ISDA Derivatives Trading Forum Sydney

October 21, 2025

Opening Remarks

Scott O’Malia

ISDA Chief Executive Officer

Good morning, and welcome to the Derivatives Trading Forum. It’s great to be back in Sydney following our last trip back in August. I’d like to thank AFMA for working with us again on this event – it’s been a really productive relationship, so a big thank you to Brett and the team for all their support. I’d also like to thank our sponsors, Kaizen, ASX and OSTTRA.

This has been a very special year for ISDA, as we celebrate our 40th anniversary. It’s been an opportunity to reflect on ISDA’s remarkable journey since 1985, when a small group of dealers got together to develop a common terminology for the swaps market. They recognized the need for greater consistency and efficiency to alleviate the documentation backlog and unlock the potential of the derivatives market. Their vision set the vital foundations of ISDA and enabled the market to evolve and grow around the world.

Today, our membership comprises more than 1,000 entities across 78 countries. Our suite of documentation continues to underpin the derivatives market, creating certainty and stability. Our focus on consistency and efficiency extends to the global regulatory framework, and we advocate tirelessly for rules that are appropriate, risk-sensitive and aligned with global standards. It’s also the basis of our digital transformation work, as we advance a set of industry solutions to bring greater automation to key processes.

In these remarks, I’ll talk about three key areas where ISDA is now working to bring greater consistency and efficiency. First, our ongoing work to standardize the calculation of margin. Second, our efforts to improve collateral infrastructure. And third, a recent initiative to improve the close-out framework for derivatives.

Margin calculations

It’s now nine years since we launched the ISDA Standard Initial Margin Model (ISDA SIMM) to provide a common, transparent methodology for calculating regulatory initial margin (IM) requirements. Over that time, it’s been broadly adopted by firms across the globe and has proved to be incredibly robust, including during stress events like the 2020 dash for cash and the post-Liberation-Day volatility in April.

The model hasn’t remained static – it’s continued to evolve over time to reflect changes in market conditions. In fact, this year marked an important milestone for the ISDA SIMM, as we published the first recalibration under the new semiannual cycle. Agreed in coordination with global regulators, this shift will ensure the model continues to appropriately reflect risk and is updated in a predictable and transparent way.

The coordination with global regulators has been a feature of the ISDA SIMM since inception. We regularly send our calibration and backtesting results and our quarterly monitoring reports to 22 global authorities and incorporate their feedback into the model. In short, we do all the work, so you don’t have to.

This is particularly relevant in the context of Australia’s superannuation sector. Funds under management have grown rapidly, and that growth is set to continue – the Reserve Bank of Australia (RBA) expects the sector to become the world’s second largest pension market within a decade, with assets rising to around 180% of GDP. About half of superannuation fund assets are currently invested overseas, and funds are increasingly using derivatives to hedge their FX risk and investment returns. Based on RBA analysis, the total superannuation FX hedge book, currently estimated at A$500 billion, could more than double over the next decade.

As derivatives portfolios grow, superannuation funds will increasingly come into scope of regulatory IM requirements. Those that exclusively use FX swaps and forwards may also see increased demand for collateral. While these instruments are exempt from regulatory IM requirements, bank counterparties are starting to ask for variation margin (VM) and independent amount as they hit capital constraints given the high volume of these trades.

The ISDA SIMM will play an important role in ensuring margin calculations are consistent, transparent and aligned with global best practices. So far, however, only two Australian superannuation funds have been approved to use the model.

We think the ISDA SIMM has proved its worth – it’s been rigorously tested, regularly reviewed by global regulators and adopted by buy- and sell-side firms around the globe. As more superannuation funds come into scope of margin requirements, we’ll continue to extol the benefits of the model to ensure all users of derivatives can calculate their margin requirements efficiently, consistently and cost-effectively.

Improving the collateral infrastructure

Calculation of margin is a critically important issue. But it’s also vital that firms can source sufficient eligible collateral and get it to where it needs to be quickly and efficiently. That’s particularly important as the world moves towards 24/7 trading. This must be accompanied by 24/7 risk management.

According to the latest ISDA margin survey, IM and VM collected by the leading derivatives participants for their non-cleared exposures increased by 6.4% to $1.5 trillion at the end of 2024.

While mandatory margin requirements have helped to provide protection against counterparty credit risk, we must recognize that the financial system has become more prone to liquidity crunches during periods of stress. During successive market shocks, firms have had to generate large amounts of cash to meet a spike in VM calls. In these scenarios, liquidity can suddenly drain out of markets, jeopardizing financial stability.

