Message-ID: <20730276.1075859826752.JavaMail.evans@thyme> Date: Tue, 29 May 2001 04:53:00 -0700 (PDT) From: smarra@isda.org To: rainslie@isda.org, jennifer@kennedycom.com, tmorita@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, joshua.cohn@allenovery.com, mcresta@cravath.com, daniel.cunningham@allenovery.com, mcunningham@isda.org, jerry.delmissier@barclayscapital.com, shawn@blackbird.net, evangelisti_joe@jpmorgan.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, yhoribe@isda.org, milphil@gateway.net, skawano@isda.org, hiroyuki_keisho@sanwabank.co.jp, 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, h.ronald.weissman@us.arthurandersen.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, pmartinez@isda.org, steven@kennedycom.com, pwerner@isda-eur.org, azam.mistry@hsbc.com, frederic.janbon@bnpparibas.com, kamin@lehman.com Subject: ISDA PRESS REPORT - MAY 29, 2001 Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: 7bit X-From: Scott Marra X-To: Ruth Ainslie , "'jennifer@kennedycom.com'" , Tomoko Morita , "'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)'" , Tim Fredrickson , "'gilbert_adam@jpmorgan.com'" , Jeff Golden , Mark Haedicke , "'Tsuyoshi Hase'" , Jose Manuel Hernandez-Beneyto , Yasuko Horibe , "'Michael Iver'" , Shigeki Kawano , Hiroyuki Keisho , 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 , "H.Ronald Weissman" , "'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 , Pedro Martinez , Steve Kennedy , Peter Werner , Azam Mistry , Frederic Janbon , Kaushik Amin X-cc: X-bcc: X-Folder: \Mark_Haedicke_Jun2001\Notes Folders\Notes inbox X-Origin: Haedicke-M X-FileName: mhaedic.nsf ISDA PRESS REPORT - MAY 29, 2001 CREDIT DERIVATIVES * ISDA restructuring welcomed - FOW * Credit Derivatives - FOW * Restructuring - the solution? - FOW * ISDA Prepares To Tackle 'Soft' Credit Event Definitions - Derivatives Week RISK MANAGEMENT * It's the end of the 'w' as we know it - FOW * ISDA fights for right to counterparty - FOW * Bankers Call Credit Their No. 1 Risk Fear - American Banker * BoE's Clementi Cautions Knowledge Of Systemic Risk Low - Dow Jones COLLATERAL * EU collateral Directive - FOW ASIA * China to Ease Rate Rules - The New York Times * Devaluation Talk Just That, And No More - Dow Jones * New CEO Helps Build Future For Singapore Exchange - Asia Wall Street Journal ACCOUNTING * ISDA Opposes the FASB's Proposed Changes on Hybrid Instruments - Hedge World * Banks account - (commentary) Financial Times * IASB Taking Tentative Steps on Agenda... - BNA ENERGY * Asian Airlines Tender For Jet Fuel Through Jet-A.com - Dow Jones OTHER ISSUES * Weak euro 'may be what the doctor ordered - Financial Times * Central bank chief resists calls for advance distribution of euro notes - BNA * Fed Chairman Warns Economic Slowdown Is Not Yet Over, Further Cuts May Be Needed - BNA * Three Areas of Contention Threaten To Derail EU Effort at Economic Reform - BNA ISDA restructuring welcomed FOW - May 2001 By Jane Sandiford The impact of ISDA's new restructuring supplement is only lust being felt in the credit derivatives market. While not viewed as the final word on the tricky issue of 'R', the modifications have been broadly welcomed. When Ernest Goodrich, md of Deutsche Bank, announced at ISDA's recent AGM that a "consensus" had been reached on the credit derivative market's restructuring problem, the audience held its breath. Despite the heavy hints that ISDA was going to make such a timely announcement, things had not looked promising. However, at the eleventh hour ISDA announced its Restructuring Supplement to the 1999 ISDA Credit Derivatives Definitions. Clarity "The 1999 definitions of restructuring were a huge improvement on the previous ISDA confirmations," says Thomas Riggs, vp and associate general counsel of Goldman Sachs. "However, they were a compromise and exposed credit protection sellers to risks that cannot easily be priced or managed." Clearly, something had to be done. "A clearer definition of 'R' will be beneficial," says Paolo Josca, head of credit derivatives in New York for Banca Commerciale Italiana. "Restructuring is often the first sign of a company in distress." Josca admits, however, that even if the ISDA modification becomes adopted as a market standard, variations will still exist. Brian Barrett, director at Merrill Lynch agrees: "The main complaint following Conseco was that the restructuring clause exposed credit protection sellers to the protection buyer's cheapest-to-deliver option. To address these complaints, dealers have proposed to substantially limit the permitted maturities of deliverables if the buyer triggers the settlement of a default swap based on 'R' as a credit event. Despite dealers' attempts to find this common ground, I am not sure that the modified 'R' will be acceptable to all." Many traders are sceptical that a single uniform contract for credit derivatives is possible. However, there is broad agreement that a clear standard framework is needed. ISDA expects that trades will still continue without 'R', but hopes that the new supplement will ease levels of confusion and reduce the 'RINR' spread. In fact, Dennis Oakley, ISDA treasurer and md of JP Morgan cites a recent five-year default swap that traded with the new 'R' supplement only two basis points more expensive than 'NR'. The old restructuring clause has been as much as 1O-l5bp more expensive. The main elements of the new restructuring definition: * Limit the number of alternatives to one revised approach, which is preferable to having more options * Impose a maturity limitation on deliverables * State that deliverables must be fully transferable * Take into account the BIS proposals on the restructuring compromise. Of course, the new Basel capital adequacy proposal requires restructuring in credit derivatives in order for them to qualify for capital relief. What impact will ISDA's new modification have on this document? ISDA states that the BIS proposal is still at an early stage and argues that it made more sense for the Association to develop its restructuring modification first, introduce it to the market, and then take it to the regulators. "This new option is structured on the same lines as other ISDA supplements," explains Richard Kennaugh, md of JP Morgan. "You can specify the extent to which you want to incorporate the supplement into your transaction - it is easily done within a sentence or two. We hope everyone utilises the modified version. Positive While this may not be the final word on restructuring, and while it may come under attack for being too 'US big bank' biased or not going far enough, ISDA's new restructuring supplement is generally considered to be a positive development for the credit derivatives market. "There has been a high degree of noise about restructuring in recent months," says Blythe Masters, global head of credit derivatives at JP Morgan. "This is only natural and is indicative of the fact that the credit derivatives business has grown sufficiently to be on the financial radar screen." Credit Derivatives FOW - May 2001 By Jane Sandiford Underpinning recent, well-publicised, developments in the industry, the credit derivatives market is seeing a steady flow of business with volumes up on the same time last year. "We have been doing some quite interesting portfolio trades," says one trader. 'We have also structured some tax arbitrage trades, synthetic collateralized debt obligations, and completed a lot of relative value trades. Interestingly, we have been pricing up some spread options again - we have not done that since 1999. This is probably the result of recent market volatility and credit spread widening. While we have not seen anything ground breaking, we have been doing some interesting I deals recently." Another trader points to the increasing accessibility of more structured credit derivatives deals. "At one stage in the not too distant past we would not have attempted to get involved in the more exotic transactions such as synthetics," he explains. "However, now we are quite involved in this market the mystery has gone and we can now see what we can do with these instruments." In addition, Deutsche Bank has recently structured an interesting deal. The deal's floating-rate notes -have been provisionally rated by S&P. At closing, Deutsche Bank will issue euro-denominated notes. As there is no collateral for the notes, Deutsche Bank will -pay the principal and interest on the notes. Deutsche Bank's obligation is, however, linked to the performance of a static EUR2.25bn reference portfolio of 150 investment-grade reference entities. "There exists, therefore a credit risk not only on Deutsche Bank's ability to repay the notes, but also on the performance of the reference pool," explains Katrien Van Acoleyen, associate at S&P's structured finance ratings group in London. "Both of these issues are adequately addressed by the BB+ rating." If a credit event occurs in the reference portfolio, all the conditions to payment have been met, and the total losses with respect to the portfolio exceed the threshold amount, then the repayment of the notes will be reduced with the cash settlement amount (defaulted amount less recovery), as calculated by Deutsche Bank as calculation agent. At the same time as the notes are issued, Deutsche Bank will also enter into two unfunded credit default swaps, which are senior to the notes. Final maturity of the notes is April 2006 but the notes can redeem early if the notional amount has been reduced to zero and (ii) when an event of default or adverse tax change occurs on the notes. Meanwhile credit derivative brokers are