ISDA has issued a new definitions manual and related provisions designed to allow firms to record derivatives and securities financing transactions (SFTs) under a single ISDA Master Agreement.

The publication of the 2022 ISDA Securities Financing Transaction Definitions and SFT Schedule Provisions follows the October 2020 ISDA White Paper, which highlighted the significant opportunity for harmonization between the two markets. A single protocol for derivatives and SFTs will reduce complexity and duplication, improve efficiency in document negotiation and management, and enable consistent rollout of document updates for both sets of products.

The use of a single agreement will also expand the netting set, helping firms reduce credit risk and optimize their use of pledged collateral. ISDA will soon commission an update to the netting opinion covering SFTs, with the first scheduled to be released later this year.

"The new SFT definition and related regulations capture the unique characteristics of SFT transactions and allow firms to customize their relationships for SFTs while also enabling derivatives, repos and equity loans to be captured through a single close-out netting arrangement under the ISDA Master Agreement. Our next priority is to revise our netting opinion to cover SFTs, after which firms will be able to enter into new SFT and derivative transactions with the confidence of an enforceable close-out netting," said Katherine Tew Darras, ISDA general counsel.

"The release of the ISDA SFT definitions and regulations is a very welcome step that provides firms with the valuable option of recording derivatives and SFTs under a single ISDA master agreement. This has many potential benefits, including improved netting efficiencies for firms active in both markets," said John Ho, Head of Financial Markets Legal at Standard Chartered Bank.

Establishing common legal standards, terms and documentation will also help drive new technology innovation by applying terms consistently and at scale in the derivatives and SFT markets.

"At a time when financial institutions are looking for ways to increase efficiency and reduce costs, having a single legal agreement for both derivatives and SFT not only reduces duplication, but sets the stage for greater automation and interoperability between the two markets. Once we modify our netting opinion to cover SFT, we believe market participants will have a strong case for trading SFT under the ISDA Master Agreement," said Scott O'Malia, CEO of ISDA.

The new SFT document was developed by the ISDA Working Group, which consists of members from both the buyer and the seller. Linklaters collaborated with ISDA in drafting the definition manual and terms.

The 2022 ISDA Securities Financing Transaction Definition sets standard terms for SFT transactions and amends certain provisions under the ISDA Master Agreement to account for the unique nature of SFTs. The SFT schedule provisions enable counterparties to make certain selections with respect to SFTs recorded under the ISDA Master Agreement. Both can be found here.

ISDA Documents (1) Release of documents to align derivatives and SFT markets

  • ISDA Releases Document to Align Derivatives and SFT Markets (pdf)