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ISDA Introduces New Rules for CDSs, Pickel Testifies Before US Senate Committee, ICE Trust Launches

The International Swaps and Derivatives Association (ISDA) has this week introduced new rules governing the market’s dealings with credit default swaps (CDS). Robert Pickel, executive director and CEO of ISDA explained the changes in a testimony before the US Senate Committee on Banking, Housing and Urban Affairs earlier this week.

The new rules cover the area of default payouts and the addition of features such as coupons to CDSs themselves, which will in effect make them closer to bonds. The aim is to make the clearing process for these instruments easier, as the market readies itself for the launch of the rest of the central clearing counterparties (CCPs).

This week IntercontinentalExchange (ICE) finally received regulatory approval from the board of governors of the Federal Reserve for ICE US Trust to act as a clearing house and central counterparty (CCP) for credit default swap (CDS) transactions in the US. The firm also received approval from the New York State Banking Department and the US Securities and Exchange Commission (SEC) and has since launched its US operations.

Founding clearing member participants of ICE Trust have begun the transfer of bilateral CDS trades to the clearing house for processing and clearing, according to the firm. The process resulting in novation to ICE Trust is underway for outstanding bilateral trading positions that settle on North American Markit CDX indices currently listed for clearing by ICE Trust. Completion of the first clearing process is expected to occur on 16 March and ICE Trust expects to process and clear additional positions over several, one-week novation cycles.

ISDA’s recommendations should help facilitate this clearing process, which will also be offered by other parties including CME later this year. Pickel also told Congress that the CDS has a beneficial role to play in the market, despite its demonization by the media as the cause of the collapse of Lehmans and Bear Stearns.

“CDS are simple financial transactions negotiated between two counterparties,” said Pickel in his testimony. “They enable firms to transfer and more effectively manage risk. In the real world, CDS play an important role in the growth and function of our nation’s (and the global) economy.” He explained that this role includes enabling banks to diversify and better manage their balance sheets and allowing companies to hedge against the default risk of their suppliers.

“Privately negotiated derivatives have continued to perform well during a greater period of stress than the world financial system has witnessed in decades,” he added. “In the wake of failures of major market participants, both counterparties and issuers of debt, CDS participants have settled trades in an orderly way precisely according to the rules and procedures established by Congress and market participants.”

Pickel concluded: “We are confident that policymakers and market participants alike will find their prudent efforts in helping build the infrastructure for derivatives over the last 25 years have been rewarded.”

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