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How Technology is Aiding the Automation and Efficiency of the Derivatives Market

It is no secret that technology and automation have transformed modern life – from smart phones changing the way we communicate and access information, to AI improving the impact of targeted marketing. Likewise, within the banking and finance industry – and the derivatives markets specifically – so too has technology (AI and automation) played a large part in transforming how we book and value trades, and how we communicate with our clients.


ISDA® SIMM in response to the margin regulations

When global regulators called for the posting of initial margin to protect against potential future exposure and systemic risk, the market needed to find a standard, automated calculation methodology to calculate this ‘potential future exposure,’ and ascertain how much initial margin each party is required to post. Rather than each counterparty investing millions in enhancing their internal systems, or setting these systems up from scratch (which would no doubt lead to many discrepancies and disputes), ISDA® came to the rescue with their Standard Initial Margin Model (ISDA® SIMM).


Since its inception in 2016, ISDA® SIMM has been adopted by more than 350 firms worldwide. The benefit of leveraging off ISDA® SIMM is that it is cost-efficient, it increases operational efficiency and creates a high level of certainty in the market in terms of reliable and standard methods of calculating initial margin exposures and amounts. The system can also be easily calibrated and adapted to address changing market conditions.


It should be noted that in the South African market, if a firm wishes to use ISDA® SIMM, approval from the regulator is required prior to adopting this model.


Legal Documentation

The legal industry is renowned for being slow to adopt technology! The derivatives market is no exception, with many counterparties still opting to negotiate legal agreements (ISDA®s, CSAs and Clearing Agreements) using paper documents and in some cases wet ink signatures.


ISDA® and Linklaters have partnered and are innovating in this area through their ISDA® Create portal where negotiations can be conducted electronically on the platform. Having your legal agreements digitised and stored centrally on the platform, will make amending agreements highly efficient and will make access to one’s current legal documents easy and reliable. 


Delivery of Notices

The 2002 ISDA® Master Agreement provides that default notices should be delivered either by post or facsimile. This goes to show how quickly technology changes the way in which we operate as I challenge anyone to find a fax machine in their office!


ISDA® is engaging with the market to establish a notices hub where firms can post notices and send automatic alerts to relevant recipients. This solution could facilitate the ease and speed at which important notices could be served. There is still some work to be done before this platform can be operational, but it is exciting to see how technology is playing an important role in automating and adding efficiency to the derivatives markets.

Source: Common Problems, Mutualized Solutions in the Derivatives Market written by Scott O'Malia, CEO of ISDA® (published in International Banker)

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