October 2020

Whitepaper: Collaboration
and Standardization
Opportunities in Derivatives
and SFT Markets

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

CONTENTS

EXECUTIVE SUMMARY.................................................................. 3

INTRODUCTION............................................................................ 5

PART 1
Overview of Repos, Stock Loans and Derivatives....................................................... 6

• Repos......................................................................................................... 6

• Stock Loans................................................................................................ 7

• Derivatives.................................................................................................. 8

Interconnectedness and Overlap of the Repo, Securities Lending and

Derivatives Markets................................................................................................ 9

The Case for Harmonization of the Repo, Securities Lending and

Derivatives Markets.............................................................................................. 11

Potential Industry Solutions to Improve Efficiencies Between Derivatives

and SFT Markets................................................................................................. 16

PART 2
SFTs and the Existing ISDA Documentation Architecture......................................... 22

Legal, Tax and Regulatory Considerations............................................................... 28

Practical Considerations....................................................................................... 30

CONCLUSION AND NEXT STEPS.................................................. 31

APPENDIX: KEY PROVISIONS COMPARISON:

GMRA, GMSLA AND ISDA MASTER AGREEMENT.......................... 32

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

EXECUTIVE SUMMARY
Financial market participants around the world share a common goal and a common challenge: to
increase margins and profitability by more efficiently deploying capital and other resources while
maintaining strong balance sheets.

One of the important ways firms are working towards this is by standardizing and automating
processes and functions. These efforts are occurring on an individual basis within institutions. They
are also occurring on a collaborative basis across firms, in the form of various industry utilities and
trade association initiatives.

ISDA believes an important opportunity exists to further expand these efforts. This paper explains
and illustrates how and why two large, important and interconnected markets – derivatives and
securities financing transactions (SFTs) – could collaborate to achieve greater standardization and
improved efficiency.

Key elements of such an approach would include:

• Developing common legal definitions across the derivatives and SFT markets, documenting
derivatives and SFTs under a common master agreement and procuring one set of legal opinions
in jurisdictions around the world on close-out netting for both derivatives and SFTs.

• Implementing consistent solutions across the derivatives and SFT markets that enable market
participants to more seamlessly adapt and migrate when key changes (such as the interbank
offered rate (IBOR) transition) occur.

• Facilitating the digitization of the derivatives and SFT markets, in terms of both negotiating and
documenting trades, and developing a consistent trade record for confirmations and reporting,
with standardized trade content and formats.

The benefits of such an approach could be significant. These benefits would include increased
operating efficiency (by reducing duplicative efforts, scaling legal work and digitizing/automating
processes) and potentially reduced credit risk (by facilitating collateral payment netting and
expanding close-out netting sets, which could favorably impact firms’ capital).

There are of course significant challenges that market participants would confront on the road to
increasing collaboration and standardization across the derivatives and SFT markets. All joint legal
work, for example, would need to recognize and preserve the unique characteristics that define
products in individual market segments. In addition, transition by a particular market segment to a
newly derived definition of a term for use across markets would need to factor in whether and how
a legacy book of business can and should be migrated to the new standard, and how that might
influence adoption of the new term.

Because of the benefits that increased collaboration and standardization appear to offer, and to
assist market participants in considering alignment between derivatives and SFT markets, ISDA has
developed this paper.

The first part provides an overview of the repo, stock loan and derivatives markets, discusses their
interconnectedness, outlines opportunities for efficiencies and describes the potential benefits of
realizing such efficiencies.

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

The second part sets out a proposal for how this could be achieved. It provides a path for expanding
the ISDA Master Agreement so it could be used to document both derivatives and SFTs. It also
considers certain key issues that would need to be addressed in such an exercise, and includes a
granular analysis of key terms from the different documents to identify specific potential synergies,
as well as those key product terms where specificity would need to be maintained.

ISDA hopes this paper will elicit constructive dialogue and analysis among derivatives and
SFT market participants on the benefits, challenges and feasibility of a more collaborative and
standardized approach in these key financial segments.

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

INTRODUCTION
Repurchase transactions (repos) and securities lending transactions (stock loans and, together with
repos, SFTs1) and derivatives transactions are used by similar market participants, share a number
of common features and are documented under similarly structured agreements. Despite this, the
SFT and derivatives markets use different terminology for the same concepts and different processes
or methodologies to accomplish the same goals. This limits the ability to achieve synergies and
efficiencies between these markets and potentially risks creating unintended inconsistencies across
them.

While there are undoubtedly some differences that are required due to the nature of the repo,
securities lending and derivatives markets, ISDA believes there is an opportunity to put in place
common standards with respect to the terminology and documentation used in these markets.
This, in turn, can mean that a common solution is found by automating and updating the
documentation in each market. Similarly, pre- and post-trade processes can be standardized,
bringing an enhanced level of efficiency across the SFT and derivatives markets.

Part 1 of this paper:

• Provides an overview of what repos, stock loans and derivatives are, how they are documented
and the overall size of those markets;

• Discusses the interconnectedness of the SFT and derivatives markets;

• Describes how the SFT and derivatives markets have developed in a manner that has created the
opportunity for efficiencies; and

• Describes the potential efficiencies and benefits that could be achieved through the
harmonization of those markets.

Part 2 of this paper:

• Sets out ISDA’s proposals on how the ISDA Master Agreement could be expanded to document
SFTs in addition to derivatives; and

• Includes a high-level analysis of some legal, tax and regulatory considerations, and highlights
some key points where further feedback from members would be needed.

Rather than having multiple sets of master documentation, significant market efficiencies could
be achieved if market participants were able to use the ISDA Master Agreement and other ISDA
documentation to transact SFTs as well as derivatives.

