The International Swaps and Derivatives Association descends on Montreal, Quebec this week for its annual meeting and conference. Ahead of the conference, I caught up with ISDA CEO and former CFTC Commissioner Scott O’Malia, who offered up a preview of the conference and a highlight of the issues the swaps world is grappling with.
“The big issue is cross-border harmonization,” says O’ Malia. “I left the commission in the middle of the cross-border debate and came over to ISDA, and now it is all about implementation and coordination of the European and U.S. rules.” He looks at the objectives set out by the G-20 in the early days of the financial crisis (the 2009 “Pittsburgh Summit”), and notes the results have deviated from those early initiatives.
“We have not had a substituted compliance determination (between the U.S. and Europe) in two years.”
As the head of an international organization that must respect all sides of this particular issue, O’Malia looks to be caught in the middle of the dispute between U.S. and European regulators. “It’s like being a daisy at an elephant dance, standing between the U.S. and Europe,” he says. One concern among regulators is mutual recognition of central counterparties, which is ironic, as it means swaps reform is being held up by a futures issue.
O’Malia sees some bright spots, however. First, one year into the new swap execution facilities regime, volume is migrating to SEFs. He worries about the future, though, and feels that the overly prescriptive U.S. rules may become an impediment at some point, but the first priority must be for the regulators to finalize the registration process. “Let them become fully licensed SEFs so they can have the confidence to move forward, compete and innovate,” says O’Malia.
“There’s this idea, though, that SEFs were only about transparency. Transparency was certainly an element of it, but liquidity aggregation is also an element of it, and is often overlooked as a priority.” O’Malia points out that, because of the U.S. rules, the credit and rates markets have continued to trade in a bifurcated manner, with two liquidity pools, one for U.S. persons and one for non-U.S. persons. “We would encourage them to look at the liquidity factor and try to increase it.”
Another bright spot is the progress being made on the margin rules. “There are still minor differences with the posting and collecting margin and the definition of an end user, but by and large those rules are coming together and they are working quickly to harmonize those rules.”
To that end, ISDA has been doing its part by developing a standard initial margin model methodology. This is a significant step forward, according to the ISDA CEO, as it is a “transparent, regulator-approved methodology that will reduce the likelihood of disputes.”
We also discussed technology, reminiscing back to his efforts at the CFTC in reviving the technology advisory committee (TAC), and looking at how he has adapted that tech focus to ISDA. He looks at the tech issue on two fronts. First is helping ISDA members figure out how to implement and utilize technology. “We have clearing, trading reporting, and a huge and growing business in compression. All these pieces have to come together. Whether on or off exchange, whether cleared or uncleared, we want to make sure that the technology and the rules are in place to make it work efficiently as possible.”
Second, ISDA has been working to upgrade its own technology. The association is moving toward a “web-based, user-friendly console that contains all the information that the membership can more easily retrieve.” He points to ISDA’s SwapsInfo database as an example.
Coincidentally (but not really), the issues O’Malia brought up – cross-border issues, SEF optimization, clearing house safety and soundness – are exactly the issues being discussed in the conference panels.
One final concern expressed by O’Malia is that of regulatory fatigue. He suggests a “cooling off” period, to “make sure we understand the impact of the rules on liquidity, volatility.” Taking a time-out to assess the cumulative impact of rules “would be a huge benefit for both market participants and regulators.”