looking to market the product to new potential users. "We have been looking to target energy and utility houses," says one. "The credit risk aspect of energy has really hit home over the past year, especially following the bankruptcy filing from the US Pacific Gas and Electricity Company. Those companies that are exposed to such energy risk are now seeking the protection that can be offered via credit derivatives." Energy companies are not the only institutions feeling the pain, of energy risk. One market source warns that some synthetic securitisation structures, issued by major credit derivatives players, may be under pressure and may be downgraded as a result of the impact of the Californian power crisis. "Some of these deals have exposure to US power utilities," says the source. "This is something we are watching very closely indeed." As FOW went to press, the full impact of ISDA's new restructuring modification had yet to be felt. "We are waiting for our lawyers to go through the supplement and come back with their recommendations," says one structurer. "However, it seems a sensible solution and is along the lines of what we have seen developing in the market. I would agree with comments that the new supplement will narrow credit spreads. While this may not be the end of the matter, it is good news for credit derivatives." Restructuring - the solution? FOW - May 2001 Any or all of the following definitions and provisions may be incorporated into a document by wording in the document indicating that, or the extent to which, the document is subject to the 1999 ISDA Credit Derivatives Definitions, as supplemented by the Restructuring Supplement. All definitions and provisions so incorporated in a document will be applicable to that document unless otherwise provided in that document, and all terms defined in these Definitions and used in any definition or provision that is incorporated by reference in a document will have the respective meanings set forth in these Definitions unless otherwise provided in that document. Any term used in a document will, when combined with the name of a party, have meaning in respect of the named party only. The Definitions are supplemented by the following Sections: Section 2.29 - Restructuring Maturity Limitation If Physical Settlement is specified in the related Confirmation, Restructuring is the only Credit Event specified in a Credit Event Notice for which Buyer is the Notifying Party, and "Restructuring Maturity Limitation Applicable is specified in the related Confirmation, then a Deliverable Obligation may be included in the Portfolio only if it is a Fully Transferable Obligation with a final maturity date no later than the Restructuring Maturity Limitation Date (RMLD). RMLD means the date that is the earlier of (x) 30 months following the Restructuring Date and (y) the latest final maturity date of any Restructured Bond or Loan, provided, however, that under no circumstances shall the RMLD be earlier than the Scheduled Termination Date (STD) or later than 30 months following the STD. Section 4.10 -. Limitation on Obligations in Connection with Section 4.7 Notwithstanding anything to the contrary in Section 4.7, the occurrence of, agreement to, or announcement of, any of the events described in Section 4.7(a)(i) to (v) shall not be a Restructuring where the Obligation in respect of any such events is not a Multiple Holder Obligation (MHO). MHO means an Obligation that (i) at the time the Credit Event Notice is delivered, is held by more than three affiliated holders and (ii) with respect to which a percentage of holders (determined pursuant to the terms of the Obligation) at least equal to 66 2/3 is required to consent to the event which would otherwise constitute Restructuring as a Credit Event. Section 2.30 - Pan Passu Ranking; Section 4.7(a)(iv) For purposes of determining whether an obligation satisfies the "Pan Passu Ranking" Obligation Characteristic or Deliverable Obligation Characteristic, the Reference Obligation(s) shall be deemed to have that ranking in priority of payment which such Reference Obligation(s) had as of the later date of (i) the Trade Date specified in the related Confirmation and (ii) the date on which such obligation was issued or incurred and shall not reflect and change to such ranking after such date. For purposes of Sections 4.7(a)(iv), "a change in the ranking in priority of payment of any Obligation, causing the subordination of such Obligation" means only the following: an amendment to the terms of such Obligation or other contractual arrangement pursuant to which the requisite percentage of holders of such Obligations (Subordinated Holders) agree that, upon the liquidation, dissolution, reorganisation or winding up of the Reference Entity, holders of any other Obligations (Senior Holders) are entitled to receive assets of the Reference Entity distributable to the Subordinated Holders to the extent that the Reference Entity's assets otherwise fail to satisfy the claims represented by Senior Holders until the claims of the Senior Holders against the Reference Entity are paid in full. For the avoidance of doubt, the provision of collateral, credit support or credit enhancement with respect to any obligation will not, of itself constitute a change in the ranking in priority of payment of any Obligation causing the subordination of such Obligation. Section 3.11 - Credit Event Notice Upon Restructuring Notwithstanding anything to the contrary in the Credit Derivatives Definitions, in the event that the relevant Credit Event is Restructuring, a Notifying Party may deliver a Credit Event Notice (CEN) with respect to all or a portion of the Floating Rate Payer Calculation Amount of a Credit Derivative Transaction. In the event a Notifying Party delivers a CEN with respect to a portion of the Floating Rate Payer Calculation Amount of a Credit Derivative Transaction, the following shall apply: * The CEN must set forth the amount of the Floating Rate Payer Calculation Amount to which such CEN applies (the Exercise Amount), which must be in the amount of 1,000,000 units of the currency in which the Floating Rate Payer Calculation Amount is denominated or an integral multiple thereof; and * A Notifying Party must deliver multiple CENs with respect to a Credit Derivative Transaction, provided, however, that under no circumstances shall the sum of the Exercise Amounts specified in each CEN delivered pursuant to a Credit Derivative Transaction exceed the Floating Rate Payer Calculation Amount of such Credit Derivative Transaction. ISDA Prepares To Tackle 'Soft' Credit Event Definitions Derivatives Week - May 28, 2001 By Victor Kremer The International Swaps and Derivatives Association over the next several weeks will canvass credit derivative dealers, hedgers and investors with a view to revising so-called 'soft' credit event definitions in credit derivative documentation. Bob Pickel, executive director and CEO of ISDA in New York, told DW there will be changes to the credit event definitions, declining to put a timeframe on the move. The issue has been a focus of discussion as the synthetic CDO and credit default swap markets have grown but raised eyebrows recently when Moody's Investors Service and Deutsche Bank engaged in a skirmish--via conflicting research reports--on the potential magnitude and probability of soft credit events, according to market professionals. The debate centers on credit events that are short of outright bankruptcy or default, being included in credit derivative contracts. ISDA documentation recognizes credit events that do not necessarily entail a default, such as the 'in furtherance of' clause of the bankruptcy definition, which could cover an obligor considering filing for bankruptcy, explained Jeffrey Tolk, v.p. and senior credit officer at Moody's in New York. If publicly reported, Tolk continued, these considerations could trigger a loss payment under a credit default swap, even if the obligor does not enter bankruptcy. In a report published at the beginning of the month Deutsche Bank concedes that "synthetic credit instruments may carry an element of documentation basis risk that is not present in a conventional cash security." However, John Tierney, the report's author, continues: "We think Moody's goes too far in implying that the presence of certain credit events in synthetic securities exposes investors (ie protection sellers) to a materially greater degree of default risk and loss." "It's an unquantifiable risk and that makes us and investors uncomfortable," said Moody's Tolk. Rather than overstating the issue the rating agency asserts that the definition of these soft credit events is so broad that their inclusion in documentation exposes investors to an unknown level of risk. "ISDA seems to be considering our point of view," he continued. ISDA's Pickel confirmed that the association is moving towards Moody's definitions. The association's G-6 subcommittee of the Credit Derivatives Market Practice Group met last Tuesday to set an agenda for tackling the credit definitions. Several investors said they share Moody's concerns with the inclusion of soft credit event definitions in ISDA documentation. "That's where it gets a little dicey," one investor noted, adding that the soft credit definitions should be dropped. A credit derivatives trader in London noted ISDA is in the early stages of looking at the definitions, but agreed that some credit event definitions might be taken out of the ISDA documentation. "You don't have to wait for ISDA," he said, adding that counterparties can agree to strike the language from