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A conversation with Stephen O’Connor, ISDA chairman of the board and managing director at 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 at 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 G20 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 rulemaking in the US, 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 G20’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 January 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 advisor at the request of the Board of Directors. George Handjinicolaou has been installed as 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.