The term SFT in this paper is not intended to have the same meaning as securities financing transactions as defined in the Securities Financing
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Transactions Regulation, which includes commodity loans and repos, and margin lending. It is intended to cover securities loans and repos or buy-sell
back transactions relating to securities

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

PART 1
OVERVIEW OF REPOS, STOCK LOANS AND
DERIVATIVES
Repos

What Are Repos and How Are They Documented?

A repo is a transaction involving the sale of a security or other asset with a commitment by the
seller to buy an equivalent asset back from the purchaser at a specified price, on demand or on a
designated future date.

Repos function commercially as a form of secured lending. The seller of the securities raises
financing on a short-term basis and the buyer receives a return on the funds transferred. The return
is the difference between the price at which it buys the assets from, and sells the assets back to, the
seller, with the price calculated based on interest rates for the financing. The return does not change
according to market fluctuations in the value of the purchased securities.

Repos are typically documented under the Global Master Repurchase Agreement (GMRA) (English
law) or Master Repurchase Agreement (MRA) (New York law). For simplicity, this paper refers only
to the GMRA. The GMRA is a form of master agreement – ie, an agreement containing standard
terms applicable to all transactions documented under that agreement. The GMRA comprises a
pre-printed form of agreement containing standard provisions that are generic to the repo market
and a negotiated annex containing elections and any supplemental terms agreed between the parties
(see Figure 1). The GMRA also includes a number of additional optional annexes setting out
additional or alternative terms relating to repos of equities, repos transacted by an agent on behalf
of a principal, repos in the form of buy-/sell-backs and repos of certain domestic securities (eg, UK
gilts and Italian securities).

Most of the terms of the repo are found within the GMRA. The remaining transaction-specific,
key economic variables (eg, number of securities, repo rate and repurchase date) are recorded in a
confirmation. A separate confirmation is entered into for each repo.

Figure 1: GMRA Documentation Structure

GMRA
(Including Annex) Product-specific Annexes
Governs the legal and contractual relationship (eg, Gilts Annex, Italian Annex, Equity Annex)
between the parties, as well as including
some transactional terms

Confirmations
Specifies the economic terms of
each transaction

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

The Repo Market

Repo markets are an essential source of secured financing for banks and financial institutions, with
a significant volume of that financing coming from central banks. The largest repo markets are in
Europe and the US, with active repo markets in approximately 40 other countries2.

The average size of daily outstanding notional in the European repo market in 2019 was
approximately €8.3 trillion3.

The average size of daily outstanding notional in the US repo market in 2019 was approximately
$4.5 trillion, split between $2 trillion of repos and $2.5 trillion of reverse repos 4,5.

Stock Loans

What Are Stock Loans and How Are They Documented?

A stock loan is a form of transaction where securities are transferred from one party (the lender)
to another party (the borrower) for a fee. The borrower is obligated to return equivalent securities,
either on demand or at the end of an agreed term. Any type of securities can be used for this
purpose, including shares, government bonds or corporate bonds, although shares are the most
common.

The borrower pays a stock lending fee for the use of the securities and provides collateral against its
obligation to re-deliver equivalent securities, in the form of cash, other securities or standby letters
of credit.

The motivation for entering into a stock loan is typically the desire of the borrower to acquire the
particular securities being lent (in particular, to settle short sales and avoid settlement failures) and
the lender’s desire to make a return on lending such securities. In this respect, stock loans differ
from repos. However, when the borrower provides cash as collateral under the stock loan, the
transaction looks very similar to a repo.

Stock loans are typically documented under the Global Master Securities Lending Agreement
(GMSLA) (English law) or Master Securities Lending Agreement (MSLA) (New York law). For
simplicity, this paper refers only to the GMSLA. Like the GMRA, the GMSLA is a form of master
agreement, comprising a pre-printed form of agreement containing standard provisions that are
generic to the securities lending market and a negotiated schedule containing elections and any
supplemental terms agreed between the parties (see Figure 2).

As with the GMRA, most of the terms of the stock loan are included in the GMSLA. The parties
will then enter into a confirmation for each individual stock loan, which records the key economic
variables for that transaction (eg, number of securities, agreed term of the loan and stock lending fee).

‘Frequently Asked Questions on Repo’ on the International Capital Market Association (ICMA) website - https://www.icmagroup.org/Regulatory-Policy-
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and-Market-Practice/repo-and-collateral-markets/icma-ercc-publications/frequently-asked-questions-on-repo/
ICMA’s semi-annual survey of the European repo market in December 2019 (published in April 2020) - https://www.icmagroup.org/assets/documents/
3

Regulatory/Repo/Surveys/ICMA-European-repo-market-survey-number-38-conducted-December-2019-210420.pdf. This figure is based on data from

the 58 most active participants in the European repo market
A reverse repo is the mirror of a repo. In a reverse repo, one party purchases a security or other asset with a commitment to sell back an equivalent
4

asset at a specified price, on demand or on a designated future date

Based on data published on the Securities Industry and Financial Markets Association website
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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Figure 2: GMSLA Documentation Structure

GMSLA
(Including Schedule) Addenda
Governs the legal and contractual (eg, UK Tax Addendum, US Tax Addendum)
relationship between the parties, as well
as including some transactional terms

Confirmations
Specifies the economic terms of
each transaction

The Securities Lending Market

The securities lending market is primarily focused in Europe and the US. As at December 31, 2019,
the reported global on-loan balances for stock loans were approximately €2.3 trillion6.

Derivatives

What Are Derivatives and How Are They Documented?

