Message-ID: <16823593.1075859847171.JavaMail.evans@thyme> Date: Thu, 8 Mar 2001 04:18:00 -0800 (PST) From: smarra@isda.org To: tmorita@isda.org, rainslie@isda.org, yoshitaka_akamatsu@btm.co.jp, shigeru_asai@sanwabank.co.jp, kbailey2@exchange.ml.com, douglas.bongartz-renaud@nl.abnamro.com, brickell_mark@jpmorgan.com, henning.bruttel@dresdner-bank.com, sebastien.cahen@socgen.com, scarey@isda.org, jcohn@cravath.com, mcresta@cravath.com, dcunning@cravath.com, mcunningham@isda.org, jerry.delmissier@barclayscapital.com, shawn@blackbird.net, evangelisti_joe@jpmorgan.com, francois@us.cibc.com, tim.fredrickson@ubsw.com, gilbert_adam@jpmorgan.com, goldenj@allenovery.com, mark.e.haedicke@enron.com, fwhx9396@mb.infoweb.ne.jp, jhb1@bancosantander.es, quentin_hills@hk.ml.com, yhoribe@isda.org, milphil@gateway.net, skawano@isda.org, hiroyuki_keisho@sanwabank.co.jp, stevenkennedy@kennedyco.com, damian.kissane@db.com, kazuhiko_koshikawa@sanwabank.co.jp, robert.mackay@nera.com, markb@cibc.ca, marjorie.b.marker@us.arthurandersen.com, lmarshall@isda.org, donna.matthews@ubsw.com, mengle_david@jpmorgan.com, tom.montag@gs.com, dmoorehead@pattonboggs.com, jonm@crt.com, yasumasa.nishi@ibjbank.co.jp, dennis.oakley@chase.com, losullivan@isda.org, ernest.patrikis@aig.com, rpickel@isda.org, maria.rosario@db.com, arothrock@pattonboggs.com, rryan@isda.org, maurits.schouten@csfb.com, charlessmithson@mindspring.com, ksumme@isda.org, teruo.tanaka@ibjbank.co.jp, steve_targett@nag.national.com.au, mark.wallace@wdr.com, h.ronald.weissman@us.arthurandersen.com, twerlen@cravath.com, dpd@aurora.dti.ne.jp, chi-wing.yuen@aig.com, apapesch@isda.org, nlim@isda.org, kdhulster@isda-eur.org, esebton@isda-eur.org, cirens@isda-eur.org, rmetcalfe@isda-eur.org, mhitchcock@isda-eur.org, kengelen@isda.org Subject: Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Scott Marra X-To: Tomoko Morita , Ruth Ainslie , "'Yoshitaka Akamatsu'" , Shigeru Asai , Keith Bailey , Douglas Bongartz-Renaud , Mark Brickell , Henning Bruttel , Sebastien Cahen , Stacy Carey , Josh Cohn , "'Marjorie Cresta (Cravath)'" , Daniel Cunningham , Mary Cunningham , Jerry del Missier , "'Shawn Dorsch (Derivatives Net)'" , "'Joseph Evangelisti (JP Morgan)'" , "'George Francois (CIBC)'" , Tim Fredrickson , "'gilbert_adam@jpmorgan.com'" , Jeff Golden , Mark Haedicke , "'Tsuyoshi Hase'" , Jose Manuel Hernandez-Beneyto , "'Quentin Hills'" , Yasuko Horibe , "'Michael Iver'" , Shigeki Kawano , Hiroyuki Keisho , "'stevenkennedy@kennedyco.com'" , Damian Kissane , Kazuhiko Koshikawa , Robert Mackay , Robert Mark , Marjorie Marker , Louise Marshall , "'Donna.Matthews@ubsw.com'" , "'David Mengle (JP Morgan)'" , Thomas Montag , Don Moorehead , Jonathan Moulds , "'Yasumasa Nishi (IBJ)'" , Dennis Oakley , "Liz O'Sullivan" , Ernest Patrikis , Robert Pickel , "'Maria.Rosario@db.com'" , Aubrey Rothrock , Rosemary Ryan , Maurits Schouten , "'Charles Smithson'" , Kimberly Summe , Teruo Tanaka , Steve Targett , "'Mark Wallace (Warburg)'" , "H.Ronald Weissman" , Thomas Werlen , "'Shunji Yagi (Sanwa)'" , "'chi-wing.yuen@aig.com'" , Angela Papesch , Nellie Lim , "Katia d'Hulster" , Emmanuelle Sebton , Camille Irens , Richard Metcalfe , Michelle Hitchcock , Karel Engelen X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\Notes inbox X-Origin: Haedicke-M X-FileName: mhaedic.nsf ISDA PRESS REPORT - MARCH 7, 2001 _ McDonough says won't extend Basel deadline. _ Benchmark Tipping Is Favoring Swaps Over Treasurys _ "It brings the products to the attention..." _ The New Forecast For Meteorologists: It's Raining Job Offers McDonough says won't extend Basel deadline. Reuters - March 8, 2001 LONDON, March 8 (Reuters) - William McDonough, chairman of the Basel Committee on Banking Supervision, said on Thursday he would not extend the consultation period for comments on the new Basel Capital Accord. McDonough is also president of the New York Federal Reserve Bank. He was in London for a British Bankers Association conference on the Basel accord. A new accord designed to make capital adequacy rules for banks more risk sensitive was launched in January. Banks and other interested groups were given until May 31 to respond. Many European banks have been critical of the short consultation period, but McDonough has previously shrugged off this criticism, arguing that banks were involved in developing the accord and a