“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 $639 trillion in over-the-counter derivatives contracts outstanding as of June 30, while the notional value of interest-rate swaps totaled $379 trillion, according to the Bank for International Settlements.
In the weeks after the demise of Lehman Brothers Holdings Inc. in 2008, LCH.Clearnet Group Ltd., 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 U.S. operations for its SwapClear service.
The standardized 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, which is the main industry and lobbying group for the privately negotiated swaps market.