From central clearing to complete regulatory transparency, the OTC derivatives industry is implementing sweeping reforms that will transform and increase the safety of this important area of finance. These ongoing initiatives – and the significant work that lies ahead – are a key focus of ISDA’s 25th Annual General Meeting (AGM 2010) in San Francisco this week.
“ISDA and the OTC derivatives industry clearly support financial regulatory reform in order to ensure market stability and reduce systemic risk,” said Eraj Shirvani, chairman of ISDA and managing director, head of Fixed Income EMEA, Credit Suisse. "Our extensive, on-going work in three key areas – strengthening risk management through the use of clearinghouses, improving transparency, and building a robust operational infrastructure – underscores our commitment to making derivatives safer."
Shirvani noted that the industry has made strong progress in clearing those products that can be cleared, and that further improvement lies ahead. A schedule of improvements is already well underway. But, he said, given their inherent nature, not all OTC products can or should be centrally cleared.
Conrad Voldstad, ISDA’s chief executive officer, said, "During the financial crisis, it became clear that the interconnectivity of the banking system has to be managed as well as the other risks inherent in the OTC derivatives market. That has led to an appropriate focus on central clearing."
“However,” Mr Voldstad noted, “corporate end-users did not create significant derivative risk nor did they suffer large derivative losses. A case for mandatory clearing of their derivatives activity cannot be made based on systemic risk.”
Voldstad also addressed issues related to mandatory exchange trading for OTC derivatives. “Exchange trading has nothing to do with reducing credit risk,” he said. “There has also been a misguided belief that exchange trading will bring more liquidity and better pricing to one of the most liquid and most efficient markets in the world. In fact, mandating that all swaps be exchange-traded will increase costs and risks for the manufacturers, technology firms, retailers, energy producers, utilities, service companies and others who use OTC derivatives. That’s because the risk-hedging products that they want and need will no longer be available."
Robert Pickel, ISDA’s executive vice chairman, affirmed that the industry’s goal is to provide supervisors with a complete view of the OTC derivatives market, both cleared and uncleared trades, across transactions, firms, and counterparties. “When we have completed the task, we will no longer have issues like we did after the Lehman bankruptcy, when market participants and others concerned about firms’ exposures to that situation. And firms like AIG will no longer be able to amass so much exposure virtually unnoticed.”
AGM 2010 will feature panel sessions on:
* Lessons from the financial crisis;
* Systemic risk: advances and challenges in the wake of the recent events;
* Global public policy issues, with a focus on issues that may affect the structure, cost, availability and liquidity of derivatives;
* Global derivatives business issues, with a focus on product and geographic opportunities and a consideration of the impact of the financial crisis on derivatives use; and
* Future of credit derivatives and structured finance, with a focus on the necessary steps to achieve renewed and prudent growth of these products
Keynote addresses will be delivered by:
* Neal S. Wolin, Deputy Secretary, US Department of the Treasury
* John B. Taylor, Professor, Stanford University and Senior Fellow, the Hoover Institution