their documentation when they enter transactions. It's the end of the 'w' as we know it FOW - May 2001 By Jane Sandiford Is the end nigh for 'w'? Judging from comments at ISDA's AGM last month, the future looks bleak for Basel's now infamous proposed capital charge for credit derivatives. Derided by the very regulators you would expect to defend it, traders now question how 'w' can survive. "Market views on the whole have been negative," explains Roger Tufts, senior economic advisor, capital policy division, at the Office of the Comptroller of the Currency. "I expect that 'w' will eventually go away. The credit derivatives market has condemned the charge in no uncertain terms and the comments from the ISDA ACM have been broadly welcomed. "It is good to hear the regulators admit that 'w' makes no sense to them either," says one trader. "I would now expect 'w' to be clarified and, at the very least, the capital charge reduced." The need for clarity on this and other features of the Basel proposal was noted at the ISDA AGM by William McDonough, chairman of the Basel Committee on Banking Supervision and president of the Federal Reserve Bank of New York: "I know that it is of particular concern that we may be confusing legal risks with 'other' risks. I think this is right." Emmanuelle Sebton, head of risk management at ISDA, is particularly heartened to hear McDonough's comments. She hopes by bringing more clarity on the nature and purpose of the 'w' charge, the debate that ISDA has had with the regulators will eventually lead to the conclusion that the charge is unjustified and should be removed from the proposed Capital Accord. "I agree with McDonough's comments on the 'w' factor," says Thomas Boemio, senior supervisory financial analyst, policy development section, on the board of governors of the Federal Reserve System. "We call 'w' the ~whatever factor'. We are not sure what it is for - it is mainly a legal risk." As such, the market believes 'w' should be consigned to the operational risk area. The US regulators seem to be in agreement - what is not so clear is the position the European regulators will take. However, with criticism coming from all sides of the debate, traders believe that 'xv' will soon be consigned to the dustbin of history - a lucky near miss for credit derivatives. ISDA fights for right to counterparty FOW - May 29, 2001 By Corinne Smith The International Swaps & Derivatives Association (ISDA) announced at its recent AGM its proposals for the treatment of counterparty credit risk, as part of its response to the easel Committee's proposed new Capital Accord. ISDA responded to Basel's first consultative paper in February last year, saying that the current treatment of counterparty risk could be improved, and needed further work before setting a new framework for a regulatory capital charge. "In October last year we created the Counterparty Risk Working Group to formulate ISDA's response, which was chaired by Tom Wilde, director at Credit Suisse First Boston, and which represented 26 institutions, nine of which participated in a quantitative calibration exercise," says Katia D'Hulster, policy director at ISDA in London. "We have now finalised our proposals and they will be included as an annex to our official Basel response, which is due by the end of May." Although ISDA completed the major part of its work on counterparty credit risk before the publication of Basel's second consultative paper in January, the Association was pleased to note a paragraph about the Committee's willingness to accept potential future exposure (PFE) modelling in the document, a sign of progress towards addressing counter-party risk on a more risk sensitive basis. Internal models The current rules for counter-party risk require institutions to calculate a credit equivalent exposure for derivatives as the sum of the current value (if positive) and an 'add on', obtained by multiplying the derivative notional by fixed regulatory factors depending on the underlying market. "This is a very crude way of calculating a regulatory capital charge for counterparty risk," explains D'Hulster. "What we propose is that the Basel Committee allow banks to calculate these credit equivalent exposures using their internal models. Just as in the current rules, however, these exposures would then be risk weighted in the same way as other credit assets. This two-step approach is one aspect of the current rules that we are not proposing to change. In the first step, banks calculate credit equivalent exposures; and in the second step, these exposures are treated as normal credit assets. The alternative is to use internal models to calculate capital directly from derivatives positions. ISDA regards this as the ultimate goal, but recognises that it must follow in the footsteps of internal modelling for fixed exposures, which the regulators are not yet ready to accept." For firms that do not have internal models of counter-party risk, the existing method could remain in place with some modification. However, many banks already have appropriate internal models for these calculations, although they would need to be reviewed and approved by regulators. "We recommend that for the calculation of credit equivalent exposures, banks use the concept of expected positive exposure," says Wilde. "By the end of this year, the Basel Committee will have prepared its final proposals, so we would like it to consider our work on counterparty risk. We would also like to see the European Union consider our work in its Capital Adequacy Directive." Bankers Call Credit Their No. 1 Risk Fear American Banker - May 29, 2001 By Nicole Darn WASHINGTON - Bankers say credit, economic capital, and systems risk - in that order - are their top three risk management concerns. Capital Market Risk Advisors, a New York financial advisory firm specializing in risk management, surveyed 40 bankers worldwide on their risk management concerns and thoughts about economic capital. The firm found emerging-market and investment banks were more gravely concerned about integrating market and credit risk than did non-emerging-market foreign banks, U.S. banks, and other financial institutions. Of the banks surveyed, 65% said they use internal models for market-risk regulatory capital and 35% use the Basel standardized measurement method. Of those using the Basel method, 69% said they plan to move to internal models. None of the emerging-market banks said they use internal models now, but 71% said they plan to. Most of the major banks and investment banks said they are currently using internal models. Sixty-three percent of all bank respondents said that if the Basel Committee on Bank Supervision would let banks use their own credit risk models now, they would not yet be ready to make the switch. BoE's Clementi Cautions Knowledge Of Systemic Risk Low Dow Jones Newswires - May 23, 2001 By David Cottle LONDON -- The Bank of England's role in combating systemic risk arouses far more internal debate than its monetary policy, the Bank's Deputy Governor David Clementi said Wednesday. In a speech on Banks and Systemic Risk at the Bank of England's annual conference, Clementi said that while the 2.5% target for inflation is "clear and transparent" the global understanding of systemic risk is in a "very preliminary stage." He added that the very definition of such risk along with the problems of measuring it and the policy weapons used to combat it remain fundamental questions which the international banking community so far has provided only partial answers. He pointed to a lack of evidence of systemic shocks. "Whilst banking crises are not exactly rare, they are episodic rather than regular and they tend to exhibit a number of idiosyncratic characteristics," he said. What is not in doubt, Clementi added, is that "financial crises, specifically banking crises produce real economic costs." He highlighted the immediate costs to the public sector if ailing banks have to be bailed out in addition to longer- term costs to growth. He pointed out that banking crises have become more common, with four out of the G10 most developed countries suffering one in the last decade. Clementi said that the increasing trend in global banking towards consolidation may lead to safer banks in the long run, it could also make bank failure more damaging in its impact. Additionally, the changing nature of bank activity also affects risk profiles, he said. "New markets, new customers, new products, new technology increase the risk of something going wrong if the industry's risk assessment procedures do not keep pace," he said. He highlighted the need to "risk proof" the global banking system through measures such as the Basel Accord on capital adequacy. Market discipline and disclosure are two cornerstones of this process, Clement said. He added, however, that there is no point in enhancing disclosures if the "market has no incentive to apply the information because it believes that banks will not be allowed to fail." The goal of improving and harnessing market discipline has to go hand in hand with the continued rolling back of state guarantees to banks, whether formal or implicit, he said. On the implications of the Basel accord for the level of capital in the banking system, Clementi stressed the need to achieve a balance. Erring on the low side of a minimum capital standard could result in an unacceptable risk, whereas to err on the high side is likely to result in wasteful and costly regulatory arbitrage," he said. EU collateral Directive FOW - May 29, 2001 By Jane Sandiford ISDA is now asking 17 jurisdictions around the