ISDA has put in place new rules to ensure credit event decisions are as transparent and free from potential conflicts as possible.
The moves are designed to counter concerns that the 15-member committee is conflicted in making trigger decisions in the US$14trn credit derivatives market. There is currently no duty for committee members to disclose conflicts.
The new rules set minimum standards for the internal conduct of DC member firms, including explicit requirements for written policies on the identity of DC decision-makers, identification and management of potential conflicts of interest and record keeping.
In addition, firms must ensure that committee members do not work in investment focused activities (credit trading, hedging, lending, investing, advisory or similar functions) unless the firm is satisfied that the relevant function is independent of the business.
To maintain Chinese walls, firms represented on the DC must make explicit how any material non-public information received through the DC process should be handled. They must also publish the DC member firm’s internal process of deciding how to vote.
The CDS market has been largely self-regulated since 2000, when it was exempted from oversight by the CFTC. However, while the move to protect against conflicts will be welcomed by market participants, the DC retains its powerful place at the centre of the CDS market.
These words are part of the CDS definitions disclosure annex:
“The procedures of the Determinations Committees are set forth in the DC Rules. The DC Rules may be amended by a Determinations Committee in accordance with the DC Rules. None of ISDA, the institutions serving on the Determinations Committees or any external reviewers owes any duty to you in such capacity, and you may be prevented from pursuing claims with respect to actions taken by such persons under the DC Rules. Institutions serving on a Determinations Committee may base their votes on information that is not available to you, and have no duty to research, investigate, supplement or verify the accuracy of information on which a determination is based.”