A derivative is a financial instrument under which the future obligations of one or more of the
parties reference, or are linked to, an asset, entity, index or other variable (known as the underlying).
A wide range of financial assets, indices and variables can be referenced, including equities or equity
indices, fixed-income instruments, foreign currencies, commodities, weather and inflation.

In general, derivatives transactions are documented under the ISDA Master Agreement. Like the
GMRA and GMSLA, the ISDA Master Agreement comprises a pre-printed form of agreement and
a negotiated schedule. However, unlike the GMRA and GMSLA, the ISDA Master Agreement is
not product-specific. This is reflected in its modular architecture, with relationship terms, product
terms, collateral terms and economic trading terms set out in separate documents (see Figure 3). In
contrast, product terms are set out in the GMRA and GMSLA (and, in the case of the GMRA, in
the annexes to the master agreement).

ISLA’s Securities Lending Market Report – 12th Edition (February 2020) - https://www.isla.co.uk/assets/smart-pdfs/isla-securities-lending-market-report-
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february-2020/files/downloads/ISLA_SLReport_Feb2020_spreads.pdf

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Figure 3: ISDA Master Agreement Documentation Structure

ISDA Master Agreement

(Including Schedule)
Credit Support Documentation
• Governs the legal and credit (eg, 2016 Variation Margin (VM) Credit
relationship of parties Support Annex, initial margin documentation)
• Schedule makes elections and changes
to standard provisions

Confirmations
• Specifies the economic terms of Definitions Booklets
each transaction (eg, 2006 Definitions, 2002 Equity Derivatives
• Includes transaction-specific modifications Definitions)
• Incorporates definitions

The Derivatives Markets

The largest derivatives markets are in Europe, the US and Asia. As at June 30, 2019, the outstanding
notional of derivatives transactions was $640.4 trillion7.

Interconnectedness and Overlap of the Repo, Securities Lending and

Derivatives Markets

The SFT and derivatives markets already interconnect in a number of ways. The following sections
list some examples of how this occurs with repos, stock loans and derivatives transactions, whether
as components of the same wider transaction or as a product that enables or optimizes the entry
into one of the other products.

Equity Derivatives and Stock Loans

Stock loans are used for financing, hedging and pricing purposes in respect of equity derivatives. For
example, if a dealer (the option seller) enters into an equity derivative (such as a put option), a stock
loan can be used to hedge the option (see Figure 4). If the option seller entered into the option
alone, it would be exposed to the risk that the share price falls below the strike price of the option.
However, if the option seller can also enter into a stock loan as borrower and immediately sell the
securities it borrows in the market at their current price, it will have hedged this risk. The option
seller may enter into further hedging transactions during the life of the transaction as the delta of
the option changes.

Bank for International Settlements OTC Derivatives Statistics https://stats.bis.org/statx/srs/table/d5.1?f=pdf

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Figure 4: Use of a Stock Loan to Hedge a Put Option

Put Option Stock Loan

Option premium Securities

Option Strike price on Option

exercise of option Seller/ Re-delivery of securities on Lender
Buyer Borrower exercise of option
Securities on exercise
of option

$ Securities

Market

Total Return Swaps and Repos

Repos are used for financing, hedging and pricing purposes in respect of total return swaps 8. For
example, if a market participant takes a short position under a total return swap, it may finance
the hedge for that position via a repo (see Figure 5). Due to the similar economic effect that can
be created by total return swaps and repos, some market participants will use these instruments
interchangeably 9.

Similarly, certain derivatives, like repos, can also be used as investments if, for example, an investor purchases a future on an index in order to gain
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exposure to the share market and subsequently chooses to roll over the future. While repos are not themselves hedging instruments, they can be used
to hedge some derivatives (such as floating rate agreements and floating rate swaps). See Is the Repo a Derivative? Pierre Faure, African Review of
Economics and Finance, 2011

A total return swap is a form of swap whereby one party makes payments based on the return of a reference asset such as a bond, equity or index
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and the other party makes payments based on a set rate (normally either a fixed or floating rate of interest). For example, if Party A and Party B enter
into a total return swap, where the reference asset is gilts with Party A as the total return payer and Party B as the total return receiver, Party A will be
synthetically short gilts and Party B will be synthetically long gilts. Under the total return swap, Party A will make payments to Party B based on the
return from the gilts (including any appreciation in the value of the gilts). Party B will make periodic payments to Party A based on a fixed or floating
rate, as well as payments resulting from any depreciation in the value of the gilts. In this example, the total return swap is being used as a means of
Party A providing exposure to the gilts to Party B on a financed basis. This is similar to the economic purpose behind the parties entering into a repo
over the gilts where Party A acts as buyer and Party B acts as seller. However, the repo will also the involve the sale of gilts by Party B to Party A at
the outset and the resale of gilts from Party A to Party B at the conclusion of the transaction, so there are additional funding and asset availability
considerations under a repo as compared to a total return swap. Based on their particular facts and circumstances, parties may therefore be able to
choose whether to document certain transactions as repos, stock loans or derivatives, knowing that they can achieve the same or a very similar overall
economic purpose

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Figure 5: Use of a Repo to Finance the Hedge for a Total Return Swap
Total Return Swap Repo

Periodic payments Purchase price

Total Return Total Return

Payments based on Securities Buyer
Receiver Payer/Seller
return from securities
Return on securities

Purchase
Securities
price

Market

Collateral Management

The introduction of regulatory requirements to clear certain derivatives transactions and to margin
non-cleared derivatives transactions, as well as capital and leverage requirements, have increased the
demand for eligible high-quality liquid assets. SFTs are used by derivatives market participants to
source the collateral they need to meet their margin requirements for both cleared and non-cleared
transactions.

