Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, April 10, 2011

SEC & CFTC Deliver Feasibility Study on Standardized Algorithmic Descriptions for Derivatives

On April 8 the SEC and the CFTC delivered to Congress a joint staff study on the “the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which 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 use 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 that 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, may 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.

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