The Swaps Committee Creates a New Standardized Interest Rate Contract

If you are a user of the over the counter derivatives, here is some good news for you. The users of the over the counter derivatives will now be able to use an interest rate swap contract with some preset terms as the industry lobby group is now seeking to standardize the market which has a total worth of $379 trillion. The contract was developed between the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association and it has pre-agreed terms on payment dates and coupons. Information on the contract was released through a press release distributed on today at the annual general meeting of ISDA. This preliminarily will be available in six different currencies and at 9 maturity points from 1 to 30 years.

According to the Chairman of ISDA, Stephen O’Connor, this gets everyone on the very same page and makes every trading the very same thing. He added it will make way for better liquidity and compression.

Incidentally, numerous hedge funds, banks and asset managers are adapting to the changes which were mandated by the Dodd Frank Act. This act was passed by the Congress in 2010 and it included a special requirement to process most of the swaps with a clearinghouse to cut the counterparty risk. As of 30th June, 2012, there were a total of $639 trillion in over the counter derivatives contracts outstanding. As far as the data released by the Bank of International Settlements, the notional value of interest rate swaps currently total to $379 trillion.

As far as the statement released by the Head of US operations for the SwapClear service, Dan Maguire is concerned, after the demise of the Lehman Brothers Holdings Inc. 5 years ago, LCH.Clearnet Group Ltd. had to start managing the risk of the defunct bank’s 66,390 rate swaps in five different currencies with some having tenure of as long as 30 years. Incidentally, LCH.Clearnet is the owner of the largest interest rate swap clearinghouse in the world.

As far as the standardized terms of the new contracts are concerned, those will allow for thousands of trades to be collapsed down to a pretty little number. These comments were made by the spokesman of ISDA, Steve Kennedy. Incidentally, ISDA is a major industry and lobbying group, mainly for the privately negotiated swaps market.