ISDA PRESS REPORT - MAY 17, 2001

ISDA PRESS REPORT - MAY 17, 2001

* ISDA Unveils New Margin Accord For Collateral Process - Dow Jones
* IRS Officials at Hearing Question Need For Hedging Regulations
Standard - BNA
* Towards one interest rate - Business Standard
* Credit protection costs down after Fed cut - Reuters
* Argentine bond swap seeks to calm fears of debt default - Financial
Times

ISDA Unveils New Margin Accord For Collateral Process
Dow Jones - May 16, 2001
By Joe Niedzielski

NEW YORK -(Dow Jones)- The International Swaps and Derivatives Association
said Wednesday that it has published new documentation on margin provisions.

The document, known as the 2001 ISDA margin provisions, updates and
simplifies ISDA'S four existing credit support documents in a single
document, ISDA said Wednesday in a press release.

"The document is easy to understand and will reduce the barriers to entry
for new derivatives market participants," Robert Pickel, ISDA's executive
director and CEO said in the release.

In many areas of the over-the-counter derivatives market, financial
institutions and other end users of derivatives , such as corporations and
fund managers, reduce credit exposure by posting cash collateral.

But unlike the highly-liquid and standardized U.S. government securities
repurchase market, where the transfer of collateral is generally initiated
by the close of business following a morning margin call, a derivatives
counterparty may have to wait as long as 10 days to two weeks before being
able to liquidate.

ISDA's new document, though, includes stepped-up timing standards for
collateral calls.

The provisions have common operational provisions, incorporate a plain
English approach and offer more streamlined timing and dispute-resolution
procedures, ISDA said.

Parties using the provisions can select jurisdiction-specific provisions to
apply to their margin arrangements under New York, English and Japanese law,
ISDA said.

The ISDA 2001 margin provisions documentation project was partially a
response to bouts of market turmoil in recent years. Several disputes have
arisen between market participants in the wake of 1998's liquidity seizure
and flight-to-quality following Russia's debt default and the near demise of
Long Term Capital Management, the heavily-leveraged hedge fund.

"The provisions were a response to market disruptions in recent years and
offer a mechanism to reduce credit exposure arising between the time of a
trade and the time at which an institution can liquidate any available
collateral," said David Maloy, managing director of global collateral and
margin at UBS Warburg and a co-chair of the ISDA collateral committee.

For institutions that want to amend their existing credit support annexes
rather than opt for the new margin provisions, amendment forms to the New
York law and English law credit support annexes will be available in June,
ISDA said.

ISDA said those forms will mirror the operative sections of the provisions
with respect to transfer timing, dispute resolution and substitutions or
exchange of margin.

IRS Officials at Hearing Question Need For Hedging Regulations Standard
BNA - May 17, 2001
By Alison Bennett

Internal Revenue Service and Treasury officials May 16 sharply questioned
witnesses on why they should broaden the risk standard used to define
hedging transactions in proposed rules (REG-107047-00) that have drawn
criticism from the practitioner community.

Nearly every hearing witness said the proposed rules do not go far enough in
implementing a new standard for hedging enacted under the Ticket to Work and
Work Incentives Improvement Act of 1999 (Pub. L. No. 106-70).

That law changed the standard for qualifying hedging transactions from one
focusing on risk reduction transactions to one centered around risk
management transactions. Witnesses complained that the proposed rules (12
DTR G-10, L-25, 1/18/01) retained too great a focus on risk reduction as a
way to assess whether favorable hedging treatment should be allowed.

The rules represent "a serious and inappropriate failure" to live up to
congressional standards, said Andrea Kramer of McDermott, Will & Emery in
Chicago. "I find it inconceivable that anybody could argue that the 1999 tax
act did not result in a far-reaching and substantive change to the meaning
of hedging transactions," Kramer said.

Questions From IRS

She was questioned closely by JoLynn Ricks, an IRS attorney-adviser on
financial institutions and products, about why the government should broaden
the standard to go beyond the position taken by the Financial Accounting
Standards Board on hedging in 1998, which focused on risk reduction.