world to update their legal opinion on the document. "We anticipate that the process, depending on the jurisdiction, should take six months," says ISDA's assistant general counsel, Kimberley Summe. "Those requests for counsel will go out this month and I would anticipate that by late fall we should have them in and we'll then make them available on our Website." While the new provisions have been broadly welcomed, significant hurdles remain. "There are considerable technical constraints to be overcome to enact the documentation," says James Crabb, head of collateral management at Barclays Capital. Crabb warns that the documentation is biased in favour of larger banks that have access to a wider range of collateral. Meanwhile, the EU has proposed a new Directive to create a uniform EU legal framework to limit credit risk in financial transactions through the provision of securities and cash as collateral. The Directive is largely in keeping with ISDA's new Provisions. "This Directive promises to support the growing use of collateral in the EU, removing many unnecessary obstacles," says Robert Pickel, ISDA's Executive Director and CEO. The EU's internal market commissioner, Frits Bolkestein, says that the proposal is "the first step towards integration of the financial market for collateral in the EU". He adds that the proposal tackles a major disincentive to cross-border transactions". Market operators currently face 15 different legal regimes for the provision of collateral, complicated potential conflicts between jurisdictions and uncertainties surrounding the law applicable to cross-border transfers of securities. "This proposal would determine which law governs cross-border collateral arrangements and would make it possible for market participants to conclude such arrangements in the same manner throughout the EU," says Bolkestein. China to Ease Rate Rules The New York Times - May 28, 2001 SHANGHAI, May 28 - China plans to relax its control of foreign currency lending rates by the second half of the year, China Securities News has reported. Banks will be permitted to adjust their foreign currency lending rates to bring them more into line with market demand than they are permitted to now. Foreign currency lending rates are now set by the central bank. The change is part of a plan to permit banks to set all lending rates within 3 years and all deposit rates within 5 to 10 years, the paper said. Relaxing state control is a critical step toward achieving the government's goal of making the country's currency fully convertible. Devaluation Talk Just That, And No More A Dow Jones Newswires Column - May 27, 2001 By James Areddy HONG KONG -- Markets make it a rule to ignore government promises not to devalue a currency. But it also makes sense to disregard statements from Beijing that sound as if its commitment to a stable currency has waned. In Malaysia, economists have glazed right over promises from Prime Minister Mahathir Mohamad that the ringgit's peg is secure, since sentiment is widespread that the exchange rate is unsustainable. It was the same thing in February when Turkey's government expressed its support for the lira before it crashed, and the way markets also cast a suspicious eye toward indebted Argentina's peso. Some even regard devaluation plans as one of the few times a government has a good reason to lie, since officials have a mandate to maintain market confidence in the national currency as long as possible. So it's strange to hear Chinese officials - not market players - hint they have lost the faith. Instead of highlighting China's strong balance of payments position or that it has the world's second largest trove of foreign exchange reserves, as other governments might, officials have made headlines in recent weeks by pointing out the yuan exchange rate's stress points. Their statements bring many traders back to 1998, and the then downward spiral of the Japanese yen. When the U.S. currency started climbing toward Y147 in the middle of that year, China led the rest of Asia with acrimonious statements that Japan's failure to address its economic problems undermined market confidence in the yen. Threatened by China with a competitive devaluation of the yuan at a time of extreme global financial turmoil, authorities in the U.S. and Japan put an end to the yen's slide with well-timed intervention in world currency markets. Chinese devaluation fears receded as the yen rebounded on worries about more intervention. Now, some think they hear echoes of the past in China's rhetoric. A clouding of the U.S. economic picture, sour relations with Washington and - most of all - the new vulnerability of Japan's yen help make the latest Chinese arguments sound shrill. "A consistent depreciation of the yen against the dollar would create pressure on the stability of the yuan exchange rate," the People's Bank of China warned this month. "China needs to take measures to improve the competitiveness of its exports," the country's Ministry of Foreign Trade and Economic Cooperation chimed in a few days later. No Face Value Yet, the way things stand now, virtually no one takes China's worries at face value. Gray market rates of the yuan in Hong Kong are stable and point to strengthening, while purveyors of derivatives who offer plays on the non-convertible yuan are having a dull spell. One analyst says China is merely reminding the market that its commitment doesn't equate stability in the yuan forever and no matter what. Another said Asia collectively wants to keep pressure on Japan, noting South Korea also hackled when the yen headed south. And it's not a critical situation. China's current account balance is expected to remain in surplus of 0.7% of gross domestic product this year, albeit down from 1.5% of GDP last year, according to Goldman Sachs & Co. The firm's "early warning signals" pick up no financial risk regarding China. Yes, analysts say, Beijing is concerned that another big fall in the Japanese currency would weaken its ability to compete with Japanese companies in third-party export markets, like the U.S. It would also reduce China's ability to carve out space in the liberalizing Japanese market and to draw investment from Japanese companies. But China's actions speak louder than its words on the currency. The yuan has remained rock solid for over seven years in the face of both downward and upward pressures, some of them severe, as in 1998. And it's worth noting the words themselves have been anything but alarmist so far. In fact, analysts say Beijing has reassured that it will allow market forces to set the yuan only gradually. PBOC Gov. Dai Xianglong's bottom line is that the yuan "will remain stable, although not fixed...so please, rest assured." China's myriad political and economic considerations - growing oil import dependency, budding statesmanship and hopes to get top dollar in its privatizations - make it difficult to argue that devaluation would provide a net benefit. Nor is it easy to say China has less "responsibility" to the rest of Asia than it did three years ago when the region's economies were being pummeled. Chinese devaluation then most certainly would have forced a new round of currency instability throughout a highly indebted and crisis-hit Asia. But while a 10%-20% weaker Chinese currency now probably wouldn't collapse Asian economies, it would be hard to pull off without making Beijing look greedy. China's buoyant, albeit weaker, export figures support the view that it continues to take market share away from the rest of the region, increasingly in the critical electronics sector. The region is already unsettled by the singular focus foreign investors have on China. China has accounted for virtually all of the region's equity fund raising so far this year, up from 77% of the total last year, according to Deutsche Bank AG. The argument that China would use a devaluation to punish the U.S. for downgrading relations also fails to hold water. The punch it would give other Asian countries would undermine the Chinese leadership's recent whirlwind of diplomacy through Asia. And, with U.S. relations in the dumps, "China now needs friends in the region more than at any time during the past decade," according to Yiping Huang, a Citigroup Inc. economist in Hong Kong. A devaluation would also upset the country's existing foreign investors. People who last year pumped US$20 billion into Chinese stocks and US$40.8 billion into factories and such on the mainland would look like suckers who paid too much. A sudden drop in the currency would also probably crash the Hong Kong stock market, denting the interests of a lot of those China is counting on to provide recurrent FDI and demand in future stock offerings, analysts point out. The Ministry of Finance sent no devaluation signals this month to the investors around the globe who demonstrated an overwhelmingly positive response to its first sovereign bond offering in about three years, according to Dennis Zhu, who helped organize the US$1.485 billion dollar-euro deal. Zhu, JP Morgan Chase & Co.'s China head of investment banking, said that may be because investors think China has the ability to control its currency, and he downplayed the risks altogether. "It would be different for a country like Thailand or Malaysia," where balance of payment weaknesses make a controlled devaluation less of a certainty, Zhu said. Or consider the U.S. export market. China is trying to climb the technology ladder, but where it competes most is in the consumer realm where weaker demand would surely affect its sales of clothes and toys. Increasingly for these type of