The International Swaps and Derivatives Association, Inc. (ISDA) has jointly submitted a letter with market participants and industry associations to global regulators detailing the industrys roadmap for making the over-the-counter (OTC) derivatives markets safer and more efficient.
ISDA says four key areas are key to the goal: increasing standardization; expanding central clearing; enhancing bilateral risk management; and increasing transparency.
In the letter, ISDA says further OTC derivatives product and process standardization would lay the groundwork for a range of risk reducing and efficiency benefits, including more automated processing, expanded central clearing, and enhanced transparency. Its standardization initiatives include benchmarking and analysis of progress toward standardization across asset classes; product standardization, including the development, publication and take-up of standardized product documentation; and process standardization, which involves working with central counterparties (CCPs), trade repositories and other infrastructure providers to standardize the design, implementation and take-up of automated processes and electronic platforms for key business.
With regard to central clearing, ISDA says a coordinated, phased-in approach would 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. It says the industry should 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; and advance the discussion concerning CCP involvement in ISDA Credit Derivatives Determinations Committees.
For the population of bilaterally managed OTC derivatives portfolios, robust bilateral risk management practices will be adopted and improved, says ISDA, including the implementation of standardized methods for reconciling portfolios and resolving disputed margin calls. The group says the industry should develop and publish dispute resolution documentation and enhance the reporting of disputes; reduce thresholds for routine portfolio reconciliation; and update the industry Collateral Roadmap and Best Practice Documents.
Finally, ISDA says a robust data infrastructure serving the OTC derivatives markets, including trade repositories, would provide critical tools to support supervisors in carrying out their responsibilities and should also provide operational benefits to market participants. The group recommends developing, implementing and enhancing the trade repository infrastructure and addressing client data confidentiality in connection with transaction data reporting.
ISDA says individual jurisdictions should adopt the principles, as well as remain consistent between regulators across jurisdictions.
Over the past several years, ISDAs and the industrys 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, says Robert Pickel, executive vice chairman of ISDA. Over 40% 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%. Trade repositories have been established for interest rate, credit and equity derivatives to provide regulators with significantly improved visibility into exposures. The industrys adoption of automation has reduced backlogs and strengthened its operations.
ISDA and the OTC derivatives industry recognize the need to build on this significant progress and to further strengthen the framework for OTC derivatives activity. 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.