Global regulators have been looking at this issue, focusing on liquidity risk management practices and stress testing – and we have a panel looking at the systemic impacts of liquidity risk later this morning.

A common option is to use the repo market to quickly transform assets into cash to meet collateral requirements. But there’s a lack of clarity on whether superannuation funds can access the repo market for liquidity management purposes under the SIS Act – something we think needs to be resolved.

A growing number of market participants globally are also looking at alternatives to cash and government securities to meet their VM requirements for non-cleared derivatives. Cash already represents a declining share of total VM received, falling from 80% in 2020 to 68% in 2024, according to the ISDA Margin Survey. But there are certain economic, capital and operational constraints that prevent some counterparties from holding anything other than cash or government securities.

For example, money market funds could be an attractive asset to post as collateral, but the current workflow requires collateral to be posted as cash and then transformed by the custodian, which can lead to increased liquidity and operational risks.

Tokenization has the potential to alleviate some of these challenges. Once tokenized on a shared ledger, a money market fund could be much more efficiently mobilized as collateral and shares could be directly posted and returned, without any need for liquidation within the collateral management workflow.

ISDA is now working with stakeholders across financial markets to enable the adoption of tokenization and we’re focusing on the key legal, regulatory and operational challenges.

ISDA will target two key areas. First, we’ll work to establish clear and consistent legal and regulatory frameworks. This includes making sure derivatives transactions on tokenized assets are underpinned by robust documentation and legal opinions. We’ll also seek regulatory certainty that tokenized assets will be permitted as collateral under the margin rules.

Second, we’ll work to establish interoperability, underpinned by common data models, smart contract standards and messaging protocols. We’ll look to leverage the Common Domain Model to establish common data standards and avoid technological fragmentation.

The tokenization of assets is a very exciting prospect that could improve the timeliness and efficiency of collateral management, bringing greater choice and flexibility for market participants. There’s still some way to go, but we’ll be working hard to overcome the hurdles and realize the potential of this powerful technology in derivatives markets.

Close-out Framework

I’ll now turn to the close-out framework.

I mentioned earlier that the drive for consistency and efficiency lies at the heart of ISDA’s powerful set of industry solutions, which are moving clunky, manual processes into the digital age.

One example is Digital Regulatory Reporting (DRR), which dramatically reduces the risk of inaccurate or incomplete reporting by converting an industry interpretation of reporting rules into unambiguous code. The ISDA DRR enabled market participants to implement updates to reporting rules in Australia last year with an unprecedented degree of consistency and efficiency. But we didn’t stop there. Last month, we extended the initiative to support rule updates in Hong Kong – the eighth set of reporting requirements available on the ISDA DRR – and we’re seeing increased adoption of this game-changing offering.

We’re also now bringing greater consistency and efficiency to the process of closing out derivatives trades. Up until now, critical termination-related notices had to be delivered by certain prescribed methods using the counterparty’s address listed in the ISDA Master Agreement. Physical delivery of notices has led to all sorts of problems over the years, with delays and uncertainty leading to serious economic consequences.

That all changed with the launch of the ISDA Notices Hub in July. With this new online platform, users can instantaneously deliver and receive notices from anywhere in the world, while also maintaining updated address details for those counterparty relationships where physical delivery of notices continues. At a stroke, the Notices Hub reduces the inefficiencies, risks and costs of physical delivery.

I’m pleased to say that more than 140 buy- and sell-side entities have now adhered to the ISDA 2025 Notices Hub Protocol, which provides the legal framework to allow delivery of notices via the platform. The Notices Hub is a vital step forward in modernizing the close-out process for derivatives trades and we’re seeing widespread interest in accessing it. If you’d like to join this growing universe of adopters, our team is available to help you with the onboarding process.

Conclusion 

I started these remarks by reflecting on ISDA’s 40th anniversary celebrations and our enduring commitment to consistency and efficiency. It’s there in everything we’ve achieved over the years, from the drafting of the very first standard documents to more recent achievements, such as the retirement of LIBOR.

It underpins our work to standardize margin calculations with the ISDA SIMM, it’s the foundation of what we’re doing to enable the adoption of tokenization in derivatives markets, and it’s the driving force behind our digital solutions, including the ISDA Notices Hub. As we continue our anniversary celebrations and look ahead to the future, you can count on ISDA to maintain its focus on consistency and efficiency in everything we do.

I’d like to finish by once again thanking AFMA, as well as our sponsors, speakers and delegates. I hope you find the event interesting, and I look forward to celebrating ISDA’s 40 years at our drinks reception this evening.

Thank you.