first proposal had been made in June 1999. "The consultation period, which we know is short...but we are not going to extend it," McDonough told a news conference. The Basel Committee intends to finalise the new Capital Accord by the end of this year so it can be implemented in national jurisdictions in 2004. Benchmark Tipping Is Favoring Swaps Over Treasurys Dow Jones - March 8, 2001 By Michael Mackenzie NEW YORK -(Dow Jones)- The near collapse of hedge fund Long Term Capital Management in 1998 triggered a massive liquidity crisis in capital markets. It also marked the beginning of the end for the role of Treasurys as a benchmark for pricing other debt securities and hedging for duration and volatility, according to a study by the Bank of International Settlements. (BIS) While the debate over alternative benchmarks for Treasurys has bounced between the relative merits of swaps and agency debt, swaps appear to be winning the hearts and minds of a trading community that has learnt the lessons of hedging risk with Treasurys, a point that the BIS seems to support. In its report titled "Benchmark Tipping In The Money And Bond Markets," the BIS cited the bitter lessons in the aftermath of the LTCM meltdown as a direct cause for the ascendancy of interest rate swaps at the expense of Treasury securities as a benchmark for capital markets. And though the question of swaps replacing Treasurys has been discussed since the U.S. government announced its debt buyback program, the thrust of the BIS report is that such a move was perhaps inevitable. "More recently the bond market has shifted away from its reliance on government securities and might well have continued to do so even if there had been no reduction in the stock of outstanding US government paper," writes the BIS. In fact, the BIS said the burgeoning popularity of swaps is creating a powerful vortex within capital markets. "Each market participant who gives up using US Treasuries to hedge private instruments subtracts liquidity from the Treasury market and adds it to the swap market, thus raising the incentives for other market participants to do likewise," writes the BIS. History On Their Side With history acting as a guide, the BIS has observed that the benchmark "is tipping from Treasury paper to the swap." The BIS cited two precedents for "benchmark tipping" - when market participants migrate to using a private instrument such as an interest rate swap instead of a Treasury security. The most recent event - following the 1984 flight to quality rush by investors, which resulted in the three-month Eurodollar futures contract eclipsing the Treasury bill futures contract in terms of volume - occurred on the heels of the LTCM near collapse. Investors rapidly diluted their exposure to other credit securities and flocked to the safe haven of US Treasurys, meaning that dealers shorting Treasurys against being long spread product including corporate bonds, agency securities and mortgages, discovered that their hedges melted down. The lessons learned from these traumatic episodes in capital markets have been recently observed since December when mortgage investors primarily turned to swaps instead of Treasurys to hedge pre-payment risks of mortgages, in what is known as the negative convexity trade. Estimates of swap volume by several investment banks since the mortgage hedging began, total in the region of $50 billion in terms of receiving a fixed rate of interest via a swap contract. Valuation Versus Investment Benchmarks Swaps are being increasingly used by traders as a benchmark for valuation purposes - hedging, pricing and establishing relative value across different asset classes. "The swaps market is generally the province of the leveraged buyer - whether hedge funds, dealers, or asset swappers," wrote analysts at Credit Suisse First Boston in New York in a research note last month. "Because levered investors determine the marginal bid for credit product, swap spreads and not government securities have become the defacto benchmark for credit valuation." Swaps perform like a synthetic bond and involve the exchange of two cash flow streams. One leg comprises a fixed rate of interest priced as a spread over a Treasury security that is traded against a floating rate of interest pegged to the three-month London Interbank Offered Rate (LIBOR). Thus they