Isda AGM: FSA’s Tiner warns against complacency

Outstanding confirmations in the credit derivatives market have continued to improve, falling to 5.5 days versus 16.2 days a year ago, according to figures from the International Swaps and Derivatives Association. The amount of time it takes for firms to send credit derivatives confirmations to clients has also improved, with 70% of confirmations now sent out one day after execution, compared with 50% in 2006.

However, dealers need to remain watchful to ensure the problems do not re-emerge, according to John Tiner, chief executive of the UK Financial Services Authority (FSA). Speaking at Isda’s 22nd annual general meeting in Boston last week, Tiner warned that rising volumes in the credit derivatives market could put renewed strain on banks’ back offices given limitations on resources and lack of spare capacity.

In its most recent market survey, published this month, Isda reported that the notional outstanding volume of credit default swaps rose by 33% to $34.4 trillion in the second half of 2006. That represents a rise of 102% over the whole of 2006, compared with 103% the year before.

"There is still a need for continued vigilance on everyone’s part and the submission of credit derivatives confirmation metrics to regulators still plays an important part in this respect,” said Tiner.

Elsewhere, outstanding confirmations have also fallen in other asset classes, with interest rates falling from 50 days last year to 14 days, commodities decreasing from 23.3 days to 7.5 days, and equity derivatives trades falling from 50 days to 21 days.

But while all banks were able to meet a target set by the New York Fed to reduce equity derivatives confirmations outstanding for more than 30 days by at least 25% by the end of January 2007, there was a slide in the number of confirmations outstanding between January and February this year, said Tiner.

“Had the deadline been February and not January, then a number of firms would have implicitly missed their target,” he said. “It is a pity that the foot came off the pedal, but perhaps this could have been anticipated as we saw a similar, if less pronounced, ‘target deadline hangover’ phenomenon for credit derivatives last year.”

Tiner noted that reducing outstanding confirmations for equity derivatives may be more difficult than for credit derivatives due to the diversity of the client base, a lack of inclination by clients to use automated confirmations, and the absence of an industry accepted master agreement for some products. As of February 2007, only 38% of equity derivatives trades were eligible for electronic confirmation. As such, dealers need to play an active role in agreeing master confirmations and encouraging the adoption of electronic confirmation platforms, said Tiner.

"The long term success and proliferation of automation in equity derivatives though will likely depend on effective engagement of the client side,” said Tiner. “We are aware this will be more difficult than with credit derivatives due to a more diverse client base, but hope the industry will encourage more clients to develop electronic confirmation capabilities.”

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