ISDA_®
Safe, Efficient Markets

Non-cleared OTC derivatives create significant value to the economy, from enabling companies and governments to manage risk in their operations, to helping pension funds meet their obligations to retirees. Current regulatory proposals on margin requirements pose a threat to the continued functioning of this vital market segment. This ISDA paper explains what non-cleared OTC derivatives are, who uses them, why some – but not all – will be cleared, and the impact of the regulatory proposals.

ISDA produces its Market Analysis to correspond with the release of the Bank for International Settlement’s (BIS) semi-annual statistical release. The BIS’s most recent release covered the period ending June 30, 2012. Our report aims to integrate market data to show the impact of clearing, netting, compression and collateral on notional amounts and risk exposures in the OTC derivatives markets. The Market Analysis draws on information sources including LCH.Clearnet’s SwapClear, TriOptima, the DTCC Trade Information Warehouse, Markit, ICE, CME, ISDA’s 2012 Margin Survey and other clearinghouses and trade vendors.

ISDA produces its Market Analysis to correspond with the release of the Bank for International Settlement’s (BIS) semi-annual statistical release, the most recent of which covered the period ending December 31, 2011. ISDA’s reporting aims to integrate market data to show the impact of clearing, netting, compression and collateral on notional amounts and risk exposures in the over-the-counter (OTC) derivatives markets. Counterparty credit losses from the Office of the Comptroller of the Currency (OCC) report are also presented.

The paper is intended to give the reader an insight into the different offsetting requirements under IFRS and U.S. GAAP and their impact on the new Basel III Leverage Ratio.

The paper analyzes existing and potential opportunities for further standardization in the OTC commodity derivatives markets in order to drive improvements in operational efficiency, reduce operational risk, and increase netting and clearing for appropriate products. It also provides a summary of OTC commodity derivatives markets’ trade processing lifecycle events and an overview of the current industry state of processing.

Portfolio Compression is a risk reduction practice is conducted in the interest rate swaps (IRS) market. This paper includes: an overview of the compression process, metrics on the significant progress achieved to date, the challenges that need to be met to increase compression by a significant amount, the approaches of four major dealers to maximize benefits and an estimate of what is possible in terms of potential notional that might be compressed.

Analysis of the over-the-counter (OTC) derivatives market based on statistics as of June 30, 2011.

The majority of sovereigns do not post collateral to support their use of over-the-counter (“OTC”) derivatives1. As a result, dealers regularly have credit exposure arising out of these contracts which is often hedged with the sovereign Credit Default Swaps (“CDS”), and interest rate and foreign exchange swaps and options. This process has been of particular concern in Europe because of the possible ban on the use of sovereign CDS. To assist in highlighting this and other concerns arising out of the practice not to collateralize OTC derivatives, two associations2 (“the Surveying Associations” or ”SAs”) conducted a survey of dealers earlier this year, regarding their OTC derivatives exposure to European Sovereigns (“ES”).

An in-depth discussion and analysis of the impact of electronic execution requirements on OTC derivatives markets that were mandated by the Dodd-Frank Act. The paper explores and analyzes whether the market structure being developed by the CFTC to implement these requirements will meet the CFTC’s key goals: increase the efficiency of the market by reducing transaction costs, improving access to markets and increasing transparency. The paper also assesses the costs and expenses that market participants and ultimately end-users are likely to bear as a result of the mandate’s implementation. The analysis was developed by ISDA staff and consultants in conjunction with NERA Economic Consulting.

The counterparty credit risk exposure of 12 US bank holding companies and international banking companies to monoline insurers has led to some $54 billion in write-downs by the banks since 2007. ISDA conducted this study as part of its examination into the losses incurred in the US banking system due to counterparty defaults on OTC derivatives. An earlier paper on the subject (below, dated August 5, 2011), showed such losses for US banks amounted to only $2.7 billion from 2007 through the first quarter of 2011. After further investigation, it became apparent that the transactions involving subprime mortgage risk taken in synthetic form (via derivatives) were booked in firms outside the US banking system.