ISDA Outlines Path Forward for Centralized Execution of Swaps
01 April 2015 - 9:04PM
Business Wire
The International Swaps and Derivatives Association, Inc. (ISDA)
today published a set of principles aimed at promoting regulatory
consistency in the development and application of centralized
trading rules for derivatives.
The execution of standardized derivatives on an exchange or
electronic trading platform was a key objective from the Group of
20 summit in 2009, and regulations have either been implemented or
are being developed in several key jurisdictions. However, ISDA and
its members are concerned about the potential for divergences in
how these rules are applied in each jurisdiction, which could lead
to market fragmentation, low trading liquidity, duplicative
compliance requirements and increased risk.
ISDA research has shown that fragmentation of global liquidity
pools has already emerged since the US swap execution facility
(SEF) rules came into force in October 2013. For instance, European
dealers are opting to trade euro interest rate swaps (IRS) with
other European dealers rather than be subject to US rules. By
December last year, 85% of euro IRS transactions were traded
between European dealers, up from 71% in September 2013.
One of ISDA’s major concerns is that this market fragmentation
will continue and broaden as US, European and other regulators fail
to reconcile their rule sets. This could prompt difficult and
intractable negotiations as to which rule set should prevail.
“ISDA believes it is critical that trade execution regimes work
on a cross-border basis to ensure regulatory consistency across
jurisdictions, proper oversight, transparency and continued
competition,” said Scott O’Malia, ISDA’s Chief Executive Officer.
“ISDA and its members believe that targeted regulatory corrections
in the US can improve the utilization of SEFs and enhance the
likelihood of coordination with European transaction rules
currently under development.”
ISDA’s paper, Path Forward for Centralized Execution of Swaps,
sets out common principles to help ensure regulatory consistency of
centralized trading rules, and so facilitate equivalence and
substituted compliance determinations. These include:
The trading liquidity of a derivatives contract (and
consequently the regulatory obligations to which the contract is
subject) should be determined by reference to specific objective
criteria. The process should be based on concrete, transparent
and objective standards so that market participants have a clear
understanding of when swaps will be required to move from the
bilateral market to centralized trading venues.
Derivatives contracts that are subject to the trading
obligation should be able to trade on a number of different types
of centralized venues. It is important for regulators to
achieve a flexible trade execution regime that would allow
contracts to be traded across jurisdictions, and not be subject to
costly duplicative compliance obligations and regulatory
arbitrage.
Trading venues must offer flexible execution mechanisms that
take into account the trading liquidity and unique characteristics
of a particular category of swap. We believe that regulators
will encourage centralized trading by permitting parties to
communicate and execute trades freely, so long as the parties
comply with the requirement to execute trades on a centralized
venue.
ISDA believes certain regulatory changes need to be made to the
US SEF rules in order to comply with the ISDA principles and to
achieve a harmonized international regulatory regime. The necessary
regulatory adjustments would include changing the process for
making mandatory trade execution determinations to ensure it is
based on objective criteria and supported by data, and to allow
greater flexibility in swap execution mechanisms.
A full version of the paper is available on the ‘Functional
Areas’ section of the ISDA website, under ‘Public Policy’.
About ISDASince 1985, ISDA has worked to make the global
derivatives markets safer and more efficient. Today, ISDA has over
800 member institutions from 67 countries. These members comprise a
broad range of derivatives market participants, including
corporations, investment managers, government and supranational
entities, insurance companies, energy and commodities firms, and
international and regional banks. In addition to market
participants, members also include key components of the
derivatives market infrastructure, such as exchanges, clearing
houses and repositories, as well as law firms, accounting firms and
other service providers. Information about ISDA and its activities
is available on the Association's web site: www.isda.org.
ISDA® is a registered trademark of the International Swaps and
Derivatives Association, Inc.
ISDA New YorkLauren Dobbs, +1-212-901-6019ldobbs@isda.orgorISDA
LondonNick Sawyer, +44 203 088 3586nsawyer@isda.orgorISDA Hong
KongDonna Chan, +852 2200 5906dchan@isda.org