goods, says Coudert Bros. trade attorney Owen Nee, "the choice is do you buy from China or do you buy from Mexico?" And the peso is trading near three-year highs against the U.S. dollar. Credit Lyonnais Securities Asia Ltd., like many other houses, was wrong in 1998 to bet on a Chinese currency fall, and it still sees Beijing as "frantic" at the prospects of seeing exports or foreign exchange reserves slip. "The obvious solution would be to allow the currency to depreciate," according to Chief Economist Jim Walker. But now he puts the currency question in a broader context. When top posts are shifted in the Chinese government next year, reformers like Prime Minister Zhu Rongji will want incoming policy makers to back their decisions such as to join the World Trade Organization. Devaluation, according to Walker, would make China appear weak in the face of the global competition the reformers have so embraced. Still, according to CLSA, "expect the rhetoric and the risk to increase sharply if the yen trades through Y130." New CEO Helps Build Future For Singapore Exchange Asia Wall Street Journal - May 27, 2001 By Shu Shin Luh Singapore -- A year ago last month, Tom Kloet became the most senior foreigner ever appointed to Singapore's stock and futures exchanges since the island's colonial times. The American's appointment as the chief executive of the Singapore Exchange Ltd., after a year-long search, fits with the Singapore government's push to attract foreign talent who will advance the island nation's position as a cutting-edge regional financial hub. The Singapore Exchange became Asia's first integrated securities and derivatives exchange after a merger of the Singapore Stock Exchange and the Singapore International Monetary Exchange in December 1999. The exchange saw an exodus of long-time executives during its early days. Mr. Kloet, who had been a senior managing director at ABN Amro in Chicago and a board member at the Chicago Mercantile Exchange, arrived in April 2000 and spent his first months rebuilding a senior management team. Since then, the exchange has gone public and established various alliances such as with the American Stock Exchange and the Australian Stock Exchange, among other highlights. Three weeks ago, the exchange joined a growing number of Singapore companies that are reporting financial earnings quarterly as part of the city-state's effort to improve corporate transparency. Mr. Kloet speaks about his first year at the exchange in an interview. The following is an edited excerpt: Q: What do you think are the highlights of your first year as CEO? A: We've embarked on a number of exciting initiatives, including everything from a solid new management team to new alliances. Seven out of 10 of the people on my team weren't with the institution 13, 14 months ago, plus me. But we've hired a group that is great. We have a cohesiveness being built that's very important. Together with that, we have successfully completed the transfer of our company from an entity that operated like a member-owned organization to a customer-driven organization. It takes time but we're making progress on that, including privatizing and taking the company public with the stock. . . . If I may borrow Winston Churchill's words: that's not the end, not even the beginning of the end, but the end of the beginning to create the future of the exchange. As an institution with a smaller domestic market, we believe we have to reach out to enter a network of relationships. Q: Was it difficult to build a new management team? A: When I came, there were definitely a few holes we had to fill. There were a few who chose to leave. . . . We didn't tell them to do it. . . . There's a lot of talent here in Singapore. But we also brought in people from outside Singapore where we thought we needed expertise that we couldn't find in Singapore. Q: Many multinationals aim to recruit locally for their offices in Asia. Do you also try to do the same for the exchange? A: Some jobs will require us to go outside because the business line simply doesn't exist here. Clearly our first choice would be to look domestically for people we see every day and who know this market. But we will look where we can get for the best people and that's the only thing that drives us. Q: Recently, Singapore has encouraged local companies to recruit "global talent." You are certainly one of them. What are your thoughts on global talent? A: Whether I'm Singaporean, American, French or from wherever, is not the issue. The most important thing is will I help (the exchange) fulfill its ambition in the global marketplace. I would interpret the government's move to be: bring the talent as needed . . . I wouldn't say it's easy to attract people to move. But Singapore is an easy place to get acclimated to. The commute is short; the lifestyle here is pretty good. I personally like the climate. People find it easy to raise families here. In relative terms, Singapore is a pretty easy sale. Q: How difficult was it for the exchange to transition from a government-run organization to a commercial one? A: I think it's still evolving. That's not a cultural change the CEO dictates. It's a cultural change the institution moves toward. I think we're moving as fast as we could. Certainly, members and participants are important to listen to. We want to make sure our team doesn't lose the focus to listen . . . The change to a commercial entity requires one to consider the (profit-and-loss) ramifications of the services you provide. We also provide a regulatory function. I think we've found the balancing act. Doing it is not as easy. Q: How has the exchange benefited from going public? A: First off, it gives the institution a certain freedom to act as a commercial entity . . . Also, it puts a financial discipline on the organization that a member organization generically might not have. Like any new public company, we make sure we're as transparent as we can be. We gave third quarter results (three weeks ago). We think it's the right thing to do. We want to make sure the exchange is setting a standard for global best practices. We are making an effort to be as transparent and still be effective in the marketplace. We're learning. Q: Being transparent goes hand in hand with good corporate governance, a topic frequently discussed here. How do Singapore companies measure up to that? A: Over the last three years, I think Singapore has made terrific strides to improving the corporate governance. . . . We announced we would adopt the corporate governance code and require our listed companies to disclose non-compliance to that code. . . . Rather than prescribing a set of corporate governance requirements that says here's what the standards should be, we think we should tell shareholders when something's wrong. That's the best for the market at this time. I admire Singapore, as somebody who's come on scene late, for - not withstanding the improvement that have been made - to yet take the next step. They are not sitting and resting on the laurels but taking the next step. Q: How have you applied your experiences serving as a board member of the Chicago Mercantile Exchange to your management of the exchange here? A: It's the ability to think outside the box a bit. Our whole management team is learning to do it here. You have to make sure your people know that it's not bad to be wrong. . . . One can't be afraid to be wrong, but don't be wrong because you haven't done the research. An idea should be able to come up from anywhere in the organization. . . . There should also be a trust level between colleagues. . . . As the CEO, I try to encourage having an institution where anybody in the institution can e-mail me. I tell everyone to call me Tom. I would say that's quite unusual in the Singapore context. ISDA Opposes the FASB's Proposed Changes on Hybrid Instruments HedgeWorld - May 29, 2001 By Christopher Faille NEW YORK (HedgeWorld.com)-The International Swap Dealers Association wishes the Financial Accounting and Standards Board would adhere to the old adage, "if it ain't broke, don't fix it." That is the gist of the ISDA comment, filed on April 30, in response to an FASB exposure draft on accounting for compound financial instruments that have characteristics of both liabilities and equity, such as convertible bonds. "The amount of change to the accounting model that has taken place in the last four years has been enormous. Such change has put a strain on the resources of both the financial statement preparer community as well as those of the financial statement users who are still tying to digest the significance of the new guidance so far and adjust their analytics accordingly," their comment argued. The ISDA is particularly unhappy about what it calls "bifurcation,"-that is, the idea implicit in the exposure draft that an instrument should be broken down unto liability and equity components, which can then be assigned to their place on the balance sheet and accounted for separately. The ISDA acknowledges one important point in favor of the proposed change - it would bring American standards in line with the approach employed by the International Accounting Standards Commission, and thus contribute to convergence. But the ISDA adds that it does not "consider their acceptance of bifurcation to be an obligation for adoption by U.S. standard setters." One industry authority consulted by HedgeWorld suggested that the volume and sophistication of the market for convertibles in the United States makes this country a special case, and justifies non-convergence. The source also indicated that bifurcation