are not a physical asset that can used as an investment benchmark - acting as an index measuring excess returns - by money managers. "Ultimately it will be up to money fund managers and not traders to determine whether swaps will become a viable benchmark," said George Oomman, derivatives strategist at Lehman Brothers. Although the growing supply of debt issued by the Government Sponsored Agencies, Fannie Mae and Freddie Mac - currently over $1 trillion - is a real asset, the agencys remain susceptible to political pressure changing their charters and reducing their better than AAA rating. "The market is looking at swaps and should Treasurys continue to shrink, the market will steadily move to swaps," said Robert Auwaerter, senior fixed income portfolio manager at The Vanguard Group in Malvern PA. "It brings the products to the attention..." Reuters - March 7, 2001 By Tom Bergin LONDON, March 7 (Reuters) - A legal wrangle between Swiss bank UBS and Germany's Deutsche Bank AG over a credit derivative contract has highlighted concerns about potential risks in a relatively new sector of the market. News this week of a lawsuit filed by UBS in Britain's High Court of Justice, comes at a time when the industry is trying to convince regulators to adopt more favourable treatment of credit derivatives in the updated Basel Accord on capital requirements. "This is illustrative of the general uncertainty of how this market works," said Richard Boulton, credit risk manager at the Financial Services Authority (FSA), the UK's financial services regulator. "There is not absolute certainty that these techniques will work all the time," he said, speaking earlier this week when news of the lawsuit, filed in February, came to light. Draft proposals updating the 1988 Basel Accord treat risks on credit derivatives as greater than for more tried and tested means of hedging credit risk such as bank guarantees. As a result they require more money to be set aside to cover risk. The market body, the International Swaps and Derivatives Association ( ISDA ), is pressing Basel regulators for talks about aspects of the proposals, which it says, are unfair. "The case won't help the image of credit derivatives. We'll have to see how things develop but hopefully it won't have a negative influence on regulators," said the head of credit derivatives at a European bank, who declined to be named. Regulators are concerned in particular about legal risk. Bank of England deputy governor David Clementi said last month question marks existed over whether players had conflicting views on details of credit derivative deals they entered into and how the law courts would treat agreements such as credit default swaps. A default swap is an insurance-like instrument which allows an investor to hedge exposure to the risk of an issuer defaulting on an underlying bond or loan. In the UBS case, the Swiss bank alleges Deutsche Bank is in default of its obligations to pay the sum of $10 million in a default swap deal designed to pay if U.S. building materials firm Armstrong World Industries Inc defaulted on its debt. According to documents filed at the High Court, UBS alleges written confirmation of the swap contract with Deutsche mistakenly lists AWI's parent Armstrong Holdings as the underlying issuer, not AWI. UBS alleges the true contract related to AWI, which filed for Chapter 11 protection from creditors more than half a year after the swap deal was transacted, and not to Armstrong Holdings, which has not filed for Chapter 11 and has not defaulted. Both banks have declined to comment on the lawsuit but credit derivative traders have been quick to reject any suggestion that the legal action supports the argument for harsher regulatory treatment of default swaps. Disagreements between counter parties over the interpretation of what constitutes a default event have resulted in court action on a number of occasions. In a notable case last year, involving the U.S. insurer Conseco, counterparties disagreed over whether the insurer's restructuring of debt constituted a default event. The market is a relatively new industry and regulators are concerned some aspects of it, like contract documentation, have not been fully standardised, leaving participants open to the risk of contractual disputes. Banks and ISDA have worked to improve documentation. ISDA is