The International Swaps and Derivatives Association, Inc. (ISDA) jointly submitted a letter with market participants and industry associations to global supervisors. The letter is the seventh in a series that publicly details the industry’s roadmap for making the over-the-counter (OTC) derivatives markets safe and efficient. It outlines commitments to improve four key areas: increasing standardisation; expanding central clearing; enhancing bilateral risk management; and increasing transparency.
“Over the past several years, ISDA’s and the industry’s commitments to global supervisors have paved the way for a substantial reduction in counterparty credit risk, a substantial increase in regulatory transparency, and a significant improvement in our operational infrastructure,” said Robert Pickel, executive vice chairman, ISDA. “Over 40 percent of the global interest rate swaps market is cleared and we have reduced uncleared interest rate swaps by $70 trillion over the past 18 months. Clearing and compression have reduced CDS notionals outstanding by 75 percent. Trade repositories have been established for interest rate, credit and equity derivatives to provide regulators with significantly improved visibility into exposures. The industry’s adoption of automation has reduced backlogs and strengthened its operations.
“ISDA and the OTC derivatives industry recognise the need to build on this significant progress and to further strengthen the framework for OTC derivatives activity,” Pickel added. “The comprehensive and strategic roadmap of initiatives and commitments set forth in our letter, together with regulatory requirements that are being implemented in various jurisdictions, will further reduce risk and improve visibility in a globally important market. Achieving greater use of buy-side clearing is central to those efforts, and ISDA will work with its diverse membership and with supervisors to accomplish that goal. Market participants have devoted extensive resources to facilitate buy-side clearing and they will continue to do so in the coming months pursuant to their own commitments as well as regulatory requirements for clearing,” he said.
Major provisions of the commitments announced today include:
Increasing Standardisation: further OTC derivatives product and process standardisation will lay the groundwork for a range of risk reducing and efficiency benefits, including more automated processing, expanded central clearing, and enhanced transparency. Key initiatives:
· Benchmarking and analysis of progress toward standardisation across asset classes.
· Product standardisation, including the development, publication, and take-up of standardised product documentation.
· Process standardisation, which involves working with central counterparties (CCPs), trade repositories and other infrastructure providers to standardise the design, implementation, and take-up of automated processes and electronic platforms for key business.
Expanding central clearing: in order to expand central clearing in a safe and sound manner, a coordinated, phased-in approach will be employed to centrally clear more transactions in eligible products, expand central clearing product offerings, and to work toward supporting a central clearing environment that can feasibly extend the risk reducing and efficiency benefits of central clearing to a wider range of market participants. Key initiatives:
· Expand central clearing in currently eligible transactions.
· Increase transparency in processes related to the expansion of central clearing offerings.
· Address key issues and challenges pertaining to access to CCPs.
· Advance the discussion concerning CCP involvement in ISDA Credit Derivatives Determinations Committees.
Enhancing bilateral risk management: for the population of bilaterally managed OTC derivatives portfolios, robust bilateral risk management practices will be adopted and improved, including the implementation of standardised methods for reconciling portfolios and resolving disputed margin calls. Key initiatives:
· Develop and publish dispute resolution documentation and enhance reporting of disputes.
· Reduce thresholds for routine portfolio reconciliation.
· Update the industry Collateral Roadmap and Best Practice Documents.
· Portfolio compression of significant and viable opportunities.
Increasing transparency: a robust data infrastructure serving the OTC derivatives markets, including trade repositories, will provide critical tools to support Supervisors in carrying out their responsibilities and should also provide operational benefits to market participants. Key initiatives:
· Develop, implement, and enhance trade repository infrastructure.
· Address client data confidentiality in connection with transaction data reporting.
The letter to supervisors also identifies several factors that could impact the commitments it offers. This includes the need for consistency between the letter’s commitments and regulatory requirements in individual jurisdictions, as well as consistency between regulators.