ISDA PRESS REPORT - MAY 2, 2001

ISDA PRESS REPORT - MAY 2, 2001

* ISDA backs push for legal certainty - IFR
* Canadian Central Bank Downgrades Forecast for 2001 Economic Growth -
BNA
* SEC Urges More Use of Fair - Value Pricing - The Wall Street Journal
* Small frys curbed - Business Standard
* The difficulty of defining a default - Euromoney Magazine

ISDA backs push for legal certainty
IFR - April 28, 2001

The International Swaps and Derivatives Association is backing an
international movement aimed at increasing the legal certainty of
collateralised transactions. With cross-border collateralisation growing,
lack of clarity over which jurisdiction applies to dealings in
indirectly-held securities presents legal risks, said Kimberly Summe,
assistant general counsel at ISDA in New York.

ISDA has joined with 16 other international organisations and 119 legal
experts to put together a proposal aimed at recognising the law of the
location of the intermediary maintaining the account to which the security
is credited as the applicable law in collateralised transactions. They hope
to have a text for adoption within a year.

The current Basle bank capital reform process is putting collateral in the
spotlight.

"lf a bank views collateral as difficult to get hold of, then it will value
it less. And it may need to increase reserve requirements with respect to
the loan secured by that collateral." said Morgan Burkett, chief legal
officer at Cygnifi Derivatives Services in New York.

Canadian Central Bank Downgrades Forecast for 2001 Economic Growth
BNA - May 2, 2001

OTTAWA--The greater than anticipated economic slowdown in the United States
has forced a downward reassessment of Canada's economic growth prospects in
2001 to between 2.0 and 3.0 percent, the Bank of Canada said May 1.

The U.S. economy is now projected to grow by between only 1.0 and 2.0
percent during 2001, even with the boost that will be provided by the
expected growth of between 2.0 and 3.0 percent during the second half of the
year, the central bank said in its semi-annual Monetary Policy Report. The
bank had indicated in a Feb. 6, 2001, update of its last semi-annual report
that it expected the Canadian economy to grow by about 3.0 percent during
2001, based on U.S. growth of 2.0-2.5 percent.

"It now looks as if growth over the first six months will average between
1.25 and 2.25 percent. For the second half of the year, we see growth
picking up significantly to between 2.5 and 3.5 percent," the latest report
said. "The pace of activity in 2002 is expected to be somewhat stronger than
in the second half of 2001, with the economy expanding at a rate slightly
above the Bank's estimate of potential output growth of 3.0 percent."

Meanwhile, the anticipated re-emergence of excess supply in the Canadian
economy will contribute to continued downward pressure on core inflation
during the remainder of 2001, and core inflation is expected to average
slightly less than 2.0 percent for the remainder of 2001, then to increase
to about 2.0 percent by the end of 2002, the Monetary Policy Report said.
Increases in the overall Consumer Price Index are expected to remain
volatile over the next few months, but then to also fall to about 2.0
percent by the end of the year if world energy prices remain near current
levels, it said.

The central bank stressed that the main risk to its projections for the
Canadian economy remain the timing and strength of the projected resurgence
of the U.S. economy, and the report noted that it will continue to monitor
developments closely and make further adjustments to its trend-setting Bank
Rate as necessary.

"For example, if consumer and business confidence in the United States does
not improve, this could lead to weaker consumption and investment spending,"
it said. "Another development that the Bank will have to watch closely
because of its possible implications for aggregate demand and inflation in
Canada is the shift in international financial market sentiment that has led
to a strengthening of the U.S. dollar against the Canadian dollar and other
currencies."

SEC Urges More Use of Fair - Value Pricing
The Wall Street Journal - May 2, 2001
By Judith Burns

U.S. mutual funds can't rely on stale prices when calculating the value of
their portfolios, a senior Securities and Exchange Commission attorney said.

In a letter to the Investment Company Institute, a leading fund-industry
group, Douglas Scheidt, general counsel of the SEC's investment-management
division, said funds should be on the lookout for events that might require
them to use fair - value prices for certain securities, rather than relying
on the last quoted price.

Mr. Scheidt said funds can't ignore major changes affecting pricing that
occur after trading closes but before the calculation of the net asset value
of the securities in fund portfolios.

Mutual funds typically compute their NAV once a day, after the close of
securities trading in major U.S. markets, using readily available
quotations. When that isn't possible, funds must base calculations on the
fair value of a security.

When calculating fair-market value, the SEC said funds should use
appropriate methods to determine the price they might reasonably expect to
receive in a current sale. It recommended funds compare fair-market pricing
results with the next-day opening prices or actual sales prices to refine
their pricing techniques and avoid using market quotes from dealers and
pricing services that prove unreliable.

