Derivatives and securities financing transactions (SFTs) interconnect in a variety of ways and share many common features, but participants that straddle both markets have to use two or more similarly structured agreements to document their derivatives and SFT trades – a situation that can be both complex and duplicative. We think there’s an opportunity to bring greater alignment and efficiency to these markets in certain use cases, which is why we’ve published new documentation that will give firms the option to trade derivatives and SFTs under a single ISDA Master Agreement.
There’s a strong efficiency and cost rationale for this. While certain terms in each agreement are specific to derivatives, securities lending or repo markets, there is significant overlap in several other areas – for instance, default and termination conditions, notice provisions, and representations and warranties. These relationship-level terms are not always defined in the same way, and the processes and methodologies involved may differ, creating operational challenges and repetition for those institutions active in both markets.
Aligning these common terms via a single ISDA Master Agreement will avoid the need for multiple umbrella agreements, reducing the operational burden for participants. At the same time, the flexible modular structure of the ISDA Master Agreement means firms still have the ability to capture the unique features of the SFT market: the 2022 ISDA Securities Financing Transactions Definitions set explicit terms for SFT trades, while the SFT Schedule Provisions enable counterparties to customize their relationship to account for the specificities of securities lending and repo transactions.
There are many benefits to this approach. Critically, using a single agreement will expand netting sets, enabling institutions to reduce credit risk. ISDA will now prioritize the commissioning of updated netting opinions covering SFTs, with the first scheduled to be available later this year. At that point, firms will have the option to enter into new SFT and derivatives transactions under a single master agreement with the confidence of enforceable close-out netting across both product sets.
Using a single agreement will also reduce duplication of effort when negotiating and managing documentation, shrink operational costs as a result of firms referencing a common documentation standard within their systems, and enable any legal or regulatory updates to be rolled out consistently for both sets of products.
In addition, having common legal standards, terms and documentation should make it possible to develop technology solutions that can be applied consistently and at scale across both derivatives and SFT markets. In fact, the SFT definitions and related provisions have been published in a digital format, creating further efficiencies in how firms use and interact with the documents, reducing complexity and facilitating greater automation.
We recognize this may not be for everyone – use of the SFT definitions and provisions will initially likely appeal most to those firms engaged in certain structured trades involving both derivatives and SFTs. Over time, though, institutions may opt for the convenience, simplicity and cost savings of using a single agreement in other situations.
For us, this is all about meeting our mission of fostering safe and efficient markets. At a time when our members are focused on enhancing operational efficiency and cutting costs, we want to make sure they have the options available to do that.