Examples of this include:

• Collateral transformation: Market participants can use SFTs to source eligible collateral, or
exchange their assets for eligible collateral, to meet their regulatory margin obligations.

• Collateral optimization: SFTs are used in optimizing collateral so market participants can meet
their regulatory margin obligations in a cheaper and more efficient manner.

The Case for Harmonization of the Repo, Securities Lending and

Derivatives Markets

The size of each of the repo, securities lending and derivatives markets has significantly increased over
the past 30 years, as each instrument has established an integral place in the financial markets10.

As the drivers for using SFTs and derivatives transactions have begun to intersect and overlap,
similar legal and commercial issues have arisen with respect to both SFTs and derivatives
transactions. Additionally, these commonalities may have led to the application of similar
regulations to both the SFT and derivatives markets. Unsurprisingly, each market has developed
similar documentation structures and products to resolve some of these legal, commercial and
regulatory issues.

Repos and stock loans allow market participants to monetize their securities holdings and repos are also a common tool used by central banks to
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support monetary policy and financial market stability. Although originally introduced as a method of risk management for market participants, the use
of derivatives has expanded significantly, with derivatives now also being used, among other things, to take synthetic positions on the performance of
an asset and provide alternative forms of financing

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

If a uniform approach is developed for these markets, participants would be able to efficiently adopt
one approach, rather than implementing multiple solutions to the same problem, depending on the
relevant type of financial instrument.

As all three markets look to invest in technology to achieve operational efficiencies, it is important
that such technology is built on a strong common foundation so it can operate seamlessly across
these markets.

Overlapping Market Participants

Participants in the SFT and derivatives markets have traditionally overlapped. Banks (including
investment banks, commercial banks and central banks), prime brokers, funds (including hedge
funds, pension funds and sovereign wealth funds) and market infrastructures (such as clearing
houses) are among the biggest players in both the derivatives and SFT markets.

Prime brokers are a particularly good example of this type of market participant, as they routinely
enter into both SFTs and derivatives transactions with, or on behalf of, clients, and re-hypothecate
client assets to facilitate trading activities on their behalf.

Given the number of services offered by prime brokers, these firms are looking for efficiencies in
the way they offer those services. Along with other entities trading both SFTs and derivatives, they
could benefit from less complexity in the documentation they need to enter into with their clients,
as well as a streamlining of the post-trade processing and collateral management they undertake on
behalf of those clients.

Similar Documentation Structure

Repos, stock loans and derivatives are all documented under master agreements, which provide
framework terms that apply to all transactions between the parties. Elections are made in a schedule
or annex, potentially with additional terms set out in annexes and/or definitional booklets, and
individual transactions are documented under a confirmation.

Although certain terms in each master agreement (or its accompanying definitional booklets in the
case of the ISDA Master Agreement) are product specific, there is significant overlap between other
terms in each master agreement, particularly the relationship terms in each agreement.

The overlapping terms in the GMRA, GMSLA and ISDA Master Agreement include:

• Default and termination provisions: Each agreement contains events of default triggered by a
failure to pay or deliver 11, insolvency, misrepresentation, admission by a party of its inability or
intention not to perform, and breach of obligations under the agreement not already covered by
other events of default. Under each agreement, following the occurrence of an event of default,
the non-defaulting party may, by way of notice to the defaulting party, trigger the close-out of
all outstanding transactions under the agreement and calculate a termination amount payable
between the parties.

Both the GMRA and GMSLA generally operate on the basis that failure to deliver securities or redeliver equivalent securities is not an event of default
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that could trigger termination of all transactions under that master document, but instead enables the other party to elect to close out the relevant
transaction

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

• Representations and warranties: Each agreement contains representations (or, in the case of the
GMSLA, warranties) relating to each party’s status and authority and capacity to execute the
agreement and any transactions thereunder.

• Notice provisions: Under each agreement, notices may be sent by post, fax or electronically.
Under each agreement, the delivery rules vary depending on the means used, but broadly involve
the notice’s arrival within the receiver’s sphere of control, except where this is not on a business
day.

• Definitions: A number of generic definitions are included in each of the GMRA, GMSLA and
ISDA Master Agreement. These include definitions relating to business day, insolvency, income,
dividends and tax.

Both SFT and Derivatives Users Rely on Industry Opinions on Close-out Netting

Close-out netting is a key method of reducing the credit risk involved in entering into multiple
transactions. It is one of the main reasons why SFTs and derivatives are documented under master
agreements.

Close-out netting consists of three parts: (i) early termination of transactions following the default
of a party to the agreement; (ii) valuation of the defaulted transactions; and (iii) calculation of a
single termination amount with respect to all transactions under the master agreement by offsetting
the value of each transaction under the agreement.

Close-out netting, in effect, allows the parties to a master agreement to treat all transactions under
that agreement as a single transaction. This avoids the situation where a counterparty is subject
to insolvency proceedings and the insolvency official tries to disclaim contracts that are out of the
money (ie, where the insolvent party would be required to make a payment) but collect under all
transactions that are in the money (ie, where the insolvent party would be owed a payment). This is
commonly referred to as ‘cherry picking’.

It is vital that market participants can rely on the enforceability of close-out netting provisions
under each of their master agreements, both to reduce their credit risk and because such opinions
allow for more favorable regulatory capital treatment.

Consequently, industry bodies in each of the SFT and derivatives markets have published legal
opinions covering the enforceability of close-out netting provisions under each of their industry
master agreements. Opinions are available for a significant number of jurisdictions worldwide.

