ISDA said on Monday that it would improve the rules governing members of the committee to strengthen the process for deciding whether credit events have occurred.
The changes, which will come into force from mid-February, will mean that determinations committee member firms will be explicitly required to have written procedures in place on the identity of their committee decision-makers, record-keeping and management of potential conflicts of interest.
That means making sure the individuals voting on credit events don’t work within core business areas such as credit trading, hedging, lending, investing, advisory or similar.
For credit default swap traders and bond investors alike, this bid for impartiality should be a well received, if long overdue, innovation — particularly as the market moves into a phase of greater idiosyncratic risk and the likelihood of credit events rises.
Since the inception of the determinations committee, ISDA has faced long-running calls to be more transparent and, to be fair, it has made a number of tweaks over the years to strengthen its accountability.
These have included updating its credit derivative definitions and — after some initial resistance — the acceptance of big-name buyside representatives to the banker-dominated panel.
Yet even in November the organisation found itself rebuffing media claims that it was a “secretive circle” that ruled over the CDS market.
ISDA made a strong argument against accusations of non-transparency.
But market participants cannot have failed to notice that the committee’s role has evolved, with recent credit events such as Abengoa late last year and Novo Banco, which is still in progress.
In these cases, the determinations committee has been called upon to set precedents with its decisions on landmark credit event questions — positioning itself almost as a court handing down jurisprudence.
Some market participants, including prominent derivatives lawyers, have questioned whether this is going beyond the original rule-setting and enforcing role that it was meant to fulfil. Whether ISDA ever wanted this role for the committee is debatable.
But what is clear from Abengoa and Novo Banco is that the committee's job has become increasingly important.
The nature of credit events themselves are changing, as national governments tinker with domestic laws and exert greater influence over the course of corporate and bank debt negotiations. ISDA’s definitions may provide an effective framework for many corporate failures, but it is almost impossible to provide for every change of legislation or government intervention.
The committee's decision on Abengoa had a high degree of transparency, even if the final ruling was not unanimous.
And there is no meat for conspiracy theorists in the Novo Banco process — at the time of writing, the committee has been unable to decide with a supermajority (80% quorum) whether the Portuguese bank has triggered a government intervention credit event and, as such, under ISDA rules the decision will pass to an external review of independent, senior market figures.
Perhaps some would argue that is what should have happened from the outset. But the crucial aspect of the ISDA determinations committee — despite what Abengoa and Novo Banco wranglings might suggest — is that its decision-making process is fast.
That was of vital importance when ruling for a Ukraine moratorium credit event last year, as an imminent bond exchange meant that a credit auction had to happen on a tight turnaround.
Whatever misgivings market participants may have about the ISDA committee, it is the only recourse the market has when it comes to settling CDS — and that is going to be more and more comforting if government interference becomes more canny and gains further ground.
Credit event determinations may not be perfect, but ISDA clearly has the will to improve the process and the latest step forward can only be a cause for celebration.
