On December 18, 2009, the ISDA Collateral Committee published a study (the “Study”) on the feasibility of extending collateral portfolio reconciliations (the complete Study may be found at this link).  Since July 2008, ISDA and derivatives markets participants have made a series of commitments to regulators regarding collateral management.  These commitments have included enhancing portfolio integrity between pairs of derivatives counterparties, known as portfolio reconciliation.  In particular, industry groups and market participants have recognized the need to (i) agree to the existence and general economic terms of the transactions between them and (ii) agree to the mark-to-market value of those transactions (within some reasonable tolerance of difference).

As we reported to you in a previous edition of this publication, on July 30, 2009, the fifteen largest broker-dealers (the “Major Dealers”) agreed to effect daily reconciliations of their portfolios, effectively covering 60% of the global OTC derivatives market across asset classes.  The Study focused on the feasibility of providing for portfolio reconciliation of OTC derivatives transactions that are not between the Major Dealers.

According to the Study (and based on a survey conducted by the ISDA Collateral Committee), there exist approximately 60,000 transaction portfolios between the Major Dealers and other counterparties.  The Study noted that many of the remaining portfolios are entered into with banks that are not Major Dealers, but which tend to perform some sort of periodic reconciliation (e.g., weekly, monthly) with their customers.  The Study also noted that many portfolios are inactive, and so, would have limited benefits from frequent reconciliation.  Moreover, the Study pointed out that assurance of portfolio integrity already exists in many cases, particularly for buy-side market participants who engage the services of external parties, including prime brokers and custodians.

The Study highlighted the many challenges that would need to be addressed for the expansion of portfolio reconciliation, including those relating to technology and difficulties for some market participants in applying dispute resolution procedures within strict timelines.  The Study also noted that the move towards central clearing for standardized OTC transactions will have an impact on portfolio reconciliation, as there will be a definitive clearinghouse record for portfolios and positions for these transactions.