As exchange trading floors are closed amidst the Covid-19 crisis and pressure grows on countries to follow the Phillippines example in closing their markets, the chief executive of the International Swaps and Derivatives Association (ISDA), Scott O’Malia, has urged markets be kept open.
Writing in the association’s Derivativiews O’Malia notes that some jurisdictions have implemented closures to certain markets and infratsructures, a move ISDA would “urge others to avoid”. He reiterates ISDA’s view, expressed in a letter to the Financial Stbaility Board (FSB) and International Organisation of Securities Commissions (IOSCO), that markets remain open “wherever possible to ensure critical payments and transactions can be fulfilled and firms are able to manage their exposures”.
O’Malia further stresses, “Unexpected market closures result in additional stress and uncertainty, affecting liquidity, risk management, transparency and stability,” and observes that ISDA has 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,” he writes. “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.”
ISDA issued 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,” O’Malia says. “It can also lead to fragmented, imperfect outcomes…[that take] time and effort to resolve.”
Acknowledging that the Covid-19 outbreak has created “unprecedented market challenges” O’Malia concludes, “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.”