Emerging markets take centre stage at Isda AGM

New Angles

Asia and other developing markets will remain a key focus area for the International Swaps and Derivatives Association, its chief executive, Robert Pickel, told more than 600 delegates attending its annual general meeting in Singapore on March 14-16. The association attracted 60 new members during the year, taking its total to 700 firms.

During the event, Isda released its year-end 2005 market survey of privately negotiated derivatives, which showed that the notional principal outstanding volume of credit default swaps (CDSs) grew by 39% to $17.3 trillion in the second half of 2005, compared with growth of 48% to $12.4 trillion in the first half. Overall, growth in the notional of CDSs reached 105% in 2005, against 123% in 2004.

One of the main issues highlighted by speakers was the need for banks to improve their infrastructure for the settlement of derivatives trades to keep pace with developments in the front office. "As instruments become more complex and volumes increase, the development of the infrastructure for managing and controlling risk must keep pace," said Teo Swee Lian, deputy managing director of prudential supervision at the Monetary Authority of Singapore. "The challenges we face include not just how to measure and understand market risk, but also how to manage operational and legal risk."

Isda also published fund definitions as well as a protocol solution to facilitate the settlement of credit derivatives trades involving Dana Corporation, which filed for bankruptcy on March 3, 2006.

The fund definitions are intended for use in confirmations of derivatives transactions in products such as hedge funds and mutual funds, where a liquid secondary market may not exist.

Isda said it is also working to develop formal documentation for sharia-compliant derivatives transactions. Pickel told Risk that Isda has engaged in dialogue with Islamic scholars worldwide, including those working for the International Islamic Financial Market, based in Bahrain, on developing a framework for sharia-compliant derivatives transactions.

Ghazanfar Naqvi, head of Islamic products at Standard Chartered Bank, told delegates: "Year on year, we see the number of players increasing. The [Islamic finance] industry is now reaching a stage where product development is moving from simple structures to more complex structures catering to project infrastructure finance, capital markets and, obviously, derivatives."

Currently, the Islamic finance industry is facing an acute shortage of the products that are required by businesses and by Islamic financial institutions. These include interest rate hedging products, forex hedging products and options products, Naqvi said.

Isda's work on sharia-compliant documentation is mainly conducted and co-ordinated through its central and eastern European committee, led by Peter Werner, policy director for Europe.

The association also named two new directors, Grant Lovett, European head of investment-grade trading at UBS Investment, and Hideyuki Sago, deputy general manager in the structured products division for the global markets business unit at Mitsubishi UFJ Securities.