Users of over-the-counter derivatives may now use an interest-rate swap contract with preset terms as the industry lobby group seeks to standardize the $379 trillion market.
The contract, which the International Swaps and Derivatives Association developed with the Securities Industry and Financial Markets Association, has pre-agreed terms including on coupons and payment dates, according to a press release distributed today at ISDA’s annual general meeting in Singapore. It will initially be available in six currencies and at nine maturity points from one to 30 years.
The development “will improve liquidity in interest-rate swap transactions and provide important benefits to end users,” said Timothy Cameron, managing director and head of the SIFMA Asset Management Group, in the statement.
Banks, hedge funds and asset managers are adapting to changes mandated by the Dodd Frank Act passed by Congress in 2010, including a requirement to process most swaps with a clearinghouse to cut counterparty risk. There were $639 trillion in over-the-counter derivatives contracts outstanding as of June 30, while the notional value of interest-rate swaps totaled $379 trillion, according to the Bank for International Settlements.
In the weeks after the demise of Lehman Brothers Holdings Inc. in 2008, LCH.Clearnet Group Ltd., owner of the world’s largest interest-rate swap clearinghouse, had to manage the risk of the defunct bank’s 66,390 rate swaps in five currencies that had tenors as long as 30 years, according to Dan Maguire, head of U.S. operations for its SwapClear service.
The pre-set terms of the new contracts allow for thousands of trades to be collapsed down to a much smaller number, according to Steve Kennedy, a spokesman for ISDA, which is the main industry and lobbying group for the privately-negotiated swaps market.