Although ISDA publishes its own opinions on the ISDA Master Agreement, the International
Securities Lending Association (ISLA) and International Capital Market Association (ICMA) began
publishing a joint opinion on the enforceability of close-out netting under the GMRA and GMSLA
in 2020. This comprises a core opinion covering both the GMRA and the GMSLA, with specific
appendices for the GMRA and GMSLA, respectively. Separate opinions are published by the
Securities Industry and Financial Markets Association in respect of the MRA, MSLA and Master
Securities Forward Transaction Agreement (MSFTA).

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Similar Regulatory Treatment of SFTs and Derivatives

There are several examples of legislation and regulatory reforms that affect both the SFT and
derivatives market in a similar way. Market participants may find it beneficial from a compliance,
efficiency and cost perspective to use one set of documents when complying with similar regulatory
requirements.

Examples include:

Interest Rate Reform

IBORs, and in particular LIBOR, have set the benchmark rate for lending on an unsecured basis for
a number of years, and are consequently referenced in significant numbers of SFTs and derivatives
transactions. With the continuation of LIBOR not guaranteed beyond the end of 2021, SFT and
derivatives market participants need to take action to update their documentation to include robust
fallbacks. This will allow transition to alternative risk-free rates (RFRs) if an IBOR ceases to be
published (or, in the case of LIBOR, is deemed to no longer be representative), and ensure any new
transactions entered into reference the RFRs.

Some Overlap with Respect to the CRR

The Capital Requirements Regulation (CRR) and the US regulatory capital adequacy standards
apply to both SFTs and derivatives.

Generally, the CRR requires the exposure value of derivatives for credit risk purposes to be
determined in accordance with certain rules, and allows the exposure value of stock loans and
repos to be determined either in accordance with the derivatives rules or in accordance with
certain other rules. To the extent that the derivatives rules and certain other rules relate to netting
(as opposed to, for example, requirements over the eligibility or type of collateral, or operational
requirements), there is significant overlap between these rules. In particular, they require that: (i) the
netting arrangement must be legally effective and enforceable in all relevant jurisdictions; and (ii)
institutions must be able to provide to their regulators the most recent version of an independent,
written and reasoned legal opinion to that effect.

Institutions generally rely on the industry standard opinions that establish the enforceability of
netting under their GMRAs, GMSLAs and ISDA Master Agreements (or any other industry
standard agreements under which they document stock loans, repos or derivatives) in order to
satisfy these requirements.

Under the US capital standards, banking organizations must risk weight their exposures under
derivatives, stock loans and repos under the standard approaches methodology and, with respect
to most internationally active banks subject to the US capital standards, the advanced approaches
methodology. As with the CRR, banking organizations are able to recognize the credit risk
mitigation of netting and collateral arrangements.

Similar to the CRR, to qualify for netting treatment, a banking organization subject to the US
capital standards must undertake a sufficient legal review to conclude with a well-founded basis that
the agreement is enforceable in the relevant jurisdictions, and must also monitor possible changes
in relevant law that may affect enforceability. The banking organization must maintain and produce
to regulators written documentation of that legal review. Financial institutions may rely on industry
standard opinions in connection with satisfying these requirements.

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Certain Bankruptcy Related Regulations Apply to Both SFTs and Derivatives

Another example of legislation applicable to both the SFT and derivatives markets is the EU
Bank Recovery and Resolution Directive (BRRD)12. The BRRD in general allows EU resolution
authorities to maintain the critical functions of failed banks by requiring certain financial
institutions located in the European Economic Area (EEA) to include bail-in provisions in
their agreements, if such agreements are governed by a non-EEA law. These provisions require
counterparties to recognize that the contract may be subject to the exercise of bail-in powers13 and
agree to the jurisdiction of an EEA resolution authority.

The contractual recognition of bail-in obligation applies to a broad range of financial instruments,
including SFTs and derivatives transactions. Each non-EEA law governed agreement entered into
by in-scope EEA financial institutions for SFTs or derivatives transactions must therefore include
appropriate language that would recognize the bail-in obligation. Such agreements would include
ISDA Master Agreements, GMRAs, GMSLAs and any other agreements used by in-scope entities
to enter into SFTs or derivatives transactions.

In the US, the Qualified Financial Contract (QFC) Stay Rules require US global systemically
important banking organizations (G-SIBs), their subsidiaries and the US subsidiaries of non-US
G-SIBs (collectively known as covered entities) to include contractual restrictions on the exercise of
certain default rights in their QFCs. This is aimed at mitigating the risk of destabilizing close-outs of
covered entities’ QFCs, which is perceived to be an impediment to the orderly resolution of a G-SIB14.

Like the BRRD, the QFC Stay Rules apply to a broad range of financial instruments, including
SFTs and derivatives transactions. Appropriate language must therefore be included in each
agreement used by parties to document SFTs or derivatives transactions, including their ISDA
Master Agreements, GMRAs and GMSLAs.

Regulatory Reporting

The regulatory reporting requirements applicable to SFTs under the Securities Financing
Transactions Regulation (SFTR)15, which is currently being phased in, are similar to reporting
requirements for derivatives transactions under the European Market Infrastructure Regulation
(EMIR)16.

Under both regimes, parties are required to report the conclusion, modification or termination of
a transaction to a trade repository by the following business day. The contents of those reports also
overlap significantly. The similarity of these regulatory obligations makes it logical to streamline the
processes used for reporting and develop cross-market solutions to reporting derivatives transactions
and SFTs.

One example of a cross-market solution that exists today is the Master Regulatory Reporting
Agreement (MRRA). Published in December 2019, the MRRA gives market participants the option
to use a single template to help them manage regulatory obligations and provide services related to
reporting under EMIR and the SFTR.

