2021 Definitions: A Better, Safer Solution

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.

One of the many knock-on effects of events in Russia is that the Moscow Prime Offered Rate (MosPrime), used by firms across the world as a reference rate for ruble-denominated interest rate derivatives, is no longer available via Refinitiv. Instead, the rate will be published by the benchmark’s administrator, Russia’s National Finance Association (NFA). As MosPrime isn’t ceasing publication, you might think this shouldn’t be an issue – and it wasn’t for those trades referenced to the 2021 ISDA Interest Rate Derivatives Definitions. For transactions using the 2006 ISDA Definitions, however, it did pose some unhelpful complexity, drumming home why all market participants should shift to the 2021 iteration.

Now is the ideal opportunity to do just that as we prepare for the imminent publication of version 5 of the 2021 ISDA Interest Rate Derivatives Definitions. This update will be the first not to be accompanied by a corresponding revision to the 2006 Definitions via a supplement. Given ISDA is no longer supporting the 2006 Definitions, and with a further three updates to the 2021 Definitions planned for this year alone, the 2006 version will swiftly become out of date.

The 2021 Definitions were developed with a number of key aims, one of which was to improve contractual robustness in the face of unknown but foreseeable future market events. As part of that, we removed the publication source as a defining characteristic of the floating rate options, meaning transactions are not disrupted if a price source changes.

On hearing the news about MosPrime, institutions using the 2021 Definitions could have logged into their MyLibrary account and typed ‘MosPrime’ into the search engine to locate it in the floating rate matrix. A glance at its key features would have immediately confirmed it is price-source agnostic – meaning contracts were unaffected by the change and no further action was required.

For trades referencing the 2006 Definitions, it wasn’t so easy. Market participants would have needed to trawl through the 2006 definitional booklet (158 pages) and all 91 supplements (600-odd pages) to ensure they have the latest description. They would have eventually discovered that the relevant Refinitiv page is named as a specific feature of the MosPrime floating rate option. Without a successor source, the failure of MosPrime to appear on the discontinued Refinitiv page when needed would lead to a fallback rate being used instead, based on a dealer poll of five major banks in the Moscow interbank market – an outcome that could potentially lead to a different rate being used on each trade.

In response, ISDA published market guidance identifying the NFA website, www.mosprime.com, as a successor source for MosPrime under the 2006 Definitions. If market participants follow this guidance, their contracts will automatically switch over. But the initial uncertainty caused by what should be a mundane event (a change in publication source) is far from ideal, especially in such a fast-moving environment.

This alone should be a convincing reason to switch to the 2021 Definitions, but there are plenty of others. The new ISDA definitions are the first to be published in digital form, eliminating the need for supplements to make amendments. Whenever an update is required, ISDA now publishes a new consolidated version of the definitions via ISDA’s MyLibrary electronic documentation platform.

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, with the ability to compare different iterations with marked-up changes, delivering significant efficiencies for firms.

Other meaningful enhancements include the rollout of new methodologies to determine a cash settlement amount for trades subject to early termination and for swaptions, and the introduction of a new fallback trigger that would apply if an entity is prohibited from using a benchmark to perform its obligations. The calculation agent provisions have also been changed to minimize the exercise of discretion, improve transparency and provide opportunities for non-calculation agents to challenge determinations.

Major central counterparties have amended their rule books to reflect the 2021 Definitions, meaning all legacy and new cleared transactions now reflect the 2021 Definitions. Around two thirds of electronically confirmed trades in the non-cleared interdealer and dealer-to-client market also reference the 2021 Definitions. It’s clear there is overwhelming momentum behind adoption, so we would encourage all those remaining on the 2006 Definitions to take the opportunity to switch.

We recognize it takes significant effort to complete the necessary systems development and documentation updates. But adopters are also now seeing the benefits of that work – not least, when a price source changes.

ISDA has published a Russian Sanctions and Market Impacts InfoHub – you can view it here.

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