ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

The future is hard to predict with any certainty, but market participants appear optimistic about the outlook for derivatives. According to a recent ISDA survey, more than four-fifths of respondents think derivatives volumes will increase or remain the same over the next three to five years, and the same proportion think end-user activity will rise or remain unchanged.

Despite the optimism, market participants are acutely aware that changes are on the horizon. Big issues like benchmark reform, the emergence of new technologies and the continued rollout of initial margin rules will transform derivatives markets. We don’t know exactly what these changes will look like, but we can make sure we have the foundations in place to prepare for possible outcomes.

Those foundations are sound. Over the course of 30 years, ISDA has led efforts to build up a solid base of industry standards, documentation and definitions that have served as the bedrock of this market. We have to retain the legal certainty they bring, but we also need to make sure they evolve with the market and keep pace with regulatory evolution and technology.

Take benchmark reform. With total outstanding notional IBOR exposure estimated at over $370 trillion, this is not something we can ignore. ISDA’s goal is to ensure viability of transactions, and the continued liquidity and safety of the market as a whole. An important step to achieve that goal is our work to develop robust fallbacks for derivatives contracts that reference certain key IBORs. Once agreed, these fallbacks will be incorporated into ISDA’s 2006 interest rate definitions. As amended, the definitions will stipulate the fallback rates that would apply if a key IBOR is permanently discontinued.

ISDA will shortly release a consultation on the proposed fallbacks, as well as the relevant credit spread methodology and term fixing adjustments for review and comment. More broadly, we’ve begun an initiative to review and update the 2006 definitions to ensure they reflect market experience and feedback. We also want to ensure the definitions are delivered in a technology enabled manner.

Another important change is the continued rollout of initial margin rules. As our new whiteboard animation points out, the posting of collateral is an important risk-mitigation tool and makes the financial system safer. But applying regulatory initial margin rules is a challenge – and that challenge will get greater as the compliance threshold drops and large numbers of smaller firms will be required to meet the rules from September 2020.

ISDA has focused on developing industry solutions to help firms comply with the rules. Two years ago, we published the ISDA Standard Initial Margin Model, which for the first time established a common methodology for margin calculation, reducing the potential for disputes.

We’re now working on a number of initiatives to optimize and automate the collateral process. This includes revising initial margin documentation to support the September 2019 and 2020 rollouts, and partnering with Linklaters to develop an online documentation negotiation tool called ISDA Create – IM.

Collateral isn’t the only area where we’re looking to bring greater automation. Later this month, we’ll be launching the first digital version of the ISDA Common Domain Model (CDM). From that point, we’ll be working with market participants, fintech companies, infrastructures and others on proofs of concept. We’ll essentially be throwing it out to the market for the next phase of development work to ensure the CDM is effective.

This is a hugely ambitious project. Its aim is to create a standard blueprint for events and actions that occur throughout the life of a trade. This will bring order and commonality to the execution and post-trade management of derivatives, which is currently a complex and costly mess.

All these initiatives are about transitioning to the future by building on our legacy of documents, standards and definitions, which have brought 30 years of consistency and legal certainty to the derivatives market. We need to keep evolving, but we have to retain the certainty and legal know-how that is critical for the safe, efficient functioning of the derivatives market.

I’d like to take the opportunity to thank all of you who made it to our 33rd Annual General Meeting in Miami last week. For those of you who weren’t there, you can get a flavor of what you missed by reviewing our Twitter feed.

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