Isda CEO addresses US Senate banking subcommittee

Association chief outlines the industry's commitment to identifying and reducing risk in the OTC derivatives business

NEW YORK - In testimony before the US Senate Subcommittee on Securities, Insurance and Investment of the Committee on Banking, Housing and Urban Affairs, Robert Pickel, executive director and chief executive officer of the International Swaps and Derivatives Association (Isda), outlined the industry's commitment to identifying and reducing risk in the privately negotiated derivatives business.

"The over-the-counter derivatives business provides essential risk management and cost reduction tools for a broad swath of users," said Pickel in his testimony. "Isda and the OTC derivatives industry are committed to engaging with supervisors globally to expand upon the substantial improvements that have been made in the business since 2005. Isda knows further action is required, and pledges its support in these efforts."

In his testimony, Pickel outlined Isda's and the industry's strong commitment to identifying and reducing risk in the OTC derivatives industry. He emphasised the fact that OTC derivatives offer significant value to the customers who use them, to the dealers who provide them, and to the financial system in general by enabling the transfer of risk between counterparties. But he confirmed that Isda recognises the industry faces big challenges, and is urgently moving forward with new solutions. Isda has already delivered on a series of reforms to promote greater standardisation and resilience in the derivatives markets; developments that have been closely overseen and encouraged by regulators, who recognise that optimal solutions to market issues are usually achieved through the participation of market participants. He stated Isda's belief that it is essential to preserve flexibility to tailor solutions to meet the needs of customers and warned any efforts to mandate that privately negotiated derivatives business trade only on an exchange would effectively stop any such business from being conducted. He added that requiring exchange trading of all derivatives would harm the ability of US companies to manage their individual, unique financial risks and ultimately, harm the economy.

The Obama administration reform proposal addressed the issue of OTC derivatives by requiring that all derivatives dealers and other systemically important firms be subject to prudential supervision and regulation. Isda has stated that it supports the appropriate regulation of financial institutions that have such a large presence in the financial system that their failure could cause systemic concerns, and welcomed in particular the recognition of industry measures to safeguard smooth functioning of the markets.

Other issues raised in the administration's proposal were addressed in a letter that Isda and industry participants delivered to the Federal Reserve Bank of New York on June 2. The letter outlined a number of steps towards that end, specifically in the areas of information transparency and central counterparty clearing (http://www.isda.org/press/press060209.html).

Click here for Pickel's testimony www.isda.org.