|
|
Enron Mail |
ISDA PRESS REPORT - JUNE 4, 2001
RISK MANAGEMENT Basle II - IFR Australia's APRA says Basel home loan rules unfair - Reuters Asia May Not Be Reader For New Basel Pact - Ctrl Bankers - Dow Jones Basel Accord Gets Chilly Reception - The Wall Street Journal Derivatives industry - IFR CREDIT DERIVATIVES Convertible default swap proposal near - IFR Credit Derivatives Market To Hash Out Successor Issues - Dow Jones ENERGY California Clash Over Power-Grid Control - The Wall Street Journal LATIN AMERICA Two banks pull out of Argentina debt swap over SEC rule fears - Financial Times OTHER Newer options - Business Standard Basle II Financial Times - June 4, 2001 The process of refining the Basle capital adequacy rules is drawing to a close. A revised set of rules will be agreed by the end of this year, to take effect in 2004. There remains broad agreement that it is about time to update the original 1988 formula for calculating how much capital a bank needs. Yet there is enough disagreement on the philosophy and details of the new proposals to suggest that their implementation will be difficult and expensive. Perhaps this will prove to be the spur the banking industry needed to start spending on information technology once again. The old rules are straightforward enough. Minimum capital requirements are set as a percentage of each bank's assets, with some broad categories of loan, such as mortgages or government debt, assigned reduced weightings. The new rules are a considerable improvement in this area, tying capital requirements much more closely to the actual risk posed by individual loans. Oddly, though, exceptional treatment is preserved for German real estate loans. But if the measurement of credit risk becomes more sophisticated, the addition of other, worse defined categories of risk - notably operational risk - restores much of the crudeness of the original agreement. It would be worth taking more time to reach agreement on the right way of measuring operational risk. But political realities, notably the length of time needed to get an updated European capital adequacy directive to incorporate the new rules, mean that this is unlikely to happen. The result is that Basle II will prove to have a much shorter shelf life than Basle I. Australia's APRA says Basel home loan rules unfair Reuters - June 3, 2001 By Marion Rae SYDNEY, June 4 (Reuters) - Australia's bank regulator said on Monday it believed proposed reforms to global capital adequacy requirements by the Basel Committee on Banking Supervision could introduce competitive inequalities in the Australian market. In particular, proposals for capital backing for the residential mortgage market, a dominant and low risk area of business for Australian institutions, needed to be modified, the Australian Prudential Regulation Authority's (APRA) general manager of risk analysis Wayne Byers told Reuters. The Basel committee has proposed that exposures secured by residential property attract a 50 percent risk weighting - the same as the current weight - but large institutions able to follow new internal ratings-based guidelines would be able to reflect the very low housing loss experience in Australia with a cheaper risk weighting of five to 10 percent. Within the proposed accord there are three methods by which banks can calculate capital charges for credit risk - a standard method which is a variant on the current method, and a further two methods, one simple and one advanced, where banks use their own internal ratings systems as a means of allocating capital. "Overall the more advanced the method you use, there are some quite significant capital savings," Byers said. "The more sophisticated methods aren't restricted to big banks but obviously they have the knowledge, the resources and the data and that means that they're more likely to pursue them." As a percentage of total assets as at March 2001, APRA said housing loans amounted to an average of 38 percent for Australia's major banks, including National Australia Bank Ltd, Commonwealth Bank of Australia, Westpac Banking Corp and the ANZ Banking Group Ltd, and 43 percent for regional banks. BIG BANKS STAND TO GAIN "Given that the minimum requirement is an eight percent capital ratio, banks have to have A$4 - which is 50 percent - for every A$100 of housing loans they make," he said. "It would stay the same for those banks that stay on the simplest method but for those banks which move on to methods where they use their own internal measures of risk, a much lower number is produced," he said. "They're based on an international average but Australian data shows it up to be a much lower risk activity," he said. APRA has proposed lowering the standardised housing risk weighting to 20 percent or allowing individual countries to allow a weighting lower than Basel requirements where historical loss rates and market characteristics made this appropriate. "I don't think the committee envisaged the big gaps that have turned out so I would expect they would certainly look to reduce those gaps between the different methods. I'm less sure that they will deal with product-level issues," Byers said. "Housing loans in Australia are a very low risk activity, they're not necessarily that in other markets where housing prices are volatile and where banks don't necessarily use conservative LVR (loan-to-value) rates," he said. Capital adequacy rules in Australia required LVRs of less than 80 percent, unless backed by mortgage insurance. "It may be that we have to do something ourselves to tackle that issue. The final proposals will be out at the end of the year and we're waiting to see how they look before we commit ourselves to any action," Byers said. Asia May Not Be Ready For New Basel Pact - Ctrl Bankers Dow Jones International News - June 3, 2001 SINGAPORE (AP)--Asian central bankers Saturday said their countries may not be ready for the Bank of International Settlements' new Capital Accord planned for 2004. "In particular, infrastructure and internal capacities in some member countries could limit their ability to fully implement the accord by then (2004)," the Governors of the Southeast Asian Central Banks said in a communique after a two-day meeting in Singapore. Asia's 1997-98 financial meltdown rocked banks and economies worldwide, drawing intense international pressure for reform among Asian financial institutions. The Basel -based Bank for International Settlements, or BIS, hopes to implement by 2004 its new Capital Accord, which would give banking regulators more power to assess whether banks have the capital to weather bad loans. The BIS acts as the banker for central banks, providing financial services for managing their external reserves. The new Basel accord poses challenges to Asian banks and regulators, Singapore's second minister for finance Lim Hng Kiang said earlier in opening remarks at the Singapore conference. Asian banks "would have to develop more sophisticated risk management capability" under the new accord, and regulators would "need to build up technical knowledge" to handle the accord, Lim said in the opening speech. The Asian central bankers also said in their communique that there is a need to use policies that prevent "excessive exchange rate volatility," which can "have severe consequences for small, open economies." Central bank representatives at the Singapore meeting came from Indonesia, South Korea, Malaysia, Mongolia, Myanmar, Nepal, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand. The meeting also included observers from Cambodia, Fiji, Laos, Papua New Guinea, Tonga and Brunei's Ministry of Finance. Basel Accord Gets Chilly Reception The Asian Wall Street Journal - June 4, 2001 By Jason Booth The international banking community has given its opinion on the new Basel Capital Accord. But it isn't encouraging. Over the last five months, bankers from around the world have been submitting views on the accord, dubbed Basel 2, which is designed to set the benchmark for bank operations and risk management. By replacing the original 1988 Basel Accords, the new agreement aims to promote better allocation of the money banks must put aside for bad loans through the use of more scrupulous risk analysis. On Friday, reaction to the new pact was made public on the Web site of the Bank for International Settlements. The Basel, Switzerland, organization, which promotes cooperation among central banks, authored the accord. Big banks called the plan too conservative, while smaller institutions said it will increase their cost of capital and warned it could deepen the divide between rich and poor nations. Most felt the regulations were onerously complex and that the planned 2004 launch date was too ambitious. The Institute of International Finance, a private association of the world's biggest banks based in Washington, weighed in Friday with perhaps the most influential assessment. "The proposal includes at every step of the credit-assessment process an element of conservatism," said Jan Kalff, chairman of the IIF steering committee on Basel 2 and former chairman of ABN Amro Bank, who was on a visit to Hong Kong. While the risk-analysis procedures mandated by Basel 2 might lower the amount of money some banks need to set aside for bad loans, those savings would be offset by added costs, the IIF said. The hiring and training of new staff, new software and a general slowing down of the lending process would generate those costs. "Some bankers have mentioned to me that the costs are going to be of the same magnitude as Y2K implementations. But Y2K was only one-off, this will be a year after year costly thing," said Mr. Kalff. The IIF report estimated a total cost to 30,000 banks of $2.25 trillion over five years. Mr. Kalff added that such costs wouldn't be incurred by nonbanking financial institutions, giving them a competitive advantage against traditional banks. Asian central bankers Saturday said their countries may not be ready for the BIS accord. "In particular, infrastructure and internal capacities in some member countries could limit their ability to fully implement the accord by then (2004)," the Governors of the Southeast Asian Central Banks said after a two-day meeting in Singapore. Meanwhile, smaller banks, especially those in the developing world, had other concerns over the Basel 2 draft. "The proposed approach will result in fostering or even deepening the division into highly developed and underdeveloped countries, both with respect to external funding and capital costs," wrote Leszek Balcerowicz of the Polish Commission for Bank supervision. The problem for emerging-market banks is that their client base typically has lower credit ratings than those of major banks do. As such, under the new rules, these banks will have set aside a greater portion of their capital to cover possible losses. If they don't, they will be punished by higher costs when they borrow money in international capital markets. And borrowers, especially smaller and less credit-worthy ones, will likely pay the price with higher capital costs. Again, less-developed nations are likely to suffer most, since higher capital costs could slow development of higher-risk small and midsize enterprises. One complaint shared by big and small banks was Basel 2's insistence that banks be more widely reviewed by credit-rating agencies to determine asset risk. In addition to expressing concerns over the added costs of this policy, some felt it would be counterproductive. "The increasing