Kramer contended that Financial Accounting Standard No. 133, which was
amended last June (118 DTR G-7, 6/19/00), is not relevant to tax questions
surrounding the hedging of derivatives. "The financial accounting rules for
derivatives and hedging transactions are fundamentally different from the
tax rules," Kramer said. "I would argue that FAS 133 is not significant
here.

In addition to urging the government to replace all mention of risk
reduction in the final rules with the standard of risk management, both
Kramer and Earl Goldhammer of American Electric Power asked for favorable
treatment for certain transactions by commodities dealers.

Commodities Proposal

Under the proposal raised by both witnesses, qualifying transactions would:

* relate to a derivative valued in reference to a commodity also
handled by the dealer;
* fall within pre-approved controls on speculation set out in formally
adopted risk management policies; and

* not be identified by the commodities dealer as having been entered
into in its dealer capacity.

"We would like to know that if a trader trades within preapproved limits,
and if you have a risk management program that is not a phony program, that
that is legitimate," Goldhammer said.

Although Goldhammer was identified on an IRS hearing document as working for
America's Energy Partners (95 DTR G-2, TaxCore, 5/16/01), he told IRS
officials that is merely his company's slogan.

Salomon Smith Barney Tax Director Mark Perwien, representing the
International Swaps and Derivatives Association Inc. in New York, also
criticized the references to risk reduction found under the proposed rules.

"It's very important for a company to be able to manage its price and all of
its other risks in a way that is consistent with how it sees the
marketplace," Perwien told the government panel.

The ISDA representative acknowledged that "obviously, IRS is concerned about
being whipsawed," but said protections, such as same-day identification of
derivatives, already exist.

He stressed that, to properly implement congressional intent, the final
rules should apply to all transactions undertaken in the ordinary course of
business that alter the taxpayer's exposure to one or more of the risks
inherent in the taxpayer's core economic activities.

In addition, he said, favorable hedging treatment should be available for
weather and energy supply derivatives. IRS also should permit hedges of
dividend streams, overall profitability, and other business risks that do
not relate directly to interest rate or price changes or currency
fluctuations, Periwen told the government.

Gap Hedges Raised

Testifying on behalf of the American Council of Life Insurers, Washington,
D.C., Frank Gould of Prudential Life Insurance Co. urged IRS and Treasury to
provide favorable treatment of gap hedging of derivatives by his industry.

"IRS field agents are routinely concluding that gap hedges are not good tax
hedges--they're consistently saying they're hedges of capital assets," Gould
said.

"Gap hedging isn't about a particular asset or group of assets," he said.
"It's about maintaining balance between assets and liabilities. It's an
integral part of how we run our business."

Peter Carlisle of Baker & McKenzie, Washington, D.C., and his colleague Jeff
Wallace, both said the IRS definition of risk management is "inappropriately
restrictive."

Wallace said that, because companies approach hedging in different ways, it
would be appropriate for IRS to be more flexible in what it considers
qualifying risk management activities.

Split Approach to Hedging?

For example, he said, some companies take a "macroeconomic" approach to
hedging, in which the entire enterprise faces economic risk, while others
take a "microeconomic," or transaction-by-transaction approach to these
risks.
"Enterprise risk reduction is a nebulous concept which is really not
practicable for taxpayers who manage their risk on a microeconomic level,"
Wallace said.

Ricks asked if IRS should consider an approach which would allow taxpayers
to do both macroeconomic and microeconomic hedging, as long as they identify
which type they are doing, and allow that to control treatment of the
transaction. Both Carlisle and Wallace said they would heartily endorse such
an approach.

The government panel included two other officials from IRS financial
institutions and products, special counsel Richard Carlisle and branch chief
Alvin Kraft. Also on the panel were Viva Hammer, a Treasury
attorney-adviser, and Robert Hanson, Treasury deputy tax legislative counsel
for regulatory affairs.

The transcript of the hearing will be in BNA TaxCore.

