Sinclair on the power of ISDA

When is a default a default

The International Swaps and Derivatives Association (ISDA) recently wrapped up its 2012 annual meeting in Chicago and released its 2012 Margin Survey results that showed a continual increase in collateralization of over-the-counter swaps. ISDA noted that the increase in collateral reduces counterparty risk.  This is important as many analysts still see

In an interesting twist ISDA, the agency that is suing the Commodity Futures Trading Commission (CFTC) over its position limit regime, invited CFTC Chairman Gary Gensler to speak at their event. Gensler laid out the Commission’s plan for regulating the swaps market.  

While ISDA is a relatively unknown organization it holds considerable significance as it determines when credit events are defaults for the huge credit default swap (CDS) market, a $37 trillion market.

Here is what Jim Sinclair had to say about the power of ISDA in a recent interview with Futures.


FM: In a recent interview you referred to the International Swaps and Derivatives Association (ISDA) as one of the most powerful organizations in the world. This even though more OTC products will be cleared. Explain?

JS: It has proven to be so because they are the ones who declare whether a default is a default. Unless they declare it as a default the credit default swaps don’t function. If you have the power to determine whether something is a credit event or a default and the market for CDSs according to the Bank for International Settlement is $37 trillion then you are an economic entity more powerful than the Federal Reserve at a point of a Greek crisis because you are the guys who say whether a CDS functions.

FM: Would they retain this power for products that are cleared?

JS: As more of these things go to a clearinghouse there still has to be an arbiter over an event. Could the arbiter change? Yes, but it is unlikely because this organization is made up of the seven banks that have issued most of the CDSs.

FM: Is this dangerous?

JS: It is necessary. What is dangerous is the concept itself, because if a firm is making a living by issuing insurance policies but is not governed by an insurance regulator, how do you know a firm has the equity to meet their commitments if a default takes place? The dangerous item is an unregulated insurance company, which the brokers that issue the CDSs are. Right now it is the seven largest banks that issue the CDSs that are acting as insurance companies without insurance regulation.

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