ISDA®
INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION
NEWS
RELEASE
For
Immediate Release Wednesday, March 31, 2004
For More Information, Please Contact:
ISDA AGM Press Room, The
Louise Marshall, ISDA New York,
212-901-6000, lmarshall@isda.org
ISDA OUTLINES
IMPLEMENTATION PLAN TO ACCELERATE AUTOMATED PROCESSING OF DERIVATIVES
Consultative
Paper Provides Recommendations, Unified Approach
for Acceleration of
Automated OTC Derivatives Processing
Moving Forward: An Implementation
Plan offers recommendations, as well as a
unified approach, for achieving the goals previously outlined in Going Forward: A Strategic Plan. Issued
by the ISDA Operations Committee in December 2003, Going Forward set forth a strategy and vision for improving
operational efficiency in the processing of OTC derivatives trades and
recommended market-wide automation by 2006.
The plan outlined in Moving Forward centers
on industry-wide adoption of a standard, secure protocol for exchanging data
utilizing FpML. Specific implementation
recommendations for improving operational efficiency include:
Trade Processing
§
Achieve automated transfer of trade data for all
participants from sales and/or trading to Operations using straight-through
processing techniques by T+0 to enable affirmation/auto-matching
and settlement processes to commence.
§
Improve completeness and integrity of trade data by making
a participant’s own affirmation/matching statistics readily available to
encourage quality data on the front end of the process.
Verification/Legal
Execution
§
The Committee recommends collapsing the verification,
confirmation and legal execution processes.
Legal execution of a trade will be recognized once all details have been
agreed upon and acknowledgement of agreement is available to all parties.
§
The sharing of trade data bilaterally or through a market
service(s) using FpML for data description and
messaging will facilitate exchange of trade details by T+0 (with allowances for
global time zones), eliminating the need for an additional verification
process.
§
For vanilla transactions, results of the affirmation or
auto-matching process should be available no later than T+1, with queries
resolved by T+5.
Matching,
Settlement and Netting of Payments
§
The Committee calls for the creation of a standard,
automated means for matching trade cash flows.
Counterparties would make available a rolling, 30-day forward view of
cash payments along with appropriate standard settlement instructions, updated
daily for new trades and trade events (amendments, cancellations, novations), bi-laterally or through a service.
§
Industry participants will agree on a set of business rules
for combining cash flows as appropriate in facilitating the matching process.
§
The industry should agree on a standard set of business
rules for netting payments on an intra-product basis.
Portfolio Management
§
An industry-wide formal portfolio management process is
recommended in order to manage actively the growing portfolio of trades, reduce
required reconciliations, track changes in mutual trade populations resulting
from trade and business events, identify potential unrecognized novations/assignments and facilitate collateral management
processes.
§
Key components of such a process include the ability to
perform daily reconciliation of portfolio trades if required, portfolio
management capabilities (including trade tear-ups and/or mass cancellations)
and/or the use of an optional central counterparty.
OTC derivatives have gained wide acceptance as financial
and risk management tools, as evidenced by the $170 trillion in notional value
outstanding at mid-year 2003, according to the Bank for International
Settlements. However, increasing volumes have raised concerns about the ability
of dealers and end users to efficiently process and settle these
transactions.
“Continued
growth in the marketplace – and the operational
challenges which result – highlight the need for accelerated standardization
and automation over the full range of OTC derivative products and processes,”
said Executive Director and CEO of ISDA Robert Pickel. “By achieving a
significant level of automation, the market will experience greater economies
of scale, lower levels of credit and operational risk and improved customer
service.”
“Open communication and continued collaboration among
dealers, end users and service providers to identify and prioritize process
improvements will be critical to achieving the goals highlighted in this
paper,” added Mr. Pickel.
The ISDA
Operations Committee has been actively building cooperation among members to
reach a consensus on operational standardization. The following banks have
agreed to use their best efforts to lead and drive the strategic change
required to realize this vision: ABN Amro, Bank of
America, BNP Paribas, Barclays Capital, Citigroup, Commerzbank,
Credit Suisse First Boston, Deutsche Bank, Dresdner Bank, Goldman Sachs, Greenwich Capital, JP Morgan Chase,
Lehman Brothers, Merrill Lynch, Mizuho Capital Markets, Royal Bank of Scotland,
Societe Generale, Morgan
Stanley and UBS.
The input for
this paper was collected from a series of brainstorming sessions, market
consultation sessions and meetings over the past few months and represents the
collective views of the industry participants. The full consultation paper can
be accessed at www.isda.org.
About ISDA
ISDA is the
global trade association representing leading participants in the privately
negotiated derivatives industry. ISDA was chartered in 1985, and today has more
than 600 member institutions from 46
countries on six continents. These members include most of the world's
major institutions that deal in privately negotiated derivatives, as well as
many of the businesses, governmental entities and other end users that rely on
over-the-counter derivatives to manage efficiently the financial market risks
inherent in their core economic activities.
Information about ISDA and its activities is available on the
Association's web site: www.isda.org.
###