Market sector alignment – at least from a documentation perspective, and updates from Capitol Hill on digital assets make the news. Here is our roundup of some of the headline news.
SFT Transactions & ISDA Master Agreements
The International Swaps & Derivatives Association (ISDA) has extended its reach to include derivatives and securities financing transactions (SFTs) within a single ISDA Master Agreement. The trade body has launched the 2022 ISDA Securities Financing Transactions Definitions along with the SFT schedule provisions. The move follows the publication of a whitepaper in Q4 2020 which outlined the alignment opportunities between the derivatives and SFT markets.
Why is this move significant? A single agreement for both markets create efficiency documentation negotiation and management and will provide other benefits in collateral management and technology. Pauline Ashall, partner at Linklaters, who advised ISDA alongside her colleagues, explains.
“When financial institutions are seeking to increase efficiency and cut costs, having a single legal agreement for derivatives and SFTs can streamline the burden of negotiating documentation, particularly for complex transactions with both derivatives and SFT features. Consistency of terms also establishes the foundation for greater automation and technological innovations across the derivatives and SFT markets, ” she said.
Additionally, there are advantages for collateral management. “While collateralisation for SFTs will continue to be calculated in accordance with current market practices, distinct from the credit support documentation for derivatives, there will be greater scope of netting of cash-flows across both SFTs and derivatives. On a counterparty default there would be considerable benefits from having consistent definitions of events of default, a single close-out process, and close-out netting across both SFTs and derivatives,” said Ashall.
So, what’s next then? The documentation is there so market participants should look into where they can utilise this, especially for any transactions with features of both derivatives and SFTs., noted Ashall. “We expect that firms are likely to start effecting transactions under the new documentation once the ISDA netting opinions have been updated to cover SFTs as well,” she added.
Biden and digital assets
On March 9th, U.S. President Biden signed an executive order on digital assets, including cryptocurrencies, that outlines “the first ever, whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology”. As stated in the White House statement, “The Order lays out a national policy for digital assets across six key priorities: consumer and investor protection; financial stability; illicit finance; U.S. leadership in the global financial system and economic competitiveness; financial inclusion; and responsible innovation.”
The order mandates various reports and studies and calls for the involvements of many government agencies. Following the White House announcement, U.S. Secretary of the Treasury, Janet L. Yellen, released a statement sharing the role of the Treasury and specifically announcing the department will working with other interagency colleagues with the aim to produce a report on “the future of money and payment systems”. How can we keep track of the reports and studies? Davis Polk has published a handy chart on the action items and summarising all the responsibilities, reports and timelines contemplated by the executive order.
So, what’s next for the regulation and oversight of the digital space in the U.S.? Read our “Quick View” feature on this very topic where Gabriel Rosenberg, Partner at Davis Polk, offers his quick view on the status of regulatory developments and the key market trends that will influence the areas of digital asset trading, stablecoins, decentralised finance (DeFi) and central bank digital currency (CBDC).
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