It’s not possible to predict the future with any certainty. In this ISDA annual general meeting (AGM) issue of IQ, which focuses on the future of the derivatives market, we don’t even try. Instead, we explore some of the challenges market participants face, and the steps that are being taken now to prepare for possible future outcomes.
Technology is a case in point. Innovations are emerging at a fast pace, but we don’t know whether the market will veer towards distributed ledger, artificial intelligence, cloud or something else. From ISDA’s perspective, it doesn’t really matter. What’s important is that the foundations are in place to allow any of these technologies to propagate, thrive and interact. That’s what ISDA’s Common Domain Model is about: it’s an effort to develop a standard digital representation of events and processes that can serve as a common framework for everyone.
The transition from interbank offered rates, or IBORs, to alternative risk-free rates represents another major transformation. The industry is working to an end-2021 deadline, and the process of transition planning is already under way. But firms need to marshal resources and fully engage with this process now in order to be prepared for the future state.
Brexit is a further example. No one knows what the final exit agreement will look like and therefore what the impact will be, but firms are looking at their options. This includes the documentation they use. Depending on the outcome, some firms may prefer to use an EU law Master Agreement post-Brexit to retain certain advantages when trading in the EU. To prepare for that possible scenario, ISDA is drafting French and Irish law Master Agreements as additional governing law options. The future is uncertain; this is about preparing for any eventuality and ensuring the industry has the tools it needs.
There are other uncertainties too – the future of the non-cleared derivatives market, the effect of new capital rules, the impact of margin rules and the outlook for cross-border trading. All of these topics will feature prominently in this year’s ISDA AGM in Miami on April 24-26.
This issue of IQ also includes a survey, in which 900 market participants give their views on these areas of uncertainty. The results show that people are understandably tentative about the challenges ahead, but they remain upbeat about the derivatives market. That shouldn’t come as a surprise. When the future is so uncertain, derivatives become even more important as an effective and efficient means of mitigating risk.