ISDA Updates FX Definitions Strategy

ISDA has published a strategy update as it continues its efforts to update its FX Definitions and related documentation, used by the foreign exchange market as the legal backbone in its dealings.

The update follows a survey taken earlier this year that sought to better understand if and how the 1998 Definitions and related documentation such as Annex A, supplements, additional provisions, forms of confirmations and template terms, might be improved and updated. The survey was driven by the need to take into account developments and events in the FX market, such as currencies becoming non-deliverable, and the general evolution of FX trading since 1998.

ISDA says over 50 market participants submitted “thoughtful” responses to its survey and additional market participants (including additional buy side firms) provided feedback to the association separately. Based on survey responses, ISDA is proposing steps that will result in new FX Definitions being developed and implemented towards the end of 2027.

The new FX Definitions will be a consolidated and natively digital set of components, including a Main Book and several Annexes/Matrices. Consistent with ISDA’s overall document digitisation strategy, it says the Definitions will be compatible with FpML and CDM.

ISDA observes that all of the changes received support from a “significant majority” of survey respondents, and adds it is also considering whether to include updates requested by the ISDA FX Operations Working Group that otherwise would have been added as a supplement to the current FX Definitions. Among other things, ISDA says it needs to confirm that a significant majority of market participants support including any such updates in the new documents.

The substantive updates to the Definitions include those looking at disruption events and fallbacks; the updating of the calculation agent; rounding; general fallbacks; novation protocols; unexpected holidays and central bank digital currencies (CBDC). There will also, as noted, be changes made to additional documentation such as EMTA Terms and other Template libraries.

The Main Book and the Annexes will be “versionable” so that ISDA can publish a new version from time to time with revised and/or new provisions in response to developments in the FX market. Upon publication of a new version, the updated provisions would automatically apply to all new and rolled FX transactions entered on or after the effective date of the new version (but would not apply to any FX transactions entered before that date).

This is in contrast to the existing FX Definitions, which cannot be updated (and, therefore, updates must be made by supplements that counterparties have to separately incorporate into their transactions).

ISDA says drafting will take place throughout 2024 and 2025, and it expects that it will finalise the new Definitions by November 2025 in order to allow time for implementation by infrastructure providers and market participants. ISDA will submit the final definitions to Swift in May 2026 (assuming Swift’s cycle for submissions remains the same). Implementation will then occur in November 2027 to align with Swift’s release schedule (again, assuming Swift’s cycle for submissions remains the same) and give market participants at least two years to update their systems and take other steps necessary for usage of the new Definitions.

Upon implementation of the new Definitions, market participants will reference them in all new FX transactions (including rolls of existing transactions). CCPs will reference the new FX Definitions in new and existing cleared FX transactions, while non-cleared FX transactions existing prior to the implementation date will continue to reference the existing Definitions (and/or related documentation).

Based on BIS data, however, ISDA says almost 80% of FX transactions roll over each year and more than 90% roll over within five years. Therefore, it explains, the amount of time during which there will be basis between legacy non-cleared derivatives that do not use the new FX Definitions and new derivatives that do use them will be relatively short.

Full details can be found here.