MARKET REGULATIONS

By Stuart McClymont, co-founder and MD at base60

In the second week of May 2017 the International Swaps and Derivatives Association (ISDA) held its annual conference in Lisbon, Portugal. As always ISDA AGMs are where global OTC Derivative industry participants across all sectors of the community, from sell and buy side firms, central counterparties, regulators, major financial market infrastructure providers (FMI’s), new technology providers and other service providers gather to review current and future challenges. However, unlike most annual conferences, post the financial crisis of 2008, regulation did not dominate this year’s conference despite a number of major regulatory reforms (MiFID II, SFTR, FRTB etc) still needing to be implemented. The focus instead was on how the industry in the past drove standards around legal documentation and in the future needed to focus on driving standards around data to capitalise on the innovative new technology that are in front of them. The industry needs to get out of the tactical thinking and take a step back, pause and think strategically.

2017 in Lisbon was a pivotal year for ISDA and its members to look back over the last 30 years and look forward to the next 30 years. The legal panel highlighted that 2017 was the 30th anniversary of the launch of the ISDA Master Agreement. The single most important standard form contract on which business is done internationally today. Without the ISDA master agreement document it is unlikely that OTC Derivatives would constitute the notional volumes they do today.

However, in 2017 we live in a world driven by data. The legalese is sound, ubiquitous and standard but data representation by industry participants differ between market participants, which is why market participants still have considerable legacy technology, debts, costs and untold number of reconciliations. This is compounded when there are now so many interested market participants to a trade on a daily basis: sell-side, buy-side, CCP, regulator, FMI. There is no single standard form for all market participants to rely on.

Having looked back at the first day of the conference, the second day was when ISDA and its members looked forward. The ISDA Market Infrastructure Technology and Oversight Committee (MITOC) highlighted that the industry face a critical juncture to either continue on its current trajectory developing new technology and market infrastructure based on independent isolated standards or instead focus on developing a common product, process and event data standard which both new innovative technology and all market participants use to consistently represent data in motion and at rest. Without doing this market participants will fail to capitalise on the new technology but instead add further cost and reconciliations to an already creaking infrastructure.

30 years ago developing the standard ISDA Master Agreement fuelled the use of OTC Derivatives, as legally there was a robust efficient way of trading. However, this volume came at a cost given every market participant be it sell-side, buy-side, CCP, regulator, FMIcaptured, stored and represented transactions differently based on the idiosyncrasies of each participant.The members of MITOC understand this is going to be a hard and long journey to tackle the infrastructure built up over the last 30 years but if not tackled, given the cost income ratios of users today, it may not be economically viable to trade OTC Derivatives in the future.

Moreover, the industry face a fundamental dichotomy which became evident during the Market Innovation & Technology panel when two live polls of the 800 plus strong audience of industry participants returned the results: when asked “Will DLT (Distributed Ledger Technology) have an impact on post trade processes?” over half of the audience returned a “Yes, within the next three years” vote. But when asked “What is the biggest technology priority for your firm?” only 10% voted DLT whereas over 60% voted “automating collateral and / or straight through processing.” What is clear from these responses is that the industry believes the innovation in technology will arrive but their immediate investment focus is on addressing current industry challenges.

The members believe this is the time to be bold and address the very foundations of financial markets infrastructure and technology delivering a common product, process and event data standard. Achieving a standard to deliver a scalable long-term Derivatives ecosystem leveraging and enhancing the existing standards in FpML and new innovative technologies to support the next 30 years should be the focus.A subset of the members of MITOC presented during their panel session their collective initial research around the core foundational components of a common product and process domain model.

However, a common product, process and event data standard between counterparties and market participants can only be achieved through collaboration between allmarket participants.By bringing together the right technical, business strategy, architecture and transformation experts across ISDA members in a collaborative environment, will the industry be able to harness, frame and drive a common industry standard model which will fundamentally change the cost base of the financial services industry, informing and capitalising on the new Blockchain, Distributed Ledger and Smart Contract technology.

As the poll and other feedback suggests an industry faced with immediate regulatory and cost pressures; limited investment; scarce resources; siloed inward thinking and decision making, the direction of travel, as it was 30 years ago, is to collaborate together to set the industry for the next 30 years on a cost efficient, risk effective Derivatives trading trajectory.

Lisbon 2017 was a pivotal year for ISDA and its members. Looking back to 30 years ago when collaboration was key to setting the standard legal foundations. 2017 is about setting the standard data foundations to fuel the next 30years. As the Portuguese would says it’s now time to “colaboracao”.