reliance on external rating agencies would undermine the initiatives of banks in enhancing their risk-management policies and practices and internal control," said the Reserve Bank of India. There was also a general call for more physical collateral, such as property and accounts receivable, to be factored into banks' credit risks. "There is ample evidence to show that such collateral is effective in mitigating risk," said Mr. Kalff of the IIF. In light of such wide-ranging concerns, many felt that it would be difficult to meet Basel 2's scheduled 2004 launch date. The IIF felt that parts of the accord would require at least 18 to 24 months of further negotiations, even though the BIS has been hoping to finalize the accord by the end of this year. Developing nations suggested that the accord be phased in over a longer period of time. In the words of Adrian Byrne of the Central Bank of Ireland: "This time frame is still too short given the range of information not available." Derivatives industry IFR - June 2, 2001 Derivatives industry officials are optimistic that some of their criticisms of the draft of the new Basle II Capital Accord will be taken on board by regulators. They believe there is a good chance that their input on the calibration of the internal ratings-based function will result in a change in the accord, for example. However, there is no sign yet that their input on the "W" factor charge on credit derivatives will result in a revision. The Basle Committee on Banking Supervision will next month release exposure drafts on operational risk and the internal ratings based approach for treatment of equities, retail portfolios, project finance and securitisation as areas for additional consultation and interim papers for its new global capital adequacy rule proposals, dubbed Basle II. "These were all green areas when the consultation came out in January," said a Bank for international Settlements official. It still remains unclear whether the "W" factor will be eliminated, he noted. "There are some strong proponents for it on the committee. So, it depends on the nature of the comment letters," he said. William McDonough, the chairman of the Basle Committee, is widely viewed as having backed away from the keeping the "W" charge in the new accord, but Oliver Page - the head of regulatory policy at the UK Financial Services Authority and a member of the committee - is believed to remain a proponent. Page said that he is keeping an open mind about the issue, however. "This is a genuine consultation process, we have got to weigh up the contributions," he said last Friday, the day after the deadline for comments on the new accord passed. The "W" charge is a 15~~ levy on credit derivatives when they are used for credit risk mitigation by banks, which contrasts with the zero weighting given to guarantees. The BIS's strategy of weeding out measures that require more attention is aimed at enabling the regulator to push ahead with certain issues and finish formulating its positions on others, while keeping to its 2004 deadline for implementing the new rules, the BIS official said. "The last thing that they want to do is push ahead with everything and then reopen structural issues," said Simon Gleeson, a partner at Allen & Overy in London. On the flip side, keeping everything on hold would make it impossible for it to work within its deadline, he added. "As far as the European Union is concerned, the problem that they face is the timing. It took seven years to get [the last Basle Accord] through and into directive form. The idea that the EU's implementation will get finished by 2004 is absurd," a derivatives industry consultant in London said. The challenge is exacerbated by the fact that when the EU writes directives they apply to all financial institutions, not just internationally active banks. This means that in addition to implementing the new rules it will have to draw lines between institutions and decide how to ensure that the system does not put small and medium-sized institutions at a disadvantage. "The Fed wants to start [enforcing new rules] as soon as possible. If they do, we will get a situation in which we have two completely different capital adequacy systems," the consultant added. The start of 2004 was set as a compromise due date between the US Federal Reserve and the UK's Financial Services Authority for enforcing the new rules. Basle II's initial industry comment period closed last Thursday. The International Swaps and Derivatives Association focused its criticisms on three areas. It argued that the introduction of rigid capital floors would increase costs, that the proposed operational risk and "W" factor charges are arbitrary, and that the proposed calibration of the internal ratings based function does not reflect market practice. "The accord takes significant steps toward defining an approach to setting banks' capital requirements, which is risk-sensitive, granular and flexible, yet there are several areas that are inconsistent with the overall goals of the accord and existing bank best practices," said Emmanuelle Sebton, head of risk management for ISDA. ISDA officials are due to meet the FSA's Page and other members of the capital group within the Basle Committee in New York in mid July, at which stage ISDA will press the case for abandonment of the 15% "W" factor charge on use of credit derivatives. Convertible default swap proposal near IFR - June 2, 2001 An informal working group within the International Swaps and Derivatives Association's credit derivatives market practice group is nearing the completion of a preliminary proposal aimed at creating standardised documentation for swaps based on convertible bonds and zero coupon convertible issues. The surge