Crypto and ESG dominate derivatives industry’s annual gathering

IFR 2433 - 14 May 2022 - 20 May 2022
5 min read
Christopher Whittall

The annual general meeting of the International Swaps and Derivatives Association has always acted as a barometer of the health of the derivatives industry, while also pointing to where it’s headed next.

The 650-odd delegates who descended on a swanky hotel in the heart of Madrid on Tuesday for the three-day event suggested this famously complex and innovative corner of finance is not just thriving; it’s embracing the latest megatrends in global markets with gusto.

That inevitably meant crypto and climate finance were top of the agenda. There is common ground between the two. Both lack consistent regulation, both have grown at a breakneck pace and both have outspoken critics. And, as the ISDA conference laid bare, financial institutions are scrambling to gauge how quickly they can expand in these two areas.

That is particularly true for crypto, a movement that not only grew up outside traditional finance, but as a challenge to it. Tellingly, hardly a session passed at this conference without crypto rearing its head. That would have been unthinkable just three years ago, the last time this crowd of bankers, lawyers and other finance professionals gathered together in person.

An interview with Sam Bankman-Fried, crypto exchange FTX’s billionaire founder, received prominent billing on Wednesday, while the conference hall was at near-capacity for a crypto panel discussion the next day. The irony of this all occurring against the backdrop of a meltdown in crypto assets was not lost on attendees.

“I’m sure many people in the room have been working overnight with all the activity that’s been going on in the markets,” said James Stickland, chief executive of Elwood Technologies, which provides investors access to crypto markets.

Regulatory unease

The market turmoil would have done nothing to allay regulators’ queasiness over the impending marriage between crypto and mainstream finance. An alphabet soup of agencies – the FSB, SEC, CFTC, IOSCO, ESMA – queued up to proclaim the need for robust oversight.

“How many US$3trn asset classes exhibit wild swings in valuations based on seemingly odd events, such as tweets published on 20 April or Saturday Night Live skits?” asked Pablo Hernandez de Cos, chair of the Basel Committee on Banking Supervision and governor of the Bank of Spain.

“We know that such markets have the potential to scale up rapidly and pose risks to individual banks and overall financial stability,” he added.

Speaking on the sidelines of the conference, one crypto enthusiast expressed frustration with such attitudes. No one questions the foundations of the stock market when Netflix or Facebook shares sink around 30% in a day, he said, so why treat crypto as if it’s an outlier?

Old meets new

Not that regulatory disquiet nor financial market fireworks look likely to stand in the way of this union between finance old and new. Audience member surveys showed most expected banks to get more heavily involved in crypto, while citing regulatory uncertainty as the most significant impediment for growth among institutional investors. In other words, the nuptials may be underway already, but they’d still like regulators’ blessing.

For its part, ISDA’s roster of crypto members is growing and it is currently engaged in crafting common standards for crypto derivatives. That is important considering derivatives are serving as a gateway to these markets for many investors.

“About 60% of our clients are coming from the traditional finance space. They’re looking to get into [crypto] primarily through derivatives,” said Nicola White, president of crypto liquidity provider B2C2 USA.

Perhaps inevitably, other topics struggled to generate the same kind of buzz, with the possible exception of sustainable finance. Still, sessions on the likes of Russian sanctions and workplace diversity were reminders of other ways in which the world has shifted in recent years, while discussions on central clearing and Libor reform pointed to some major areas of focus for these sprawling markets.

Despite the busy schedule, attendees also had time to network and unwind. On Wednesday evening, they mingled outside at the hotel’s packed rooftop bar as the sun set over Madrid: glasses in hand, eating tapas while Spanish guitar music wafted through the air. A handful even braved the makeshift dance floor later in the evening.

The overarching impression from ISDA’s three-day conference was unmistakable. The derivatives industry is in rude health – and excited about what’s coming next.