Directive 2014/59/EU of May 15, 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms
12 

Bail-in powers include powers to write down debt owed to creditors, convert debt to equity or impose temporary stay on termination rights
13 

These restrictions include requiring express recognition of the stay-and-transfer treatment of the US Federal Deposit Insurance Act and the Orderly
14 

Liquidation Authority to reduce the risk that those powers would be challenged in a foreign jurisdiction
Regulation 2015/2365 of November 25, 2015 on transparency of securities financing transactions and of reuse and amending Regulation 648/2012
15 

Regulation 648/2012 of the European Parliament and of the Council of July 4, 2012 on derivatives, central counterparties and trade repositories
16 

15
 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Consultations have also begun on amending the rules on what is reportable under EMIR, partly in
order to bring those rules more in line with the requirements more recently introduced under the
SFTR. This may bolster market support for streamlining the processes for reporting across the SFT
and derivatives markets.

Potential Industry Solutions to Improve Efficiencies Between Derivatives

and SFT Markets

The similarities between the SFT and derivatives markets provide a number of opportunities to
introduce efficiencies to both markets through the standardization and development of processes
and technological solutions. The possible solutions outlined in this section are intended to create
greater efficiency, with resulting cost savings, as well as increase the potential for greater innovation
across the SFT and derivatives markets.

Streamlining Common Terminology, Documentation and Definitional Booklets

Repos, stock loans and derivatives are all documented under master agreements, which include
overlapping terms.

A number of definitions are common to ISDA Master Agreements, GMRAs and GMSLAs.
However, the same terms are not always defined in an entirely consistent manner across all three sets
of documentation, creating ambiguities and compliance challenges.

Take the definition of insolvency as an example. In the context of bankruptcy proceedings, an

event of default17 occurs under both the 2011 GMRA and the 2010 GMSLA if the administrator
is appointed with respect to “all or any material part of such party’s property”18. In comparison, an
event of default occurs under the ISDA 2002 Master Agreement if the administrator is appointed
with respect to “all or substantially all of its assets”19.

To illustrate this point, suppose a bankruptcy administrator is appointed to monitor the bankruptcy
of the factories of a manufacturing company, but not the company’s holdings in other commercial
real estate. In this case, the inconsistency between the insolvency definitions under both the GMRA
and GMSLA and the ISDA 2002 Master Agreement could produce disparate outcomes. Under
the GMRA and GMSLA, the bankruptcy of the factories is likely to constitute an event of default,
as the administrator has been appointed with respect of assets that form a material part of the
company’s property.

However, if the company also had a number of other real estate holdings, the bankruptcy of the
factories may not be considered an event of default under the ISDA 2002 Master Agreement, as
the administrator would not have been appointed with respect to ‘substantially all’ of the assets of
the company. The occurrence of the bankruptcy of the factories would therefore give the entity’s
counterparties the right to close out under any GMRAs or GMSLAs they had in place, but not
under any ISDA Master Agreements.

See paragraph 10(a)(vi) of the 2011 GMRA and paragraph 10.1(d) of the 2010 GMSLA
17 

2011 GMRA, limb (vi) of the definition of ‘Act of Insolvency’; 2010 GMSLA, limb (e) of the definition of ‘Act of Insolvency’
18 

Section 5(a)(vii)(6), ISDA 2002 Master Agreement. The insolvency event of default under the 1992 ISDA Master Agreement is similar, although worded
19 

slightly differently. For the purposes of this example, the focus is on the ISDA 2002 Master Agreement

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

While certain differences may need to exist between SFT and derivatives documentation, potential
areas of alignment could also include:

• Default and termination provisions;

• Representations;
• The range of governing laws and jurisdiction clauses that can be elected under each agreement; and
• Notice provisions.

A common documentation standard could reduce operational costs, as parties could program their
systems to reflect one documentation standard with consistent definitions and avoid having to
accommodate similar (but not exact) definitions under the relevant agreements.

The recent COVID-19 crisis has highlighted the importance of such standardization. During the
pandemic, market participants had to review provisions across a number of agreements to determine
how default notices could be delivered separately under both derivatives and SFT documentation.
If market participants had in place a common form of notice, and a standard method for delivery of
default notices for SFTs and derivatives transactions, then unnecessary complexity and the resulting
operational costs could have been reduced.

A harmonized approach to updating documentation across SFTs and derivatives markets can
be achieved through the use of protocols20 or automation and negotiation platforms. This is
particularly relevant where parties’ SFT and derivatives documentation needs to be updated in
response to legal or regulatory requirements, such as the BRRD and interest rate reform.

ISDA has used protocols for many years to enable market participants to update their agreements
to reflect regulatory change. Traditionally, these protocols have been restricted to updates to ISDA
Master Agreements and other derivatives documentation. However, ISDA has published some
protocols that can be used to amend GMRAs, GMSLAs and other SFT documentation, in addition
to ISDA Master Agreements, which could help market participants comply with the BRRD and the
QFC Stay Rules.

Specifically, these protocols allow market participants to amend their SFT and derivatives contracts
holistically, across counterparties (rather than renegotiating every agreement with each counterparty
to include the required regulatory language)21.

Certain future ISDA protocols are also intended to cover SFT documentation, in addition to
ISDA Master Agreements. These include the ISDA 2020 IBOR Fallbacks Protocol, which market
participants can use to incorporate fallbacks for certain key IBORs into existing transactions.

Industry bodies are increasingly working together to agree on coordinated approaches to regulatory
change (eg, the current reforms to interest rates are being coordinated across the derivatives,
SFT, loan and bond markets). As market participants develop common solutions, it makes sense
for markets with similar documentation structures (such as the SFT and derivatives markets) to
implement these changes on a cross-industry basis.

