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SURVEY - DERIVATIVES - All bets on hold as market waits out crisis.
Financial Times, 09/25/01 SURVEY - DERIVATIVES - Exchanges trading on an uncertain future - COMMODITY DERIVATIVES by Adrienne ... Financial Times, 09/25/01 Groups ask state to reconsider PGE rate hike Associated Press Newswires, 09/24/01 SURVEY - DERIVATIVES - All bets on hold as market waits out crisis. 09/25/2001 Financial Times © 2001 Financial Times Limited . All Rights Reserved The US crisis has created turmoil for the equity and bond markets but that is what derivatives thrive on. The financial markets have suffered a severe shock from the terrorist attacks on New York and Washington on September 11. Everything that was being planned - from mergers and acquisitions to the launch of cutting-edge derivatives instruments - is now under review, cancelled or postponed. The watchword now is risk. Already we have witnessed a big switch into the least risk-averse instruments - short-dated government bonds, for the most part. Yet derivatives markets should be beneficiaries of investor behaviour. By their nature they are creatures of risk, volatility and uncertainty. This year had been shaping up as a landmark year in the derivatives industry. The credit derivatives sector has seen the most spectacular growth, since credit risk has been rising in a weakening economic environment and protection against it was becoming a leading concern for investors and companies. The growth of the credit derivatives business has also proved a lure for insurance companies, looking to diversify their own risk portfolios outside their traditional business areas. One result of this, bankers say, was the prevalence of regulatory capital arbitrage deals, with banks, which are looking to utilise their own capital, happy to pass on chunks of their risk exposure to those such as insurance companies, seeking diversification. "The awareness of credit risk is very high in the corporate market," says a senior investment banker. "That creates opportunities for insurance companies to come in and take on that risk. They are looking for a diversified portfolio of risk - property, casualty, credit, etc. They are pretty active, especially at the low-value, plain-vanilla end of the market." Other investors are more interested in getting more yield on their portfolios. Given that before the terrorist attacks the outlook for interest rates was relatively favourable - that is to say that they were seen to be falling in both Europe and the US - yield investors were going outside their traditional areas of investment, in long-dated government bonds, in search of higher returns. The credit derivatives market is able to provide that. A bond issued by even a top-notch company is almost always going to yield less than a credit derivatives market product, according to fund managers. "There are huge capital markets volumes in the credit derivatives area," another banker says. "We've seen an increase this year in over-the-counter market activity, and there has been a lot more issuance, since liquidity is a key factor in building the market." There are three key factors to derivatives products - structuring and pricing, valuation, and risk management, including market risk, credit risk, liquidity risk, and settlement risk. As derivatives products became much more widely available, not just to sophisticated investors but to chief financial officers at companies, the industry has also been attracting the close attention of regulators. This is hardly surprising - the debate continues, for example, as to whether the use of credit derivatives by banks concentrates risk rather than dispersing it, which is what these instruments are supposed to do. Other developments this year have included the record growth in turnover in exchange-traded derivative products. Europe's two big exchanges, in Frankfurt and London, continued to slug it out for supremacy and have unveiled a wide range of new products to attract more volume and investors. The trading pits at the Chicago derivatives exchanges, meanwhile, have carried on echoing to the sound of thousands of traders, even though most of the rest of the world has moved completely into electronic trading. So, where are the markets heading? Some observers argue that the industry in Europe is in general more sophisticated and less commoditised than its US counterpart. This may be because it is of more recent development and banks have tended to specialise in over-the-counter solutions for clients rather than developing products that can be traded on an exchange. It has also been encouraged to spread by the advent of the euro, which has created a thriving cross-border business. Christophe Reech, chairman and chief executive of Reech Capital, a derivatives industry specialist, says the growth of the industry and its increased sophistication have a solid foundation. "Traditional solutions (to risk managment) are not good enough any more," he says. "You need to be a little bit creative. If you provide traditional solutions you solve the immediate problem but not the evolutionary one." One of the fastest-growing niche areas is the provision of weather derivatives. Demand began among natural gas companies in the US looking to hedge their exposure to extreme weather. Now many companies are in the market, with the most basic products designed to hedge against unusual temperature movements. Much of this business is also tailor-made for clients, with risks managed through secondary market trading. According to Paul Murray, director of weather risk management at Enron, possibly the largest trader of weather derivatives contracts, the market is growing at 40 to 50 per cent by number of transactions. "I'm pretty optimistic about the market - the weather isn't going to go away," he says. Whether the optimism that characterised much of this year will now evaporate in the wake of the terrorist attacks remains to be seen. With a new air of uncertainty gripping investors, and a sudden bout of risk aversion witnessed in the equity and bond markets in the aftermath of September 11, all bets are off. However, given that interest rates are certain to fall further - many analysts predict that the Federal Reserve will steadily lower US interest rates by at least another 50 basis points - yield enhancement and risk management are expected to continue to stay at the forefront of investor concerns. That could create the conditions for much more activity in both credit and equity derivatives. "It's far too early to predict anything, but derivatives are designed to minimise and control risk," says a leading derivatives industry banker. "I am pretty confident that there is a lot more growth to come in this industry." © Copyright Financial Times Ltd. All rights reserved. http://www.ft.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. SURVEY - DERIVATIVES - Exchanges trading on an uncertain future - COMMODITY DERIVATIVES by Adrienne ... By ADRIENNE ROBERTS. 