ISDA has welcomed the European Commission's continued recognition of the important role derivatives play in the economy, as expressed in the EC's Communication outlining future policy actions on derivatives markets. However, the Association says that proper consideration should be especially given to any policy requiring that standardised OTC trades be conducted on an exchange or electronic trading platform.

In light of the G20's recent agreement that exchange trading should take place "where appropriate", ISDA believes that the benefits, as well as the drawbacks, of exchange trading now need to be carefully weighed. Mandated exchange trading could limit the flexibility of derivatives users to hedge their risk exposure, the Association notes. It warns that some forms of price disclosure and inappropriate forms of standardisation will harm liquidity by disincentivising participation in derivative markets.

"ISDA and the industry have achieved significant progress improving and standardising various derivatives markets, including CDS, and we look forward to continued success in collaboration with the Commission," comments Robert Pickel, ISDA executive director and ceo. "At the same, we want to make sure that any new policies or regulations preserve and enhance the critical ability of market participants to manage their risk exposures."

For example, ISDA strongly believes that increasing collateral requirements on non-financial institutions could be excessively burdensome. The Association says it looks forward to working with regulators on the recently publicised international regulatory initiative focusing on an appropriate collateralisation framework for bilateral transactions.