Isda introduces new definitions for FX and currency options

The International Swaps and Derivatives Association and Foreign Exchange Committee at the New York Federal Reserve have introduced an appendix to the 1998 definitions on FX and currency swaps this week. These changes are designed to standardise definitions for barrier and binary transactions.

The appendix will augment the current framework by introducing common reference terms for options buyers and sellers with reference to knock-out, knock-in, double knock-out, double knock-in, no-touch binary, one-touch binary, double no-touch binary and double one-touch binary transactions.

To-date, market participants have been left to amend the 1998 framework to define the event and barrier particulars for each of these options. But the new supplement introduced yesterday is designed to increase the efficiency that deals are done by standardising the approach, cutting down on disagreements and the time taken to close deals.

“The 2005 supplement sets forth common reference terms for a growing sector of the foreign exchange market-place and should offer the benefits of efficient documentation processes and enhanced legal certainty to market participants,” said Isda in a statement.

Isda has been playing catch-up with the markets for some time now, as new products require further clarification and revamps of old frameworks. The association is also expected to introduce further documentation templates for credit default swap options referenced to asset-backed securities early next year.

Foreign exchange derivatives contracts have grown by almost half in the past two years, and currently account for over $31 trillion in notional value.