Isda issues new guidelines for derivatives transaction settlement

The International Swaps and Derivatives Association has published a set of guidelines for the matching, netting and settlement of cashflows arising from over-the-counter derivatives transactions.

Isda wants the guidelines to “standardise the operational practice and to support market development through technological innovation”, it said in a statement.

The association’s paper has set out a three-step process, beginning with matching payments prior to settlement on a gross basis, followed by netting payments to allow a lower number of payments, and finally to arrive at a settlements clearing process. This final stage was, however, admitted to be, “a little way off”, by Julian Day, a policy director at Isda.

Day said the guidelines had been “driven as much as anything by considerations of cost, in terms of the staff levels required to resolve nostro breaks arising from incorrect gross settlements, as well as efficiency gains made available from making fewer settlements once firms begin netting payments.”

Settlement volumes between counterparties involved in derivatives transactions rose 20% during 2003, according to the 2004 Isda Operations Benchmarking Survey. The survey also mentioned that the time taken to resolve nostro breaks increased significantly. The guidelines were debated at a working group the association held over the summer, attended by industry participants as well as software vendors.

Day expects software companies to come up with offerings in the area very soon, noting that much of the functionality envisaged in the paper already exists within the securities sector. “There may be scope for adapting these systems for the derivatives sector,” he said, adding that any solution will have to be compliant with the programming language, FpML (Financial Products Mark-up Language). FpML is the industry standard for describing and transmitting derivatives transactions information between firms.