is not a simple matter, because it may create the misleading appearance that the liability and equity components of an instrument are entirely unrelated, whereas in economic fact (and as marketed) they are intertwined. Some industry skepticism notwithstanding, this exposure draft seems not to have stirred up the same sort of hornets' nest as have other recent FASB initiatives, such as the recent elimination of asset pooling for mergers. All mergers initiated after June 30, 2001 must use the purchase method. In a closely related move, the FASB has also lately determined that effective next year, pure goodwill recorded on corporate balance sheets will no longer be amortized, but will be subjected to an "impairment" approach. In a 14-page report, issued in mid May, a financial services firm, Friedman, Billings, Ramsey & Co. concluded that the net effects of these changes will be bullish for stocks. "We anticipate the psychological perception of applying current P/E ratios to higher future GAAP earnings will result in higher stock prices," wrote the FBR's senior analyst, Laurie Hunsicker. Ms. Hunsicker acknowledges that the new accounting methods do not change the underlying economic realities, but expects that psychology will trump such matters. Banks account Financial Times - May 28, 2001 Who could argue against the disclosure of fair values in company accounts? Bankers, who are seething over plans to change the way they account for financial instruments such as derivatives and loans to customers. The plans have been drawn up by the Joint Working Group, a body made up mainly of accounting standard-setters from the world's biggest economies. Bankers say the results would lead to dramatic swings in the value of balance sheet assets that would often be meaningless and potentially damaging. It is certainly the case that the existing accounting rules often fail to reflect the impact of changes in interest rates or credit risks on bank earnings. Fair value accounting would force banks to adjust their accounts in the light of rises and falls in the values of all financial instruments. The result would be greater volatility in profits but proponents of the change say it would give investors a truer picture of corporate health. Not so, say the banks. While fair value accounting is appropriate for trading activities, it would not reflect the real business of making long-term loans to customers, which are largely held to maturity and therefore rarely traded. Banks manage loan portfolios to make a stable interest margin over the terms of the loans - not on the profits determined each year in relation to the interest rate at the time. This is more than an academic argument. Supporters of fair value accounting say the existing state of affairs masks the real financial position of banks - one reason why banks are often given lower stock market ratings than securities houses which mark their loans to market. Opponents say the volatility of fair value accounting would not only confuse consumers and investors, it could lead banks to withdraw from lending that caused volatility even though it was safe. At worst, the result would be to amplify the economic cycle, with sudden withdrawals of credit accentuating the downturn when markets slow. The issue is further complicated by the continuing international negotiations over the amount of capital banks have to hold. The new Basle accord would base capital requirements on risk assessments rather than market pricing, leading some bankers to fear a divergence between the Basle formula and accounting standards. It is impossible to argue against greater transparency in bank accounting but it should be recognised that there is more than one way to capture financial reality. Much more work is needed before fair value accounting can be proclaimed as the right answer for banks. IASB Taking Tentative Steps on Agenda With Help From National Rulemaking Groups BNA - May 29, 2001 By Steve Burkholder LONDON--The International Accounting Standards Board took more steps May 25 to set its rulemaking agenda, placing fast-track efforts to improve existing standards and to ease companies' switching to international rules at the front of a long docket. The steps are tentative, however. Under its constitution, IASB must consult with its advisory council--which is yet to be named--before it can formally fix an agenda. A meeting with the advisory panel is expected to take place in July. The improvements project is an omnibus effort intended to mend a variety of rules IASB inherited from its predecessor board, the International Accounting Standards Committee, and to rid those standards of inconsistencies and inappropriate choices in accounting methods. The transition, or first-time application, project is being watched closely by the Big 5 accounting firms and their European client-companies. That audience is mindful of the planned European Union directive that would require some 7,000 companies in the region to carry out their financial reporting using international standards by 2005. New Rules by End of 2003 For that to occur, and to remedy the concerns of securities regulators, IASB effectively has to significantly improve a variety of accounting rules and issue new ones by the end of 2003. In addition, IASB expects to tackle a project on business combinations quickly and hopes to have it done in comparatively short order. The focus of the planned work on merger and acquisition accounting would be to consider barring the pooling-of-interests method of accounting and adopt the purchase method instead. IASB also plans to target the treatment of goodwill, a key element in purchase accounting, and weigh a possible adoption of impairment against the survival of the writedown of goodwill acquired in a combination. As with all standard-setting projects and less substantial efforts, the board has its eye on convergence. It is working toward issuing a single set of high quality accounting rules that could be used by companies around the world in raising capital. Heavy Involvement of National Boards The path to that goal will include heavy involvement of major national standard-setting bodies in the rulemaking of IASB. The mechanisms for that work--which are to include joint projects and other "partnership working arrangements"--were detailed in a meeting May 24 with the heads of standard-setting panels from Australia, Canada, France, Germany, Japan, New Zealand, the United Kingdom, and the United States. IASB has formal "liaison" relationships with those boards. A sharing of human resources by the sparely staffed IASB and groups such as the U.S. Financial Accounting Standards Board would be complemented by a trading of knowledge, the rulemakers suggested. "I expect that the FASB will gain as much as it gets out of the work of IASB," FASB Chairman Edmund Jenkins told the international board and his counterparts from around the world. IASB 'Not a Dictator' At the May 24 meeting, IASB Chairman David Tweedie and his colleagues sought to provide assurances that the newly restructured international panel will not usurp the authority of the national standard-setters. In forging shared-work arrangements on topics such as stock-based compensation, or share-based payments, revenue recognition, and consolidations policy, there will be no directives to national boards to arrive a particular conclusion, Tweedie suggested. "IASB is not a dictator. It's simply a facilitator," he said. Earlier in the meeting, Hans Havermann, chairman of the German accounting standards board, discussed the IASB-national boards model for working toward converging rules and stated that "the autonomy and independence of the local standard-setters" must remain intact. In response, James Leisenring, a former long-time FASB member now serving on IASB, suggested the model of joint projects and shared labor and research is not intended to be a threat to the autonomy of any national board. The notion behind convergence, he added, is to "put some pressure on all of us to get to the same answer" and work "with a spirit of cooperation." That does not mean, however, that IASB and a national board with which it works on a particular project will be assured of arriving at the same answer, Leisenring said. "They always have the right to reach different conclusions," he said of the national boards. In summarizing the May 24 discussion on rulemaking-by-partnership, Tweedie said that there would be a method of resolving conflicts, which he called "an important issue." The IASB chairman noted that rulemaking agendas of the international board and the major national standard-setters will have to be aligned. Such an alignment means also that due process schedules--for example, comment periods on draft rules--will have to be coordinated, as at least one participant in the meeting suggested. Tentative Listing of High-Priority Projects Besides the improvements, transition, and combinations project, IASB's list of high-priority technical efforts includes: * share-based payments, or stock-based compensation, a controversial project that would have an expected goal of expensing stock options (101 DTR G-7, 5/25/01); * reporting financial performance, which IASB and FASB members have suggested could hold the key to acceptability of controversial moves toward fair value in accounting, especially for financial instruments; * financial instruments, which possibly could mean a near-term repair of the flawed International Accounting Standard 39, while moving more deliberately toward full fair value-based measurement and recognition of financial assets and financial liabilities; * distinguishing