International Swaps and Derivatives Association's (Isda) Conrad Voldstad, Eraj Shirvani (outgoing chair) and Stephen O'Connor discuss the derivatives industry and the challenges facing the sector.

At a press briefing during the International Swaps and Derivatives Association (Isda) annual general meeting in Prague on April 12, senior executives expressed concern about the complexity of regulation facing the derivatives industry in the coming 12 months.

Eraj Shirvani, outgoing Isda chair, and managing director and head of fixed income for Europe, the Middle East and Africa at Credit Suisse, said the multiplication of clearing providers was causing him to ask questions about what would work better for the industry. "You worry about the fact that, right now, a lot of clearers have different risk waterfalls, different approaches to what they are clearing," he said. "I think some level of standardisation, some level of minimum standards, best practices, that regulators put out, would probably be useful."

"If you have several clearers per asset class per region, it starts becoming a difficult thing for a financial institution to manage," he added.  "All of the sudden you imagine a Morgan Stanley or a Credit Suisse having to connect to 15 different clearers, all with their own risk waterfalls, all with their own guaranttee funds. I worry about some of the practical issues that come out of that." 

But Shirvani acknowledged regulators have their own perspective on clearing as well. "We have to balance that with the very, very real and very, very important requirement that some of the regulators want to have some level of control on clearing in their domestic jurisdictions, and that makes a lot of sense," he said. "And if you have that ultimate global clearer, you then have that ultimate too-big-to-fail institution, which we also want to avoid."

However, Shirvani predicted there will eventually be a clearing shakeout. "I think over time you are probably going to see less clearers, and clearers across asset classes, or clearers that are more global in nature. Or at least some way to standardise or to have connectivity between the clearers."

Robert Pickel, executive vice-chair at Isda, stressed the importance of the development of a supervisory framework for clearers across national borders to reduce confusion among financial services firms. He said, "I think short term it's important for regulators to co-ordinate so that people who do a trade know where they are supposed to clear that. There is some potential that there could be ambiguity or even conflict."