EXECUTIVE SUMMARY
Derivatives markets today are very different to the derivatives markets before the crisis. In response to regulatory changes instigated by the Group-of-20 (G-20) nations in 2009, most derivatives trades are now reported to a repository, clearing is more common, and electronic execution is gaining momentum. These changes have had an impact on virtually all areas of the transaction process, from pre-trade execution through to lifecycle management and reporting.
Market participants have worked hard and have been successful in meeting the various deadlines for compliance set by regulators. But in focusing on meeting the tight timelines, less attention has been given to achieving operational and technological efficiencies.
The complexity inherent in the new derivatives ecosystem is now putting derivatives participants under considerable strain. Given the lack of opportunity to redesign the embedded processes in order to meet regulatory time frames, industry participants find themselves struggling with a complex set of workflows that create challenges for continued compliance, efficiency and operational risk management. There is also growing concern about the capacity across the industry to support the needs of all market participants in all areas.
This now needs to be addressed.
This paper provides an insight into the challenges facing market participants across all parts of the derivatives process, and proposes a path forward for developing a standardized, efficient, robust and compliant ecosystem that supports the needs of an array of market users. The principles focus on three key areas:
• Data: Agreement on formats and identifiers would significantly benefit market participants and regulators. In particular, a robust, granular, multi-use product identifier with strong governance based on an open-source infrastructure would remove many systemic inefficiencies and further promote transparency.
• Documentation: Despite a plethora of standard documents published for industry use, many documents are still customized between transacting parties. The benefits of this customization are now being questioned. There are opportunities for further standardization and digitization across the suite of existing ISDA documentation, from Master Agreements to definitions booklets and confirmation templates, which will drive more efficient processing and adoption of technology, both within firms and across the market.
• Process: The complexity and multiplicity of business processes required to support the same functions within or across asset classes is significant. In some cases, this has been caused by a divergence of requirements, driven by global regulations. However, there is an opportunity for the industry, working collaboratively with global regulators, to reassess and promote improved standards in this space. Standard processing models can provide a solid base for further evolution of the derivatives processing environment in order to remove cost and inefficiency. Additionally, the industry would benefit significantly from a holistic review and redesign of collateral management processes to aid compliance with new rules on margining for non-cleared derivatives.
To deliver these objectives, the industry needs to collaborate effectively across all sectors – market participants and their representatives, infrastructures and regulators. Where standards are required, it is imperative they are suitable for addressing the needs of all stakeholders. While market participants have collaborated on initiatives in the past, many firms continue to individually build and maintain the same functional solutions, particularly in post-trade activities. In many cases, there is no competitive advantage in continuing to do this, and it only serves to increase the overall cost of supporting the derivatives market.
In addition, the industry needs to further explore the role of existing and new technologies in the development of the future-state derivatives ecosystem. Technology has evolved considerably over recent years and continues to do so. While many market participants and infrastructures have embraced technology as part of the evolution of the current ecosystem, adoption has not always been complete. This may continue to be the case, but the current need to find efficiencies provides a platform from which the industry can collaborate on the analysis, design and implementation of a system that leverages advancements in technology. Cloud services and distributed ledger are two examples where industry focus on how they can be deployed to address the challenges faced by market participants would be extremely worthwhile.
All of this requires time and commitment on the part of industry participants, as well as thought leadership, direction and oversight. If the industry is able to collaboratively explore the opportunity to redesign the processing model and leverage advances in technology, ISDA believes it will benefit from greater operating efficiency, more consistent regulatory compliance and increased quality and transparency of data.
As a first step, there is an urgent need to agree on common objectives, be they short-term solutions to current infrastructure challenges or longer-term objectives associated with process redesign. ISDA, with its broad membership, has always provided an environment for this to happen, and will continue to encourage and facilitate discussion among traditional and new operators in the derivatives market, as well as other industry associations and regulators. If market participants embrace this opportunity and pursue the proposals outlined in this paper, we believe there is a real opportunity to improve operating efficiency, reduce operating costs and risk, and increase both quality and transparency of data.

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