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.

Derivatives market participants have been enthusiastic advocates for the use of technology, but various pockets of the business – including the documentation and definitions that form the backbone of this market – have proved trickier to shift from a primarily paper-based way of working. We’ve been striving to change that, and last week saw a major step in that journey with the launch of ISDA’s first fully digital definitional booklet.

It’s a big change, but publication of the 2021 ISDA Interest Rate Derivatives Definitions in digital form via ISDA’s new electronic documentation platform, MyLibrary, will deliver significant efficiencies that will make life much easier for firms in the future.

As an example, determining the terms of a trade will be considerably simpler as firms will be able to go straight to the version of the definitions that applied as of a particular date, with the enhanced search functionality of MyLibrary enabling users to quickly zero in on key clauses.

That simply hasn’t been possible until now. Firms would need to manually assemble the definitional booklet plus the relevant supplements in paper or PDF form to fully understand the terms of their trades – a process that had become complex, cumbersome and labor-intensive given the 76 supplements that have so far been published since the last definitional booklet was developed in 2006. It’s also unnecessary in the digital age.

The 2021 Definitions combine all of the provisions into a single structure – the main book and a series of easy-to-use matrices – creating a consolidated golden-source version of the definitions. Whenever changes need to be made in future, ISDA will republish the definitions in full on the MyLibrary platform, removing the need for supplements entirely.

That means users trying to ascertain the terms of a trade will be able to quickly retrieve a single digital version of the definitions that applied at the time that transaction was agreed, cutting down on complexity and the potential for error. This will be increasingly valuable as the definitions are amended over time – in fact, subsequent iterations are already in the pipeline to reflect new floating rate options that will be added to the definitions.

This, along with other digital features of the MyLibrary platform, like the ability to compare different versions of definitions with marked-up changes, will deliver real and immediate efficiencies for firms.

The 2021 Definitions also include a number of other substantive changes to better align with current market practices and conventions. These include the rollout of new methodologies to determine a cash settlement amount for trades subject to early termination and for swaptions, the introduction of a new fallback trigger that would apply if an entity is prohibited from using a benchmark to perform its obligations, and changes to the calculation agent provisions.

Together, these amendments will ensure the definitions are robust and fit for purpose for the next decade or more.

Firms have a bit of time to prepare – the implementation date has been set for the weekend of October 2/3 – but the 2021 Definitions will require effort and resources to implement. Some institutions may decide to stick with the current iteration a bit longer than that – that’s what happened when ISDA performed the last overhaul of the definitions in 2006.

However, most major clearing houses have said they will transition cleared trades to the 2021 Definitions from the October implementation date. That includes the conversion of outstanding cleared EONIA and LIBOR exposures to risk-free rates between October and the end of this year, which is expected to be under the 2021 Definitions at most central counterparties. ISDA will also stop updating the 2006 Definitions from the implementation date, meaning they will quickly become outdated as new content is added exclusively to the 2021 Definitions.

Our full attention is now on helping firms prepare for implementation. This includes a series of conferences (starting on June 24), educational webinars and the forthcoming publication of a user handbook that will walk participants through the key differences between the 2006 and 2021 Definitions. We have also started work on a best practice checklist to highlight the operational changes firms need to make to be ready for implementation, and a centralized hub where market participants can specify their readiness to use the 2021 Definitions. This will allow institutions to set out the key elections they intend to use in different trade types, alongside their ability to continue offering transactions referencing the 2006 Definitions for a time, in parallel with those referencing the 2021 Definitions.

Interest rate derivatives are by some distance the largest segment of the derivatives market, with a gross market value of $11.3 trillion. It’s therefore essential that the framework for documenting these trades is as efficient as possible, rather than contributing to complexity. Advances in technology – in particular, the ability to publish the 2021 Definitions digitally – mean those efficiencies are now achievable. We encourage firms to take advantage of that.

ISDA is holding a training event on the 2021 Definitions on June 24, with CLE/CPE/CPD credits available. Click here for more details.

Click here to watch a short animation on the new definitions.

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