A protocol is a multilateral contractual amendment mechanism that allows for various standardized amendments to be deemed to be made to all in-
20 

scope agreements between a market participant that adheres (ie, signs up) to the protocol and all of its counterparties that have also adhered to the
protocol
For example, by adhering to an ISDA bail-in protocol, a market participant will be deemed to have included contractual recognition of bail-in language
21 

in all of its in-scope SFT and derivatives master agreements that are not governed by EEA law with their counterparties that have also adhered to the
protocol. This language will only be deemed to be included where one of the parties to the contract is an in-scope EEA financial institution that may be
subject to resolution under the BRRD

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Protocols are a simple way of implementing such cross-industry amendments. They have always
provided an efficient method for updating documentation because parties are only required to
adhere to one protocol to amend all in-scope agreements with other adhering parties. Protocols
also eliminate any need for bilateral negotiations between parties (and the costs involved in
such processes) in order to implement such updates. Extending protocols to also cover SFT
documentation where relevant increases their efficiency, therefore reducing the need for extended
market outreach.

Developing Technological Solutions on a Cross-market Basis

The SFT and derivatives markets are increasingly looking to rely on, and invest in, technology.
The similar documentation structure for SFTs and derivatives should make it possible to develop
technology on a cross-market basis. By developing technology for use by all three markets, and
extending any existing technology across these markets, participants can create single solutions
to issues affecting both SFTs and derivatives, and further leverage the economies of scale that
technology has to offer.

Documentation and Negotiation Platforms

Although industry standard documentation is available for repos, stock loans and derivatives
transactions, these documents are generally negotiated and amended on a bilateral unstructured
basis. This adds time and complexity to the negotiation process and results in inconsistency across
each market – often due to the drafting approach taken by each firm rather than substantive
commercial disagreement.

ISDA has brought efficiencies to the process of updating documentation to reflect legal or
regulatory requirements through the publication of protocols that parties can use to amend their
existing ISDA Master Agreements (and, in certain cases, SFT documentation).

However, protocols are by definition a standard non-negotiable form of amendment that cannot
be expected to satisfy the requirements or particularities of all market participants and may not be
suitable for day-to-day contract negotiation between parties, which is largely accomplished on a
bilateral unstructured basis.

ISDA has begun to address the limitations of protocols and the inefficiencies of bilateral
unstructured negotiations for the derivatives market through the introduction of ISDA Create22,
an online platform for the automation, negotiation and execution of derivatives documentation.
Firms can currently use ISDA Create to electronically negotiate and execute their regulatory initial
margin (IM) documentation. ISDA will extend ISDA Create to other ISDA documents over time,
including the ISDA Master Agreement this year, but the technology could also be applied more
broadly to the negotiation and execution of repo and securities lending documentation.

A common terminology and documentation standard could increase the benefits provided by
technology solutions such as ISDA Create, as it would enable easier comparison of the data
produced by the relevant platform across all three markets. It would also make it easier to develop a
single amendment process for regulatory updates.

https://www.isda.org/2020/09/10/isda-create-infohub/
22 

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

A single platform will also be simpler and require less training for staff at each institution, as well as
provide a single point of entry for service providers (eg, entities looking to offer onboarding services
such as assistance with anti-money laundering (AML) and know-your-counterparty (KYC) checks),
thereby increasing the scalability of the solutions those service providers offer.

Application of the Common Domain Model to Other Financial Markets

ISDA has developed a Common Domain Model (CDM), which serves as a blueprint for how
derivatives are traded and managed across the trade lifecycle. The market-wide adoption of the
CDM would allow for more efficient processing of transactions throughout their lifecycle, including
trade confirmation, reporting and settlement. The CDM will provide an authoritative source of data
for those trades, thereby avoiding the current drain on resources as a result of parties needing to
continually reconcile their trades. The CDM should also remove the risk of trades being reconciled
incorrectly.

The CDM has the potential to cover other financial markets, including SFTs. By providing a single
data representation of trades across the derivatives and SFT markets, the CDM could provide
significant cost savings (through the reduction in trade reconciliation) and address the market need
for an efficient solution to this issue.

With a single documentation platform and CDM for the repo, securities lending and derivatives
markets, there will be a single entry point for other service providers. This allows pre-trade
service providers (such as KYC and AML providers 23) and post-trade providers (such as analytics,
optimization and compression platforms, as well as regulatory reporting services) to integrate their
systems with just one standard, increasing the scalability of the solutions they can provide.

Currently, the provision of such services is hampered by the fact that each market participant still
operates its own version of the trade record and applies its own processes to that data – whether
operational processes, such as trade confirmation and reporting, or legal processes, such as updates
to documentation. This provides a high barrier to entry for third-party pre- and post-trade service
providers, as it can be difficult to source the data they require from market participants. Once such
data has been acquired, it then normally needs to be standardized before it can be used.

A single documentation platform and CDM would remove those barriers to entry, encouraging
market participants to outsource a number of their pre- and post-trade processes to service
providers. These providers can then offer their services on a more cost-effective basis because of the
significant number of trades they can handle.

In the onboarding space, this has the potential to reduce costs for financial services firms and
standardize the content and format of information required from their clients across all three
markets, providing simpler onboarding.

In the post-trade space, this has the potential to help certain large financial institutions outsource
a number of their internal processes, thereby significantly reducing their operational costs. By
providing those solutions on a large scale across multiple markets, vendors should be able to reduce
the costs they charge their customers, enabling users to run these processes at a lower cost than if
they were performed internally.

