“The International Swaps and Derivatives Association ( ISDA ) should ditch its Credit Derivatives Determinations Committee ( DC ) and hire independents. Surely having a group of insiders make decisions to trigger or not trigger credit default swaps ( CDS ) is poor industry governance. It’s all about perception. Surely it should always be up to a panel of independent experts to decide these matters and remove the risk of accusations of bias. ISDA should ditch the DC format and contract dispassionate experts for every occasion”.

I wrote that in January 2016, almost a decade ago. Why do I bring it up now? Because the situation has never been resolved and the topic just came up at ISDA’s three-day AGM in Amsterdam that ended on May 15, in an innocuous-sounding session ( “Transforming the DCs” ) towards the back end of day three.

I stand by every word I wrote back then, and I’m flabbergasted that the topic of how the DCs are set up and governed is still unresolved after so many years under scrutiny.

Just to explain: the DCs were introduced in 2009 amid the chaos of the Global Financial Crisis. Their role is to determine whether the terms of specific credit derivatives contracts have been triggered in the event of defaults or bankruptcies and to declare subsequent events. Within the rules that they’ve set for themselves.

The issue that’s been out there for longer than I can remember is that voting members of the DCs are sell-side and buy-side market participants. So, the very firms that may have positions and hence vested interests in the outcomes they’re deliberating on are the self-same firms making the decisions as to who gets paid out on CDS and how processes unfold. It screams conflict of interest.

How can an industry take itself seriously when it thinks it’s OK to organise itself under rules that are so open to abuse? As I wrote almost 10 years ago, perception matters. Particularly for a market as big as the credit default swap ( CDS ) market.

CDS activity amounted to US$15.1 trillion – yes, trillion – in the first half of 2024, according to data from the Depository Trust and Clearing Corporation’s Trade Information Warehouse published in a November 2024 ISDA market study. Most of that was in the form of index transactions but US$1.5 trillion was in single-name transactions. More than two-thirds ( 68% ) of those single-name trades referenced corporate entities; the rest sovereign. And by region, Europe represented the largest share of activity ( 48.2% ) followed by the Americas ( 41.5% ).

The committees have sat in judgement on a series of situations over the years. But it wasn’t until the back end of 2023, after years of ever-present concerns about conflict, that ISDA launched an independent review of its DC process. That review was published in May 2024 when a market consultation was launched, conducted by the Boston Consulting Group based on recommendations from law firm Linklaters.

The consultation results were published in September 2024 and led to a proposal that just came out – on May 8 ( it’s open for comment until June 6 ) – for a new governance committee that would include three independent members.

It doesn’t go far enough. Those making decisions about events and how rules are applied must all be independent.

ISDA blithely says the proposal would be the first in a series of amendments “to improve the structure of the DCs and maintain their integrity in changing economic and market conditions”.  The chirpy blurb for that AGM session noted “broad support to implement many of the enhancements”, including the separate governance body, tighter information disclosure to improve transparency, and the appointment of up to three independent members.

It was noteworthy, however, that a short Conflicts of Interest section comes almost at the end of its Charter for the Credit Derivatives Governance Committee, and is the second point in the Miscellaneous section; a bit of ass-covering if you ask me.

Even if the proposal is accepted, the governance committee will only be responsible for taking market feedback and adopting rule changes affecting the structure and operations of the DCs “to ensure their long-term viability and meet market expectations for efficiency and transparency in credit event determinations”, ISDA says.

It will be barred from involvement in DC decisions, “ensuring separation between the determinations process and the procedure for setting the structure and framework of the DCs,” again from ISDA. Barring the governance committee from making rule changes that could impact live credit events would avoid the perception of conflicts of interest, ISDA reckons.

Actually, it won’t. The DC set-up has been living under perceptions of conflict of interest for years. ISDA and the credit derivatives industry should stop dancing around the totem of self service. Let’s get regulators to step in and take charge.