ISDA Makes Case for Non-Cleared OTC Derivatives

Just two days after the CFTC’s mandatory clearing rules for OTC derivatives went into effect, sparking a litany of industry commentary and a threat from Bloomberg to file suit against the CFTC over swap collateral rules, ISDA is out with a paper making the case for the role of non-cleared OTC derivatives in the global economy.

The paper lends some industry support to the premise that onerous collateral requirements could ultimately harm the swaps market.  In its press release, ISDA writes:

The International Swaps and Derivatives Association, Inc. (ISDA) today announced the publication of a paper, Non-Cleared OTC Derivatives: Their Importance to the Global Economy.

The non-cleared segment of the over-the-counter (OTC) derivatives market includes many important products with significant value to the economy.  These products enable industrial companies and governments to effectively finance and manage risk in their operations and activities and help pension funds meet their obligations to retirees.  They help support economic growth by enabling banks to lend to corporate and individual customers.  They play a vital role in virtually every industry – from financial services to international trade to home mortgages. 

Current regulatory proposals regarding margin requirements for non-cleared OTC derivatives pose significant threats to the continued functioning of this vital market segment.  Such proposals also fail to fully consider the lessons learned regarding margin practices during the recent financial crisis. 

The paper explains what non-cleared OTC derivatives are, who uses them and why. It outlines the evolution of clearing in the OTC derivatives markets, why some – but not all – OTC derivatives will be cleared, the types and benefits of non-cleared OTC derivatives and the impact of the regulatory proposals in this area. 

To download the full paper, visit the ISDA website by clicking here