The International Swaps and Derivatives Association, Inc. (ISDA) today jointly submitted a letter with market participants and industry associations to global supervisors. The letter is the sixth in a series that publicly details how the industry will work to further strengthen the robustness of the OTC derivatives market infrastructure, improve transparency and build a more resilient risk management framework.
“ISDA and the industry recognize the need for further enhancements to the infrastructure and framework of the OTC derivative markets,” said Eraj Shirvani, chairman of ISDA and managing director, head of Fixed Income EMEA, Credit Suisse. “The commitments that the industry is making today build upon solid foundations already laid and further underscore our focus on transforming and strengthening OTC derivatives markets. They reflect the strong partnership of the major dealers, significant buy-side institutions and global supervisors, with a goal of reducing systemic risk by improving market transparency, standardization and risk management practices.”
In the letter, the industry highlights further commitments regarding central clearing, transparency, standardization, operational efficiency targets, and collateral:
Central Clearing: The industry commits to broaden the set of OTC derivatives eligible for clearing, taking into account risk, liquidity, default management and other factors. The industry also commits to elevated targets for clearing dealer-to-dealer swaps and to work with clearinghouses to accelerate the growth of clearing for transactions between dealers and buy-side market participants.
Transparency: ISDA and the industry have been working towards the creation of global data repositories. Repositories have been launched already for credit and interest rate products and the industry is in the process of building a repository for equity derivatives. Such repositories will give regulators insight into trading activities of all market participants. The industry will also perform work to assess adequacy of price transparency in markets.
Standardization & Operational Efficiency: The industry affirms its continuing commitment to achieve further product, processing and legal standardization in each asset class with a goal of securing operational efficiency, mitigating operational risk and increasing the netting and clearing potential for appropriate products.
Bilateral Collateral Arrangements: The industry has set new goals in the areas of portfolio reconciliations and dispute resolution, and has updated a roadmap for improving collateral management.
In addition to containing further industry commitments, the letter also serves to update the global supervisory community on the progress that has been made since the group’s June 2009 letter.
“Significant progress has been made and continues to be made as the industry works proactively and cooperatively with regulators and policy makers globally,” said Stephen O’Connor, ISDA Board Member, Chair of the ISDA Industry Governance Committee, and Managing Director, Morgan Stanley. “While work remains to be done, actions taken to date have fundamentally changed the OTC derivatives markets for the better. Many of the measures, and central clearing in particular, serve to significantly reduce systemic risks.”
Industry achievements since the June letter include:
· The implementation of a revised and formal ISDA Governance framework, with increased participation of the buy side in the strategic agenda, policy formation and decision-making process.
· Significant progress on product standardization for credit derivatives, including, the completion of the 2009 ISDA Credit Derivatives Determinations Committees, Auction Settlement and Restructuring CDS Protocols.
· Meeting or exceeding clearing targets set in respect of dealer-to-dealer new and historic trade volume for clearing-eligible interest rate and credit derivative products. More than 90 percent of new dealer-to-dealer volume of clearing-eligible Interest Rate Derivative products is now cleared through central counterparty clearing facilities (CCPs). In addition, more than 90 percent of total dealer-to-dealer volume of clearing-eligible Credit Derivative products is now cleared through CCPs.
· The successful launch of CDS clearing in Europe, the recent launch of Single-Name Clearing in Europe and North America, and the extension of clearing services to the buy-side.
· Significant progress in the implementation of data repositories, with the achievement of universal data repository coverage for Credit Derivative products and the launch of the Interest Rate Derivative Data Repository. The launch of the Equity Derivative Data Repository is scheduled for mid-2010.
· Delivery of proposals for improvements to the OTC collateral process.
· Continued improvement in industry infrastructure, as measured by further reduction, and in some cases elimination, of unsigned transaction confirmation backlogs, and continued improvement in operating performance metrics.
* Transparency in the credit default swap market has been increased significantly due to public dissemination of data by the DTCC Warehouse Trust.
