Do derivatives need algo-based description?

Washington, DC – Today, the Commodity Futures Trading Commission and the Securities and Exchange Commission (Commissions) have delivered to Congress a joint staff study on “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions that may be used to describe complex and standardized financial derivatives” (see Title VII, Sec. 719(b) of Dodd-Frank). Based on the public input, staff investigation and analysis, the joint study concludes that current technology is capable of representing derivatives using a common set of computer-readable descriptions. These descriptions are precise enough to be used both for the calculation of net exposures and to serve as part or all of a binding legal contract.

The Commissions’ staff study also concludes that before mandating the use of standardized descriptions for all derivatives, the following are needed: a universal entity identifier and product or instrument identifiers, a further analysis of the costs and benefits of having all aspects of legal documents related to derivatives represented electronically and a uniform way to represent financial terms not covered by existing definitions.

To the end, in the Commissions’ staff view, standardized computer-readable descriptions are feasible for at least a broad cross-section of derivatives. The joint study contemplates that other financial regulators and the U.S. Treasury’s Office of Financial Research, along with the Commissions’ staff, will engage in a series of public-private initiatives to foster collaboration between regulators and the derivatives industry, working towards representing a broader cross-section of derivatives in computer-readable form.

The Commodity Futures Trading Commission (CFTC) thanks the many members of the derivatives industry and public that provided information for the joint study and thanks the responsible staff at both Commissions for their collaborative efforts. The staff responsible for the CFTC’s participation in the joint study process include: Andrei Kirilenko, Chief Economist and Study Team Lead, JonMarc Buffa; Nancy Doyle, Frank Fisanich, Irina Leonova and John Paul Rothenberg.

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