As part of their onboarding process for new customers, financial services firms are required to carry out know-your-customer checks (checks on the
23 

identity and suitability of the client, as well as the risks involved in that business relationship) and anti-money laundering checks on that client. A
number of financial services firms will now outsource these checks to external companies

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

Collateralization of SFTs and Derivatives Transactions

Stock loans and repos are typically collateralized, either on a per-transaction or per-portfolio
basis. With the introduction of regulatory requirements to collateralize derivatives transactions,
a significant number of derivatives transactions are now also collateralized. This is normally
conducted on a portfolio basis.

In order to reduce funding costs for market participants that are required to make or receive
separate margin transfers for their portfolios of repos, stock loans and derivatives transactions on
a daily basis, entities could net the daily collateral payments calculated for each portfolio (subject
to regulatory requirements)24. Once the collateral payments payable for a counterparty pair’s
derivatives portfolio and SFT portfolio have been calculated, those payments could be offset so only
a single collateral payment is due on any day for both portfolios.

Netting the payments due between each party will likely reduce the amount the transferring party
is required to pay and remove the need for the receiving party to make any payments, thereby
reducing the funding requirements of each party. It also eliminates the intraday exposure that would
occur if a party makes its collateral transfers early in the day and has to wait for its counterparty to
make its collateral transfers25.

Creating a Common Set of Legal Opinions

Each industry body publishes its own opinion on the enforceability of close-out netting under
the relevant master agreement for that industry. These opinions are pre-requisites for some market
participants entering into any master agreement documenting SFTs or derivatives transactions.
This is because market participants need to confirm an opinion is in place in order to rely on the
enforceability of close-out netting under the relevant master agreement. This creates comfort over the
level of credit risk against their counterparty and, for certain financial institutions, enables them to
reduce their exposure and therefore the amount of credit risk capital they are required to hold.

ISDA believes that the common subject matter and similarities in the analysis required present an
opportunity to create a single set of legal opinions, thereby simplifying the scrutiny that market
participants would be required to perform for each new agreement. This simplification would be
aided by the development of a common documentation standard, as described in earlier sections.

The rationalization process has already begun across the repo and securities lending markets with
the publication of the 2020 ISLA and ICMA opinions in a combined format. This comprises a core
opinion covering enforceability of netting under both the GMRA and the GMSLA, with specific
appendices for the GMRA and GMSLA, respectively. However, separate opinions are still published
by the Securities Industry and Financial Markets Association relating to the enforceability of netting
under the MRA, MSLA and MSFTA. More can be achieved to create efficiencies, even within the
SFT markets, and certainly across the SFT and derivatives markets.

Although netting collateral payments carries significant benefits, it is unlikely that single pool of collateral for an entity’s SFT and derivatives portfolios
24 

could be created due to regulatory constraints. This is because, according to the non-cleared margin rules in each relevant jurisdiction, market
participants must collateralize the full market value of their outstanding derivatives transactions. By combining collateral pools for SFTs and derivatives
transactions, this risks the market value of a party’s SFT portfolio offsetting the market value of its derivatives portfolio, leading to under-collateralization
of parties’ derivatives transactions, which may not satisfy regulatory requirements. Therefore, as a minimum, a separate collateral pool should be held
for parties’ derivatives portfolios, which is distinct from the collateral for their SFT portfolios

Although this proposal does provide potential benefits for market participants, its viability will need to be considered on a case-by-case basis under the
25 

regulatory requirements applicable to any pair of counterparties. A cost/benefit analysis will also need to be done regarding the operational impact of
this proposal

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 Whitepaper: Collaboration and Standardization Opportunities in Derivatives and SFT Markets

In 2020, ISDA also expanded the coverage of its e-contract opinions to include GMSLAs. These
opinions look at the enforceability of electronically confirmed contracts under the laws of various
jurisdictions, in the context of transactions and agreements that may be entered into by means of
electronic data exchange or other means of electronic communication.

As the enforceability of netting provisions is at the core of each set of industry opinions, it should
be possible to publish one set of opinions to cover SFT and derivatives documentation. While there
would be an initial cost in combining the existing industry opinions, making these opinions more
accessible across all three markets could unlock significant savings for market participants.

Advocacy and Governance

One of ISDA’s main goals is to make the global derivatives markets safer and more efficient. This
is partly achieved through advocacy on behalf of its members on a number of issues, such as
regulation and business policy.

A significant amount of regulation applies to both the derivatives and SFT markets. Industry bodies
representing both markets are therefore frequently advocating on similar issues and have worked
together on initiatives to address regulatory requirements, such as the development of the MRRA in
2019.

In order to increase the impact of any advocacy and governance efforts by each industry, efforts
should be carried out on a coordinated basis across the derivatives and SFT markets. This would
allow both industries to speak with a single voice, increasing the possibility of a regulator being able
to implement the changes requested.

For example, in 2018, ISDA, ICMA and ISLA worked together to advocate for amendments to
be made to EMIR to exempt transactions resulting from post-trade risk reduction services (eg,
compression) from the clearing obligation. This included collaborating on the publication of a
whitepaper on the benefits of post-trade risk reduction services26 in reducing risk in the financial
markets, including the SFT and derivatives markets27. The closer alignment of the derivatives and
SFT markets could encourage more such collaboration on advocacy in the future.

https://www.isda.org/a/TDmEE/EMIR-REFIT-Incentivizing-Post-Trade-Risk-Reduction-Whitepaper.pdf
26 

This resulted in the inclusion of a requirement under EMIR REFIT (Regulation 2019/834) that the European Commission, in cooperation with the
27 

European Securities and Markets Authority and the European Systemic Risk Board, assess which trades resulting from post-trade risk reduction
services, if any, should be granted an exemption from the clearing obligation under EMIR

21