"Funds that automatically use market quotations to calculate their NAVs
without first verifying that the market quotations are readily available
cannot be assured that the resulting NAVs are accurate," Mr. Scheidt wrote
in his letter dated Monday.

Accuracy could be called into question if a fund ignores developments in
markets such as Tokyo or Hong Kong, which close 12 to 15 hours ahead of the
U.S. closing, the SEC attorney said.

Market swings, natural disasters, terrorist activity or a major change in
government or policy could have dramatic effect on foreign securities
prices. If a fund determines a significant event has occurred after a market
closes that would affect the value of a security it holds, the fund must use
" fair value pricing methodology," rather than the closing price, when
valuing its portfolio, said Mr. Scheidt.

"Funds can't just put their head in the sand," Mr. Scheidt said yesterday in
an interview.

The ICI said it plans to distribute Mr. Scheidt's comments to its members.
"The letter will be useful in providing guidance to the funds on this
matter, " ICI spokesman John Collins said.

Fair - value pricing isn't limited to non-U.S. securities. In cases where
trading in a U.S. security is halted, or there is a significant development
after an early market close, funds should no longer rely on the closing
price or last quotation when calculating their NAV, according to the SEC
staff letter. On the other hand, where market quotes are deemed reliable, it
said funds must continue to use them and can't switch to fair - value
pricing.

Fair - value pricing has been controversial for funds in recent years. In
the fall of 1997, there was an outcry from investors who complained they
bought and sold shares without realizing some fund companies, including
Fidelity Investments, relied on fair - value pricing after Asian markets
swooned. Fidelity calculated an increase in the value of its Hong Kong and
China fund using fair-market pricing.

Investors could be harmed if a fund doesn't use fair - value pricing, since
it could generate arbitrage activity that dilutes shareholder value, the SEC
letter noted. If the fund's NAV doesn't reflect up-to-the-minute changes,
shares could be overpriced, benefiting investors who sell their stake while
harming those who overpay to acquire shares. Conversely, if the fund is
underpriced, sellers would suffer at the expense of buyers.

" Fair - value pricing can protect long-term fund investors from short-term
investors who seek to take advantage" of such situations, Mr. Scheidt said.

Additionally, the SEC urged funds to provide investors with more information
on when and how they will use fair - value pricing, saying "plain English"
disclosure could reduce shareholders' complaints about the practice and
discourage arbitrage activity.

Small frys curbed
Business Standard - May 2, 2001
By Sangita Shah

The introduction of individual stock futures and options to replace the
carry forward system will drive out the small retail investors from the
stock markets, market sources said.

According to market participants, while derivatives as instruments have
always been an alien system to the Indian market, the technicalities
involved will leave domestic investors bewildered.

The introduction of index futures in June 2000 can be termed as anything but
successful. This can be proved by the fact that the average daily volume of
sensex futures has not crossed Rs 10 crore. Even Nifty futures, which has
performed better in terms of liquidity, has barely registered an average
daily volume of Rs 12 crore. This is a fraction of the cash market turnover
of Rs 5,000 crore collectively, in a stable market.

"Lack of understanding as to how the derivatives in stock markets are to be
operated is the major roadblock, in the success of the futures and options
market in our country," Bhavin Shah, a derivatives trader at a domestic firm
said.

In fact, even the LC Gupta Committee has noted in its report in March 1998
that " derivatives are not always clearly understood. A few well-publicised
debacles (sic) involving derivatives trading in other countries has also
created widespread apprehensions in the Indian public's mind."

While economic literature recognises the efficiency enhancing effect of
derivatives on the economy in general and the financial markets in
particular, the Committee felt the need for educating public opinion, as
also the need to ensure effective regulatory checks.

"It is worth mentioning that while regulatory checks have been implemented,
it has failed to educate public opinion. Under the circumstances, it is
probably high-handedness on the part of the authorities to thrust upon them
an alien system without giving an opportunity for smooth transition," a fund
manager said on conditions of anonymity.

However, the fact should also be considered that if futures and options in
individual stocks are introduced in the country, India will be among the
handful of global exchanges which have these systems. The problem is
compounded by the fact that there are few international precedents for India
to draw on in the matter of options and futures in individual stocks.

The difficulty of defining a default
Euromoney - April 2001

It's not difficult to see why the market is so taken with credit default
swaps. For the protection buyer, they are a quick and easy way for investors
worried about a particular credit risk - whether originally taken on via
bonds, loans, ~ trade notes, or derivative counterparty exposure - to gain
reassurance without having to dispose of assets. For sellers of protection,
default swaps provide the opportunity to buy into sectors to which they may
have little or no exposure, while avoiding the need to make a large capital
investment up front. The buyer pays a premium to the seller in return for an
agreement that, if a default occurs, the seller ~ pays a sum equal to the
value lost and assumes _ ownership of the defaulted assets.

