ISDA/FOA swaps clearing template an “important” step

A standard contract for buy-side firms and their clearing members "will make life easier" when clearing OTC derivatives across central counterparties, according to those involved.

A standard contract for buy-side firms and their clearing members "will make life easier" when clearing OTC derivatives across central counterparties (CCPs), according to those involved.

The International Swaps and Derivatives Association (ISDA) and the Futures and Options Association (FOA) yesterday launched their Client Cleared OTC derivatives addendum to provide a template to document the relationship between a clearing member and the client when using the principal-to-principal client-clearing model.

Barry Hadingham, head of derivatives and counterparty risk at Aviva Investors, participated in the working group that shaped the addendum, which supplements the ISDA Master Agreement or FOA futures and options agreement.

He said the document was "important" because the buy-side would otherwise have to draft bespoke bilateral documents with clearing members for each individual clearing house.

"The single addendum makes life much easier," he said. "This document replaces all of those individual arrangements and sits in the middle, linking to all of the European clearing houses. 

"Essentially, it means we only have to negotiate one agreement for each of our clearing members."

The release of the addendum follows rules changes under European market infrastructure regulation (EMIR), which requires standarised OTC derivatives to be centrally cleared.

Hugo Jenkins, managing director of FOA, said having individual contracts between clients and each CCP would have been lengthy and time-consuming for everyone involved.

"It's not in the interest of the client, who would obviously have multiple contractual arrangements. It's not in the interest of clearing members, because they would have to spend enormous amount of time getting their clients comfortable with those terms.

"And it's not in the interest of CCPs themselves as onboarding thousands of clients would take a long time," he said.

Difficult adjustment

However, Hadingham said the move from the standard bilateral ISDA agreement to the clearing addendum was a difficult adjustment for some asset managers, as the new document leans towards protecting the clearing member.

"The clearing members would argue that from a risk management perspective they have no choice to have these things in the documentation and that central clearing is very different from bilateral arrangement." 

Hadingham said the initiative was kicked-off by the sell-side, noting, "it probably would have been better if the buy-side was involved from the beginning."