Three years after the onset of the crisis, Asia finds itself again at a defining moment in its history. This time, the threat is from the outside: developments in the US economy may prove to be the catalyst of further financial, political and social change in the region.
Asia has come a long way since the beginning of the crisis. Capital controls introduced in Malaysia, followed by a tightening of regulations in Thailand and the intensified vigilance of central banks elsewhere in the region, created by default the new onshore derivative markets of Asia. These have recently been joined by promising developments in the domestic debt capital markets, enhancing their ability to serve both local and foreign issuer needs. In addition, fixed income investment institutions have become more sophisticated and increased their participation in the domestic markets, providing the demand to spur the development of these nascent capital markets.
The depth and breadth of domestic derivative markets have increased over the last two years, with liquidity and maximum tenors steadily improving. Singapore, Thailand, Taiwan and Korea have seen the introduction of interest rate options. Recent regulatory events in Indonesia have strengthened the case for onshore books in that country, and a domestic interest rate index is under development. Given the rapidly changing market, what can be said about the role of the derivatives industry body, the International Swaps and Derivatives Association (ISDA)? In the past, outside the mainstream financial markets community, ISDA was primarily known in Asia for its legendary swap documentation, and less for its representation of the various firms involved in the derivatives business. Over the last few years, this lay perception has changed, as ISDA has moved rapidly to engage in dialogue with the regulatory and other governmental institutions involved with Asian markets, and to promote discussion of pressing market issues in the region.
This enhanced role was clearly seen when Malaysia introduced capital controls in 1998. ISDA played an important role in orchestrating member firm activity aimed at resolving issues with a minimum of market disruption. I have always noted that ISDA in Asia often seems rather like an indulgent parent, sought after in times of distress and taken for granted during periods of stability. This proved true once again in early 2000 in the case of the Taiwan derivatives disclosure regulations, where ISDA was asked by its membership to help resolve a thorny issue with the Taiwanese Securities and Futures Commission (SFC). ISDA's Asia-Pacific Steering Committee was able to bring expert advice and measured judgement to bear on the issue, resulting in a fruitful solution that suited both the industry and the regulator.
This success was followed shortly by ISDA developing a constructive dialogue with the PRC State Administration of Foreign Exchange (SAFE), leading to clarification of issues relating to the GITIC bankruptcy. ISDA now plans to hold a meeting and seminar in Beijing, aimed at further developing the relationship with the PRC regulatory authorities, and enhancing knowledge and usage of derivatives in that country.
One of the vital objectives for ISDA in Asia is to continue to build strong relationships with Asian regulators, particularly during periods of market stability. ISDA is able to bring expert opinion to bear on complex market and legal issues, potentially assisting a regulatory institution to resolve problems without damaging vital industry and market mechanisms. In addition, through its membership, ISDA can provide useful input on the development of new markets, particularly where a regulator seeks advice on establishing new benchmarks and fostering activities for the first time.
To return to the opening theme of this note, ISDA is likely to play an increasingly important role regardless of whether Asian markets remain turbulent or achieve stability. If history is any guide, however, such a role will be more demanding in circumstances of financial turmoil. It is important for ISDA to use the coming months to further increase its credibility with the Asian regulatory community and to establish relationships of trust. This will help ensure that any future crisis situations are dealt with efficiently by both the industry and the various governmental entities involved.
By Azam Mistry, ISDA: Co-Chair of ISDA Asia-Pacific Steering Committee; HSBC: Director, Head of Risk Management Advisory HSBC.