For their part, dealers enthuse about being able to amalgamate limited
liquidity in different parts of the market and convert it into a readily
tradable instrument. "One of the big advantages of credit default swaps is
that they are in pure derivative form," says Glenn Barnes, global co-head of
credit derivatives at Merrill Lynch. "It's not like credit insurance where
you have to suffer a loss before you get paid."

Credit default swaps have quickly become ~ the largest component of the
credit derivatives market, making up over two-thirds of global business.
According to Merrill Lynch, the credit derivatives market accounted for $893
billion of notional value in 2000, a figure estimated to top $1.58 trillion
by 2002. "Derivatives are now absolutely central to the whole credit
benchmark," says Tim Frost, European head of credit derivatives at JP
-Morgan. "Bond issues cannot be priced without knowledge of credit swap
prices."

While the threat of a bear market lingers, -credit default swaps can only
grow in popularity as investors seek to insulate themselves against risk.
"Up until three years ago, the -only liquid protection from risk available
to bond investors was to -. go short on bonds and hope they got cheap enough
to buy before they had to deliver," says Gordon Black, a -managing director
in credit derivatives at Bear Stearns.

However, because the credit default swap market is now taking centre stage,
the structure of swap agreements is coming under much closer scrutiny. At
the heart of the debate is the question how to define a credit event. In
1999, reacting to continued confusion in the market over the issue, the
International Swaps & Derivatives Association (ISDA) published a list of
conditions, each of which is sufficient on its own trigger a swap agreement.
These credit events are bankruptcy, failure to pay, restructuring
repudiation or moratorium, obligation default and obligation acceleration.
At the time of publication, ISDA stated that these definition "were critical
to the growth in demand fro credit derivative transactions.

For a while, this kept market participant quiet. Although most felt that the
arrangement was by no means perfect, they were happy to use ISDA's list as
the basis of their credit default swap contracts. Having a blueprint for
swap agreements attracted greater numbers of investors with no previous
experience of default swaps, and liquidity boomed. But it wasn't long before
the flaws in the plan began to surface. At the end of 2000, following a year
of catastrophic results and event risk, US-based financial-services company
Conseco restructured over $~ billion of debt. With the agreement of its
banks, it extended the maturity of its bonds and loans until the end of
2003. Under ISDA rules, this triggered default and banks that had written
protection for parties exposed to Conseco found themselves having to pay
out.

"Initially, we were fairly confident about ISDA including restructuring
instead of the old 'material change'. We saw it as a step on the road to
default," explains Black. "But people failed to recognize at the start that
restructuring is not the same as default. You can't demand par value in the
case of a default. This exposed the seller not only to credit risk, but
market risk as well."

In response to growing dissatisfaction with ISDA's guidelines, some market
participants have gone about simplifying matters unilaterally. Dealers at a
number of major US houses have decided to remove restructuring from the list
of credit events included in credit default swap contracts. There is a
liquid market for these swaps in the US, which trade at a discount to those
with a restructuring clause. Other institutions have attempted to establish
a market in swaps that carry a more limited definition of default. Enron, an
energy trader that is also a large dealer in credit markets, is trying to
build a market in pure bankruptcy contracts, where bankruptcy is the only
event that can trigger payment.

Regulators are warning investors to pay particular attention to the contract
when they enter a credit default swap deal. Even banks aren't immune from
confusion. Last month it emerged that UBS Warburg was suing Deutsche Bank
over an unpaid obligation. UBS bought protection from Deutsche on Armstrong
World lndustries, which meant that if AWl defaulted on its payment or went
bankrupt, Deutsche would have to pay UBS $so million. In December, A\XTI
filed for bankruptcy but in the meantime it had undergone a reorganization
and created a holding company. So when UBS applied for payment from
Deutsche, the German bank refused to pay on the grounds the name on the
contract didn't match the name of the entity that had defaulted. The dispute
nearly ended up in court.

In London in February at Euromoney Institutional Investor's International
Bond Congress, David Clementi, deputy governor of the Bank of England,
voiced concern about the rapid growth of the credit derivatives market.

"It is intrinsically more difficult to standardize the definition of a
credit event compared with that of a price or interest rate - the underlying
for most other derivative products," he said. "Market participants will
therefore have to pay even greater attention to documentation."

It's all in the contract
Credit-rating agency Moody's Investors Service, too, has expressed concern
that investors don't always know what they are buying. "When investors enter
an agreement with a derivatives trader, they're talking to someone who works
with these products full time. So they're getting into something fairly
technical with a dealer who knows much more about the subject than they do,"
says Isaac Efrat, managing director in the structured finance department at
Moody's. "Investors always enter the market from the same direction, of
wanting to sell protection, whereas dealers tend to hedge everything. The
risk has to go somewhere and my guess is that it's going to investors," he
continues.

