The Future of the OTC Derivatives Market

Transcription

1 The Future of the OTC Derivatives Market ISDA 25 th Annual General Meeting Robert Pickel ISDA Executive Vice Chairman

2 The Case for Financial Innovation The ascent of money has been essential to the ascent of man [F]inancial innovation has been an indispensable factor in man s advance from wretched subsistence The evolution of credit and debt was as important as any technological innovation in the rise of civilization Harvard Professor Niall Ferguson in The Ascent of Money 2

3 OTC Derivatives Today Derivatives are an integral risk management tool for the world s leading companies Used by over 94% of Fortune 500, and 60% of mid-sized companies Netherlands Canada Switzerland Britain France Japan Germany US Percent using derivatives South Korea China

4 OTC Derivatives Today A considerable portion of financial innovation over the last 30 years has come from the emergence of derivative markets. NYU Professors Acharya, Brenner, Engle, Lynch & and Richardson Derivatives play an important role in the economy EU Commission Communication, 2009 Despite the problems that have been associated with OTC derivatives during the financial crisis, these instruments remain integral to the smooth functioning of today's financial markets. Federal Reserve Board Testimony,

5 Key OTC Derivatives Issues The characteristics of OTC derivative markets the private nature of contracting with limited public information, the complex web of mutual dependence, the difficulties of understanding the nature and level of risks increase uncertainty in times of market stress and accordingly may undermine financial stability. EU Commission Communication

6 Current Industry Initiatives Broad consensus on key issues: Appropriate regulation for all financial institutions that may pose a systemic risk to the financial system Stronger counterparty risk management (including clearinghouses) Improved transparency (trade repositories) More resilient operational infrastructure 6

7 ISDA's Key Accomplishments Standardization of market practices and conventions reduces risk (Big & Small Bang Protocols) ISDA Industry Governance Committee drives commitment process with NY Fed, global supervisors Board and industry governance broadened with buy-side Developed / promoted advancements in collateral management CDS standard model improves consistency and reduces differences regarding the calculation of CDS prices ISDA CDS Marketplace SM website brings together information, data and statistics on the CDS business 7

8 Initial Progress in Central Clearing More than $200 trillion of IRS cleared $7 trillion of CDS cleared Including $6.7 trillion of CDS index trades $100 trillion of notional reduced through portfolio compression Including $65 trillion of CDS index trades

9 Clearing Commitments Credit Derivatives October 2009 July 2010 New Eligible Trades Submitted for Clearing (Individually) 95% 95% New and Historical Eligible Trades Cleared (Collectively) 80% 85% Interest Rate Derivatives October 2009 July 2010 New Eligible Trades Submitted for Clearing (Individually) 90% 92% New Eligible Trades Cleared (Collectively) 70% 90% Historical Eligible Trades Cleared (Collectively) 60% 75%

10 Portfolio Compression CDS market size substantially reduced via portfolio compression $70 US$ trillion $60 $50 $40 $30 $20 $10 $ H 09 10

11 Further Progress in Central Clearing Industry has publicly committed to additional progress Currently working with clearinghouses to clear: Additional interdealer traders Backload of existing contracts End-user trades Further opportunities to reduce notionals via portfolio compression 11

12 Full Regulatory Transparency The goal: complete visibility for supervisors By product type By firm By counterparty Across the market The solution: centralized data repositories 12

13 Full Regulatory Transparency CDS Trade Repository Up and Running 13 Source: DTCC Deriv/Serv LLC; isdacdsmarketplace.com

14 Full Regulatory Transparency CDS Positions and Activity Source: DTCC Deriv/Serv LLC; isdacdsmarketplace.com

15 Full Regulatory Transparency Efforts underway with global regulators to determine right mix of pre- and post-trade transparency Most of OTC derivatives markets is at least as liquid and transparent as underlying cash markets No need for exchange trading in these market segments Industry will study transparency issues in other market segments 15

16 Stronger Infrastructure Aged Confirms Continue to Decline CDS Equity Int Rate Source: Markit

17 Stronger Infrastructure E-confirmations Continue to Increase 100% 90% CDS Equity Int Rate 80% 70% 60% 50% 40% 30% 20% Source: Markit

18 Current Public Policy Issues Preserving flexibility to tailor solutions to meet the needs of customers is essential Efforts to mandate that privately negotiated derivatives business trade only on an exchange would reduce availability Banning naked shorting via CDS would adversely impact credit markets "Asset bubbles occur more frequently when it is difficult to short the asset." - William Dudley, President, New York Federal Reserve Need for cross-border regulatory coordination 18

19 OTC Derivatives: The Road Ahead Privately negotiated derivatives will remain vital risk management tools ISDA and the industry are committed to working together to make further progress Stronger Risk Management Greater Transparency More Robust Infrastructure 19

20 The Future of the OTC Derivatives Market ISDA 25 th Annual General Meeting Robert Pickel ISDA Executive Vice Chairman