ISDA lauds over $25 trillion reduction in CDS notionals

By Jennifer Chiou

New York, Oct. 31 - The International Swaps and Derivatives Association, Inc. said that it applauded a number of industry initiatives that have had the beneficial effect of reducing notional amounts outstanding in credit default swaps, significantly reducing operational, legal and capital costs for industry participants and improving operational efficiency in CDSs.

In 2008, efforts to reduce notional outstanding amounts have been rewarded by a decrease of over $25 trillion in CDS notionals, ISDA said in a news release, adding that this reflects a range of activities, including compression exercises run by Trioptima, Creditex and Markit.

In addition, auctions and settlements of the recent series of credit events, including Fannie Mae, Freddie Mac and Lehman Brothers Holdings, Inc., have proceeded smoothly, the release noted.

This year to date, Trioptima has reduced by $24.5 trillion the amount of CDS notional outstandings through its series of compression cycles, also known as tear-ups, which have included index, tranche and single-name trades, ISDA said. Trioptima's triReduce Credit service has been in effect since 2005.

Additional efforts implemented by Creditex and Markit that focus on the single-name space began as recently as September and now account for $550 billion in compressions, the release added.

"This reduction in notionals is major progress by anyone's standards," ISDA chairman Eraj Shirvani, co-head of credit sales and trading at Credit Suisse, said in the release.

"That we have been able to reduce outstanding CDS by more than $25 trillion during this period of immense growth and activity for our products is testament to the will and force behind the industry's efforts to keep operational issues firmly in check."

According to ISDA's semiannual survey to mid-year 2008, the notional amount outstanding of CDSs decreased by 12% in the first six months of the year to $54.6 trillion from $62.2 trillion. For the same period, Trioptima reported $17.4 trillion in completed CDS tear-ups.

Subsequent notional reductions would bring CDS notional outstandings to $46.95 trillion before accounting for new trades since July 1, the release stated.

The notional principal, or notional amount, of a derivative contract is a hypothetical underlying quantity upon which interest rates or other payment obligations are calculated.

ISDA is based in New York and represents participants in the privately negotiated derivatives industry.

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