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by Judy Inosanto

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  • Global over-the-counter (OTC) derivatives dealers, buyside institutions and other market participants are making steady progress in strengthening the operational infrastructure for the trading of these instruments by increasing electronic trade processing and reducing the level of outstanding trade confirmations. This assessment is according to the International Swaps and Derivatives Association (ISDA®), which recently published a review of the industry’s efforts to improve its operational practices over the past year.

    ISDA released the report at its annual meeting in San Francisco in April, attended by a global audience consisting of market participants, regulators, solution providers and journalists. At the meeting, senior executives from ISDA, the industry and policymakers reviewed key initiatives, ranging from central clearing to regulatory transparency, that the OTC derivatives community has tackled and will continue to tackle to achieve greater safety in the market.

    Survey findings

    The 2010 ISDA Operations Benchmarking Survey indicates the confirmation process has been automated to the point where infrastructure improvements are reflected in the continuing decrease in confirmations outstanding. For example, 99% percent of eligible credit default swap (CDS) transactions were confirmed electronically in 2009, up from 95% in 2008. In addition, the number of business days’ worth of outstanding aged confirmations for CDS contracts dropped to 1.1 compared to 3.8 last year. (The complete survey is available at the ISDA website,

    The survey findings reflect the industry’s investment in infrastructure over the past several years, according to ISDA, whose Executive Vice Chairman, Robert Pickel, stated that these efforts have created a "stronger and more resilient operational infrastructure for the privately negotiated derivatives business."

    At the annual meeting, ISDA’s CEO Conrad Volstad noted the impact such improvements have made in the market. "As history has shown, the financial system suffered from the Lehman default, but the losses were contained," he said. "They were contained, in large part, due to actions the industry had taken in concert with its regulators, the NY Fed and its global counterparts. Confirmation backlogs had largely disappeared, portfolios of contracts were reconciled and largely agreed with respect to valuations. A large portion of Lehman’s interdealer interest rate swap book had been cleared through the LCH and the well-practiced unwind process worked well."

    Expanding use of clearing services

    Pickel also cited the strides the industry has made to guarantee, or clear, a larger population of CDS trades. "Today, more than $200 trillion of interest rate swaps have been centrally cleared. Some $7 trillion of CDS have also been cleared," he said. "I’m happy to say that firms are meeting or exceeding their targets. While there are immense challenges to be addressed with regards to central clearing, the performance to date demonstrates the industry’s commitment to clearing what can be cleared… namely, the most liquid, standardized trades."

    Pickel noted that the two principal areas of focus for the industry include broadening the set of OTC derivatives that are eligible for clearing and broadening the number and type of market participants that are able to clear their transactions. "As we look to expand clearing, we certainly need to take into account risk, liquidity, default management and other factors," he said. "These are all important considerations. But at the end of the day we should continue to see a larger percentage of outstanding volume migrate to central clearing facilities."

    Market transparency

    A focal point of the meeting was the industry goal to provide supervisors with a complete view of the market. While a great deal of progress has been made on this front, particularly in the CDS market, where DTCC operates the Trade Information Warehouse through its Warehouse Trust Company LLC subsidiary, there is an industry commitment to expand these efforts to ensure regulatory visibility across transactions, firms, counterparties and the market as a whole.

    Pickel noted that the transparency requirements of the market and regulators are being realized through the establishment of central trade data repositories per major asset class, including CDS, interest rate swaps and equities. As a result, all trades, both cleared and uncleared, are recorded into these repositories, acting as a single source of information about the market.

    DTCC’s Warehouse for CDS was cited as an example of how such a repository is effectively bringing transparency into the market. "We will no longer have issues like we did after the Lehman bankruptcy, when market participants and others worried about firms’ exposure to that credit event. One need only look back to the bank-ruptcy that had many people worried – General Motors. When GM went bankrupt a year ago, it was handled smoothly and uneventfully, in large part because of steps the industry had taken. That included the readily available information on net notionals that DTCC provides," said Pickel.

    He also encouraged meeting attendees to look at the CDS data published on DTCC’S website, noting the information has been a valuable source in recent weeks when concerns rose on market exposure on sovereign debt. (To see the data, go to and click Issues & Initiatives on the homepage.)

    "Supervisors were able to look into the CDS repository to examine how much net exposure there was, and what the recent trading activity looked like," he said. "I think this visibility played an important role in enabling regulators to see that CDS really played no role in the sovereign debt crisis in Greece. The information was very helpful indeed and can only be more beneficial for regulators going forward."

    Ongoing progress

    With a singular regulatory focus on reducing systemic risk, ISDA identified four initiatives to support this goal:

    • Make sure an effective regulatory framework is in place
    • Strengthen counterparty risk management
    • Improve transparency
    • Build a robust operational infrastructure.

    "The progress that has been achieved by the industry in terms of automation, operational efficiency and ensuring that a larger population of eligible trades is guaranteed through a central counterparty provider reflects the OTC derivatives community’s commitment to bring greater safety into the market," said William Stenning, DTCC managing director, Business Development, DTCC Deriv/SERV, who attended the ISDA meeting. "We look forward to our ongoing collaboration with ISDA, market participants and regulators to ensure these goals are met and that the viability of this important market is protected." @