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.

Did you know the 2006 ISDA Definitions have been amended nearly 70 times through various supplements, without a comprehensive consolidation of these amendments? Are you aware the original 2006 Definitions didn’t account for clearing and still reference the British Bankers’ Association in the defined terms for LIBOR? When the flagship definitional booklet was first published, Apple hadn’t even released the first iPhone, so just think about how much has changed from a technological standpoint, even in the derivatives business.

With average daily turnover of $6.5 trillion, it’s clearly important the industry standard terms for interest rate derivatives trades reflect these changes – which is why we’ve started on an ambitious, root-and-branch update of the definitions, due for rollout in 2020.

This review is based on industry feedback and has several key aims – to keep what works in the 2006 ISDA Definitions but update them to reflect the transformation in market practice and regulation that has occurred over the past 14 years, to make them more robust in the face of contingencies such as benchmark cessations and market closures, and to ensure they are clear and easily accessible by users, including through digital means.

The latter point is particularly exciting. Parties currently have to manually assemble the definitional booklet plus various supplements, typically in paper or PDF form, in order to determine the terms of each trade at the time of execution – a process that is unwieldy, time consuming and easy to get wrong.

In contrast, the new 2020 ISDA Interest Rate Derivatives Definitions will be available on a web-versioning platform that will enable users to electronically access everything. This will allow the 2020 Definitions to be amended and restated in their entirety each time they are updated, enabling users to view the fully consolidated set of definitions that prevailed at any particular time. Additional functionality could include hyperlinks within the text to explanations of key terms, the ability to run comparisons between different versions of the text, and multimedia content and guidance.

We’re also looking to structure the definitions so they are easier to consume by machines – for example, by using formulae instead of legal narrative to describe mathematical terms and documenting identical concepts with consistent language. Over time, the mechanics of the definitions will also be available via open-source code and aligned with the Common Domain Model. This will not only improve efficiency, but will allow information contained in the definitions to automatically flow through to trading, operational and risk management systems in a consistent way.

Other proposed changes range from the substantial to the highly technical. These include replacing the valuation mechanics used to settle swaptions and trades subject to mandatory or optional early termination to better reflect current trading and collateral practices, reviewing provisions relating to the role of calculation agent, amending the floating rate options to provide a single price-source-agnostic definition for each interest rate benchmark, and incorporating the forthcoming supplement on fallbacks for derivatives referencing interbank offered rates (IBORs), as well ensuring robust fallbacks are in place for non-IBOR benchmarks.

These proposed changes will have an impact right across firms, from legal to trading to operations. We are in the process of gathering feedback from our working groups on the proposals, so it’s important that different function areas within buy- and sell-side firms, market infrastructures and middleware providers engage in the process and give their input now. The intention is to publish the 2020 Definitions at the end of this year. More information is available here.

We recognize an overhaul of the definitions will require systems changes and time and resources to implement. But it comes with a number of very important benefits – modernized, future-proofed definitions that are more robust against market closures and other contingencies and fully reflect 14 years’ worth of fluctuations in market practice. By publishing our first natively digital set of definitions, we’ll have a framework for interest rate derivatives that will last for the next decade or more.

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