October 10, 2017 / 12:43 PM / 9 months ago

ISDA CDS panel faces call for more transparency

LONDON, Oct 10 (IFR) - The framework for determining whether credit default swaps should pay out may benefit from improved transparency and changes to the composition of the committee that determines credit events, according to a new survey.

A review of ISDA’s credit derivatives determinations committees and the CDS auction process by the International Organization of Securities Commissions found demand for an array of potential improvements to the current framework.

Respondents to a survey suggested increased disclosure around potential conflicts of interest and a possible expansion of the panel of five buyside and 10 sellside firms, which meet behind closed doors to determine when an issuer is in default.

“Participants provided a number of suggestions for improvement that focused on the transparency of the process,” said IOSCO in its report.

Other suggestions included increased disclosure of potential conflicts of interest and greater clarification of DC rules regarding governance and conduct. Some respondents called for the creation of a panel of independent representatives to vote on material DC decisions, while others were keen to expand the participation to external observers.

In particular, respondents want to explore the possibility of expanding buyside participation on the DC. Current buyside membership on the DC sees five of the largest hedge funds - AllianceBernstein, Elliott Management, Citadel, Pimco and Cyrus Capital - cast votes on default questions alongside the 10 largest dealers.

IOSCO’s statement on the functioning of the DC process, issued by the body’s task force on OTC derivatives regulation, comes days after an agreement to transfer administrative DC duties from ISDA to ICE Benchmark Administration fell at the final hurdle.

IBA, a division of the InterContinental Exchange, was selected for the DC Secretary role through a public tender in December. Having failed to reach an agreement with the DC for necessary rule changes to facilitate the change, ISDA is now searching for another entity to take over the administrative reins when its current term runs out in April 2018.

In its report, IOSCO said it would continue to engage with relevant participants in the DC and auction processes to monitor the impact of those planned changes.

Despite the suggestions for improvement, IOSCO noted no pressing need for changes to the composition and functioning of the DC. The research highlighted a range of recent improvements aimed at improving transparency, such as the inclusion of buyside firms and a supermajority voting requirement in which decisions are passed by a minimum of 12 votes. Respondents also suggested improvements to the external review process that kicks in when a vote fails to meet the supermajority threshold.

Other recent developments require DC members to confirm they have written policies in place for managing potential conflicts of interest, while each participant’s vote is published on the ISDA website.

IOSCO also recognised developments from IHS Markit and Creditex, which play an administrative role in auctions that determine payouts on CDS once the contracts have triggered. Those include publication on the Creditex website of dealers’ physical settlement requirements, initial market submissions and limit orders as well as financial penalties for outlier submissions.

A spokesperson at ISDA was not immediately available for comment. (Reporting by Helen Bartholomew)

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