The International Swaps and Derivatives Association is set to propose the creation of an independent governance committee to oversee the panel of banks and investors that rule on matters in the US$8trn credit default swap market, industry experts told ISDA’s annual legal forum in London on Wednesday.
The proposal will be a central part of the reforms ISDA plans to put forward next month to revamp the credit derivatives determinations committees for the first time since the controversial decision-making panels were established in the aftermath of the 2008 financial crisis.
“At the moment the DC [determinations committee] does everything. It marks its own homework, makes determinations, is responsible for liaising with the market, and for making rule changes – and that's not really best practice,” Simon Firth, a partner at law firm Linklaters, told the forum. “There should be a separate governance body to oversee the DC operations.”
Controversy has long dogged DCs given that members of the panels – which make decisions vital to the functioning of these complex markets – are among the largest firms trading credit derivatives. That dynamic has ignited concerns over governance and potential conflicts of interest, prompting ISDA in late 2023 to commission Linklaters to review the structure and operations of the committees.
Linklaters published its report in May in which it stopped short of recommending a sweeping overhaul and instead suggested smaller changes. Chief among them was the idea of adding an independent governance committee to oversee how DCs operate and implement changes to committee rules. More than 70% of respondents to a market-wide consultation last September on potential changes to the DCs supported the creation of such a body.
Firth, who led the review, suggested retired high court judges and lawyers could sit on the governance committee, which he said would be solely focused on ensuring the continued smooth functioning of the DC and would have no influence on underlying decision-making and deliberations.
Owain Markham, associate general counsel at Bank of America, advocated for a broader variety of market participants to fulfil this oversight role – including infrastructure providers, clearing houses, senior trading personnel and back-office staff.
“It would be nice to see a broad representation of the market on that [governance] committee,” said Markham at the ISDA forum. “Broad representation [means] you get broad engagement and everybody feels invested in the product, looking at it and caring about it.”
If such a governance committee is created, it could then decide what other changes to the DCs should take place based on industry feedback, said Paul Glasgow, managing director of credit trading at JP Morgan.
“The key is to get the governance committee in place to then allow the industry to say: 'This is our number one priority and this is our number 10 priority'," Glasgow told the forum. “That then allows smaller institutions to send [suggestions]. A lot of people don’t have unlimited resources to be involved in the [DC] process, but they still need to be involved in that process.”
Giving buyside firms a greater voice in the process has been a particular area of focus in the reforms. There are three large investment managers on determination committees, but lawyers say many buyside firms don't have the means or resources to participate effectively in the decision-making process.
One proposed change – which has proved popular in industry consultations – is allowing buyside firms to submit publicly available arguments to the DC in favour of a particular outcome for a CDS-related event.
“The involvement of the buyside [within the DC process] has been somewhat disappointing,” said Fabien Carruzzo, partner at law firm Kramer Levin Naftalis & Frankel. “Being able to provide statement of cases is important … [and] the buyside thinks that leads to better determinations.”