The International Swaps and Derivatives Association (ISDA) held their Annual General Meeting (AGM) in Madrid, Spain on May 10th-12th. This conference featured keynote addresses from some of the senior financial, banking, and derivatives regulators around the world. It focused on some of the prominent issues facing the industry including crypto and digital assets, regulatory reporting, and document digitization. During the conference, ISDA celebrated the 10-year anniversary of the of the launch of ISDA Amend with IHS Markit (now S&P Global Market Intelligence), the platform allowing derivative counterparties to exchange regulatory documents and representations electronically.

Some of the speakers at the AGM included Securities and Exchange Commission (SEC) Chairmen Gary Gensler, Commodity Futures and Exchange Commission (CFTC) Chairmen Rostin Behnam, Chair of the Financial Stability Board (FSB) Klaas Knot, Chairman of the Basel Committee on Banking Supervision Pablo Hernández de Cos, Chair of the European Securities and Markets Authority (ESMA) Verena Ross. There were additional sessions with FTX CEO Sam Bankman-Fried, Founder and a regulatory panel with representatives from the U.S. Treasury Department, CFTC, U.K. Financial Conduct Authority (FCA), European Commission and FSB.

Crypto - do regulators need tools or are they locked and loaded?
A large focus of the conference was the emergence of cryptocurrencies, stablecoins and digital asset derivatives. In the past year, the transaction volume for crypto-linked derivatives has eclipsed the volume in the crypto spot market. At the same time, many of the largest digital asset exchanges have moved to acquire CFTC regulated entities including Futures Commission Merchants (FCMs), Derivatives Clearing Organizations (DCOs) or even going so far as registering as Swap Dealers with the CFTC. These developments combined with the considerable volatility around crypto assets, including the implosion of one of the largest stablecoins (Luna's TerraUSD coin) during the conference, heightened the focus on the need for regulation and standard documentation in the sector.

Almost every regulator that spoke at the AGM, made mention of crypto and the influence digital assets are having on financial markets, especially the derivatives market. They also stressed the need for clear standards and regulations that could allow innovation to continue in the sector while mitigating the potential systemic risk that can arise from these assets. The bifurcated nature of the regulatory apparatus around crypto in the United States was noted a major challenge by many of the regulators and panelists that were present at the AGM.

This dichotomy was on vivid display when comparing the addresses by leaders of the CFTC and SEC. Chairmen Behnam and CFTC Commissioner Caroline Pham talked about the need for additional legislation to help define who regulates the digital asset market, particularly the spot market for cryptocurrencies. Both believed the CFTC, given its traditional role regulating OTC derivatives in the U.S., was the logical body to lead the regulation of digital assets. They also stressed the need to work with the industry and foster innovation in this emerging asset class.

SEC Chair Gensler on the other hand repeatedly mentioned the risks to investors and potential impacts on financial stability that the emergence of digital assets could pose. He asserted his view that the SEC already possessed much of the authority it needed to regulate digital assets under the existing securities laws, particularly the vast majority cryptocurrencies which he believed fell under the definition of a security. One of the most noteworthy statements Chair Gensler made pertained to regulating digital asset platforms and exchanges. He put forward the view that if these exchanges were offering digital asset derivatives linked to underlying digital assets he considered to be securities, then they might have to register as Security-Based Swap Dealers (SBSDSs).

Regulatory Reporting - ESG & Crypto Standards Needed, New Dodd-Frank & EMIR Rules
Another central theme of the conference revolved around the data that was being disseminated to regulators and the public. For emerging assets like crypto and Environmental Social and Governance (ESG), reporting requirements are still in development and there continue to be questions about the quality of the data used to measure and quantify the environmental risks posed by these asset classes. Traditional instruments like equities, fixed income and derivatives already have established reporting regimes, yet there was considerable debate as to whether this information should be disseminated to the public via a consolidated tape. Verena Ross, Chair of ESMA, announced the European Union's intention to create a consolidate tape in the EU, starting with fixed income instruments and then moving to equity and derivative instruments over time.

Reporting requirements were a top priority for many conference attendees who are cognizant of the amendments to the CFTC swaps reporting regime are scheduled to go into effect on December. CFTC Behnam confirmed to the audience that there would be no extension of the no-action relief that expires on December 5, 2022. This will be followed by the EMIR Refit reporting amendments that become effective in 2023. S&P Market Intelligence showcased its Global Regulatory Reporting Solutions (GRSS) which allows clients to use a single software platform that allows reporting in virtually every major reporting jurisdiction including the U.S. EU, Japan, Singapore, Hong Kong, Canada, and Australia.

One of the most important elements of the CFTC re-write is the addition of a new transaction reporting field known as the Federal Entity Indicator (FEI). This field will need to be included on all swap transactions that are required to be reported to a Swap Data Repository (SDR) under Part 43 and Part 45 of the CFTC's rules and is designed to denote whether or not the counterparty is transacted with a federal entity. Without a central database of these federal entities or a definition that aligns with other previous regulations, it will be incumbent upon Swap Dealers to collect this information for all of their in-scope derivative counterparties.

On one of the panels, Lansing Gatrell (Managing Director, S&P Global) mentioned that the absence of such a central database is what makes platforms like ISDA Amend so powerful by providing a mechanism of collecting data like the FEI.

Document Digitization
Digitization and harmonization of contractual terms was another central focus of the conference. The need for unified standards, templates and definitions came up in almost every discussion of crypto and ESG at the AGM. Many pointed to the evolution in the credit and cleared derivatives market to highlight the potential benefits that standardization can bring.

One significant development came in opening remarks by ISDA CEO Scott O'Malia, when he announced the alliance between ISDA, Linklaters and S&P Global Market Intelligence to make the ISDA Create contract negotiation platform available within S&P Global Market Intelligence's Counterparty Manager service. ISDA Create allows users to customize legal documents such as ISDA Master Agreements and Credit Support Annexes (CSAs) using built-in clause library thereby providing greater efficiency and transparency to the current practice of emailing redlined documents. The integration of ISDA Create into Counterparty Manager will now give customers the ability to complete the entire onboarding lifecycle, including the formal contract negotiation, within one software platform.

Posted 15 June 2022 by Adam Goldberg, Regulatory and Compliance SME, Network & Regulatory Solutions, S&P Global Market Intelligence

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.