Finding Contractual Provisions in Stressed Markets

November 12, 2024

When trouble strikes, firms need to get a grip on their derivatives exposures quickly. That can mean having to scour hundreds of pages of paper or PDF documents to determine what options are available, a grueling process that can take time. But in volatile, fast-moving markets, delays cost money. There is a better way. A digital approach to documentation allows firms to zero in on critical clauses at the push of a button. And the latest upgrades to the ISDA MyLibrary digital documentation platform mean that process has become easier than ever before.

MyLibrary is an online hub that houses core ISDA documentation in digital form, including the 2002 ISDA Master Agreement, the 2021 ISDA Interest Rate Derivatives Definitions and the 1998 FX and Currency Option Definitions. Launched in 2021, the platform now hosts over 135 derivatives documents and document versions, giving users the ability to access and navigate commonly used agreements in one place.

As part of a series of recent improvements, the MyLibrary search function has been significantly enhanced, allowing users to rapidly identify all occurrences of specific terms across documents, meaning firms can find the critical provisions, rights and obligations associated with their trades even more quickly than before. Users can also now search by date, ensuring they can, within seconds, drill down to the prevailing primary and ancillary documents at the time a particular trade was executed and digitally bookmark key passages. Both these developments will improve efficiency and reduce risk at times when key contractual terms need to be identified swiftly.

Just think about the alternative. A firm would need to pull together the original document or definitions and all the relevant supplements that prevailed at the time the trade was agreed, then trawl through what could be hundreds of pages to find the pertinent provisions. Bookmarking would basically involve a highlighter pen and sticky notes. That would take manpower and time at a point when every second counts.

Combined with ISDA Create, a digital platform for the negotiation and execution of derivatives contracts that captures and stores the resulting legal data, firms can access the specific details of their negotiated trades within a few clicks of a mouse, giving them a complete picture of their exposures.

Having reviewed its rights, a firm might opt to take the nuclear option of terminating a trade with a counterparty, but that process has become incredibly complicated in recent years - something that became clear when Silicon Valley Bank and Signature Bank failed last year. Specifically, new mandatory margining and collateral segregation requirements for non-cleared derivatives, plus the implementation of bank resolution regimes and the potential for temporary stays on termination, created acute complexities that banks would have been navigating for the first time, potentially slowing their response.

As a remedy, we recently launched the ISDA Close-out Framework - essentially, an online decision tree that sets out the questions firms would need to ask, the steps they would need to take and the order in which they would need to take them when dealing with a termination. We'll shortly be launching a series of 'tabletop' exercises, in which senior executives from different parts of a firm will work through a hypothetical termination scenario, using the Close-out Framework as a reference tool. As regulators increasingly focus on internal bank processes for managing the default of a counterparty, we hope this will be a useful preparatory resource to help firms plan for the worst.

A critical part of the close-out process is the physical delivery and receipt of termination notices, but this has long been problematic if firms have moved offices without updating the address details in their documentation. A more recent issue emerged during the pandemic lockdowns, making it extremely difficult to deliver or receive notices.

Our response is the ISDA Notices Hub - an online platform that will enable the instantaneous delivery and receipt of critical termination notices, eliminating risk exposures and potential losses that can result from delays in terminating derivatives contracts. We're currently working on building the platform, which will launch next year on S&P Global Market Intelligence's Counterparty Manager platform.

This is all part of an effort to create a digital solution for managing terminations - from the review of documents to sending termination notices and navigating the close-out process. Together, these solutions will allow firms to cut errors and risk and redeploy resources, making derivatives markets safer and more efficient, even in the most turbulent of times.

Visit the ISDA Solutions InfoHub to learn more.