OTC Derivatives

An Over-The-Counter (OTC) derivative is a financial contract that is arranged between two parties without going through an exchange or other intermediary.

Over the past decade, the financial industry has been subject to severe regulatory tightening.

This thrust emerged from different needs:

  • Protecting individuals, savers and companies.
  • Making the financial infrastructure more solid.
  • Facilitating FinTech new comers and opening the market.

The regulator's ultimate intent was to make the financial industry more transparent and fair.
This trend started 15 years ago in both Europe and the US and it is still a very important topic in the financial industry.
OTC Derivatives were greatly affected by this change as their use was poorly regulated. In fact, they were often used inappropriately, particularly during the 2008 financial crisis.

International Swaps and Derivatives Association

Transactions in OTC Derivatives rely on the legal agreements defined by ISDA, the association of participants in the market for over-the-counter derivatives. ISDA has its headquarters in New York City, and its scope is to promote standardization of the legal agreements behind OTC derivatives transactions.

ISDA has over 925 member institutions from 74 countries.

Increasing the standardization of contracts, digitization, and transparency.

In recent years, ISDA has made a great effort to adapt to the requests of the regulator by proposing improvements aimed at increasing the standardization of contracts, digitization, transparency. Some of these improvement proposals have been defined only at a prospective level, others have been implemented and have become tools.
The most important innovations are:
  • ISDA Create -> A tool that allows parties to negotiate ISDA legal agreements in a digitalized manner www.isdacreate.org
  • ISDA Clause -> The tool sets out standard drafting options for frequently negotiated provisions within the ISDA Master Agreement, as well as the most common variants of these provisions.
  • ISDA Common Domain Model -> Wants to improve the standardization and transparency of OTC derivatives, promoting the adoption of a common language and a consistent hierarchical representation.
  • ISDA Smart Contracts -> ISDA has published a number of papers exploring issues of legal and regulatory uncertainty as market participants seek to apply new technologies, such as smart contracts and DLT, to derivatives trading.

Smartivative OTC Derivative
Trading and Management

Smartivative offers:

  • Managing the negotiation of ISDA agreements – this can be achieved using Smartivative or connecting to the ISDA Create API. Both approaches of mapping legal clauses are based on the ISDA Clause Library
  • Structuring and trading confirmations (the financial derivative). Define and trade a specific financial agreement between the parties.
  • Blockchain: Smartivative collects legal logic and financial parametrization and then builds a smart contract and deploys it into the Blockchain.
  • Managing and monitoring the lifecycle: the smart contract deployed is able to manage the legal clauses and the financial parametrization of the single confirmation.
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