22 November 2014

Machine-readable OTC derivatives contracts move a step closer

11 April 2011  |  10561 views  |  1 Financial numbers

Regulatory efforts to introduce more automation in manually-driven over-the-counter derivatives trading have been advanced by the publication of new research into the feasibility of rendering OTC documentation in machine-readable format.

A joint study by the Securities and Exchange Commission and the Commodity Futures Trading Commission was commissioned in July under a Dodd-Frank mandate to explore "the feasibility of requiring the derivatives industry to adopt standardised computer-readable algorithmic descriptions which may be used to describe complex and standardised financial derivatives".

The SEC/CFTC study, published late Friday, concludes that "current technology is capable of representing derivatives using a common set of computer-readable descriptions. These descriptions are precise enough to use both for the calculation of net exposures and to serve as part or all of a binding legal contract."

However, while the use of automated techniques may be adopted across a "broad cross-section" of derivatives, their universal application as an industry standard requires further work. Outstanding issues include the development of "a universal entity identifier and product or instrument identifiers, a further analysis of the costs and benefits of having all aspects of legal documents related to derivatives represented electronically, and a uniform way to represent financial terms not covered by existing definitions".

The US Office of Financial Research is currently trawling for ideas about how it should go about creating a legal entity identifier (LEI) system for financial contracts.

The OTC study suggests that the SEC and CFTC seek input from other regulatory agencies and the OFR and "engage in a series of public-private initiatives to foster collaboration between the regulators and the derivatives industry to work toward representation of a broader cross-section of derivatives in computer-readable form".

Read the full study:» Download the document now 291.1 kb (PDF File)

Comments: (1)

A Finextra member | 11 April, 2011, 18:57

LEI is really so important to the FS industry for so many reasons. The need is for it to be global and cover all markets and all types of investor. If the industry is seduced by SWIFT it will set the whole concept back years. Whats needed is a fresh start with a Global council operating a not for profit licence for LEI use. It then should utilise existing networs and technologies to deliver to the user. I fear that SWIFT will be seen as a quick cheap option and that it is certainly not! 

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