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Enron Mail |
ISDA PRESS REPORT - November 29, 2000
* Exchange Mergers To Encourage Derivatives Markets * Equity Derivatives Growth Lures US Banks To Europe * German Electricity Market Set For Growth * Euro-MPs Seek Reform Delay Exchange Mergers To Encourage Derivatives Markets Asia Risk - November 2000 Malaysia's derivatives markets are set for big changes after December. This is now the mostly likely date for the merger between the Commodity and Monetary Exchange of Malaysia (Commex). The amalgamation will bring together all the country's exchange-listed futures and options trading. Completion of the merger also seems likely to lead to the launch of several new derivatives contracts, which had been put on hold pending the union. Kloffe, which is owned by the Kuala Lumpur Stock Exchange, currently lists just one contract - futures on the KLSE composite share index. Commex is itself the result of a merger in late 1998, between the 18 year old Commodity Exchange, offering palm oil contracts, and the Malaysian Monetary Exchange, which began operating in 1995 to provide three month klibor futures. The need to rationalise Malaysia's exchanges and cut costs are the main reasons for the merger, according to Allan Au Yond, head of business development at Commex. This rationalisation is being strongly pushed by the government as part of its broader plans for consolidation in the financial sector. Although volumes have fallen on both the Kloffe and Commex since controls were imposed in September 1998. Au Yond says this is not the key factor in amalgamation. In any case, activity on the Commex is rebounding, he says. A new name for the combined exchange has not been decided. After the proposed December merger, the trading of all futures and options will be located in the stock exchange building. All trading will also be electronic. At present, Kloffe trades on screen, but Commex still uses the open-outcry system. According to Commex officials, they will be seeking approval for a bond futures contract to compliment the short-term klibor one. Kolfe, meanwhile, is planning to launch options on the composite share index before the end of the year. Exchange officials would also like to launch options on individual shares. However, this will have to wait until the authorities lift the ban on "short" selling and the lending of shares. Such practices were banned in August 1997, during the Asian Crisis, although short positions on composite index futures are allowed. At that time, excessive short-selling was blamed for the sharp drop in share prices. While the ban exists, options on individual shares would be unlikely to find much investor interest. Another launch proposal under consideration is a futures contract on an Islamic index, covering shares acceptable under Shari law. Kloffe was hit quite badly by the imposition of foreign exchange controls in September 1998. Until, trading volumes had been rising. The early days of East Asia's crisis inevitably created heaving trading, with monthly contract volumes peaking at 94,850 in June 1998. The average monthly volume in the first half of this year has not been much more than a third of that level. This is hardly surprising. Foreigners accounted for about 50% of the Kloffe turnover in 1998. This year, the proportion is down to 20%, as foreign equity investors deserted the country once the repatriation controls were relaxed. New equity portfolio investment from overseas remains low. Along with other Asian markets, the Kuala Lumpur stock exchange has seen a sharp fall in share prices in 2000. In the year to early October, the Malaysia dollar returns index, compiled by Standard & Poor's IFC, was showing a fall of almost 16%. But this was only half the drop seen across much of the region, which posted an average slide of 30%. Share price performances this year partially reverse the strong advances made in 1999, when the Malaysian market climbed 47% and gains in Asia averaged 73%. Equity Derivatives Growth Lures US Banks To Europe IFR - November 25, 2000 By Elisabeth Bertalanffy US investment banks including Morgan Stanley Dean Witter and Merrill Lynch are stepping up their bid to win equity derivatives business in Continental Europe after a boom year. One area in which they are aiming to win market share from European banks is the sale of derivatives Alastair Cooper, managing director in the equity group at MSDW in London, said that the bank has increased the headcount in its European equity derivatives operations by 45% this year, and is planning to add roughly the same number next year. The vast majority of these hires have been, and will be, on the marketing side. The client functionality side, such as research, has also been boosted. The bank is also preparing to roll out an improved technology platform early next year, which will provide sophisticated online facilities for its clients. According to Cooper, the bank has invested a lot in the platform - which offers, for example, state-of-the-art risk management and execution management systems - and also in improving its infrastructure. Over the last few years, MSDW has been rapidly building up headcount and resources across virtually all product