The waiver of mandatory clearing requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act for certain OTC derivatives transactions would reduce risk in the financial system and help to achieve the risk-reduction goals of the Act, the International Swaps and Derivatives Association, Inc. (ISDA) said.  

A swap that is required to be cleared may hedge the market and counterparty risk of a swap that is not able or required to be cleared. In such circumstances, managing both transactions on a bilateral basis reduces risk. The alternative -- clearing one swap through a central counterparty clearing facility (CCP) and managing the other on a bilateral basis -- increases risk between the two counterparties as well as in the CCP and the financial system more broadly. Waiving mandatory clearing for swaps in these specific circumstances would have the effect of reducing risk. 

“ISDA is committed to working with policymakers in the US to implement the provisions of the Dodd-Frank Act that pertain to OTC derivatives and to make our markets safer and more efficient,” said Conrad Voldstad, Chief Executive Officer, ISDA. “This specific provision of the Act has unintended consequences that could be damaging to the marketplace and the level of risk in the marketplace. We believe the CFTC and SEC should exercise flexibility in interpreting the Act through rulemaking to achieve its objectives.”

The Association estimates that addressing swaptions, caps and floors would be the biggest reason for waivers. Over $40 trillion of these transactions are currently reported in the TriOptima Rates Repository, indicating that splitting the risk management of the trades would increase counterparty risk by a significant amount. These products should become eligible for clearing in the relatively near future and once they are, the waivers need not be granted for them. In addition, the Commissions could put in place reporting requirements and waiver limits to ensure the use of the waivers is not designed to avoid clearing.

Press release