Five years ago, the International Swaps and Derivatives Association held a lavish 20th anniversary dinner among the dinosaur skeletons in London’s National History Museum.
The mood was triumphant. No wonder: back then the derivatives market was exploding, and ISDA’s belief in the value of self-regulation was so widely shared that one senior banker quipped that ISDA did not need external lobbyists “since we have Alan Greenspan [former Federal Reserve chairman] doing that”. How times change. This year, ISDA marked its 25th birthday. However, there was no public bash. Instead, the word “ISDA” has become distinctly toxic in Washington and Brussels’ political circles. Meanwhile, as financial reform intensifies, some of its own members are quietly asking questions about the future of the group.
After all, ISDA’s self-described mission is to champion the cause of “privately negotiated” derivatives contracts (ie those concluded in the over-the-counter market, away from any public exchange). However, many politicians and regulators partly blame the OTC market for the recent crisis, and want to push more derivatives on to public exchanges and clearing platforms. So can ISDA still play an effective lobbying role? The answer is of interest to more than just derivatives experts. For the story of ISDA is not just a mirror of modern finance; it also provides a fascinating cautionary moral about the dangers of hubris and group think.