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".
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