The International Swaps and Derivatives Association has formed a committee of buysiders who will discuss and give feedback on the creation of a net physical settlement procedure for credit default swaps. The move comes after an investor from PIMCO expressed concern during a call with market participants to discuss a draft of the procedure that buyside interests are not more represented in a formalized procedure.
The working group will be made up of various buyside groups, including hedge funds, and is open to ISDA members and non-members. It is scheduled to meet every two weeks with the first meeting likely taking place in April. ISDA is aiming to have something in place by June. A spokeswoman for the association said the committee was formed because a project as large as the net physical settlement of CDS should have the involvement of non-ISDA members. "If we want to get a project out that will affect the whole market, we need the input of non-members," she said.
It is not the first time ISDA has sought to include the buyside in a committee to work on an ISDA-led initiative. For example, ISDA formed a working group of dealers and buysiders to work on its 2003 standardized credit default swap definitions.
Representatives from PIMCO have been vocal about the need for more buyside participation. Rama Nambimadom, financial engineer in the CDS group at PIMCO, was the representative who called for more representation of the buyside during the ISDA call. Daniel Ivascyn, a portfolio manager in PIMCO's structured products division, agreed that there should be a more balanced contribution from the buyside and dealer community. But he added that it is not easy to organize buysiders because of practical reasons.
"I think generally dealers have been more involved in the drafting of the proposals because it is easier for dealers to organize as a group. The buyside is more spread out geographically and any buyside firms' flows are lower than in the dealer community. But the buyside has been invited to be involved. It is a unique time in the drafting of these rules. We want to have as much input as possible," said Ivascyn.
Nambimadom said he would like to see certain processes of the draft procedure clarified, such as which notes would be deliverable for net physical settlement. "At this point, we have some concerns about how the deliverable obligations and credit events will be determined. I think it is premature to come up with a settlement process before you decide the manner in which the deliverable-set is determined," said Nambimadom.