lines in Europe. Equity derivatives, however, had been lagging behind in this expansion drive, Cooper explained, owing in part to prioritization and risk appetite considerations. Last year, the bank's management made the decision significantly to expand MSDW's European equity derivatives business, with a special commitment to carving out a market position in the mushrooming local retail markets. The decision was driven by several factors, according to Cooper. First, MSDW wanted to leverage its strength in related areas, such as its equity cash, high-net-worth individuals and mergers and acquisitions businesses, he said. Also, the bank is extremely optimistic on economic prospects in Europe, which it believes point to further growth in equity derivatives volumes in the near future. Additionally, Cooper noted that the range and sophistication of equity products has been steadily increasing - especially in the retail sector with strong growth in single-name and sectoral products. One of the most important elements in MSDW's foray into the European equity derivatives and retail arena - where so far the bank has not left much of a mark is its efforts on the technology side. This is especially important for retail clients, whom the bank can now reach directly. MSDW's interest in the retail market has been sparked by the considerable increase in the volume of equity and equity-linked products in this area. Cooper pointed to the advanced warrant and certificate markets across Europe, as well as to the breadth of alternative assets, like funds of hedge funds. "The retail market is becoming more and more sophisticated, and the product offering wider and more complex," he said. "Internet trading is furthering this trend, because it makes it so easy to deal." Merrill Lynch has been targeting the European retail market for some time now, and is one of the largest US players on the Continent. The bank is managing to leverage off its strong position in the US equity markets to compete with European banks, and has also been willing to commit large numbers of staff and significant investment in technology to make a name for itself. Merrill strongly emphasises the ecommerce side of the business, currently offering a dozen product sites in eight languages around the world - in Europe it provides sites for Italian, German and UK clients - and a fully integrated global product menu. From this month, its online site allows for the trading of warrants and certificates. On the retail side in Europe, the bank already offers a range of equity-linked products, including certificates and LDRs - tracker shares, jointly developed with European stock exchanges and STOXX. On its certificate platform, the bank more than doubled issuance in Europe this year. It has also rolled its successful US HOLDRS product out in Europe. It is among the market leaders in warrants and listed options. Aside from the well-developed Swiss and German markets, Spain and Italy are also promising retail arenas for the future: MSDW's acquisition of Spanish firm AB Asesores last year will provide a valuable launching pad for the bank's foray into this market, as it provides it with an extensive retail brokerage presence, Cooper said. At the same time, it is expanding its credit card business in Europe, and stepping up direct braking and marketing, he added. Cooper acknowledged that it would be difficult to compete against established retail market players like Deutsche Bank and UBS Warburg on their home turf. MSDW will thus focus on niche sectors, and will also take advantage of its strengths, like its leading role in the technology sector. The bank will also be able to add value in non-European indices and sectors. Banks that want to be successful in the European retail markets have to recognise that it is a staff-intensive, low margin, high-volume business. Merrill, for example, has 210 equity derivatives salespeople worldwide, and a staggering 18,000 retail financial consultants. Another crucial element is a strong technology platform, which is costly, and takes time to set up. It remains to be seen if other US houses which have traditionally been strong in equity derivatives are willing to take the plunge into the retail market. Goldman Sachs, for example, has so far focused primarily on the high-margin business of large institutional clients, using fewer staff to cover large areas of the market. However, the European equity derivatives retail market has been going strong for some time now, and shows no signs of slowing down. It would come as no surprise if more US players were to push into the sector soon. German Electricity Market Set For Growth IFR - November 25, 2000 The German electricity derivatives market is expected to grow tenfold over the next four years, a development that will be helped by the start-up of several electricity spot and futures exchanges. Last month, the European Energy Exchange (EEX) started simulating energy futures trades with 20 market participants, including banks and regional and international electricity providers, according to an EEX spokesman in Frankfurt. The Amsterdam Stock Exchange is also targeting the German, as well as the Dutch, electricity futures market, in cooperation with the Hanover