ISDA reports legal guidelines on smart derivatives contracts

• Read the ISDA Legal Guidelines for Smart Derivatives Contracts here

Derivatives are fertile territory for the application of smart contracts and distributed ledger technology (DLT) because their main payments and deliveries are heavily dependent on conditional logic. However, these technologies are at a relatively early stage of development and there is still a lack of agreement on what a smart contract is, what role these technologies can play in the derivatives market, and how these technologies might interact with existing legal standards and documentation.

At present, most proof-of-concepts of new technologies for over-the-counter (OTC) derivatives transactions are focused on events that take place at the transaction level, such as the automation of payment obligations or collateral transfers. However, this narrow focus on the economic terms and payment mechanics within individual transactions does not take into account the overarching contractual terms that derive from the broader contractual relationship.

Complexity may arise beyond the individual transaction level and might affect the broader contractual relationship between the parties, including:
• The provision of representations;
• The requirement to deliver certain documents to a counterparty;
• A payment obligation becoming subject to a withholding tax;
• The transfer of transactions as a result of a merger with another entity; and
• The insolvency and consequent default of a party.

Focusing exclusively on the economic terms of an individual transaction may ignore much of the external complexity that can affect a party’s ability to perform its obligations (or assert its rights) in relation to that transaction.
For technology developers the challenge is to bring the benefits of technology to aspects of the lifecycle of a transaction (such as payments and settlements, collateral exchange, notifications or calculations) while being in line with the legislation in force.

Further reading:

• ISDA Whitepaper Smart Contracts and Distributed Ledger – A Legal Perspective
• Whitepaper Smart Derivatives Contracts: From Concept to Construction

ABOUT ISDA Since 1985, ISDA has worked to make the global derivatives markets safer and more efficient. Today, ISDA has more than 900 member institutions from 69 countries. These members comprise a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. In addition to market participants, members also include key components of the derivatives market infrastructure, such as exchanges, intermediaries, clearing houses and repositories, as well as law firms, accounting firms and other service providers. Information about ISDA and its activities is available on the Association’s website: www.isda. org.

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