In the words of Willie Nelson, nothing lasts forever but old Fords or a natural stone. Knowing that, it’s best to get ahead of things – to look at whether a system, solution or mechanism continues to do what it’s meant to do in the best and most efficient way, before any potential issues start to emerge. That was our thinking when we decided to commission an independent reviewer to look at the structure and governance of the Credit Derivatives Determinations Committees (DCs).

These industry committees of buy- and sell-side firms play a vital role – they ensure there is a single decision-making process for determining whether a credit event has occurred, avoiding the potential for uncertainty, disputes and conflicting outcomes across different sets of credit default swap (CDS) counterparties. Crucially, having certainty that all contracts would have the same outcome meant that CDS could be cleared at central counterparties, a regulatory priority after the global financial crisis.

However, the market for credit derivatives has changed significantly since the DCs were introduced in 2009, with new regulations, capital requirements and market structures. Meanwhile, the number of firms willing to participate on the DCs has fallen from 26 in 2009 to 12 today. Now, there’s nothing in the DC rules that sets a minimum required number of committee members. The DCs have continued to function effectively, and there’s nothing to suggest they won’t be able to do so in future. Nonetheless, after nearly 15 years with more or less the same fundamental structure, we think it makes sense to kick the tires to check if any potential changes could be made that would ensure the integrity of the DCs for the next 15 years.

That’s why we appointed Linklaters in December to oversee an independent review. As part of that process, Linklaters will conduct a series of interviews over the course of several weeks with market participants and other stakeholders, including academics and regulators. Once complete, the review will be made available on ISDA’s website for consultation to determine which, if any, of the potential changes have the broad support of the market. No dates have been set for the consultation yet, but we’ll ensure market participants are given plenty of time to provide feedback.

It’s important to note that ISDA is not responsible for changing the structure and governance of the DCs. The DCs are committees of industry participants subject to a set of DC rules. ISDA has never been directly involved in the DC decision-making process, has never controlled the DCs and has never had the power to change (or even vote on) the DC rules. ISDA did serve as DC secretary from the establishment of the DCs in April 2009 until October 2018. As secretary, ISDA was only responsible for various administrative tasks, including distributing questions submitted by eligible market participants to the relevant DC, convening DC meetings and publishing the results of DC votes.

While ISDA is not involved in the DC process and does not control the DCs, our mission is to foster safe and efficient derivatives markets. As such, we have an interest in ensuring the DCs continue to function robustly. Following the independent review and market consultation, we will work with members to flesh out those proposals that have support into specific implementing changes, which will be recommended to the DCs – but the DCs will ultimately decide whether to implement those recommendations.

The credit derivatives market has not been without its controversies over the past 15 years, but there’s no doubt that having a single body to determine whether a credit event has occurred, based on public information, rules and definitions and with public reporting of how each DC member firm has voted, has helped make the credit derivatives market safer and more efficient. We hope our review will ensure we have a robust, centralized and transparent mechanism for the determination and settlement of credit events for many more years to come.