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December 15, 2011
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Looking Ahead to 2012
A conversation with Stephen O'Connor, ISDA chairman and managing director, Morgan Stanley
Stephen O'Connor, ISDA Chairman of the Board and Managing Director, Morgan Stanley
With swaps and derivatives likely to play as critical a role in the year to come as ever before, SmartBrief asked Stephen O'Connor, chairman of the International Swaps and Derivatives Association and managing director of Morgan Stanley, to share his insight on regulatory reform, his association's evolving role in the marketplace and other changes coming in 2012.

A new Mission Statement was unveiled this year: "ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products."

We revised the mission to emphasize the continued commitment of market participants around the world to the goal of making safe and efficient markets. Is there another market that has moved as swiftly and as broadly to address its challenges as the OTC derivatives markets? We're clearing over 50% of interest-rate swaps, the vast majority of derivatives activity between market professionals is fully collateralized, trillions of dollars of transaction volume has been eliminated by trade compression and swap-data repositories have been built to report transaction data to regulators. We are reducing the risks of interconnectivity and increasing the transparency of risks to global regulators. This is all right out of the G-20 playbook.

The emphasis on "all users" is particularly noteworthy, and ties in to ISDA's outreach to the buy-side.

We recognize that our efforts in risk management and other areas are much stronger if we have all types of market participants at the table when we develop and execute on a strategy. It's the approach we took more than two years ago when we developed the Big Bang and Small Bang Protocols -– which have had enormously positive effects on CDS market liquidity and transparency. With the IIGC, the ISDA Industry Governance Committee, buy-side participation has been essential to much of the progress made, and one of the co-chairs is from the buy-side. The ISDA board has also added directors from several buy-side firms. Greater inclusion, greater representation across market participant types and geographical regions is absolutely necessary, and we'll be doing more of it as we move into 2012.

With Dodd-Frank rule making in the U.S., EMIR finalization and MiFID in Europe, the next year will continue to be busy on the regulatory front. What is ISDA's approach?

We absolutely support the G-20-s goals. Mitigation of systemic risk by increased transparency to regulators, and increased focus on counterparty credit risk are essential components of a more stable system. However, ISDA has a number of concerns that certain regulatory initiatives are focused on market structure, not systemic risk reduction. Too much time and too many resources are being spent discussing, debating and formulating rules that don't center on meaningful risk reduction. And some of these rules are being written without adequate analysis of the costs and benefits.

ISDA's approach will continue to be constructive and factual. By constructive, I mean that we engage with policymakers with a pro-active, positive approach aimed at addressing the key systemic risk issues that have been raised. By factual, I mean that we are undertaking research that explores and quantifies the impact of proposed regulations and changes, even if the policymakers are not taking that step. Our recent paper on the Costs and Benefits of Mandatory Electronic Execution is a good example, as is professor Craig Pirrong's paper on Clearing, both available on

There are some changes at the executive level coming.

Yes. Effective Jan. 1, Bob Pickel returns to the position of CEO, succeeding Conrad Voldstad, who has served in that position since 2009. Connie has been a leader in the swaps and capital markets for three decades and ISDA is grateful for his tremendous contributions to the Association and the markets. Connie will stay on at ISDA as a special adviser at the request of the board of directors. George Handjinicolaou has been installed as deputy chief executive officer and head of Europe. We feel confident that this strong management team provides great continuity and positions ISDA to address the challenges of this period of regulatory reform into the next year and beyond. SmartBrief/SmartBlog on Finance (12/15)
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What YOU Expect 2012
Based on reader surveys conducted in ISDA dailyLead, this is how you and your colleagues see the industry taking shape in 2012:
Do you think the 2012 volume of sovereign CDS will ...
50%   Increase
45%   Decrease
5%   Stay about the same
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Which will have the biggest effect on your business in the coming year?
52%   Basel III
38%   Dodd-Frank Act
7%   MiFID revision
3%   Other regulatory developments
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Which derivatives asset class will see the most growth by percentage in the year ahead?
33%   Credit default swaps
27%   Interest rate
26%   Commodity
14%   Equity
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For central clearinghouses, do you think there will be ...
52%   Multiple in each region
18%   One globally for each asset class
15%   One for each region for each asset class
15%   One for each region
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Product announcements appearing in SmartBrief are paid advertisements and do not reflect actual ISDA endorsements. The news reported in SmartBrief does not necessarily reflect the official position of ISDA.

Top Stories of 2011

These are the most clicked and shared stories in ISDA dailyLead in the past year.

Battle over derivatives market heats up
Reuters (11/22)
Derivatives traders might have to clear OTC swaps by April
Financial Times (tiered subscription model) (10/11)
CFTC finalizes rules governing swaps clearing
MarketWatch (10/18), Bloomberg (10/18), Reuters (10/18)
FATCA is expected to cause issues for global investors
The Economist (11/26)
ISDA aims to standardize collateral arrangements for derivatives
The Wall Street Journal/Dow Jones Newswires (11/3), Global Financial Strategy (11/3), Financial Times (tiered subscription model) (11/3)
Italian case might test effectiveness of corporate CDS
Financial Times (tiered subscription model) (11/28), The New York Times (tiered subscription model)/DealBook blog (11/28)
U.K. and EU compromise on derivatives-trading regulations
The New York Times (tiered subscription model)/DealBook blog (10/4), The Telegraph (London) (10/4), Bloomberg Businessweek (10/4), Reuters (10/4)
Regulations might lead swaps dealers to adopt agency model
The Wall Street Journal/Dow Jones Newswires (10/13)
Obama disappoints EU leaders by opposing transaction tax
The Wall Street Journal/Real Time Economics blog (11/3)
Concerns arise about process for determining LIBOR
Bloomberg/Bloomberg Markets magazine (11/22)
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Upcoming Events
Expand your knowledge and expertise by attending the following ISDA events:
Jan. 25 -- Standard CSA: Standardized Bilateral Collateralization of OTC Derivatives -- New York -- Agenda -- Register

Feb. 9 -- Basel III Conference: The New Capital Accord -- Proposals and Implications -- London -- Agenda -- Register

Feb. 23 -- EU Regulation in a G20 World -- London -- Agenda -- Register

Feb. 28 -- ISDA Equity Derivatives Definitions Symposium -- Johannesburg -- Agenda -- Register

April 30 to May 2 -- ISDA 27th Annual General Meeting -- Chicago -- Agenda -- Register

View a full schedule of ALL upcoming ISDA events.
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