommends the adoption of a standard, multi-use derivatives product identifier as a key requirement for reducing duplication and inconsistency. ISDA has published a number of principles papers that call for consistent reporting standards across borders and the adoption of globally consistent product and trade identifiers. Most recently, ISDA published a paper that sets out principles for the creation of a global product identifier. This comes on top of work to establish standard derivatives taxonomies and develop the Financial products Markup Language (FpML) messaging standard.

The paper also 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.