currently trying to nail down a definitive description of debt restructuring, which has proven a particularly tricky issue. While some market participants fear the market may be harmed by fallout from legal actions, other experts in the sector are more sanguine. "The momentum of the credit derivative market is such that it will require more than these small problems to stop the market growing," said Jonathan Davies, head of credit derivatives at PricewaterhouseCoopers. Thesetypes of cases made firms address the issues involved, Davies said, adding: "It brings the products to the attention of senior management and accelerates the evolution of the market." The New Forecast For Meteorologists: It's Raining Job Offers The Wall Street Journal - March 8, 2001 By Chip Cummins Two years ago, Bradley Hoggatt was heading for an academic career in meteorology, intent on discovering more about how hurricanes form. But just before he started working on a doctorate, a very different opportunity blew in. Now Mr. Hoggatt forecasts weather for a floor full of M.B.A.s who trade billions of dollars in weather-sensitive energy commodities such as natural gas and electricity for Aquila Inc., the trading subsidiary of a big Midwest utility. With no business background himself, Mr. Hoggatt is also trading complex financial contracts based on his predictions. "I'm putting my money where my mouth is," says the tall, square-shouldered 28-year-old. Weathermen and women have become a hot commodity in the exploding energy-trading business. While off-target forecasts on television may frustrate parents and schools and embarrass politicians, as they did this week on the East Coast, they can lose bundles for electricity and natural-gas traders. So as trading has boomed, so has demand for trained meteorologists, a profession that traditionally hasn't paid all that well and is often the butt of jokes. From Wall Street to Houston's Louisiana Street, where many energy companies have set up shop, recent graduates are earning twice what they would earn at the National Weather Service or in academia. "The appetite for weather is insatiable," says James L. Gooding, director of meteorology at Duke Energy Corp. A former NASA scientist, Dr. Gooding will be adding a fourth forecaster to his Houston team in the next year. Enron Corp., an energy-trading giant based in Houston, has more than doubled its staff of weather forecasters to nine in the past three years, plucking talent from places like the Weather Channel. Williams Cos., a Tulsa, Okla., competitor, is endowing university fellowships to lure meteorology students. And since 1999, Aquila, which is owned by UtiliCorp United Inc., of Kansas City, Mo., has hired two other meteorologists from Mr. Hoggatt's alma mater, the University of Wisconsin, plus another scientist with a Ph.D. in climatology. That hiring paid off a bit during this week's winter storm in the Northeast. While many on the East Coast were getting miscues from TV weathermen on a pending, possibly historic blizzard that fizzled in New York and other cities, traders at Aquila simply looked to Mr. Hoggatt. Last Friday, Scott Macrorie, an electricity trader for the Mid-Atlantic region at Aquila, stopped by to see how the storm was progressing. Mr. Hoggatt's team told him temperatures in his region of interest would be lower because of the storm, though the snowfall forecast on TV seemed a little high. Sure enough, temperatures fell and snowfall in many cities was less than predicted, lifting electricity prices and making Mr. Macrorie a profit that he says was in the tens of thousands of dollars. About 500 university students in the U.S. graduate each year with bachelor's degrees in meteorology, according to the American Meteorological Society. An additional 300 or so graduate with masters degrees or doctorates. Until just a few years ago, those graduates didn't typically have many options: TV for those who had the blow-dried look, back-office jobs with the government or a handful of private consultants for those who didn't. Research was an option. And some airlines and utilities kept a few meteorologists on staff to help position airplanes or power-line repair trucks during storms. Now, deep-pocketed trading companies are offering many meteorologists with graduate degrees salaries ranging from $60,000 to $90,000. Performance