ISDA considered ways to further the collaboration and standardization of processes and functions between the derivatives and securities financing transaction ("SFT") markets.

In a Whitepaper, ISDA highlighted efficiencies that could be achieved by an alignment between the two markets, resulting in reduced costs for market participants. In particular, ISDA stated that institutions operating in both derivatives and SFT markets could benefit from greater harmonization in documentation, as well as improvements in post-trade processing and automation. ISDA identified several opportunities, including:

  • leveraging the existing overlap in terminology to create a common documentation standard for derivatives and SFTs and obtain a single set of legal opinions on close-out netting for each jurisdiction;
  • creating solutions to enable firms to implement legal, regulatory or market practice changes (i.e., interest rate benchmark reform) on a consistent basis across derivatives and SFT markets; and
  • developing common standards and taxonomies to facilitate automation and interoperability across derivatives and SFT markets and enable a consistent trade record for confirmation and reporting on a broad scale.

ISDA also outlined a proposal for how the ISDA Master Agreement could be expanded to cover SFTs as well as derivatives. Specifically, ISDA proposed a set of SFT provisions to be added to the schedule of the ISDA Master Agreement, along with the publication of an SFT definitional booklet.

Commentary

There are undoubtedly similarities between many types of derivative transactions and many SFT transactions. However, at least in the United States, it is the largely arbitrary, but historically ineradicable, distinction in regulatory treatment of the transactions necessitated by the division of authority among the SEC, the CFTC, and the banking regulators that create the operational issues, much more than differences in documentation.

Primary Sources

  1. ISDA White Paper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets
  2. ISDA Master Agreement (February 2019)

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