ISDA Outlines Path Forward for Centralized Execution of Swaps

ISDA published a paper that set out principles intended to promote regulatory consistency in the development and application of centralized trading rules for derivatives.

Although the execution of rules regarding standardized derivatives on an exchange or electronic trading platform was a key objective from the G-20 summit in 2009, ISDA stated, it is concerned about the potential for divergent applications of the rules in different jurisdictions.

According to ISDA research, global liquidity pools have evidenced fragmentation since the U.S. swap execution facility rules came into force in October 2013. For example, ISDA explained, European dealers are opting to trade euro interest rate swaps with other European dealers to avoid being subject to U.S. rules. ISDA stated that it is concerned that market fragmentation will continue and broaden if regulators fail to reconcile their rule sets.

The ISDA paper, titled "Path Forward for Centralized Execution of Swaps: Key Principles," sets out three principles to ensure the regulatory consistency of centralized trading rules, as well as facilitate equivalence and substituted compliance determinations. These principles are as follows:

• the trading liquidity of a derivatives contract (and, consequently, the regulatory obligations to which the contract is subject) should be determined by reference to specific objective criteria;

• derivatives contracts that are subject to the trading obligation should be able to trade on a number of different types of centralized venues; and

• trading venues must offer flexible execution mechanisms that take into account the trading liquidity and unique characteristics of a particular category of swap.

See: Path Forward for Centralized Execution of Swaps: Key Principles. Related news: CFTC Commissioner Giancarlo Releases Swaps Trading Rules White Paper (with Patel Comment and Delta Strategy Group Summary) (January 29, 2015).