commodity exchange. And the Leipzig Power Exchange (LPX) is planning to roll out futures trading in the first half of next year. An official at a leading German energy company said that volume in the electricity forwards market in Germany is currently only about E25m per year. By 2005, however, the company forecasts volumes of up to E250m - 10 times as much. The vast majority of these trades are done over-the-counter. His company currently trades forwards, futures, swaps and options, as well as hybrid products linked to the prices of commodities, whose production is very energy consuming, such as aluminum. Tenors are usually a year. Liquidity is still lagging behind, even in the spot markets. EEX, which launched electricity spot trading in August, has average weekly trading volumes of roughly 100,000 megawatt hours. Rival LPX trades roughly half that amount. In the derivatives arena, the major players are investment banks, like Morgan Stanley Dean Witter, and international power companies, like Enron or Hess, as well as local electricity company RWE. But all the signs are there that the electricity derivatives market is poised to take off. The official pointed to the fact that the market for qualified energy derivatives personnel, such as traders as well as legal and compliance experts, is completely exhausted. "It shows how everybody is looking to build up, or strengthen, their capabilities in this business," he said, adding that his company also is looking for International Swaps and Derivatives Association documentation experts. A two-pronged approach is necessary to foster the energy derivatives market, the official stressed. First, it is important to conduct education and information campaigns to draw smaller players into the market, and lobby for the standardisation of contracts to increase trading volumes and liquidity. Another important application for energy derivatives is as an access provider to lesser deregulated markets in Europe, according to the official. He explained that Germany and the UK are the most deregulated energy markets in Europe, while other markets, like the Benelux countries and Italy, still lag behind. The easiest way to enter and open up these countries is via derivatives, which are unregulated. Euro-MPs Seek Reform Delay Financial Times - November 29, 2000 By Doug Cameron The European parliament is seeking a moratorium on sweeping reform of the global banking industry because of concern that US banks will gain a competitive advantage. The Bank of International Settlements (BIS), the industry's de facto regulator, is due to publish a consultation paper in January on updating the 1988 Basle Accord, which governs how banks manage risks on their balance sheets. The BIS plans to allow banks to use their internal systems for managing and monitoring risks, replacing the current framework where central banks set minimum capital requirements to cover potential losses. However, while US banks may be able to implement the changes by the start of 2002, European rivals will have to wait as long as three years as legislation passes through the European Commission, Council of Ministers and parliament. Sarah Villers, the European parliament member for London who leads its working group on the Basle reforms, said that while the US introduced the 1988 rules in a matter of months, the EU took two-and-a-half years. "European banks undoubtedly suffered last time," said Ms Villers. A report passed last week by the parliament said the "EU should also press for a moratorium on the implementation of the revised accord for an agreed period of time to allow Basle Committee members to adopt implementing legislation and enable the accord to enter into force on the same day in all countries." However, the industry appears to be resigned to implementation at different times, and many view it as the price worth paying for the greater management flexibility that the internal ratings system will provide. "We have to live with the fact that the EU cannot go any faster," said Jan Kalff, the former chairman of ABN Amro who now heads work on Basle for the Institute of International Finance, a trade body for the global banking industry. "There will be a competitive disadvantage for the EU-based banks unless we can force the US to [slow down]," he said, adding that this was unlikely. The large US banks, which are expected to benefit most from the revised accord, are keen to push for its early implementation. Officials involved in the Basle talks suggested that the BIS was unwilling as well as powerless to become involved in any possible confrontation with the US over the timetable. However, officials conceded that a twin-track timetable would contradict its intention of creating a level playing field in the way banks manage risk and are monitored by local regulatory authorities. Ms Villiers agreed that the US was unlikely to accede to any request for delay and was pressing for fast-track European legislation which would, at best, allow directives implementing the new accord to be passed in a minimum of around 18 months. End of ISDA Press Report for Wednesday, November 29, 2000. 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
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