The International Swaps and Derivatives Association, Inc.
(ISDA) yesterday announced that it has published the ISDA Independent
Amount Whitepaper and Market Review of OTC Bilateral Collateralization
Practices. Both documents have been developed by the ISDA Collateral Steering
Committee under the auspices of the ISDA Industry Governance Committee.
“Collateralization has become a key method of mitigating counterparty credit
risk in the derivative markets,” said Julian Day, Head of Trading
Infrastructure, ISDA. “ISDA and the industry continue to work toward the
increased smooth functioning of the collateralization process of OTC derivatives
transactions through its efforts in relation to standards and best practices,
and collateral law reform efforts across the globe.”
The documents are designed to provide better understanding of current market
practices. In these documents, a number of recommendations were made for market
participants to enhance practice or understanding in the collateral management
arena.
The Independent Amount Whitepaper examines the risks associated with
under-collateralization or over-collateralization associated with Independent
Amounts under ISDA Credit Support Annexes, and the potential alternatives that
may be developed by the derivatives market to protect participants. The
Whitepaper was jointly produced by ISDA, the Managed Funds Association (MFA) and
the Securities Industry and Financial Markets Association (SIFMA). It was one of
the commitments outlined in the derivative industry letter global supervisors
dated June 2, 2009.
The Market Review of OTC Bilateral Collateralization Practices is a broad
market review of bilateral collateralization practices for OTC derivatives to
facilitate better understanding of current market practice, especially as it
relates to the different types of counterparties active in the market. The
objective of the review is to enable a more complete appreciation of the use of
collateral as a credit risk mitigant across the diverse OTC derivative market,
including some of the motivations, capabilities, limitations, and typical
practices of market participants engaging in collateralization. ISDA has worked
collaboratively with regulators to determine the appropriate scope of this
analysis.
The Independent Amount Whitepaper and the Market Review are both key
publications from the ISDA Collateral Steering Committee that provide the
context for collateralization as a risk reduction technique across market
participants.
Additionally, on March 1, 2010 the industry set new goals in the areas of
Portfolio Reconciliations and Dispute Resolution, updated the roadmap for
improving collateral management and re-affirmed its intention to complete
development of an enhanced industry framework for resolving disputed margin
calls. Each of these initiatives take into account risk, liquidity, default
management and other processes with a goal of securing operational efficiency,
mitigating operational risk and increasing the netting and clearing potential
for appropriate products.
Both the ISDA Independent Amount Whitepaper and Market Review of OTC
Bilateral Collateralization Practices are available on the “Collateral
Committee” page of the ISDA website: www.isda.org.
