INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC
For Immediate Release Thursday, October 11, 2007
For More Information, Please Contact:
Carmen Neumann, ISDA London, 0203 088 3554, firstname.lastname@example.org
ISDA PUBLISHES DEFAULT RISK STUDY
The Study was conducted in conjunction with seven leading international
banks in order to assess the impact of IDR guidelines on banks’ regulatory
capital. The IDR guidelines represent a major revision to the regulatory regime
for trading book activities. If the guidelines are implemented as proposed
by regulators, market risk regulatory capital can be expected to almost treble
relative to the current VaR-based regime. Failure
to align the IDR guidelines with the existing market risk capital rules can
inappropriately shift firms’ primary attention to managing default risk in
the trading book, whereas experience demonstrates that default risk is much
less significant than market risk, even in turbulent markets.
The IDR Study complements a technical paper prepared by ISDA for the Accord Implementation Group Trading Book Working Group in January 2007. The paper recommended that the Basel Committee adopt a capital horizon of 60 days for modelling IDR in the trading book and permitted firms to reflect diversification between default risk and market risk.
Participating firms committed considerable time and resources to provide information and technical expertise to inform the regulatory process for the IDR guidelines. ISDA hopes that the study will encourage regulators to improve dialogue with industry participants and gain a better understanding of the technical nature of modelling for incremental default risk. This enhanced dialogue is a pre-requisite for developing a successful framework for this risk based on sound modelling principles.
ISDA’s IDR Impact Study is available at the Association’s website: www.isda.org.
ISDA, which represents participants in the privately negotiated derivatives industry, is among the world’s largest global financial trade associations as measured by number of member firms. ISDA was chartered in 1985, and today has approximately 820 member institutions from 56 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.