ISDA Calls for Derivatives Standardization Through SEF Flexibility

The paper, Path Forward for Centralized Execution of Swaps, recognizes that standard derivative execution on exchanges or electronic trading platforms was a key objective of the Group of 20 (G20) summit in 2009, and that regulators have made efforts to implement in several key jurisdictions.

However, the potential for disagreement as to how the rules are applied in different jurisdictions is a cause for concern to ISDA, which could lead to continued fragmentation in the market as regulators "fail to reconcile their rule sets", prompting "difficult and intractable negotiations as to which rule set should prevail".

The paper states that the trading liquidity of a derivatives contract should be determined by reference to a specific objective criteria, based on "concrete, transparent and objective standards".

"ISDA believes it is critical that trade execution regimes work on a cross-border basis to ensure regulatory consistency across jurisdictions, proper oversight, transparency and continued competition," says ISDA CEO, Scott O'Malia. "ISDA and its members believe that targeted regulatory corrections in the US can improve the utilization of SEFs and enhance the likelihood of coordination with European transaction rules currently under development."

Research conducted by ISDA has found an emergence of liquidity fragmentation since the introduction of US SEF rules in October 2013, as European dealers opt to trade euro interest rate swaps (IRS) with other European-based dealers over US counterparts. There was a 14-percent increase in the number of euro IRS transactions between European dealers from September 2013 to December 2014.