In testimony before the U.S. House of Representatives Committee on Agriculture, Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, Inc (ISDA), today applauded the strength the OTC derivatives industry infrastructure has demonstrated during the recent financial markets turmoil.
“CDS are an efficient means of hedging risk or adjusting positions,” said Pickel in his testimony. “They remain an accurate indicator of credit quality, are highly liquid, and have been the best way to manage or express a view on credit risk in troubled times when cash and securities markets have seized up.”
Pickel outlined in his testimony the industry’s and ISDA’s ongoing efforts to identify and reduce the sources of risk in the privately negotiated derivatives business. ISDA and its members continue to work with the President’s Working Group (PWG), the Federal Reserve, the SEC and other regulators towards operational enhancements in the CDS industry.
In addition to these ongoing efforts, the PWG announced a series of policy objectives for the OTC industry on November 14. The PWG divided its recommendations into four broad categories: 1) improving the transparency and integrity of the credit default swaps market; 2) enhancing risk management of OTC derivatives; 3) further strengthening the OTC derivatives market infrastructure; and 4) strengthening cooperation among regulatory authorities. ISDA supports these four objectives and believes that continuing to pursue the improvements industry and regulators have worked on over the last several years is key to ensuring the OTC derivatives industry in the US remains healthy and competitive.
The PWG also released a Memorandum of Understanding among the Federal Reserve, the Commodities Futures Trading Commission and the Securities and Exchange Commission related to regulation of central counterparties. This Memorandum is an important step in ensuring that regulators do not work at cross-purposes while working to facilitate the creation of a central clearinghouse.
One result of the industry’s efforts is that central counterparty clearing of CDS in the US is expected to commence operations before the end of 2008.
Pickel also emphasized the European Commission’s belief in the need for a "European clearing solution," regardless of what is done in the US. Given that Europe is the largest global center for OTC derivatives activity actions taken by regulatory officials there will likewise have a tremendous impact on market participants in the US.
During his testimony, Pickel discussed ISDA’s semi-annual survey, which, at mid-year 2008, stated that the notional amount outstanding of CDS decreased by 12 percent in the first six months of the year to $54.6 trillion from $62.2 trillion. This reduction in outstanding notionals represents a significant achievement for the industry in addressing operational and transaction management issues, and is just one example of efforts being undertaken, in coordination with regulators, to help ensure the operational infrastructure of the OTC industry is sound and able to withstand any challenges.
Pickel also stated that the CDS market has held up extremely well under the strains of multiple failures of large market participants and issuers of debt. The auction and settlement process have performed effectively, and the collateral and netting arrangements among market participants have operated as intended. The current turmoil has exposed the need for market participants to increase the speed with which they implement operational improvements and to commit to examining what further improvements might be necessary.
A complete transcript of Robert Pickel’s testimony is available at www.isda.org.
