The International Swaps and Derivatives Association, Inc. (ISDA) today jointly submitted a letter with industry associations and leading financial institutions to the Federal Reserve Bank of New York. The letter highlights a series of strategic steps that ISDA is making in connection with the ongoing commitments of market participants to further strengthen the operational infrastructure for OTC derivatives.
ISDA, together with the Operations Management Group (OMG), the Managed Funds Association (MFA) and the Asset Management Group of the Securities Industry and Financial Markets Association (SIFMA), submitted the letter to Timothy Geithner, president of the NY Fed, in an effort to improve derivative market processing and scalability as well as augmenting risk mitigation and transparency.
“Recent market events have impacted the derivatives industry by increasing operational processing demands and challenging the infrastructure to manage increased trade activity and risk management,” said Robert Pickel, executive director and chief executive officer, ISDA. “ISDA’s efforts have improved the efficiency and transparency of the privately negotiated business via the continued standardization of documentation, promotion of sound risk management practices and education of the marketplace.”
The ISDA initiatives outlined in the letter include:
CDS Auction Hardwiring
Conferences in New York, London, Sydney, Tokyo and Hong Kong to promote awareness in regard to the industry commitments in respect of Operations matters
Publication of Master Confirmation Agreements to harmonize equity derivative transaction and trade processing
Commodities Documentation Matrix
Various Best Practices and Guidance notes, relating to individual asset classes and collateral matters
Commodities Service Provider event to further promote awareness of existing solutions
One of the initiatives outlined in the letter is ISDA’s establishment of a successful auction-based mechanism (a process which has been commonly referred to as “hardwiring” the provisions into ISDA documentation), which allowed for cash settlement in fourteen credit events including Fannie Mae, Freddie Mac and Lehman Brothers.
In addition, ISDA’s Collateral Committee has worked closely with major dealers to identify and pursue further advances in collateral management, including portfolio-reconciliation best practices.
ISDA continues to work closely with OMG, MFA and SIFMA to improve the OTC processing environment by significantly reducing systemic risk and increasing transparency. Looking forward, ISDA supports the use of central counterparty processing and clearing to significantly reduce counterparty credit risk and outstanding net notional positions. The Association plans to continue to support initiatives and platforms that operate to eliminate economically redundant trades through trade compression. ISDA will also continue to work closely with solution providers in the trade affirmation and confirmation area; maximizing throughput on these platforms is critical to improving operational efficiency and to reducing levels of outstanding transaction confirmations.