ISDA Issues Standardised Interest Rate Swap Contract

Users of over-the-counter derivatives (OTC) may now use an interest rate swap contract with pre-set terms as industry lobby group the International Swaps and Derivatives Association (ISDA) seeks to standardise the US$379 trillion market.

The contract, which ISDA developed with the Securities Industry and Financial Markets Association (SIFMA), has pre-agreed terms including on coupons and payment dates, according to a press release distributed at ISDA’s annual general meeting in Singapore. It will initially be available in six currencies and at nine maturity points from one to 30 years.

“This gets everyone on the same page, all trading the same thing,” said Stephen O’Connor, ISDA’s chairman. That’s “better for liquidity, better for compression.”

Banks, hedge funds and asset managers are adapting to changes mandated by the Dodd-Frank Act passed by Congress in 2010, including a requirement to process most swaps with a clearinghouse to cut counterparty risk. There were US$639 trillion in OTC derivatives contracts outstanding as of 30 June, while the notional value of interest-rate swaps totalled US$379 trillion, according to the Bank for International Settlements (BIS).

In the weeks after the demise of Lehman Brothers Holdings in September 2008, LCH Clearnet Group, owner of the world’s largest interest-rate swap clearinghouse, had to manage the risk of the defunct bank’s 66,390 rate swaps in five currencies that had tenors as long as 30 years, according to Dan Maguire, head of US operations for its SwapClear service.

The standardised terms of the new contracts allow for thousands of trades to be collapsed down to a much smaller number, according to Steve Kennedy, a spokesman for ISDA.

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