In a new publication, ISDA explores the benefits of digitization and blockchain solutions for global foreign exchange derivatives markets.
As blockchain and distributed ledger technology (DLT) use cases continue to grow across the broad spectrum of financial markets, the International Swaps and Derivatives Association, Inc. (ISDA) is once again stepping into the crossroads of technology and derivatives with the publication of the ISDA Legal Guidelines for Smart Derivatives Contracts: Foreign Exchange Derivatives (the Guidelines).
The Guidelines provide a general introduction to foreign exchange derivatives (FX) for those designing technological solutions for the FX market and examine the potential benefits and opportunities to apply DLT and smart contract technology to the FX market, taking into account the legal and operational issues that need to be considered.
Given the size of the FX market (second only to the interest rate derivatives market), and the fact that various features of FX trading lend themselves to standardization and automation, the Guidelines emphasize the existing and emerging opportunities for scalable technological solutions. Potential benefits for FX market participants from digitization, DLT, smart contract technology, and other innovative technological solutions include:
- Programmability and process automation
- Increased accuracy of valuation and settlement calculations
- Increased efficiencies and cost-savings
- Interoperability and scalability of solutions
- Enhanced operational resilience
From a regulatory perspective, the Guidelines note that digitization can promote and enhance compliance and oversight as a result of the “consistent creation, processing, and aggregation” of financial data across markets and jurisdictions. This may, in turn, strengthen operational resiliency and contribute to a reduction in regional and global systemic risks.
The Guidelines, with contributions from Latham’s Yvette D. Valdez, seek to provide a framework to assist developers and legal practitioners in tailoring solutions for the FX market that use innovative technologies, such as smart contracts and central bank digital currencies. Importantly, the Guidelines seek to ensure that the design and implementation of new technological solutions can proceed in a manner consistent with existing legal and regulatory expectations and requirements.
The Guidelines are part of the ISDA Smart Contracts library, a growing set of legal and regulatory resources for market participants seeking to apply innovative technologies to derivatives trading.