ISDA proposes independent committee for CDS panels
The International Swaps and Derivatives Association has published details of its proposal to create an independent governance committee to oversee the panel of banks and investors that rule on matters in the US$9trn credit default swap market.
The proposal, which had been widely expected, is part of a series of reforms aimed at revamping the credit derivatives determinations committees for the first time since the controversial panels were established in the aftermath of the 2008 financial crisis.
The governance committee will comprise between 15 and 20 senior professionals with "significant experience" in the CDS market, spread across banks, institutional investors and market infrastructure firms such as clearinghouses.
It would be responsible for taking market feedback and adopting rule changes affecting the structure and operations of the CDS determinations committees to “ensure their long-term viability”. It would also be prohibited from involvement in any of the determinations committees' decisions, which are vital to the everyday functioning of CDS markets, and be prevented from making rule changes that could impact deliberations over live CDS events.
“This is the first step in a series of proposals that ISDA will be making to improve the structure and governance of the DCs," ISDA chief executive Scott O’Malia said in a statement. "Having a single, industry-wide determination on whether a credit event has occurred is critical to enable the clearing of CDS transactions, so having a DC process that is strong, robust and transparent is essential to the safe and efficient functioning of this market."
Controversy has long dogged the determinations committees because their members work in many of 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 law firm Linklaters to review the structure and operations of the panels.
Linklaters published its report in May 2024 in which it stopped short of recommending a sweeping overhaul and instead suggested smaller changes. Chief among them was adding an independent governance committee to oversee how the determinations committees operate and implement changes to committee rules. More than 70% of respondents to a market-wide consultation in September on potential changes to the DCs supported the creation of such a body.
ISDA has suggested that any proposed rule change to the determinations committees put forward by the governance committee would be open to market consultation before being voted on by the governance committee. Any potential changes would also need an 80% supermajority to pass.
ISDA is accepting feedback on its proposal until June 6. Further proposals, based on September’s consultation, will be published by ISDA in the coming months.