For
Immediate Release December 10, 2003
For More
Information, Please Contact:
Alexandra Gage, ISDA New York, (212) 901-6000, agage@isda.org
The target timeline calls
for automated trade verification, confirmation and legal execution for interest
rate derivatives, credit derivatives, equity derivatives, FX derivatives and
commodity derivatives by June 2005. ISDA believes that automation of trade
processing will reduce operational risk by facilitating
straight-through-processing, bi-lateral settlement reconciliation and
collateral matching within agreed upon timeframes. The consultation paper also
outlines recommended timeframes for key elements in the processing of OTC
derivatives transactions:
Confirmations
·
For vanilla OTC derivatives, the goal is to electronically match and
affirm (legally execute) all inter-dealer transactions on Trade Date with
certain reasonable exceptions for time zones.
·
For other transactions, practice around confirmation and execution
should support a significant reduction in the interval between deal trading and
agreement:
·
Trade verification: same day (“T+0”)
·
Trade confirmation: for OTC vanilla products on T+1, for complex manual
transactions, as soon as practicable, but no later
than T+5.
·
Legal execution: for vanilla automated OTC products, by T+5. For
complex manual transactions, as soon as possible, but no later than T+10.
Settlement Efficiency and Cashflow Matching
By December 2005, counterparties
should seek to reduce settlement effort via the following techniques:
·
Netting of cashflows between any two parties
across OTC derivative transactions for a particular settlement date.
·
Novation of transactions to a high quality clearer who can
act as a central counterparty to the trade.
·
Active management of the historical trade portfolio, i.e., through swap
tear-up arrangements.
In addition, upcoming cashflows for any settlement date should be matched and
netted as follows:
·
Parties submit schedule of upcoming payments by S-10.
·
Resolve any discrepancies and agree match by S-5.
·
Agree net cashflow by S-2.
Cross Product Netting & Portfolio Reconciliation
ISDA additionally recommends
that the following market practices be adopted by year-end 2006:
·
Cross-Product Netting: the end state architecture should enable systems
which can undertake cross product matching and netting of cashflows
across all OTC transactions for any settlement date.
·
Portfolio Reconciliation: the market should move to enable reconciliation
of daily trading and legacy portfolios for purposes of reconciling exposure and
collateral computations.
“OTC derivatives have
established themselves as a widely recognized tool for financial and risk
management in the international marketplace – and there is every indication
that the growth of these important tools will continue,” said
“This paper is intended to
provide a common direction and a clear framework for the standards and
expectations we are working to implement,” continued Mr. Pickel. “While we
recognize that not all ISDA member firms will have the technology investment or
capability to achieve this vision by 2005, we believe a commitment by the major
industry participants will help drive the remainder of the marketplace towards
adoption of the standard.”
According to Mr. Pickel,
automating technologies is key to settling the rapidly
growing volume of derivatives trades. The market standard being widely adopted
is Financial products Markup Language (FpML), which enables firms to electronically generate,
match and dispatch trading confirmations. ISDA has promoted industry-wide
automation with a variety of initiatives. For example, ISDA’s
2003 Benchmarking Survey results showed that the industry is increasingly
setting and meeting targets on confirmation processing. The survey found that
in 2002, participating firms met their objective of producing confirmations by
T+5, for FRAs, vanilla swaps and commodity
derivatives. To educate members on the processing efficiency that FpML offers, The Association has also held ongoing
conferences, workshops and information sessions in
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, Credit Suisse First Boston International, Deutsche Bank, Goldman Sachs, Greenwich Capital Markets, JP Morgan Chase, Merrill Lynch, Mizuho Capital Markets, Royal Bank of Scotland, Morgan Stanley and UBS.
The full consultation paper can
be accessed at www.isda.org.
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.
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