Remy Blaire: As global capital markets seek greater efficiency as well as standardization in derivatives markets, collateral mobility is taking center stage.
Now, ISDA, the trade association for OTC derivatives, is joining forces with Global Digital Finance on a landmark report on using U.S. tokenized money market funds as collateral.
The initiative examines how digital innovation can transform liquidity management, as well as accelerate settlement and unlock capital across the financial system.
Well, joining us live here at the New York Stock Exchange to break down the report's findings is Amy Caruso, Head of Collateral Initiatives at ISDA.
Amy, great to have you here. Thank you so much for joining us.
Amy Caruso: Thank you for having me.
Remy Blaire: So first and foremost, tell us about the why behind this report and why you partnered with GDF.
Amy Caruso: Great. So the derivatives market is about $23 trillion. And every year ISDA does an annual margin survey. About $1.6 trillion in initial margin and variation margin is posted by the largest derivatives market participants in the world, and we're seeing this number grow higher and higher.
It's more and more important to have the high-quality liquid assets in the right place at the right time, and also to reduce operational and liquidity risk. So using tokenization can help mitigate some of those risks.
And we were delighted to partner with Global Digital Finance, which is a leader in digital and crypto technologies. ISDA is known for its legal and capital and risk strengths, and we're really combining efforts for this report.
Remy Blaire: And I did want to ask you, expanding on what you just said, why did you decide to focus specifically on money market funds?
Amy Caruso: That's a great question. So there's a number of different assets that can be used for OTC derivatives and also repo and securities lending and exchange-traded derivatives.
But money market funds, even though they're eligible in most of those scenarios, they're not being used in the traditional form. It's very cumbersome from an operational perspective, and tokenization of money market funds can help reduce some of those operational and secondary liquidity issues.
Remy Blaire: And zooming in on the report, it was an extensive one that involved over 100 firms. So give us your take on the outcome as well as the initial objectives.
Amy Caruso: Sure. So the objectives were really to focus on the legal and regulatory status of U.S. tokenized money market funds in the U.S. market as collateral.
And we accomplished that. We have a great, we call it the Table 5. It's got everything written in a very simple, simplistic form using the SEC and CFTC taxonomy of digital twins, digital native or custodian or intermediary models of where things stand from a legal and regulatory perspective.
We also had a sandbox, a near-production test environment that really demonstrated how tokenized money market funds can move through the collateral ecosystem in a variety of simulations.
And that helps identify operational challenges that will lead to future work between ISDA and GDF in the future.
Remy Blaire: And I do want to get your perspective on the importance of industry collaboration, especially with GDF and ISDA. So for our viewers, can you explain this to us?
Amy Caruso: Sure. ISDA's been around for 41 years. We're known for our master agreements, where there are standard legal terms and clauses that all banks and counterparties can use, those documents. That's very important.
And also what we've been building over the years with mutualized solutions like ISDA Create, digital documentation, digital regulatory reporting and our 10-year anniversary of ISDA SIMM.
But we're not digital asset experts, and we see that as an innovation that our industry needs to embrace carefully, but embrace.
And so partnering with GDF, which is a leading organization in the digital asset technology realm, they're an IOSCO member. They're working on not only regulatory advocacy, but also real use cases and opportunities. They're an excellent resource of tools.
Remy Blaire: And finally, Amy, I do want to ask you about next steps for tokenized collateral as well as future collaborations with GDF.
Amy Caruso: Well, we're already getting a list of things that need to be done. We understand the industry is interested in this, but there's so many operational nuts and bolts that have to be worked out.
And so I anticipate we'll be working together. I don't have a specific work product and timeline, but we have been in discussions with GDF and our mutual members to see how we can move forward.
Remy Blaire: Well, I appreciate your time. Thank you so much for joining us here today at the New York Stock Exchange.
Amy Caruso: Thank you for having me. Thank you.
Remy Blaire: And that does wrap it up for Market Movers: Midday, live from the New York Stock Exchange. Thank you so much for watching, and have a great day.
