Investment Operations

ISDA Expands Clause Library to Cover Collateral Documentation

Financial Compliance

ISDA said today that it has expanded ISDA Clause Library to cover its collateral documentation, a development it said will bring greater efficiency and standardization to the negotiation and collateral management process.

The expansion follows the publication of the ISDA Clause Library for the ISDA Master Agreement in June 2020, which was aimed at bringing greater consistency in the drafting of clauses when there is no need for customization. By adding standard drafting options for frequently negotiated provisions within ISDA’s collateral documentation, analysts say the ISDA Clause Library should further reduce complexity within industry standard documentation, make contract negotiation quicker and more efficient, and improve the consistency and accuracy of legal agreement data.

“In publishing the ISDA Clause Library for the Master Agreement last year, ISDA took a significant step toward promoting enhanced standardization of language within industry documentation,” said Katherine Tew Darras, General Counsel at ISDA. “Expanding the Clause Library to cover ISDA collateral documentation builds on this foundation, increasing consistency and paving the way for digitization of documentation,” she added.

To develop the ISDA Clause Library, ISDA said it had conducted a review of thousands of agreements to identify clauses that essentially achieve the same outcomes, even though they may be worded differently. The resulting data feeds into the ISDA Legal Agreement Taxonomy, which establishes a framework for identifying and categorizing commonly used clause variants. Standard drafting options are then made available in the ISDA Clause Library that achieve the same outcome as the clause variants within a category.

Industry watchers say the ISDA Clause Library is an important component in ISDA’s strategy to increase standardization in order to facilitate the digitization of legal documentation and the automation of derivatives processes through the development of smart derivatives contracts.

To help achieve that, the ISDA Clause Library has been incorporated into ISDA Create, an online platform that allows parties to digitally produce, deliver, negotiate and execute derivatives documents. According to ISDA documentation, the ISDA Legal Agreement Taxonomy is also being used as the source for a legal agreement data application within ISDA’s Common Domain Model (CDM), which establishes a common, industry-wide terminology for trade events and processes. The CDM-based legal agreement data model is aimed at ensuring greater connectivity between contractual terms and associated derivatives processes and data.

“As events of the past year have demonstrated, it is time to move away from paper-based documentation and embrace greater digitization,” said Scott O’Malia, ISDA’s Chief Executive. “Last year, ISDA and several other trade associations made a joint commitment to regulators to promote the development of a digital future for financial markets,” O’Malia said. “As part of that commitment, we agreed to promote the adoption of standardized and simplified legal documentation. The ISDA Clause Library delivers upon this objective and is a key component of ISDA’s strategy to support greater digitization, foster an environment for technological innovation, and build a safer, more robust financial system,” he added.