29 November 2012

ISDA's response to the European Commission's public consultation on the regulation of indices

In its response, the International Swaps and Derivatives Association (ISDA) has limited itself to commenting on those issues that are directly relevant to ISDA and OTC derivatives markets.

In relation to any transition to alternative benchmarks, there should be clear and long-term arrangements in place. Failure to achieve a smooth and progressive transition will result in major market dislocation and significant “jump risk” if there is an abrupt move from old benchmarks to a successor. The rate of any transition will likely be chiefly determined by the speed of migration to an alternative in terms of liquidity, as well the extent to which market participants have amended their documentation (Q 39).

Regarding a hybrid methodology for calculation purposes, ISDA generally supports the use of actual trade data (where available) in benchmarks’ compilation. At the same time, ISDA believes that it will still be necessary to deploy algorithms or expert judgement to fill the gaps where no trade data exists. In fact, ISDA would argue that expert judgement still plays a part even where actual trade data exists, given that the decision to transact the trade(s) in practice depends upon the exercise of such expert judgment (Q 10).

ISDA developed ISDAFIX to facilitate the determination of exercise values for cash-settled swap options. The existence of such a benchmark provides a transparent, readily available value to which parties to a transaction can refer as a settlement rate. Without such a benchmark, it might be necessary to go through the process of calling a number of active dealers for quotes in order to settle transactions (Q 1).

ISDA encourages the Commission to take account of the distinction between key public benchmarks, that are primarily used for purposes of pricing a broad range of financial instruments or contracts, and benchmarks in the broader sense (including proprietary indices). In short, not all indices should be regarded as “public goods”, and this should be reflected in the design of regulation (Q 34).

In relation to future reforms, there should be alignment with existing regulatory initiatives. Particularly, if transactions are to be reported, then existing reporting databases, systems and reporting routes should be leveraged (Q 41).

Full response

© ISDA - International Swaps and Derivatives Association