Isda plays key role in improving operational infrastructure

Joint letter to regulators shows the efforts Isda is making to strengthen the operational infrastructure for privately negotiated derivatives.

NEW YORK – A joint letter signed by market participants to a group of international regulators dated July 31, highlights some of the significant efforts the International Swaps and Derivatives Association is making in connection with the ongoing commitments of market participants to strengthen the operational infrastructure for privately negotiated derivatives.

The Isda initiatives outlined in the letter include: completion of its project to incorporate as the market standard an auction settlement mechanism for credit default swaps; best practices for collateral management; efforts to facilitate compression in size and scaleability of credit derivatives portfolios; and the integration of buy- and sell-side efforts in respect of enhanced operational efficiency.

“These efforts are consistent with Isda’s primary purpose, to encourage the prudent and efficient development of the privately negotiated derivatives business via the continued standardization of documentation, promotion of sound risk management practices and education of the market-place,” said Robert Pickel, executive director and chief executive officer, Isda.

One of the initiatives outlined in the letter is Isda’s efforts to strengthen credit event management across the industry with the incorporation of Isda’s off-the-shelf credit derivatives settlement auction mechanism into Isda documentation. Isda is working with its membership to finalize that incorporation (a process that has been commonly referred to as “hardwiring” the provisions into Isda documentation).

The association has worked closely with major dealers to identify and pursue further advances in collateral management, including portfolio-reconciliation best practices. In addition to the best practice guidance published today, Isda will continue to work on a number of related initiatives intended to further strengthen market mechanisms over the next several months.

The letter to regulators puts increased focus on Isda’s project towards compression of CDS portfolios, an initiative that will minimise the operational burden of managing the universe of outstanding CDS trades between dealer firms. Isda is co-ordinating ongoing discussions on portfolio compression, and has facilitated member firms’ selection of third-party providers for the compression service.

Isda continues to work closely with the Managed Funds Association and the Asset Management Group of the Securities Industry and Financial Markets Association on outreach to buy-side participants towards greater co-ordination with the sell-side community in respect of the commitments being made to regulators.

The group last met with the regulatory community at the Federal Reserve Bank of New York on June 9 and submitted a previous letter on March 27, 2008.