Towards one interest rate
Business Standard - May 17, 2001
Janaki Krishnan

The introduction of options and futures to replace the time-tested badla
system effective July 2, 2001 will align interest rates in the money and
equity markets, leading to a more effective monetary transmission mechanism.
At a macro level, the significance of the Securities and Exchange Board of
India (Sebi) decision to ban badla and all deferral products and have only a
cash and a derivatives market marks the integration of the equity and money
markets. This means the RBI's interest rate signals will be absorbed faster
in the wider financial system. Currently, as Shekhar Sathe, CEO of Kotak
Mahindra Mutual Fund, says, there are varying badla rates on each of the
scrips eligible for carry forward. "It is like having 200 interest rates in
the system," he says. Badla rates are derived as the sum of an equity risk
premium on that particular scrip over and above the interest rate component.
In effect, since the equity risk component varies from week to week and
differently in different scrips, it masks the cost of money. Thus, badla for
scrip X may be 30 per cent but for scrip Y it may be only 12 per cent. The
financial sector is sharply divided between the banking and the equities
sector.

All this is set to change with the introduction of derivatives. At a
simplified level, since operators can take a position on the spot and
futures markets at the same time, the cost of money is already factored into
the derivative prices. This reflects the opportunity cost of taking a
forward position. Thus, an operator who buys in spot and short sells in the
futures market is actually putting up cash now in return for future gains.
Since this involves a cash outlay, the operator will at least expect his
returns to cover the interest costs for the period of the contract.
Derivatives pricing, thus, incorporates the cost of money. Says Sebi board
member J R Varma, "The system will eventually lead to a convergence of
interest rates throughout the system." Market sources said though the extent
of banks' involvement in the revised trading systems will only be clarified
later, there were tremendous opportunities for banks to take proprietary
positions in the derivative markets. For instance, banks could play a
leading role in the developments of "calendar spreads" which are basically
forward-to-forward contracts in the foreign exchange markets. Thus, a bank
may buy a one-month contract and sell a six-month contract. Since the price
of the latter will be more than that of the one-month contract, the bank
will make a net spread. But since the market rates of interest will smoothen
out over all markets, this spread will typically reflect the difference
between one-month and six-month money. "Arbitrage opportunities like this
will lead to a uniformity of interest rates," Varma said. Money market
dealers welcomed the move saying that "equities as an asset class are a
welcome addition to the limited deployment options before banks".
Acknowledging that not all banks will be comfortable with dealing in the
equity derivatives markets, one dealer says, "As long as one bank is
comfortable arbitraging between the money and equity markets, the rates will
align as this bank can borrow in call and deploy the funds in derivative
spreads. If the call money rates are higher, this bank can do a reverse
arbitrage." The second implication is that equity prices in the spot markets
will respond quicker to interest rate changes. Currently, lower interest
rates will to lower interest costs for companies in the coming years,
thereby boosting its net profits. This reflects in optimism on the equity
price front after interest rates are cut. But with a derivatives market, a
rate cut will immediately impact derivative prices and arbitrageurs will
ensure that this is immediately transmitted to spot equity prices too. "Much
like in the US, we are looking at a situation where money market rates will
determine the valuations of a wide spectrum of asset classes, and not just
gilts," the chief dealer, of a private bank says. "This will lead to a much
more responsive financial system," he adds.

Credit protection costs down after Fed cut.
Reuters - May 17, 2001
By Tom Burroughes

LONDON, May 16 (Reuters) - The cost of credit protection declined across
most sectors in the default swap market on Wednesday after the U.S. Federal
Reserve's rate cut but prices on two firms' debt rose due to planned new
issuance, dealers said.

Credit default swaps narrowed around two to three basis points for
automakers and telecoms, continuing a trend of recent weeks and further
encouraged by the Fed's 50-basis point easing on Tuesday, said a dealer for
a European bank in London.

Default swaps are insurance type instruments, which allow investors to
adjust their exposure to the risk of default or other event on a bond or
loan. They compose the most liquid part of the present credit derivative
market.

"Spreads in the cash and default (swap) market are both two to three basis
points tighter in general," the dealer said.