between liabilities and equity, a project similar to the pending FASB project focusing on classifying such items as mandatorily redeemable preferred securities; * consolidations policy, or determining on what basis a company should consolidate subsidiaries it effectively controls despite lack of equity ownership, a project that has bedeviled FASB for some 18 years; * measurement objectives, which would focus on such questions as fair value versus "deprival value"--the latter an accounting concept in Great Britain--as an avenue to better use of present-value-based methods of measurement and associated notions of discounting and estimating future cash flows (100 DTR G-7, 5/23/01); * revenue recognition, with the related tasks of devising rules on liability recognition and possibly having to revise or devise bedrock definitions, a likely prospect in the liabilities-equity effort, also; * insurance contracts; * impairment; and * derecognition. Parts of that full plate of high priority items are expected to be taken up at IASB's next meeting in late June. As described by Tweedie May 25, the last day of the board's four-day meeting, the tentative agenda for that meeting includes transition issues, "obviously a big issue"; business combinations; performance reporting; more agenda-setting, with a refining of assignment of priorities; and the measurement objectives topic. Asian Airlines Tender For Jet Fuel Through Jet-A.com Dow Jones - May 29, 2001 By Jeremy Bowden SINGAPORE -- All Nippon Airways Co. Ltd. (J.ANA) and Japan Airlines Co. Ltd. (JAPNY) are among several major airlines to have tendered for part of their jet fuel needs through a new Internet platform, Jet-A.com, according to oil traders. The Internet site is backed by 24 major airlines, including the two Japanese carriers and other Asian-based airlines including Singapore Airlines Ltd. (P.SAL), Cathay Pacific Airways Ltd. (H.CPA) and Air New Zealand Ltd. (A.AIZ). The site is also backed by six major oil companies, including BP PLC (BP), Exxon Mobil Corp. (XOM), Chevron Corp. (CHV) and the Royal Dutch/Shell Group (RD). In total, Jet-A estimates its backers represent 60% of the global jet fuel market. According to oil traders, jet fuel is one of the most generic of oil products and as such is easier to trade through an electronic system than oil products with a greater variety of specifications, such as gasoline or fuel oil. Unlike most other online oil trading systems, Jet-A.com is designed for physical trade, in the form of buy and sell tenders - with a facility for direct one-to-one negotiation - rather than derivative trade. The web site, however, provides links to derivative trading sites, as well as other physical trading sites. As well as tenders, airlines will also be able to make spot purchases from a variety of suppliers around the clock. Jet-A has agreed to team up with Platts' PlattsDirect system, along with business-to-business management software company TradeCapture.com, to provide its online electronic cash exchange. Platts is a division of McGraw-Hill Cos. (MHP). Jet-A estimates that 95% of worldwide jet fuel transactions are already based on Platts' price assessments, and "qualified trades" from the Jet-A.com PlattsDirect system will be used in Platts' own market assessments, according to a Jet-A press release. The Chicago-based site was formed Jan. 24. It also provides a data collection point for ticketing information, and will maintain fuel contract and price databases. Further services are expected to be launched in 2002. Jet-A says its site should save the airline industry up to $100 million annually in fuel procurement costs. Weak euro 'may be what the doctor ordered' ECB WATCH: Financial Times; May 29, 2001 By TONY BARBER Slower economic growth, rising inflation and a tumbling euro make an unpleasant combination for the European Central Bank. Each factor seems to reinforce the others. As Ernst Welteke, Bundesbank president, observed last Friday, the euro's weakness has contributed to the euro-zone's problem with inflation over the past year. Higher than acceptable inflation reduces the ECB's scope for cutting interest rates. This in turn restricts economic growth, especially in Germany. Pessimism about the growth outlook then causes currency markets to sell the euro, and the vicious circle is complete. Is there any way out? In the short term, probably not. One nasty blow for the euro was the revision this month of the widely followed Morgan Stanley Capital International equity market indices. The resulting adjustments by portfolio managers could cause even more money to flow out of the euro and into other currencies than was first thought. Paul Meggyesi of Deutsche Bank estimates the net outflow will be about Dollars 43bn, higher than his initial calculation of Dollars 26bn-Dollars 30bn. However, the main beneficiary is likely to be not the dollar but sterling, which Mr. Meggyesi thinks will receive an inflow of Dollars 44bn. Any further strengthening of the pound against the euro will provide food for thought for those, in the euro-zone as much as in the UK, who are contemplating British adoption of the single currency. Be that as it may, it is uncertain that the ECB would accept the "vicious circle" diagnosis set out above. "The ECB is only in a bind if its objective is to cut interest rates, rather than to do what it can for the economy without prejudicing its inflation objective," says Nigel Anderson, of the Royal Bank of Scotland. This point becomes clear when one recalls that, since the euro's birth, the ECB has always argued that real interest rates in the euro-zone have been low by historical standards. The ECB's main interest rate stood at 2.5 per cent between April and November 1999. Coupled with oil price-induced inflation and the falling euro, the overall effect was to create a monetary policy setting that was very lax for many euro-zone member states. This explains the seven rate increases between November 1999 and October 2000 that took the ECB's main rate up to 4.75 per cent. The mild cut that the ECB finally delivered on May 10, bringing the main rate to 4.5 per cent, ended up being less mild than the ECB intended. Because financial markets did not like the ECB's reasoning behind the cut, it triggered a fall in the euro that may ease overall monetary conditions by more than the cut itself. The euro's weakness does make it harder for the ECB to bring down inflation below its target ceiling of 2 per cent a year. But it also represents a monetary easing that, as Mr. Anderson suggests, "might be just what the doctor ordered for the euro-zone". Market suspicions that the ECB may be thinking of intervention in support of the euro may therefore be overdone. For sure, disorderly market conditions sometimes prompt central bank intervention. But the euro's latest decline has taken place in an orderly fashion. It is a better tonic for the euro-zone economy than a sharp rise in the currency. If the ECB thinks otherwise, it is up to the bank's senior members to say so. Central bank chief resists calls for advance distribution of euro notes Financial Times - May 29, 2001 By Peter Norman Wim Duisenberg, president of the European Central Bank, yesterday insisted that the changeover to euro notes and coins on January 1 next year would be a success, rejecting pleas for small denomination euro notes to be distributed to the public in advance. He told the European Parliament's Committee on Economic and Monetary Affairs that the bank's general council "does not intend to change its decisions" on so-called front-loading to the public at this late stage in the changeover timetable. Disputing claims that all retailers wanted such a measure, he pointed out that the advance distribution of euro notes to the public would upset the existing logistical plans for the changeover. It would also be expensive for individuals because they would have to pay for the euro notes in national currencies yet not be able to use them before January 1. Some retail groups, especially in the Netherlands, have warned of chaos on "Euros -day" as consumers struggle to get used to the new currency and have insufficient paper money. But Mr. Duisenberg said the difficulties would be eased by the planned conversion of automatic teller machines to euros in the early hours of January 1 and their loading with Euros 5 and Euros 10 notes. He also said banks planned to open on that day in some euro-zone countries, while consumers should also have benefited from information campaigns that would provide details of the new notes to every household in advance. "The challenges with regard to the cash changeover should not be underestimated," the ECB president said. "At the same time, I am not aware of any indications that could place the effectiveness of the careful and comprehensive preparations for a smooth and successful cash changeover in doubt." In a wide ranging question and answer session, Mr. Duisenberg also: * defended the ECB's recent rate reduction of 0.25 per cent as consistent with the euro-zone's harmonised inflation rate falling below 2 per cent next year from a rate of 2.9 per cent in April. * declared it was not the bank's policy to surprise financial markets (as the last rate cut did). But if the choice was between surprise or delay of a monetary policy decision, he would accept surprise. * reaffirmed that intervention was a weapon available for use on foreign exchange markets. However, Mr. Duisenberg stressed that the ECB would worry about the euro exchange rate only if it were to have "a sizeable impact on inflationary expectations". * urged governments