A group of trade associations and major broker-dealers last week submitted a letter to the Federal Reserve Bank of New York and other regulators confirming their commitment to streamlining trading and processing of credit and equity derivatives and detailing the industry's goals for improving operations in the troubled sectors.
In response to recommendations the President's Working Group on Financial Markets released earlier this month, the Securities Industry and Financial Markets Association's asset management group, the Managed Funds Association, the International Swaps and Derivatives Association, and 17 broker-dealers on Thursday outlined efforts that the MFA said would lead to "fundamental change in derivatives markets processes through the use of electronic platforms to improve market discipline and efficiency."
The MFA said benchmarks - or "operating expectations for electronically eligible, confirmable trade events with all counterparties (excluding novations)" - that will be met by July include ensuring that 90% of derivatives trades are submitted accurately and matched without amendment; boosting to 90% the number of trade submissions that occur on "T+1, or trade date plus one; and having 92% of trades matched by T+5."
The main goal of what the MFA calls the operations management group - comprised of senior representatives from the major dealers and several buy-side institutions, as well as the MFA, ISDA, and SIFMA - is to create a derivatives marketplace that "confirms the vast majority of its trades on the date the trade is executed."
Other goals the operations management group wants to meet this year include having consent requests for trade assignments, or novations, submitted more quickly via electronic platforms, rather than through e-mail, which is how most are sent today. Members want to promote "consistent use of electronic confirmation platforms" for eligible trades. To help do so, a market implementation plan will be delivered by May that is intended to educate participants on how to operate consistently within the standards and benchmarks the group sets.
The ISDA also said yesterday that it has activated a process to "hardwire" its auction settlement mechanism into standards and protocols "where appropriate," to better integrate and manage the payments that are supposed to occur in a credit default swap referencing a defaulting entity.
"ISDA has committed to review with supervisors in May 2008 the industry's status on this matter and [set] a timetable for next steps in the effort," the group said in a statement.
"ISDA is pleased to be a part of the industry effort to improve operational efficiency," said executive director and chief executive Robert Pickel. "In particular, we look forward to working with our members and the broader industry as we proceed with the hardwiring of the auction mechanism into the ISDA documentation."
The Managed Fund Association, which represents the hedge fund industry, called the commitment signaled in the letter "unprecedented" and said it was "the first time that MFA has demonstrated its support of industry efforts by joining the major dealers in submitting a letter to industry regulators detailing the latest operational targets and commitments."
"MFA is pleased to have had a major role in developing the latest industry strategy, and we are committed to working closely with the major dealers, ISDA, and SIFMA to reach industry goals," said MFA president and chief executive Richard Baker, the former Louisiana congressman and senior member of the House Financial Services Committee who left Congress to join the organization earlier this year. "MFA fully endorses the collaborative efforts to improve market discipline and efficiency by strengthening transaction processing and settlement arrangements for credit and equity derivatives."
Alternative investment firms involved in the efforts include Citadel Investment Group and BlueMountain Capital Management, according to the MFA. "The OTC derivatives markets are vital to our industry, and we pledge to work toward developing solutions that will enhance and ensure their proper functioning," Baker said.
"SIFMA and AMG are committed to advancing true operational scalability by working hand in hand with buy-side member firms to ensure that they successfully meet the necessary and evolving operational requirements," said SIFMA managing director Joe Sack. "SIFMA will add value to the process by maintaining dialogue, flow of information, and facilitating industry partnerships that will create technology solutions."
SIFMA said it will work through its asset management group and the Asset Managers Forum - an affiliate of the AMG -to help the buy side meet its commitments.
The commitment represents the continuing work of the operations management group, according to SIFMA, which has previously been tasked with leading efforts to improve the processing of over-the-counter derivatives. Dealers began addressing operational deficiencies in 2005, in consultation with regulators, including the New York Fed, which said Thursday it welcomes the industry's commitment.