For Immediate Release Friday,
September 21, 2001
For More Information, Please Contact:
Stacy Carey, ISDA New York, (212) 332-1200; Fax (212) 332-1212; scarey@isda.org
ISDA STATEMENT ON
NEW YORK, Friday, September 21, 2001 – The International Swaps and Derivatives Association (ISDA) today strongly welcomes the decision made by the Basel Committee on Banking Supervision to remove the “W” charge from Pillar 1 of the Basel review and transfer it to Pillar 2.
ISDA’s May 2001 response to the Consultation Paper issued by the Committee in January, http://www.isda.org/c_and_a/docs/BASELRESPONSEII08Board.pdf, stated it was unclear if the W factor was meant to address market, legal or credit risk. ISDA’s analysis of the various transactions subject to W revealed that the residual risks arising from these transactions were addressed by the Committee through other charges, particularly collateral haircuts and operational risk capital requirements. ISDA viewed the W charge as double-counting risk.
Applying a specific charge on credit risk mitigation transactions was also unjustified in light of market practice: losses experienced on repo or credit derivatives trades had been minimal, and the contracts used to document the transactions were enforceable and effective.
Of particular concern to ISDA was the comparative treatment of credit default swaps and guarantees, where it seemed that the Committee considered bilaterally negotiated, non-standardized products to bring better protection than standardized marketable derivatives. In ISDA’s view, this carried the risk of seeing market players structure transactions as guarantees, leading to market fragmentation and a substantial rise in the cost of credit protection. ISDA is pleased to see that the Committee has changed its stance on this crucial issue.