International Swaps and Derivatives Association sets out work to enable tokenized assets as variation margin collateral for non-cleared derivatives

The International Swaps and Derivatives Association (ISDA) published a derivatiViews commentary by Chief Executive Officer Scott O’Malia outlining work to support the use of tokenized assets as collateral to meet variation margin requirements for non-cleared derivatives, as firms look for alternatives to cash and government securities during periods of stress-driven liquidity demand. ISDA linked the initiative to lessons from recent market shocks where large variation margin calls can drain liquidity. Its margin survey data show that, by end-2024, leading market participants subject to non-cleared margin rules had collected USD 1.5 trillion of initial margin and variation margin, up 6.4% year on year, while cash as a share of total variation margin received fell to 68.3% in 2024 from 80.0% in 2020 as government securities rose to 17.8% from 12.7% and other securities increased to 13.8% from 7.4%. The commentary notes limited progress in widening collateral usage due to economic, capital and operational constraints, and points to tokenized money market funds as a potential way to avoid workflows that require posting cash and then transforming it via custodians, as well as tokenization as a potential solution to physical delivery barriers for assets such as gold. ISDA said its work will concentrate on developing clear and consistent legal and regulatory frameworks, including documentation and legal opinions for derivatives on tokenized assets and regulatory certainty on eligibility under non-cleared margin rules, and on establishing interoperability through common data models, smart contract standards and messaging protocols, with the Common Domain Model positioned as a key tool. Several ISDA working groups are already exploring tokenized assets as collateral.