The Credit Derivatives Determinations Committees (DCs) play a vital role. Without a single, industry-wide determination on whether a credit event has occurred, it simply wouldn’t be possible to clear credit default swaps (CDS), making the market less safe and less efficient. It’s therefore critical the DC process remains strong, transparent and trusted – and the DCs have this week taken an important step to ensure that’s the case by voting to amend the DC rules to form a governance committee under a charter developed by ISDA’s Credit Steering Committee and published by ISDA.

This governance committee will be responsible for overseeing the operation of the DCs and making changes to the DC rules where necessary to ensure long-term viability and meet market expectations for efficiency and transparency in credit event determinations. The governance committee isn’t allowed to have any involvement in DC decisions, guaranteeing separation between the determinations process and the procedure for setting the structure and framework of the DCs. Any proposed rule change would be open to market consultation for at least 30 days before a vote by the governance committee, enabling industry participants to feed into the process.

The first committee comprises representatives from 18 firms active in the CDS markets – five buy-side and 10 sell-side firms, along with ICE Clear Credit, LCH and S&P Global. The individuals at these firms must have significant experience in the CDS market and, if the firm is a DC member, cannot also be the firm’s primary DC representative.

This represents a significant change in the governance of the DCs that will support a robust process for updating the DC rules. Back in December 2023, ISDA launched an independent review of the structure and governance of the DCs with the aim of maintaining the integrity of the DC process. That culminated in a series of recommendations that were put out for market consultation last year. The idea of a separate governance body garnered significant support during that consultation, prompting us to draft a proposal for consultation in May. But other potential changes also proved popular, including appointing up to three independent members of the DCs, requiring the DCs and the DC secretary to provide adequate reasons for all material decisions they take and disclosing any material steps taken in the DC process on the DC website.

It’s our intention to work with industry participants to develop detailed proposals for other recommendations that have received strong market support and to present these to the governance committee for a vote.

A robust, standardized determinations process that is binding on all market participants is critical for central clearing, which, in turn, significantly reduces risk in the financial system. But that determinations process needs to be trusted and transparent. The decision by the DCs to vote in favor of the governance committee charter is an important milestone in evolving the DCs to strengthen that trust, ensuring the credit derivatives market continues to function safely and efficiently.