Derivatives play a critical role in supporting vibrant capital markets, enabling market participants to alleviate uncertainty, transfer risk and enhance returns. By allowing companies to lock in the cost of issuing debt or create certainty in the exchange rate at which they can convert future overseas revenues, derivatives enable firms to lend, borrow and invest with confidence.
This ability to hedge risk and manage exposures shouldn’t only be an option for firms in the main financial centers – entities in emerging and developing markets should also be able to use these instruments domestically to mitigate risk and facilitate access to capital. But safe, efficient derivatives markets don’t emerge by accident: they require deliberate choices on the legal and regulatory framework. ISDA has long worked with policymakers in emerging and developing markets to help navigate these issues, and we published a whitepaper earlier this year that explores some of the choices and implications, based on best practices and work in advanced economies.
One of the most fundamental steps is ensuring the enforceability of close-out netting. By allowing counterparties to offset their various obligations into a single net amount owed by one party to the other, netting significantly reduces credit risk and increases the capacity for firms to lend. It also encourages greater participation by foreign and domestic institutions, boosting liquidity and competition.
ISDA has worked with authorities across the globe to help draft legislation on the enforceability of close-out netting and has so far published netting opinions for over 80 jurisdictions, providing certainty for firms trading in those markets. The latest of those opinions was published for China in August, following implementation of the Futures and Derivatives Law (FDL) – an important milestone in the development of a well-functioning derivatives market in China.
Netting legislation isn’t enough on its own, though. Local policymakers need to determine the scope of permitted activity, whether registration requirements are necessary and what disclosure standards should apply. Broader regulatory issues – for example, whether to introduce clearing, margin or reporting mandates – also need to be considered, as well as expectations on risk governance and management.
This issue of IQ looks in more detail at what is needed to support the development of effective and robust derivatives markets, as well as analyzing the specifics of China’s FDL and possible next steps. ISDA will continue to assist however we can in the advancement of local derivatives markets – we strongly believe vibrant capital markets and the ability to manage exposures efficiently and cost effectively should be achievable for everyone.
Click on the attached PDF to read IQ in full.
Documents (1) for Strengthening Markets – IQ August 2022
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Expanding Legal Agreement Coverage in the CDM
This paper examines the recent extension of the Common Domain Model (CDM)1 to represent two of the most significant, and previously undeveloped, areas of its legal agreement model: umbrella agreements and contract amendments. Umbrella agreements are widely used to document...
ISDA Omnibus Canadian Representation Letter
On September 2, ISDA published the Omnibus Canadian Representation Letter, which combines previously published representation letters drafted to assist firms in compliance with Canadian trade reporting, business conduct, regulatory margin and clearing classification rules. The Omnibus Canadian Letter is designed...
Joint Response on Cross-margining
On August 31, ISDA and FIA submitted a letter to the US Commodity Futures and Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) on the agencies’ joint request for comment on the implementation of portfolio margining and cross-margining...
Accounting for Carbon Credits: Latest Developments
This paper updates and extends the analysis set out in ISDA’s October 2023 paper on accounting for carbon credits. While preserving the original focus on the accounting treatment of voluntary carbon credits (VCCs) and compliance carbon credits (CCCs), it expands...
