King & Wood Mallesons (KWM) has collaborated with The International Swaps and Derivatives Association Inc (ISDA) to publish a new whitepaper that sets out the practical steps for developing smart derivative contracts.
The whitepaper highlights the critical link between the technological possibilities and the commercial, legal and regulatory realities in using smart derivatives contracts effectively.
King & Wood Mallesons Partner Scott Farrell who led on the collaboration with ISDA, said that smart contracts could help revolutionise the international derivatives market.
"Smart derivative contracts have the ability to create much-needed efficiencies that would benefit the entire industry. However, transforming smart contracts from an exciting concept to have a practical application presents a number of challenges."
The paper analyses some challenges and issues from both a technological and legal perspective, and proposes a practical framework for consulting smart derivatives contracts. The framework includes the following:
- Select parts of a derivatives contract for which automation would be effective and efficient.
- Change the expression of the legal terms of a derivatives contract into a more formalized form.
- Break the formalized expression into component parts for representation as functions.
- Combine the functions into templates for use with particular derivatives products.
- Validate the templates as having the same legal effect as legal terms of derivatives contracts.
The paper also notes that the ISDA Common Domain Model (CDM) could play an important role in ensuring that a shared, standardized representation of events and actions that occur through the derivatives lifecycle is applied across the industry.
"A holistic regulatory and legal approach, which looks through both a technology and commercial lens, will be fundamental. ISDA's work, including its CDM, helps show the way market participants can take smart contracts forward in a safe, efficient derivatives market," continued Scott.
Further information on the whitepaper can be found here. ISDA's announcement can be found here.
The KWM team is Australia's leading team of derivatives lawyers and has been at the forefront of developments in the Australian derivatives marketplace since its creation. We are Australian counsel to The International Swaps and Derivatives Association, Inc (ISDA) and key legal advisor to other industry bodies, international financial institutions, market infrastructure providers, state entities, funds and corporates.
KWM is recognised as one of the world's most innovative law firms. The KWM team has won FT innovation in law awards in 3 of the last 5 years. In July 2016, KWM published open source smart contract architecture for collaboration with the wider legal and tech community. For this innovation, KWM was awarded the FT award for "Innovation in Knowledge, Data and Intelligence.