in convertible and zero coupon convertible issuance this year and the trend towards stripping the equity and credit components out of large issues are heightening the need for the documentation. "Right now, there isn't a standard. That's the problem. Each firm uses different language. Resolving this will enhance liquidity in an already well-functioning market," said Derek Smith, head of credit derivatives trading at Goldman Sachs in New York. Credit derivatives market participants would benefit from standardisation, as it would improve liquidity. "If you strip a convertible with one dealer and want to unwind with another dealer you might come across dealers that don't like the documentation. So, they are unlikely to bid, and you are forced to go back to the first dealer," said John Tierney, head of credit derivatives research at Deutsche Bank in New York. Even though only a portion of investment grade convertibles are stripped and stripping typically covers between a third and a quarter of a stripped convertible, the activity still generates vast amounts of credit default swaps business. On a US$3bn issue, for instance, in excess of US$750m can be stripped, which is time consuming to offset, given that credit default swaps usually trade in US$10m blocks. Standard documentation is also needed because stripping often causes a 30-50% jump in the price of the issuer's single name credit default swap. "It's more technical than controversial. Creating documentation that works is the challenge," said Smith. Before the group's proposal is available for general use, it will need to be approved by ISDA's documentation committee and vetted by the industry. Credit Derivatives Market To Hash Out Successor Issues Dow Jones - June 4, 2001 By Joe Niedzielski NEW YORK -(Dow Jones)- Credit derivatives professionals are working on a solution to the vexing question of how these contracts should be treated when companies spin off units or restructure into separate entities. These demerger or successor issues are expected to take some months to resolve and the International Swaps and Derivatives Associations new subcommittee of the credit derivatives market practice group has given the question priority among a host of other long-term issues. Adding some momentum to the discussions is the pending restructuring of AT&T Corp. (T). AT&T is among the more actively-traded credits in the single name credit default swap market. These over-the-counter derivatives contracts let buyers transfer the default risk on loans or bonds by selling it to a third party for a premium that's derived from the notional amount of the contract. AT&T's plan, first unveiled last fall, would split the company into a business and consumer long-distance unit, as well as broadband and wireless units. AT&T is expected to go ahead with the plan in the coming months. "People seem motivated about resolving this," said one credit derivatives official in New York. "As AT&T gets closer, I would imagine that would galvanize people further on this side of the Atlantic." When companies split up, spin off units, or "demerge," the successor entities are allocated different portions of the previous entities outstanding debt obligations and publicly-issued bonds. ISDA's 1999 document governing credit derivatives essentially calls for the default swap to follow the entity that takes on the majority of the obligations in a merger, consolidation, or transfer. This "all or substantially all" clause in the documentation, though, can be interpreted differently in other legal jurisdictions. And that could pose a problem if a market participant has contracts on a particular credit with U.S. and English counterparties. Still Fallout From National Power A number of market participants are attempting to negotiate a resolution to default swaps written on the U.K.'s National Power PLC, which demerged late last year. In the split, Innogy Holdings PLC (IOG) received the former company's U.K.-based power and generating assets. National Power changed its name to International Power PLC (IPR) and took the international power assets. Innogy Holdings was also allocated with about 60% of the former company's debt obligations and about 88% of its public bonds. International Power kept about 40% of the former company's debt obligations and about 12% of its public bonds. The credit derivatives official in New York said there are theoretical ways of hashing out the successor issue. One possible approach would be to have multi-name default swaps after a demerger for participants that held contracts on the single name corporate prior to the demerger. Essentially, the trade would be split into a series of trades on the demerged entities, though it would likely be difficult to calculate the relevant notional amounts that should be allocated among those new default swaps, this person said. Two banks pull out of Argentina debt swap over SEC rule fears Financial Times - Jun 2, 2001 By Thomas Catan Two investment banks unexpectedly pulled out of managing Argentina's record debt exchange yesterday because of worries they may have violated US securities regulations, placing at risk millions of dollars in fees. On the advice of their lawyers, Deutsche Bank and ABN-Amro yesterday withdrew from a group of 12 banks chosen by the Argentine government to manage the multi-billion dollar transaction. It is understood that Banco de Galicia, an Argentine bank, will also exclude itself from offering the bonds in the US. People close to the banks said company lawyers had become concerned that some pieces of research in the run-up to the transaction may have breached US securities regulations. A spokesman for the Securities and Exchange Commission in Washington would neither confirm nor deny it had