Twenty-five years since its foundation and two years after the depths of the financial crisis, the International Swaps and Derivatives Association (ISDA) continues to play an important role in creating a safer and more efficient over-the-counter (OTC) derivatives industry. ISDA’s ongoing initiatives – and its commitment to the significant work that lies ahead – are a key focus of ISDA Chief Executive Officer Conrad Voldstad’s opening remarks at the Association’s 2010 Regional Conference in New York today.
In his remarks, Mr Voldstad reminded the audience of ISDA’s commitment to reducing risks and increasing the transparency of the derivatives business, areas in which ISDA and the industry are devoting significant resources and in which substantial progress has been made.
Reducing Risk: The industry’s focus on reducing risk in the derivatives business involves greater use of central clearing facilities, where appropriate, and compressing or ‘tearing up’ economically redundant trades. To date, over $66 trillion in credit default swaps (CDS) have been ‘torn up’ and another $10 trillion of CDS trades have been cleared. Considering that the current level of CDS outstanding is $25 trillion, this means that the industry has worked collectively to reduce outstanding CDS volumes by nearly 75%.
In the interest rate swaps market, about $100 trillion of trades have been torn up to date. Some $210 trillion of trades had been centrally cleared as of year-end 2009. ISDA estimates that another $200 trillion could be cleared within the next few years. This would leave less than $80 trillion in interest rate swaps uncleared out of a market that today numbers $500 trillion.
Mr Voldstad highlighted the new practice of tearing up interest rate swaps that have already been cleared, which holds significant promise for reducing risk and the level of swaps outstanding. In 2010, about $30 trillion of cleared interest rate swaps transactions have been torn up, and the Association estimates that it might be possible to tear up another $200 trillion in currently cleared swaps.
Transparency: The OTC derivatives industry has significantly enhanced transparency.
"We have helped to significantly improve transparency by coordinating the establishment of trade repositories for credit, rates and equity products," said Mr Voldstad. "Regulators and the public have access to a tremendous amount of information about the marketplace."
Current market structure: Mr Voldstad concluded his remarks by citing a few points about the OTC derivatives market that underscore and illuminate its nature and structure today.
There are fewer than 2,000 standardized interest rates swaps executed on an average day. The largest maturity – 10 year dollar swaps – trade about 200 times a day. Most standardized swaps trade 20 times or less per day or once every half hour. In all, there might be 600 US dollar trades a day and 400 Euro trades a day.
Using the Depository Trust & Clearing Corporation (DTCC) data for CDS in the past six months, only five names averaged 20 trades per day. They were all sovereign entities. Some single reference name may have multiples of 40 distinct contracts available for trading.
“These are interesting figures,” Mr Voldstad said. “They illustrate the story of a market that has much less volume than one might imagine from the $600 trillion figure we all talk about. They are much more consistent with a market where less than $100 trillion is not cleared.”
ISDA’s focus on the business today and in the future continues its consistency of purpose over its 25 year life. Among its key accomplishments and initiatives:
ISDA has been the documentation resource for the industry, helping to substantially reduce legal risk;
ISDA has championed netting, a key credit risk reduction tool, providing netting opinions and helping secure netting legislation in scores of countries;
ISDA’s 1999 and 2003 Definitions standardized CDS contracts, developed governance for determining credit events and auctions and recently helped to reduce risk either through clearing houses or tear-ups;
ISDA has worked with the New York Federal Reserve and over a dozen global regulators to improve the infrastructure of the marketplace: confirmation backlogs have been virtually eliminated through straight through processing. Portfolios are regularly reconciled. Clearing targets have been established and met.
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