and trading bonuses can double or even triple the figure. That compares with the roughly $33,000 the National Weather Service pays a junior forecaster with a graduate degree. "It's a bit unusual for meteorologists to have the prospect of lucrative employment after graduation," says John Nielsen-Gammon, a professor of atmospheric sciences at Texas A&M University. "This is a bit of a switch." So far, there has been no dearth of meteorological talent available, partly because the National Weather Service wrapped up a big expansion project in the mid-1990s and slowed hiring. It hires only to replace people who leave, about 30 to 50 meteorologists a year. And the high-pressure world of billion-dollar commodity bets isn't for everyone. When Carl Altoe graduated from Penn State, one of the nation's top meteorology programs, he got a heavy sales pitch from Enron. "It's quite an impressive place," he says of Enron's trading floor, but he wasn't sure forecasting skills alone would be enough to make the grade. "I would be afraid that if money wasn't made in a hurry, I'd be tossed," says Mr. Altoe, who accepted a position with the National Weather Service in Marquette, Mich. For others, having forecasts count puts a new thrill in the old art. After two years as a manager at the Weather Channel's Latin American division in Atlanta, Jose Marquez posted his resume on an Internet job site run by the American Meteorological Society. Enron called. "Have you heard about Enron?" Mr. Marquez remembers being asked. "And I said, honestly, `No.'" During a visit, Mr. Marquez, a 33-year-old Navy-trained meteorologist, found Enron's trading floor exhilarating. Enron courted Mr. Marquez heavily, tracking him down three times during his Christmas vacation in Puerto Rico. Mr. Marquez decided the sprawling trading floor was just the sort of active work place he was looking for. Also, he'd be getting a 10% to 15% boost over his Weather Channel salary, before potential bonuses from Enron. "I'm getting more money than I would anywhere else," he says. Weather has long affected prices of everything from grain at Chicago's early commodity markets to the stocks of retail companies on Wall Street. Jon Davis, a meteorologist for Salomon Smith Barney in Chicago, started forecasting the weather for agriculture traders back in 1985. But volatile energy prices have raised the stakes for forecasters who are able to gauge air-conditioning use in the summer or natural-gas demand during the winter heating season. Meanwhile, all sorts of companies are turning to energy traders and Wall Street for " weather derivatives ," complex contracts used to hedge financial risks associated with the weather. "With every passing year, you do more energy and more energy," Mr. Davis says. Despite big advances in data collection and modeling, betting millions of dollars on weather forecasts can still be tricky business. Short-term forecasts are pretty good. Predicting weather two weeks from now is chancy. Most meteorologists get their data from the government, particularly the National Weather Service. Many then tweak it with their own interpretations or forecasting models. Disappointed last year by poor long-term forecasts from 11 private consultants, Aquila has a contest offering $100,000 to the meteorologist or team that can best predict temperatures in 13 major U.S. cities over the course of a year. "I call it the forecast bakeoff," says Mr. Hoggatt. The high stakes also mean more pressure on forecasters. WSI Corp., a Billerica, Mass., weather-forecasting firm, started an energy service last year, and Jeffrey A. Shorter, a WSI vice president, says energy clients can be less forgiving than his other clients in TV and aviation, especially when the forecasts are wrong. But, he adds, "presumably, more often than not, we're right." **End of ISDA Press Report for March 8, 2001.** THE ISDA PRESS REPORT IS PREPARED FOR THE LIMITED USE OF ISDA STAFF, ISDA'S BOARD OF DIRECTORS AND SPECIFIED CONSULTANTS TO ISDA. THIS PRESS REPORT IS NOT FOR DISTRIBUTION (EITHER WITHIN OR WITHOUT AN ORGANIZATION), AND ISDA IS NOT RESPONSIBLE FOR ANY USE TO WHICH THESE MATERIALS MAY BE PUT. Scott Marra Administrator for Policy & Media Relations ISDA 600 Fifth Avenue Rockefeller Center - 27th floor New York, NY 10020 Phone: (212) 332-2578 Fax: (212) 332-1212 Email: smarra@isda.org - Ivy.gif