JPMorgan has agreed to hand over its proprietary credit default swap (CDS) pricing engine to the International Swaps and Derivatives Association (ISDA) as an open source platform with a view to improving transparency in the market. It is hoped that this move will deter regulators from stepping in to regulate the sector, which has come under increased scrutiny over the last six months.
Last month, Colin Peterson, chairman of the US House of Representatives agriculture committee, proposed a draft bill under which CDS trading would be banned for investors that do not own the underlying bonds or loans of these derivatives. This proposal was widely condemned by the industry as a move that would end the trading of CDSs.
“This bill would increase the cost and reduce the availability of essential risk management tools while failing to address the true causes of the credit crisis,” explains Eraj Shirvani, ISDA chairman and head of European and Pacific credit sales and trading at Credit Suisse. “Throughout the crisis, CDSs have remained available and liquid. They have been the only means of hedging credit exposures or expressing a view at a critical time for the industry. Impairing their use would be counterproductive to efforts to return the credit markets to a healthy, functioning state.”
The decision by JPMorgan to make its CDS analytical engine, which was developed by its Quantitative Research group, available to the industry via ISDA is seen as a direct reaction to this legislative threat. The association will therefore make the technology available as an open source code in order to increase transparency around CDS pricing.
“JPMorgan has invested a lot of intellectual capital in this analytical engine. Its willingness to assign this to ISDA for us to make it available as open source to the entire industry demonstrates our collective commitment to the integrity of the CDS product,” says Robert Pickel, executive director and CEO of ISDA. “ISDA and its members are vigilant to public concerns around transparency. This is yet another measure of increased standardisation in CDS.”