ISDA consultation paper calls for trade automation of OTC derivatives by 2005

ISDA consultation paper calls for trade automation of OTC derivatives by 2005

The International Swaps and Derivatives Association (ISDA) has released a consultative paper calling for the automation of all OTC derivatives trades by 2005.

The target timeline calls for automated trade verification, confirmation and legal execution for interest rate, credit, equity, FX and commodity derivatives by June 2005.

ISDA says that 14 leading banks have agreed to lead and drive the changes necessary to achieve operational standardisation within the timeframe. The paper calls for T+1 confirmation of plain vanilla transactions and T+5 for the larger, more complex manual transactions.

The Association believes the automation of trade processing will reduce operational risk by facilitating straight-through-processing (STP), bi-lateral settlement reconciliation and collateral matching. By December 2005, counterparties should aim to be netting cashflows and performing novation with a central counterparty in an effort to remove further risk from the settlement process.

Robert Pickel, ISDA's executive director and CEO, says the paper is intended to provide a common direction and a clear framework for automating the processing of OTC derivatives transactions.

"While we recognise that not all ISDA member firms will have the technology investment or capability to achieve this vision by 2005, we believe a commitment by the major industry participants will help drive the remainder of the marketplace towards adoption of the standard," he adds.

Pickel says automating technologies is key to settling the rapidly growing volume of derivatives trades. The market standard being widely adopted is Financial products Markup Language (FpML), which enables firms to electronically generate, match and dispatch trading confirmations.

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