Perkins Coie – “The International Swaps and Derivatives Association (ISDA) has published the first in a series of guidelines for what it colloquially refers to as “smart derivatives contracts” (the Guidelines).* A smart derivatives contract is a derivative that incorporates software code to automate aspects of the derivative transaction and operates on a distributed ledger, such as a blockchain. This series of papers is intended to “provide high-level guidance on the legal documentation and framework that currently governs derivatives trading, and to point out certain issues that may need to be considered by technology developers when introducing technology into that framework.”Derivatives have long been thought to be a fitting use case for smart contract solutions. It is little surprise that derivatives industry incumbents and startups alike are working on novel smart contract solutions to facilitate the execution and clearing of derivatives. Smart derivatives contracts have the potential to create significant efficiencies in the derivatives market by automating the performance of obligations and operations under a derivatives contract.  Derivatives settlement is largely reliant upon conditional logic informed by certain data points that can be made available via oracle.However, swaps trading under lengthy master agreements and at heavy volumes add significant complications.  There can be many barriers to smart contract implementation because of the complexity of the legal frameworks, the significant payment netting that occurs, subjective elements of event of default provisions, as well as other costs, fragmentation risks, and technological issues.ISDA recognizes these complexities and has discussed this with industry participants to determine where it can lend assistance as companies experiment with smart derivatives contracts.  ISDA and derivatives traders have voiced concerns about technology developers being sufficiently aware that the legal terms of the ISDA Master Agreement, the supporting documentation, and each individual transaction that sits underneath it, should be appropriately incorporated and not be disturbed without due legal consideration and advice on the potential impact. As a result, ISDA has initiated a series of Guidelines designed to illuminate the core principles of ISDA documentation – and certain important legal terms – that should be maintained when technology is applied to derivatives trading, in a comprehensive fashion with a practical approach.”

• The Whitepaper on Smart Contracts is available here.
• The Whitepaper on Smart Derivatives Contracts is available here.