May 20, 2021

Virtually the same: 35th ISDA AGM


The International Swaps and Derivatives Association held its 35th annual general meeting over three days last week. Last year, the conference was due to be in Madrid, but it was postponed, and with international travel even less viable this year, the conference moved online.

For those unable to attend the online version, here is a summary of the highlights, from a few of three of the topics covered: IBOR transition, prudential issues such as Basel III implementation and future challenges and opportunities such as digitalisation.

Absent the opportunity to meet like-minded souls over coffees and evening events, the online version was excellent.  Broader access, and a great line up of topics and presenters, alleviating the disappointment that the industry’s big event could not happen in person this year.

Perhaps a hybrid of a live event, with online access to broaden participation, will be on the cards in future years. We hope so…

IBOR transition

  • In many jurisdictions around the world the deadline for transition from LIBOR is 31 December 2021.
  • Sterling-denominated transactions appear to be transitioning fastest, with ISDA/Clarus data showing 44.9% of new GBP-denominated rates derivatives being SONIA-linked, vs 4.7% of equivalent USD trades referencing SOFR and 2.4% of JPY trades referencing TONA.
  • The FCA expects 97.5% of outstanding GBP LIBOR derivatives to transition to SONIA compounded in arrears by year end, thanks to widespread adoption of fallback mechanisms referencing that rate.
  • The Hong Kong Monetary Authority praised the widespread adoption of the ISDA 2020 IBOR Fallbacks Protocol among Hong Kong institutions, seeing an 86% fall in the number of contracts without adequate fallbacks once the Protocol came into effect in January 2021.
  • Despite the prominence of RFRs as alternative reference rates, several speakers noted that corporates appeared to prefer other rates with credit spreads or forward-looking elements, particularly in the loan market.
  • Depressed uptake in certain RFRs, and competition with other replacement rates, sparked some concerns for liquidity in these new markets. However, the general consensus was that the RFRs would end up with the greatest liquidity as the transition accelerates, with other alternatives being constrained to niche uses, at least where derivatives are concerned.

Pandemic liquidity responses

  • Several speakers’ remarks touched on non-bank financial institutions’ vulnerabilities resulting from the pandemic. The two key areas of concern were spikes in initial margin requirements (and the related pro-cyclicality these can have) when extreme scenarios hit and improving controls and disclosure around money market funds.
  • As the pandemic strained liquidity in derivatives markets, so did Brexit: after the transition period ended on 31 December 2020, EU trades of derivatives subject to the EU’s derivatives trading obligation (“DTO”) were unable to be executed on UK venues, with the converse being true for UK-based firms under the UK DTO. This may serve to push more trades to US swap execution facilities, which both regimes recognise as equivalent. Outside of equivalent venues, firms must trade with local counterparties, reducing liquidity and choice for market participants.
  • Andrew Bailey, Governor of the Bank of England, discussed several ideas being considered by the Financial Stability Board in relation to money market funds, including:
    • clarifying the definition of “cash-like” and clearly identifying those money market funds that are more or less cash-like;
    • limiting asset holdings to government instruments; and
    • moving from a cash on demand model to the introduction of a notice period for money market fund redemptions.

Capital requirements and Basel III implementation

  • With phases five and six approaching following a year-long, pandemic-induced delay, initial margin requirements will be expanding into smaller firms over the next 18 months. Issues flagged to look out for were:
    • needing to harmonise or otherwise manage a plethora of documentation resulting from the use of sub-advisors rather than having a single pool of managed assets;
    • completing KYC for your counterparty’s custodian – one speaker noted that this presents a large workload for which many were (and some may remain) unprepared; and
    • custodians’ on-boarding timetables should be considered, given the demands of regulatory change and a relatively fixed resource pool.
  • Many lenders showed reluctance to draw down on their capital buffers in the pandemic despite regulators’ exhortations to do so, fearing overly-aggressive post-pandemic mandates to replenish those buffers that might affect dividend payments, etc.

Digitalisation initiatives

  • Adoption of the Common Domain Model continues to increase, enabling greater compatibility, consistency and efficiency of derivative processes and calculations.
  • The 2021 ISDA Interest Rate Derivatives Definitions will be the first set of definitions to be natively digital, and are to be adopted by default starting on 4 October 2021. The major trading venues and central counterparties are all primed to adopt the new definitions as their defaults on that date.
  • ISDA Create recently added ISDA Master Agreements to its document library, widening the suite of documents which can be created, negotiated and executed electronically.

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