A call from ISDA CEO Scott O'Malia to keep markets open

Governments, central banks and regulators have taken decisive and critical action in response to the economic and financial turmoil caused by the coronavirus outbreak, from rate cuts and fiscal stimulus packages to regulatory relief in reaction to market stress and industry contingency measures. But some jurisdictions have gone further and implemented closures to certain markets and infrastructures – a step we would urge others to avoid.

We believe it is essential that markets remain open wherever possible to ensure critical payments and transactions can be fulfilled and firms are able to manage their exposures – a position we set out in a letter to the Financial Stability Board (FSB) and International Organization of Securities Commissions and in a joint letter to US authorities last week. Unexpected market closures result in additional stress and uncertainty, affecting liquidity, risk management, transparency and stability. As such, we welcome the recent statement from the FSB on the importance of keeping markets open and preserving the financial system’s capacity to finance growth.

ISDA does have a well-established process in place to deal with market closures and the impact on derivatives. Our standard documentation sets out contingencies for certain disruption events, including fallbacks. ISDA also typically issues guidance on the impact of specific incidents, based on the provisions within the documentation, with the aim of promoting orderly valuation and settlement of derivatives positions. This includes guidance following the closure of certain markets and systems in China after an extension of the Chinese Lunar New Year holiday to contain the coronavirus outbreak, and subsequent closures in the Philippines on March 17 and 18.

Even with this process, however, working through the practical implications of a market closure is complex and time-consuming – at a time when most institutions have few resources to spare. It can also lead to fragmented, imperfect outcomes. For example, the extension to Chinese New Year occurred over month-end and was announced after the holiday had begun, which resulted in payment dates being shifted backwards. A strict interpretation of the fallback provisions meant parties would have been due to pay four days before they were even aware of the obligation. The ISDA guidance set out a practical solution, but it took time and effort to resolve.

The rapid escalation of the coronavirus outbreak has created unprecedented market challenges, forcing regulators and market participants to think on their feet and act quickly. Fortunately, the financial system is more resilient and more able to withstand stress as a result of post-crisis reforms. However, we would urge authorities to continue to act as necessary to ensure capital and liquidity is available, and firms are able to access financing and manage risk. Keeping markets open is vital to enable that.

Developments, including information on market closures, regulatory relief and electronic execution, can be found here. Please email Covid19.MemberContact@isda.org if you have any questions.

Photo by Fas Khan on Unsplash