not to delay fiscal consolidation and to bring their budgets in line with the medium term goal of the EU's stability and growth pact of being "close to balance or surplus". Fed Chairman Warns Economic Slowdown Is Not Yet Over, Further Cuts May Be Needed BNA - May 29, 2001 Further interest rate cuts may be needed in order to spur adequate economic growth, but the underlying potential for the economy remains strong, Federal Reserve Chairman Alan Greenspan said in a May 24 speech to the Economic Club of New York. "The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated, requiring further policy response," Greenspan said. Greenspan added, however, that the Federal Open Market Committee's decision to cut the Federal funds rate by 2.5 percentage points over the last five months are "front-loaded policy actions that should be providing substantial support for a strengthening of economic activity later this year." The Fed chairman warned that new investment in capital equipment is continuing to slow despite evidence that the expected rates of return on such equipment remain high. Greenspan said, however, that he still believes "we are experiencing only a pause in investment" for innovations that have spurred the strongest productivity growth in more than 20 years. Greenspan also dismissed concerns that the risks of rising inflation were beginning to overshadow the slowing economy. "The lack of pricing power reported overwhelmingly by business people underscores an absence of inflationary zest. Undoubtedly businesses are felling the effects of diminished pressures in product markets. With energy inflation probably peaking and the easing of tightness in labor markets expected to damp wage increases, prices seem likely to be contained," Greenspan said. He added that although some private sector economists have noted concerns that the rising yields for long-term Treasury notes may be signaling that the markets are worried about inflation, the increase "probably reflects some expectation that the decline in the supplies of outstanding marketable Treasury debt may not be as dramatic as earlier thought." Responding to a question following his speech, Greenspan said the Fed is not in a position to assess the likely impact of the $1.35 trillion tax cut bill on FOMC policy. "We would observe how it affects the economy and then respond to the economy," Greenspan said. The tax cut bill that passed the Senate on May 23 would provide for $100 billion in immediate tax relief over the next two years, but discussions are continuing in a House-Senate conference committee to decide whether the money should be distributed through rebate checks, changes in employer withholding, or not at all. Three Areas of Contention Threaten To Derail EU Effort at Economic Reform BNA - May 29, 2001 By Joe Kirwin BRUSSELS--Despite several summits and numerous declarations dedicated to European Union economic reform, the process launched more than a year ago in Lisbon by EU leaders to make the 15 member states more competitive vis-a-vis the United States has hit a rocky patch in the month of May that threatens to derail a number of key initiatives. Foremost among the Lisbon reform initiatives experiencing trouble is an electricity liberalization initiative. Confounding that effort is a major feud between the French and Italian governments which developed because France's state-owned national utility EdF bought a controlling stake in Italian state-owned utility Montedison. Not only has the issue threatened new economic reform plans such as electricity market deregulation, but it has even imperiled a fundamental EU single market tenet concerning the free movement of capital. The latter is threatened due to emergency legislation passed May 24 by Italy blocking foreign companies from purchasing Italian state-owned companies. Another initiative pinpointed in Lisbon as well as in Stockholm in March at a follow-up economic reform summit but now facing gridlock and possible defeat is a new fast-track approach to pass financial service legislation. The other legislative initiative in trouble is a corporate takeover directive that collapsed because of disputes between the Council of Ministers and the European Parliament. Electricity Deregulation Issue The source of the conflict in the EU electricity deregulation issue revolves around the French government's refusal to deregulate its own electricity market while EdF is out buying up utility companies in other member states that have deregulated. Even though EU leaders focused on this problem in Stockholm and called on the Commission to address the unfair situation, EdF has continued on a buying spree. Montedison was its most recent purchase. Initially the French utility announced May 17 its purchase of Montedison was only as a minority shareholder. The Commission subsequently announced that the matter was therefore not of its concern. However, EdF was forced to announce May 21 that it had, in fact, upped its stake and bought a controlling share in Montedison. The Italian government, outraged by the blatant double standard pursued by the French government and state-owned utility, passed a law blocking the purchase by a foreign company of an Italian state-owned firm. Commission Spokesman Andrea Dahmen stated May 25 that the EU executive body would scrutinize the Italian legislation. "We will go through it carefully and see if it is in contradiction or not with existing EU law," Dahmen said. "Existing EU law in this case is the free movement of capital." Power Struggle Over Financial Services In the case of proposals for fast-track financial service legislation based on a plan known as the Lamfalussy process, the Commission and the European Parliament are in the throes of a power struggle. The thrust of the Lamfulussy process is a plan that would by pass the normal EU legislative process that includes passage of legislation through the Council of Ministers and the European Parliament, which usually takes at least two years. That time span is considered much too long to keep up with fast-moving financial markets. Instead, the Lamfulussy process calls for a framework law to be passed through the normal legislative procedure but would also allow for regulations to be passed in a short period of time by two special committees. However, the European Parliament wants to have a recall or veto on the regulations approved by the special committees. The Commission and Council of Ministers, concerned that this would set a precedent for the future, have rejected the EP's demand. As a result, the EP's Economic and Monetary Affairs Committee Chairwoman Christa Randzio-Plath said May 24 the framework law that would put the Lamfulussy process in place will be blocked. "If there is no agreement between the European Parliament and the Commission, the Lamfalussy approach will not work," said Randzio-Plath. "There will be just the Parliament and the co-decision procedure. We support the goal of speeding up securities market regulation and will continue to work for a deal fully safeguarding the Parliament's rights under the co-decision procedure." Despite Randzio-Plath's threats, Internal Market Commission Frits Bolkestein said the EU executive body would move ahead and propose the framework legislation and supporting directives in June. "I am confident that a solution can be found," Bolkestein said May 24. "But it will be impossible to give the Parliament the callback right it is seeking." Corporate Takeover Directive The dispute over the corporate takeover directive is just as difficult. At stake is a directive that has been in negotiation for more than 10 years. The central point of dispute concerns conditions that would allow for a hostile takeover of a company to proceed if shareholders give the go-ahead. The 15 EU member states finally approved the directive earlier this year that would allow for a hostile takeover. But the EP is insisting that a company's board of directors be allowed a so-called poison pill that would allow them to defy shareholders and ward off a hostile takeover. Led by German MEP Klaus Heiner-Lehne, the EP is concerned that without the poison pill European companies will be easy prey for U.S. corporate raiders. The EP's cause received a major boost in the past month when German Chancellor Gerhard Schroeder announced his government was backing away from its support for the Council of Minister-approved bill. Sweden, which holds the EU rotating presidency, rejected Germany's attempt to reopen the Council of Minister version of the corporate takeover directive. However, the German announcement has strengthened the EP's hand in Conciliation Committee negotiations, which have been underway for more than two months. If there is no agreement by June 5, the Conciliation Committee process expires and so does the directive. Therefore, the Commission would have to start from scratch with a new proposal. "I think the chances of failure are now 70 or 80 percent," said Lehne. "I have heard the Council of Minister decision. They do not want to discuss defensive measures. This is dictatorship of the Council. Nothing more, nothing less." Commission Spokesman Jonathan Todd said if no agreement were reached on the corporate takeover directive, it would be the EP's fault. "If they don't agree to the compromises the proposal will go in the bin," said Todd. "We will have to reflect on whether to start over again. In the meantime EU industry will pay the price with the harm done to the Lisbon process of restructuring and competitiveness." **End of ISDA Press Report for May 29, 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