How Are We Doin’?

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

Former New York City Mayor Ed Koch was famous for asking New Yorkers “How am I doin’?” The response gave him a quick job rating from his constituents. Sometimes it was a cheer, sometimes a boo.

With the publication this week of a series of final rules from the CFTC, it might be timely to ask “How are we doin’?” This set of rules covers a range of issues, including confirmations, valuation, portfolio reconciliation, dispute resolution and compression. In short, it’s a laundry list of what ISDA and our members have been focusing on in recent years to deliver safe, efficient markets.

And we’re happy to report that, on balance, the final rules would seem to us to elicit more cheers than boos.

For example, one important issue involves an extension of the time period for compliance with a set of external business conduct rules. This extension was important for purely practical reasons as much remains to be done by market participants to amend their contracts to address these rules. The process of doing so began with the recent launch of the Dodd-Frank Protocol and ISDA Amend, a joint ISDA-Markit initiative that automates part of the required compliance. We already have over three dozen adhering parties and we expect that number to grow substantially over the next month or so. But even with the efficiencies provided by those processes, mid-October was looking like a stretch to get everyone—buy side, corporates, pension funds and others—on board. So the extension was much needed.

In other portions of the release, ISDA’s comment letters are cited as the basis for changes in the final rules. Our positions, of course, were not adopted across the board and some concerns remain, but many critical parts of the rules reflect a reasoned approach to achieving regulatory goals. For example, the CFTC decided not to apply the rules retrospectively, something we advocated. On disputes, the difference in valuations must exceed 10% before dispute mechanisms are triggered and reports of disputes to the regulators are required if the dispute exceeds $20,000,000. The time periods for resolving disputes have been extended although they are still shorter than we advocated or have been working toward in our ongoing collateral committee efforts.

Also, the release acknowledges the successful efforts undertaken with the OTC Derivatives Supervisors Group, led by the New York Fed, to address issues such as confirmation backlogs and portfolio reconciliation. In executing its legislative mandate, the CFTC must put its own stamp on these issues while building on the real progress made through ISDA’s and the industry’s efforts with the ODSG.

The CFTC also acknowledges in several instances the central role played by ISDA documentation, the global standard for documenting derivatives. That’s an important consideration, particularly as we proceed with many amendments to the documentation driven by the Dodd Frank Act. The CFTC does not explicitly endorse ISDA documentation because it points out parties can—and do—negotiate variations to those terms. We are, after all, dealing with privately negotiated bilateral contracts.

Finally, the rules indicate that the CFTC will not view failure to comply with documentation and confirmation requirements as a violation of the rules or the Dodd Frank Act so long as procedures are in place to comply and there is a good faith effort to follow those procedures. This is a practical approach, and it is encouraging that the CFTC is motivated to encourage compliance and appears not to be constructing traps for the unwary.

We and our members will continue to study these final rules to identify implementation challenges and concerns. We look forward to a constructive dialogue on these issues in order to foster safe and efficient markets.

And in the meantime, feel free to let us know how we’re doin’.

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