The credit derivatives transaction settlement process is working well overall amid credit defaults, according to a report released Monday by senior financial supervisors from seven countries.

The report assesses how firms manage their credit default swap activities related to the settlement of credit derivatives transactions terminated by the occurrence of a credit event. Surveyed participants reported that recent credit events were managed in an orderly manner, with high participation rates and no major operational disruptions or liquidity problems, it found. “Overall, the review confirmed the effectiveness of the existing auction-based settlement mechanism,” it said.

The report is based on discussions with senior members of selected institutions, comprising major dealers, buy-side firms, service providers and an industry association. The regulators that conducted the study include Canada’s Office of the Superintendent of Financial Institutions, along with supervisors from the United States, the United Kingdom, Germany, France, Japan and Switzerland.

Among other things, the survey also found that access to accurate CDS counterparty exposure data is essential to efficient credit event processing. “Therefore, having all CDS trade information in one centralized infrastructure will make it easier for firms to identify affected trades. It can also facilitate handling of various lifecycle events, such as settlement and credit event processing,” it said.

It also concluded that formalizing market-wide and internal procedures will reduce the operational risk associated with auctions and help market participants address unexpected developments.

IE