Isda AGM: industry getting to grips with nuts and bolts of reform

nuts and bolts

Twelve months ago, with the derivatives market already getting a hammering in the court of public opinion, an excruciating article in the New York Times caught the industry letting its hair down at an S&M-themed club in San Francisco, during a party at the International Swaps and Derivatives Association's annual get-together. This year's event - in medieval Prague - got underway last night with a reception in the more sober surroundings of the Convent of Saint Agnes of Bohemia.

Conference proceedings start this morning, and will bear witness to an industry  facing huge upheaval, as regulators on both sides of the Atlantic race to finalise new market structure rules. But the fight over the general shape of those rules is over, and attention has shifted in recent months to the nuts and bolts of reform - where Isda itself feels more comfortable, says Robert Pickel, the association's executive vice-chairman.

"We were certainly forceful in trying to suggest that hanging the crisis on the derivatives market was really not appropriate - and that shaped our relationship with the legislators and, to some extent, the regulators. But when you get down to the nitty-gritty, it really plays to Isda's strengths, and what we've done over the years - like putting in place the infrastructure for trading derivatives, and managing risk via standardised documentation," he says.

The agenda for this year's event - at the cavernous Hilton hotel on the banks of the Vltava river - reflects that. It suggests the industry is rolling its sleeves up and getting to work. Sessions have a practical focus: progress made towards central clearing, for example, or developments in collateral management. Isda's new slogan - "safe, efficient markets", which was added to the association's website at the start of this month as part of a rebranding exercise - makes an appearance in the title of a panel discussion on market transparency.

Real tensions remain. On market transparency, for example, the industry has been voluntarily building a series of new trade repositories to capture market data, under terms agreed with bank regulators. But the scope of those efforts conflicts with proposals being drawn up by the Commodity Futures Trading Commission (CFTC) for mandatory repositories. Last week, the largest dealers announced they would begin the search for a new interest rate repository because the existing one - operated by TriOptima - doesn't satisfy the CFTC's draft requirements.

We were certainly forceful in trying to suggest that hanging the crisis on the derivatives market was really not appropriate - and that shaped our relationship with the legislators and, to some extent, the regulators

"One of the things coming out of the crisis was that while regulators may have been able to access information about the derivatives exposure of their regulated entities, there was no real ability to connect the dots across different entities and jurisdictions - so, over the last few years, we have focused on enabling regulators to connect those dots," says Pickel. "But the CFTC sees repositories as a be-all and end-all of information about the market. So they want to get into valuations, even pricing - it's a much more expanded view of what a repository is."

It certainly doesn't end there. In the past few months alone, disputes have blown up about capital requirements for CCP default fund contributions, whether clearers should be required to have access to central bank liquidity, membership criteria and risk management standards for CCPs, and the impact swap execution facilities will have on dealer-client relationships. No-one knows how fragmented derivatives portfolios will become, how much it will cost in total margin, or what the impact will be on liquidity. Despite all this, Pickel insists Isda's members aren't quibbling with the move to central clearing.

"People realise and agree it is the right move for a certain category of trades. I think what we'll see at the AGM is a discussion of the challenges in dealing with all this and trying to implement it in a way that continues to make these products available to customers in a cost-effective way," he says. There will also continue to be demand for bespoke, bilateral trades, he argues - but it's not clear yet what proportion of the market will be deemed eligible for clearing, nor how the economics of uncleared business will pan out when regulators have decided how those trades need to be capitalised, collateralised and reported.

"There are different views on how big the bilateral part of the market will be - but as long as people have idiosyncratic hedging needs, there will be individual, tailored transactions, and that will continue to be a portion of the market," he says.

Hanging over all of this are dramatic post-crisis changes to derivatives pricing practices, brought about by increased funding costs and counterparty risk, plus the sudden emergence of a significant basis between Libor and overnight interest rates. The combined effect has been to turn a simple swap with a collateral agreement into one of the most exotic pricing challenges in the market - making life difficult for dealers when they need to argue for regulatory forbearance, as one global head of rates recently told Risk: "It's difficult to stand in front of regulators and say the over-the-counter derivatives market is functioning well when we can't even agree how to price a plain-vanilla interest rate swap."

These issues, and others, will get an airing over the next couple of days as more than 900 delegates descend on Prague - a record for an Isda AGM. The bottom line for many of them: "There's still so much work to do," says Pickel.

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