warned investment banks. In an effort to buy time to restart its struggling economy, Argentina hopes to exchange bonds coming due before 2006 for longer-dated paper. The government stopped taking offers from bondholders yesterday and is due to announce the results of the massive operation on Monday. Market analysts expect the government will succeed in swapping around Dollars 20bn, by far the largest transaction of its type. If that is the case, the group of investment banks would earn Dollars 110m, which is considered to be a juicy fee for relatively light work. However, concerns that the "Chinese wall" between analysts and sales people had been breached may have cost several banks their share of the fees. Some bankers suggested it was not the SEC that had raised the initial objection, but rather investment banks threatening each other to maximise their proportion of the fees. According to an Argentine official, the problem first came to light on Thursday after questions were raised about a research report by Deutsche Bank's emerging markets analysts. California Clash Over Power-Grid Control The Wall Street Journal - May 4, 2001 By Rebecca Smith As California politicians wade deeper into the energy crisis, the state's electric-grid operator appears headed toward a showdown with federal energy regulators over whether its board is independent enough. The California Independent System Operator Friday bowed to pressure from the Federal Energy Regulatory Commission and submitted its qualifications to continue as a federally sanctioned grid operator. But the tardy filing is almost certain to be challenged by federal regulators and market participants because the ISO's governance structure has strayed from a "bedrock requirement" that it be "independent of control by any market participant." The market participant casting the long shadow is the state of California. Since January, when the state of California began buying huge sums of electricity on behalf of its nearly broke utilities, the ISO has been under pressure to give state officials preferential treatment and unique access to market-sensitive information. Its chief operations officer, paid $245,000 a year according to the most recent IRS filing, is on indefinite loan to the governor's office where he is working as an energy adviser. This politicization of the ISO is significant because the organization's purpose is to run a market for power needed to keep the electric system in balance and to give buyers and sellers impartial access to the power lines on which they depend to move electricity. Unlike other commodities, electricity can't be stored. Transactions, therefore, depend completely on instantaneous access to the electric superhighway of high-voltage lines. The FERC worries that a loss of political independence by the ISO will further degrade the state's already dysfunctional energy market. The FERC hasn't formally accused the ISO of acting improperly, but it is clear that a wall between the state and the ISO that once was solid has become permeable. Last month, the ISO notified the FERC that the state of California had asserted "it must have access to the ISO control room floor" and "nonpublic information" as a "necessary condition" of continuing to buy power, even though such preferential access violates ISO rules. But without the state to back power purchases -- it has spent nearly $8 billion on electricity since January -- the ISO's market would collapse and blackouts and chaos likely would ensue. The governance issue, which may appear esoteric, actually cuts to the heart of the power crisis in California. State officials feel they have ceded too much control to the FERC, which they accuse of shirking its duty to protect consumers. As a consequence, the state has forced its way into the inner workings of the formerly arcane ISO, a public-benefit corporation formed three years ago amid California's push to deregulate its electricity market. In January, the state legislature authorized the governor to eject a FERC-approved board of directors and hand pick his own five-member ISO board. The state attorney general ordered old board members to resign or face personal fines of $5,000. Currently, one ISO board member is a former member of the governor's staff, while another, on the governor's behalf, negotiated the proposed purchase of utility transmission assets by the state, all the while serving as chairman of the supposedly independent board. The ISO's chairman says changes in the board structure have made the ISO more answerable to the citizenry and "efficient." Michael Kahn, who is a San Francisco attorney, added that the governance structure had to change to reflect the fact that "we're in a state of emergency." In its filing Friday, the ISO took the position that the tighter relationship between the ISO's board and the state doesn't violate the FERC's requirement that ISO boards be free of control by market participants. Even though the state has been "required to provide financial support," the ISO asserts, this "participation does not make ... the State a market participant." Many market watchers scoff at that contention. "Inevitably, this will lead to a showdown," said N. Beth Emery, former general counsel of the ISO and now an energy attorney for Ballard, Spahr, Andrews & Ingersoll in Washington, D.C. "Clearly, the ISO is in violation of the independence requirement." But the FERC doesn't have many tools for enforcing its vision of autonomy. That may explain why it has failed to intervene. It can order the ISO to make board changes, for instance. But if it refuses, there may not be much the FERC can do except threaten to rescind the ISO's operating tariffs. That, of course, is the opposite of what the FERC wants to do, which