“Landmark” Change as ISDA Overhauls IRD Definitions

In what it describes as a “landmark change for the interest rate derivatives market”, ISDA has announced the implementation of its new standard definitional booklet for interest rate derivatives, designed to ensure its documentation keeps pace with changes in market practice, regulation and technology.

The 2021 ISDA Interest Rate Derivatives Definitions represent the first major overhaul of the definitional booklet since 2006 and are the first to be published in purely digital form, creating significant efficiencies in how firms use and interact with the definitions, the association says.

The new definitions consolidate the nearly 90 supplements to the 2006 Definitions into a single electronic booklet, reducing complexity and the potential for error. In the future, ISDA says it will republish a revised digital version of the 2021 Definitions in full each time updates are required, eliminating the need for further PDF or paper supplements.

The 2021 Definitions introduce a number of other important updates and enhancements, reflecting changes in convention and advances in technology, including:

• The ability to easily compare and highlight changes between different versions of the 2021 Definitions via ISDA’s new electronic documentation platform, MyLibrary.
• The methodology used to determine a cash settlement amount for swaptions and trades subject to early termination has been replaced to align with current collateral and valuation practices.
• The naming conventions for floating rate options have been amended to make them more standardised, with the publication source removed as a defining characteristic to help streamline the definitions.
• Certain payment and calculation provisions have been revised to make the definitions more robust in the face of market closures.
• A new fallback trigger has been introduced that would take effect if a party is prohibited from using a benchmark to perform its obligations. Generic fallbacks have also been added for those floating rate options without existing fallback arrangements, complementing the existing ISDA fallbacks for interbank offered rates.
• The calculation agent provisions have been modified, with the addition of a framework for disputing determinations made under the cash settlement and generic fallback methodologies.

“The 2006 ISDA Definitions have played a pivotal role in the interest rate derivatives markets for the past 15 years, but wading through a definitional booklet plus 586 pages of amendments via nearly 90 supplements is no longer sustainable,” says Scott O’Malia, ISDA’s chief executive. “The new 2021 ISDA Interest Rate Derivatives Definitions brings the interest derivatives market up to date and into the digital age, enabling firms to easily access and navigate a consolidated set of definitions in electronic form.”

Susi de Verdelon, group head of SwapClear and listed rates at LCH, adds, “LCH is a strong supporter of the 2021 ISDA Interest Rate Derivatives Definitions. Given the increased electronification of markets since the last major definitional overhaul, we commend ISDA for using the publication of the 2021 Definitions to reinforce standardisation, drive messaging fidelity and efficiency, accommodate flexibility in interest rate derivatives markets and anticipate future market changes.”

Implementation comes four months after the 2021 Definitions were published, and follows 18 months of consultation and feedback from buy- and sell-side market participants. ISDA says most major central counterparties have announced they will reflect the 2021 Definitions in their rules from today (4 October). ISDA adds it expects implementation in the non-cleared derivatives market to be phased in over time, in line with the experience of other definitional booklet launches, however, it will no longer support or update the 2006 ISDA Definitions from October 4.

“The 2021 ISDA Interest Rate Derivatives Definitions introduce some important changes to reflect current market practices and bring the industry standard documentation up to date,” says Guy Gurden, global head of MarkitServ rates product management at Osttra.