The International Swaps and Derivatives Association will issue a protocol or legal agreement for novation processing with the aim of cutting operational headaches that have attracted regulatory attention to the OTC mart. Novation, which is also known as assignment, is where a counterparty reassigns a transaction to a new counterparty. Lack of communication between counterparties when issuing a novation often means a bank makes a payment to the wrong counterparty, which leaves trades unconfirmed. "[Novation processing] is a market-wide issue that requires a multilateral solution and a protocol provides this," said Julian Day, European policy director at ISDA.
Gay Huey Evans, the then director of the Markets Division at U.K. regulator the Financial Services Authority, warned dealers at the start of the year not to ignore a backlog of unconfirmed credit-default swap trades (DW, 3/18) that has built up because of the rapid growth of CDS trading volumes. Officials at several firms said they have been working hard to clear unconfirmed trades and welcome ISDA's effort. One senior trader said an ISDA protocol will show regulators the dealing community is working to tackle the problem.
The final draft of the protocol has not been formalized, but it will require firms to get verbal permission before initiating a novation. Day estimates the protocol will be made available in the immediate future and will be open for participants to sign up for several months. He declined to estimate how many firms will sign the protocol but he believes it will be significant.
