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ISDA derivatiViews - Digital Benefits: A Member Perspective

Derivatives users have seen the many benefits that new technologies are creating for other industries, and are keen to bring greater automation to their markets too. That’s not as easy as it sounds, though. Derivatives markets are beset by complex, disparate legacy processes that technology on its own won’t solve. At ISDA, we’ve argued that the starting point for wide-scale automation and interoperability has to be further standardization and the distribution of those standards in digital formats. A recent survey shows that our members from different business functions strongly share that view.

This member feedback is critical to ensure there’s consensus on the strategy and how to get there. Nearly all respondents – 96.6% – said they supported ISDA’s objective of developing standards and digital formats for its documentation and other products in order to support automation. Asked to rank the benefits of standard digital formats of ISDA content, 86.0% pointed to more convenient access, while 71.0% highlighted time/resource savings and the benefits of having a standard data model for ISDA terms across systems.

The vast majority of respondents said they would use digital versions of ISDA’s documentation, with HTML (73.6%) the most popular format. The preference is for ISDA to prioritize new natively digital documents, rather than focus on digitizing existing documentation. In fact, 84% of survey respondents highlighted the new 2020 ISDA Interest Rate Derivatives Definitions as being a priority in terms of digital availability. Most (97.1%) want online versions of the documentation to allow dynamic user interaction like search functionality and links to terminology definitions.

A large proportion (93.3%) felt benefits could be achieved by aligning the digital representations of ISDA documents with other ISDA products and services. In addition, 95.1% agreed there is an advantage in delivering these digital representations in a way that can be directly incorporated into the systems of market infrastructures, vendors and market participants. Asked to rank the main advantages, 75.5% highlighted greater connectivity between systems/processes and legal contracts, and 73.5% pointed to ease of market adoption of new documentation and standards.

It’s great to have this feedback, and it will help us steer a path as we further implement our digital strategy. As it stands, a lack of commonality in how firms represent trade events and processes can result in mismatches between counterparties, disputes and inconsistent regulatory reporting, increasing inefficiency and costs. Reliance on bespoke, paper-based documentation, physical document exchange and wet-ink signatures adds to the complexity. The key terms within those contracts typically have to be interpreted and captured manually for use in internal systems and processes, leading to the potential for mistakes and inconsistencies.

Standardizing the terms commonly used in contracts to cut down on unnecessary customization will improve the consistency and accuracy of legal data and will enable the digitization of legal documentation. This, in turn, will drive greater process automation and efficiency.

ISDA is working on a number of initiatives to make this a reality, and it’s incredibly pleasing that much of the member feedback validates that work. In June, we launched the ISDA Clause Library, a new drafting tool intended to promote greater standardization of language within ISDA documentation. We also plan to make our forthcoming 2020 ISDA Interest Rate Derivatives Definitions available in a digital format – in line with the priority expressed by members in the survey. The new definitions will be available on a web platform that will allow users to electronically view a consolidated version of the text that existed at a specified time, as well as incorporating search functionality and hyperlinks to explanations of key terms – again, in line with the dynamic user interaction respondents to the survey said they wanted.

ISDA also looking to align and integrate the digital documentation and legal data with other standards – for example, the Common Domain Model, which establishes a common digital representation of events and processes that occur during the lifecycle of a trade. As respondents to the survey noted, doing so will allow information within the documentation to flow directly through to trading, operational and risk management systems in a consistent way, enabling front to back automation.

We are committed to making this vision a reality. Last week, ISDA signed a letter with seven other trade associations to commit to promoting the development of a digital future for financial services, focused on three core areas: standardization, digitization and distribution. This includes supporting the development of interoperable industry standard models, promoting the adoption of standardized legal documentation, and exploring the delivery of that documentation in digital form.

Digitization comes with a number of benefits, including less complexity, less cost and less need for manual intervention. The survey results demonstrate this a future that market participants want to realize, and there’s consensus across the market on how to achieve it.

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