Central clearing of derivatives has become a cornerstone of regulatory efforts to reduce risk and make markets more resilient. But to work for credit derivatives, there had to be a single, standardized mechanism for determining whether a credit event had occurred. That was the genesis of the Credit Derivatives Determinations Committees 15 years ago, and they’ve ensured this market has been able to function safely and efficiently ever since. Of course, that’s not to say the process can’t be improved, which is why we launched a public consultation earlier this week on possible changes that could be made to the structure and governance of the committees.

The recommendations were made by Linklaters following an independent review commissioned by ISDA at the end of last year. Those recommendations include appointing independent members of the DCs, permitting DC members to refer complex questions to an independent panel by a simple majority vote, establishing a separate governance body to overview the operation of the DCs and requiring the DCs to provide adequate reasons for all material decisions.

The recommendations are open to market-wide consultation until July 26, which is being overseen by Boston Consulting Group. If the consultation shows substantial market support for a proposed change, ISDA will work with members to develop those solutions more fully. These will then be presented to the DCs, which are solely responsible for agreeing and implementing any changes – ISDA is not involved in the DC process and does not control the DC rules.

Having a robust DC process is critical to the smooth functioning of the credit derivatives market. Without it, market participants would have to return to the messy process of bilateral settlement, which was operationally cumbersome, frequently led to disputes and resulted in inconsistent outcomes across the market. That’s simply not compatible with the central clearing of trades, which requires a standardized settlement process that is binding on everyone, enabling all credit derivatives to perform in the same way following a bankruptcy, failure to pay or restructuring credit event.

Having the DCs in place has meant a large proportion of the credit derivatives market has been able to clear, reducing risk and enhancing market stability. According to ISDA SwapsInfo analysis[1], 83.1% of total index credit derivatives traded notional and 48.2% of security-based credit derivatives traded notional were cleared in the first quarter of 2024.

Ensuring the DC process remains robust and continues to function effectively in the future should therefore be of critical importance to everyone active in this market, which is why we commissioned this review. We look forward to receiving industry comments on the changes proposed by Linklaters, and we encourage you to submit your views.

Click here to visit the consultation page.

Click here to read the Linklaters report.

[1] Based on index credit derivatives transactions disclosed to the Depository Trust & Clearing Corporation (DTCC) swap data repository under US Commodity Futures Trading Commission regulations and security-based credit derivatives reported to the DTCC security-based swap data repository and ICE Trade Vault under US Securities and Exchange Commission regulations