Someone using the then-newly minted interest rate derivatives definitions back in 2006 would only have needed to read 158 pages of the main book to get a clear picture of the terms of their trades. Anyone referencing the 2006 Definitions today would have a somewhat bigger task on their hands. To keep pace with market developments, ISDA has had to publish an extra 586 pages of amendments via nearly 90 different supplements over the past 15 years that require interleaving with the main book, making the job of keeping track of trade terms complex, time-consuming and prone to error. This is clearly not sustainable – which is why this week’s implementation of the new 2021 ISDA Interest Rate Derivatives Definitions is so important.
This represents a big milestone for the market and follows long and intensive engagement with both buy- and sell-side institutions to ensure the updated definitions reflect developments in regulation, market convention and technology.
Significantly, the new definitions are the first to be published in digital form, creating meaningful efficiencies for market participants – including through the eradication of supplements. Now, whenever an update is required, ISDA will republish a new version of the definitions in full via ISDA’s MyLibrary electronic documentation platform. MyLibrary also allows users to view marked-up versions of the changes quickly and easily, avoiding the need to manually compare and contrast multiple supplements in paper or PDF form. In fact, ISDA has already published version 2 of the 2021 Definitions to account for changes that have occurred since initial publication in June.
While the 2021 Definitions retain much of what worked well in the 2006 Definitions, modifications have been made in a number of other areas, including the calculation of a cash settlement amount for trades subject to early termination and the exercise of swaptions, the duty of the calculation agent and rights to challenge a calculation agent’s determinations.
As of the October 4 implementation date, all but one of the major central counterparties (CCPs) had amended their rule books to reflect the 2021 Definitions. The remaining CCP will follow suit at the beginning of December.
We expect take-up in the non-cleared market to phase in as institutions become more familiar with the 2021 Definitions and make the necessary systems changes. That’s in line with our experience of launching new definitions in the past – but, given ISDA has announced it will now stop updating the 2006 Definitions and most CCPs have already switched, swift migration to the new definitional booklet will be the only way to ensure the terms of new interest rate derivatives trades reflect latest market practices and align with cleared transactions.
Change is never easy, particularly when the foundations of that market have been in place for 15 years. Nonetheless, the 2006 Definitions are past their best. Even with 586 pages of amendments, the 2006 Definitions lagged current market practice in certain areas. The new 2021 Definitions bring the interest rate derivatives market up to date and into the digital age, enabling safe and efficient trading for the next 15 years and beyond.