In telecoms, five-year default swaps on British Telecom were cited at 85/90,
about two basis points tighter, Deutsche Telekom were two basis points in at
98/108, and France Telecom slightly narrower at 87/97, the dealer said.

In the car sector, the dealer said protection on DaimlerChrysler has fallen
about two basis points to 87/91. Another trader at a European bank said
French carmaker Peugeot traded at 21, three bps down from the start of the
week. In banks, activity was quiet but default swaps were a touch tighter.
Deutsche Bank senior debt was cited at a bid/offer spread of 14/19.

In industrials, default swaps inched down on firms such as French glassmaker
St Gobain , which declined to a bid/offer spread of 37/43, down around four
basis points from Monday, a dealer said.

DEFYING THE TREND

Credit protection costs rose on a couple of firms to buck the general trend.
Five-year default swaps on the Swedish mobile phone company Ericsson rose 15
basis points to 115/135 from Tuesday, when bankers announced the firm was to
issue 1.25 billion euros of five-year and 250 million sterling of seven-year
bonds.

Another Scandanavian firm in play was the Finnish-Swedish forest industry
group Stora Enso , which is to issue a dollar-denominated global bond.

Five-year default swaps have widened about 10 basis points to 70/85 since
the announcement last week, said a dealer for a European bank.

MOSTLY ONE WAY

Default swaps were grinding lower on most names, in part because of
synthetic credit portfolio deals which means players who are short credit
risk are hedging their positions by selling default swaps.

The growth of the synthetic portfolio market has been pressing down credit
protection prices recently. A synthetic portfolio replicates portfolios of
bonds by selling default swaps on various names.

To change this trend players may need to believe the interest rate outlook
is changing or fresh debt supply is in the pipeline, said one dealer for a
European bank in London. "We need some issuance and a view that rates have
bottomed out," he said.

Argentine bond swap seeks to calm fears of debt default
Financial Times - May 17, 2001
By Peter Hudson & Thomas Catan

David Mulford, the US banker who has played a leading role in putting
together Argentina's massive bond swap, on Wednesday defended the deal,
saying it represented a new market-led approach to tackling sovereign debt
crises.

The deal, which seeks to exchange near-term bonds for longer dated paper, is
seen as crucial to calming fears that Argentina could default on its $128bn
debt.

Investors are anxiously awaiting terms of the transaction, which Mr Mulford,
a former US Treasury undersecretary with connections to Domingo Cavallo,
Argentine economy minister, said could be launched as early as next week.

Speaking in Buenos Aires on Wednesday, Mr Mulford, international chairman at
Credit Suisse First Boston, said the deal would be easily the largest of its
kind and could resolve Argentina's financing problems without the need for
additional aid from financial institutions. The International Monetary Fund
helped assemble a package of aid worth nearly $40bn in December.

Although he declined to discuss details of the swap, citing Securities and
Exchange Commission regulations, Mr Mulford described it as "essential to
long-term success in restoring Argentine growth".

He added that the operation would imply a "substantial reduction" in debt
payments over the next three to four years. If the deal was a success, he
said, its size "will effectively change the Argentine debt market and market
perception".

According to bankers, the transaction could save Argentina $3bn-$4bn in debt
servicing costs before 2006, giving it time to resume growth and bring its
debt burden under control.

Argentina's benchmark FRB bond surged 2l points on Wednesday after the
Argentine president, Fernando de la Rua, signed a decree authorising the
deal.

Argentina has been mired in recession for nearly three years, raising doubts
about its ability to keep servicing foreign debt. That prospect has caused
alarm because the country accounts for almost a quarter of tradeable
emerging market debt.

Although the overall size of the debt is comparable to that of other
emerging markets, Mr Mulford said concerns about its short-term structure
meant that "unless that is addressed it is doubtful world markets will
really support growth" in Argentina.

The country's interest rates are at a very high level as a result of
investor uncertainty. But Mr Mulford rejected suggestions that Argentina
should await lower rates before launching the deal. "It's essential to do
this deal now," he said.

**End of ISDA Press Report for May 17, 2001.**

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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