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.

Anniversaries are important. They provide an opportunity to look back on important events in the past, and consider how they shaped the present. Ten years on from the collapse of Lehman Brothers, it’s therefore natural that people think back on what happened and ask what has changed.

The answer is: quite a lot. Consider the progress made in implementing the Group-of-20 derivatives market reforms. A key feature was the central clearing of standardized derivatives. Today, approximately 75% of total interest rate derivatives notional outstanding is cleared, mitigating bilateral counterparty credit risk.

Capital levels have increased significantly. The largest global banks have bolstered Tier 1 capital to the tune of €1.5 trillion since 2009, and bank liquidity profiles have significantly improved. Unlike 2008, formal processes for recovery and resolution are now in place in the event a bank fails.

According to the Financial Stability Board (FSB), 19 out of the 24 FSB countries have derivatives trade reporting mandates in place. Mandatory margin requirements are also being phased in, significantly reducing the risk of losses from the default of a counterparty.

But, 10 years on from the collapse of Lehman Brothers, now’s the time to ask what’s working, what’s not and what can be made better.

ISDA has worked to highlight areas where improvements can be made, and to suggest solutions to implementation challenges. The most important is the cross-border harmonization of rule sets. On capital, for instance, we’ve highlighted the need for local regulators to aim as far as possible for global consistency when implementing the Basel framework. A lack of harmonization would create impediments for internationally active firms, reducing the efficiency of markets and increasing compliance costs.

Consistency and cooperation are also important in regulatory reporting. It makes little sense for different jurisdictions to have their own reporting requirements and data formats. This needlessly increases the compliance burden for derivatives users, while reducing the ability of regulators to aggregate exposures on a global basis and spot the early signs of another financial crisis.

Another key issue is calibrating the rules to ensure they are risk-appropriate. For example, we’ve highlighted the challenges that will emerge in September 2020, when the threshold for compliance with initial margin requirements for non-cleared derivatives reduces from €750 billion to just €8 billion – a change ISDA estimates will capture more than 1,000 additional smaller banks and buy-side firms. In response, we’ve flagged the need to prepare early, and published guidance on the steps in-scope firms will need to take to comply.

These are just a couple of the issues still outstanding. It was important that we learned the lessons from Lehman and implemented changes to ensure the financial system is more resilient. But it’s also important we learn the lessons from the past 10 years, and refine and improve the rules where necessary to ensure the derivatives market remains both safe and efficient.


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