is encourage creation of multistate grid organizations free of any political favoritism. But California's angry isolationism appears to be growing. Gov. Gray Davis said the ISO's filing ensured the state will "maintain control of our own energy destiny and not be subject to the whims of federal regulators or the interests of other states." To date, the FERC has been steadfast in its resolve to make regional grid operators independent organizations, free of control of utilities and power marketers. It has rejected other grid-operator proposals because it felt utilities that owned the power lines were attempting to retain too much control. But Order 2000, the landmark decision issued in December 1999 that promoted the creation of independent grid runners throughout the nation, never contemplated a state government assuming such a huge role in a market as has occurred in California. If anything, that role is likely to increase. Not only is the state of California the biggest power buyer in the nation now, but it has formed a power authority that intends to build and operate generating plants. In addition, Mr. Davis is promoting a plan to buy the transmission systems of the state's investor-owned utilities. As such, a new vertically integrated utility is forming that could be larger than any the nation has seen since the "power trusts" of the 1930s were broken apart by Congress. It is rife with conflicts of interest. The ISO's drift has created a fissure in the solid support it enjoyed from the state's big utilities that transferred control of their transmission systems to the ISO in 1998. PG&E Corp.'s Pacific Gas & Electric Co. unit, which is in bankruptcy proceedings, declined to join the ISO filing, which was supported by Edison International's Southern California Edison unit and Sempra Energy's San Diego Gas & Electric Co. unit. PG&E said in a separate grid-plan filing that it would prefer the ISO join a multistate grid organization. It expressed reservations about the independence of the current board. Opposition to the state's influence is becoming more vocal. The Electric Power Supply Association, a trade group representing power producers, warned FERC last month that the ISO has become "a partisan advocate for the State of California" and sought FERC intervention to defend the rights of all market interests. Newer options Business Standard - June 4, 2001 By Gaurav Dua In addition to the numerous advantages of derivatives in terms of risk management, price discovery and instruments for providing the required leverage to the investor, options are also very effectively used as a tool to develop and structure innovative products. Investment bankers use various form of options including call, put, exotic, binary and so on, to structure products for retail investors. Such products have gained immense popularity in developed markets like the US and Europe. In fact, structured products offered by investment banks like Salomon Smith Barney (SSB), Goldman Sachs and others, are also actively traded at the Chicago Board Options Exchange (CBOE). These relatively new investment vehicles are similar to call or put options as they have an expiration date, and are cash settled like index options. The capital markets division at CBOE assesses the concept behind the instrument and provides regulatory guidance before the product is offered in the market. One of the very successful and popular examples of structured products is capital protected notes where the return on investment is linked to the performance of certain indices, basket of stocks or a single stock in a given time frame. Here, the investment bank or intermediaries will calculate the present value of risk-free interest that can be earned * on the capital and use it to buy * call options. The best part of the instrument is that there is no risk * of capital loss. And the risk of the investor is only limited to the * interest that could have been earned on the capital. This apart, exotic options like knock-in or knock-out options, where the expiry of the option is based on certain conditions, are utilised to provide flexibility and additional features to the investors. For instance, structured products such as Target Trust Warrants offered by SSB guarantees an assured return of six per cent with no risk to the capital and investor can opt for redemption before the expiry date. But there is a cap on the maximum amount of return that can be earned on the deposit. A typical example of index based structured product is Equity based notes by SSB where the returns to the investor is based on the * appreciation in Dow Jones * Industrial Average in a given time frame. This product is actively traded on CBOE. In the Indian context, structured products could very well fill in the gap between the high risk high return equity investments and low risk low return fixed deposits by banks. The drop of 150 basis in the interest rate on popular investment avenues such as public provident fund, national saving certificate and others, has already compelled the small investors to look at others investment alternatives for higher returns. In such a scenario, structured products are expected to do well in India. Structured products could turn out to be a boon for numerous software professionals who were unable to cash-in on their employee stock option (ESOP) in the bull-run due to the lock-in period. "Investments bankers could target such professionals with customised structured products using put options", says Sanjiv Mehta, chief executive officer derivative segment, Bombay Stock Exchange. Normally, customised structured products are used for high networth clients. **End of ISDA Press Report for June 4, 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
|