The International Swaps and Derivatives Association, Inc. ("ISDA") has formed a Collateral Roadmap Group comprising several sub-working groups under the umbrella of its Collateral Committee. The Collateral Committee, as stated on ISDA's website, "works toward the increased smooth functioning of the collateralization process of OTC derivatives transactions through its efforts in relation to standards and best practices, and collateral law reform efforts across the globe." The purpose of the Collateral Roadmap Group is to publish its guidelines in the "Roadmap for Collateral Management," a commitment made by ISDA to the Federal Reserve Bank of New York (the "FRB") in its Oct. 31, 2008 letter to the FRB (the "FRB Letter"). Click here to read the FRB Letter.
The sell-side and buy-side communities are encountering an increased set of collateral-related issues. Lawmakers and regulators are scrutinizing the current system and both the sell-side and the buy-side are evaluating whether the current collateral systems in place are effective.
Therefore, ISDA is calling for greater industry participation, from both sell-side and buy-side clients, in its Collateral Roadmap Group. The goal of these groups is to determine best practices in each and to draft white papers and proposals for presentation to U.S. and international regulators including the FRB.
If you are a member of ISDA, you are encouraged to contact Julian Day ([email protected]) if you are interested in joining one or more of the working groups below. If you are not a member of ISDA, or would like to know more about the issues discussed in any of the working groups below, please contact Kristin Boggiano or Craig Stein (see the bottom of this Alert for their contact information).
1) Best Practice Document. This sub-group will produce a "best practice document" compiled by several smaller sub-groups addressing the following areas of improvement identified in the FRB Letter:
B) Valuations and Calculations
as well as two sub-groups related to areas of improvement suggested by ISDA members:
D) Portfolio Reconciliation
E) Dispute Resolution
2) Standardized Electronic Communication of Margin Calls. The focus of this sub-group will be the automation of the margin call process and the establishment of standardized messaging and protocols for margin calls.
3) Central Intermediation of Margin Calls. The sub-group will work to identify an approach to central intermediation of margin calls.
4) Margin Call Timeframes. The focus of this sub-group is the timeframe of margin calls, whether they should be shortened or lengthened, and the feasibility of the drafting of a related ISDA protocol.
5) Approach for handling Independent Amount. Both legal and economic issues affect the treatment of independent amounts, also known as initial margin. This sub-group will focus on topics such as the treatment of independent amounts versus margin and restrictions on rehypothecation.
6) Changes we want to see in the CSA. This sub-group will collect and suggest proposed revisions to ISDA's Credit Support Annex (the "CSA"), the current form of which was published in 1994.
7) Cross Product Collateralization Approach. The topic of this sub-group is "umbrella" or "master master" agreements under which collateral for multiple products can be netted, and it will determine whether there should be an industry standard for such product netting.