09/25/2001 Financial Times © 2001 Financial Times Limited . All Rights Reserved SURVEY - DERIVATIVES - Exchanges trading on an uncertain future - COMMODITY DERIVATIVES by Adrienne Roberts - What will be the outcome of the rivalry between Nymex and London's IPE? The September 11 attack has added a brutal new twist to the ongoing contest. After the devastation of New York's central business district, local commodity exchanges are still struggling to recover. The US trading floor for coffee, cocoa, sugar and orange juice was destroyed when the south tower of the World Trade Center collapsed, damaging the adjacent New York Board of Trade. The show goes on, however, this time relocated to cramped premises in a backup site in Queens. The world's largest energy exchange, the New York Mercantile Exchange (Nymex), based in the World Financial Center, was undamaged. But access to the building was made difficult by the surrounding carnage. It was almost a week before Nymex traders were able to return to the floor for abbreviated trading sessions. The attack completely eclipsed the recent rivalry between Nymex and its largest competitor, the International Petroleum Exchange. Some traders used to say that Nymex and the IPE each had one big worry. Nymex feared the IPE would develop serious electronic trading capacity and the IPE worried that Nymex would create a rival Brent oil contract. Both fears came true this year. First the IPE agreed to a takeover by the InterContinentalExchange (ICE), an internet market for over-the-counter energy and metal derivatives. For the IPE, this means ICE will develop the systems to take it fully electronic in 12-18 months. For ICE, it means access to clearing facilities. It recently announced that users would be able to clear ICE's West Texas Intermediate and Henry Hub natural gas swaps through the London Clearing House, alongside their IPE futures business. Then, in retaliation, Nymex launched a Brent contract this month and made it clear that, in New York at least, the future of open outcry trading would be preserved. Major incentives to trade the new Brent contract led several IPE floor traders to say they planned to relocate to New York. The terrorist attack abruptly interrupted the contest, at a time when it was important for Nymex to gather momentum. The US exchange has a limited window of opportunity to build up liquidity in its own Brent contract before the IPE's electronic platform is fully established. Some analysts think the contest will be won or lost even earlier, arguing that Brent must take off in the first few weeks of trade if it is to succeed at all. In the meantime, digital trading is still a contentious issue among IPE users. Some - not least the independent local traders - prefer open outcry. Others like the idea of a system where new products can be more cheaply and easily introduced. Where most of them do agree, however, is the advantages of real time risk management, and straight-through-processing which automates paperwork and reduces the risk of costly back-office errors. Other exchanges, too, are divided on the advantages of electronic trade. London International Financial Futures and Options Exchange (Liffe) commodity contracts went electronic late last year, but the London Metal Exchange is keeping open outcry. The LME launched a more sophisticated version of its electronic platform this month but Simon Heale, chief executive, has made it clear that open outcry will continue until LME members say otherwise. As competition between exchanges intensifies, there is pressure on managers to ensure that their market remains the market of choice. "You have to consistently review your contracts to ensure that they continue to be successful. You have to ask yourself: 'is this still what the market wants?'" said an IPE director. Liffe, for example, is planning on expanding its product range into weather derivatives, and has already started publishing three European weather indices. The exchange is also looking at expanding its portfolio of wheat products and is considering introducing an arabica coffee product to add to its existing robusta futures. Recent experience shows that some new products can take time to bed down, however. Weather derivatives - strictly speaking closer to an insurance contract than a typical commodity derivative - have a good following in the over-the-counter market, but the Chicago Mercantile Exchange is not yet seeing much call for its standardised weather derivatives, launched in 1999. Bandwidth futures, offered by anumber of online exchanges, also have yet to reach their full potential. Set up on the assumption that surplus network capacity would become a tradeable commodity, bandwidth exchanges have been hit hard by the decline in telecoms business. One of this year's latest products, Euronext's Bordeaux wine future, has yet to prove itself. Even computer memory is becoming commoditised. Enron has plans afoot for an over-the-counter DRAM market. Commodity exchange executives are not quite ready for DRAM futures. For the time being, they say, rapid technological change makes microchips too much of a moving target to form a standardised contract. © Copyright Financial Times Ltd. All rights reserved. http://www.ft.com. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved. Groups ask state to reconsider PGE rate hike 09/24/2001 Associated Press Newswires Copyright 2001. The Associated Press. All Rights Reserved. SALEM, Ore. (AP) - Three business and consumer groups asked state regulators Monday to reconsider their approval of impending rate increases of 30 percent and more for Portland General Electric customers. Motions filed with the state Public Utility Commission also said the increases, due to take effect Oct. 1, should be suspended until the PUC decides whether to take another look at the issue. The requests were filed by Associated Oregon Industries, Industrial Customers of Northwest Utilities and the Citizens' Utility Board, claiming the PUC didn't consider the economic impact of such large and sudden increases. The increases announced by the commission on Aug. 31 will raise rates by about 32 percent for residential customers, 37 percent for small business and as much as 53 percent for industrial consumers, depending on consumption. PGE is the state's biggest electric utility, serving about 730,000 customers. PUC spokesman Bob Valdez said commissioners would try to give an answer soon. "The commissioners are aware of the timing issue and are trying to expedite this," he said. While large, he said, the rate increases weren't unexpected. "The commissioners were aware the increases were significant and looked at the case for 11 months," he said. "The lion's share, 80 percent to 90 percent, was due to rising wholesale power costs." Bob Jenks, executive director of the Citizens' Utility Board, a consumer advocacy group, said current economic conditions make a rate review necessary. Copyright ? 2000 Dow Jones & Company, Inc. All Rights Reserved.
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