Bankers, unsurprisingly, dispute this, saying that the rating agency is
underestimating investors' knowledge of the structures. "Frankly, I think
people do understand the risks very well," says Barnes at Merrill Lynch.
"Some of the most recent entrants to the market, pension funds and hedge
funds, have quickly picked up how credit default swaps work." Others say
that the whole point ~f default swaps is the exposure to risk. "Moody's is
raining on the parade," says a credit derivatives trader. "Credit default
swaps-are supposed to synthetically create the risk profile of a bond. The
buyer acquires the risk and is paid for it."

But most admit that there are kinks in the market that need ironing out.
Most of these are to do with one particular type of credit event.
"Restructuring is where things come unstuck," says a market participant.
"The current restructuring clause in credit protection is more in favour of
the buyer," says Antonio di Flumeri, director of credit derivatives at
Deutsche Bank. He believes that a company's restructuring shouldn't give
rise to a default. "Banks holding loans and protection have the opportunity
to realise a windfall gain by restructuring those loans to trigger the swap,
then delivering a cheaper asset to the seller of protection," di Flumeri
says. Barnes agrees. "From the dealer's perspective, it isn't fair if the
holder of the asset consents to the restructuring of a loan but this then
triggers a credit event payment," he says. "This gives the bank

Without such protection, financial institutions would lose out on capital
relief. An alternative, which has found more favour among bankers, is to
place restrictions on what is deliverable in the case of a restructuring.
Under present arrangements, if a bank sells a five-year protection on a loan
or bond with the same length maturity and that debt subsequently needs to be
restructured, the original lending bank can agree to any terms it chooses.
It might, for example, allow a company to extend its debt to a maturity date
of 30 years in the future.

Because a restructuring has taken place, that bank can then exercise the
default swap and
the seller of the protection ends up owning 30-year debt. This can be a real
problem if that investor has been marking the bond or loan to market. "What
is cheapest for the buyer of protection to deliver may cause problems for
those who have sold protection," says Black.

The answer may be for ISDA to set a limit to the time over which debt can be
restructured, perhaps restricting it to the same maturity as the original
loan, or two or three years beyond it. This would limit bankers' discretion
and help redress the balance. "The question is, can we convince the banks
that this isn't limiting their ability to restructure?" asks one trader.
"They're going to say: 'What, you're telling me I can only restructure over
two years? That's not much of a restructuring'. They'll ask for 10, we'll
say three, maybe we'll settle on five."

Whatever the outcome of this debate - as Euromoney went to press ISDA had
not yet announced its conclusions - it needs to be resolved quickly.
"Everyone realizes that something has to give," says a credit derivatives
trader. "This market has only existed for three years and there's only been
any sort of meaningful liquidity for two. The last thing we want to do is
shoot ourselves in the foot." Unless an agreement is reached soon, there's a
real danger that the emergence of default swaps without restructuring in the
US could lead to the establishment of a two-tier market. Certainly, the
possibility of Europe excluding restructuring is a remote one, "I've tried
to do credit default swaps without it a couple of times in Europe and it
just doesn't work," says one derivatives trader. So that leaves it to the US
to back down. Or does it?

"European investors do often tend towards European names and the same
situation occurs in the US and Asia," says a banker. "In theory, each
jurisdiction could have its own treatment. This wouldn't be a disaster, but
it would affect liquidity." Moody's Efrat says: "I can easily envision a day
when there will be a wide range of credit default swap contracts determining
what counts as a default."

Stephen Selig, counsel at Baer Marks & Upham, goes further. There is no
reason why contracts shouldn't be specific to particular deals, he says.
"Unless I'm missing something, I really don't see why the scope of the
protection, and what gives rise to a trigger of the swap, can't be part of
the individual contract between the buyer and the seller. ISDA tries to
cover every eventuality and all you get is a long and unreadable list of
conditions."

For the sake of practicality, not to mention liquidity, it seems likely that
ISDA will come down on the side of a single set of criteria. "The market
needs a standard product," says Black at Bear Stearns. "You don't want to
have to compare documentation every time you do a credit default swap
because different jurisdictions have different standards." Participants want
to use credit default swaps for different purposes: some want to hedge
receivables, others use them as a synthetic asset class and others still to
hedge loans. So a blueprint is also essential to avoid exploitation of new
entrants in the market. "At the limit, if everyone developed a contract
which suited their own needs perfectly, there would be no trading at all,"
says Frost at JP Morgan.

Opinions are divided on whether this debate is causing a slowdown in the
credit default swap market. Says Deutsche Bank's Flumeri: "Volumes are the
highest they have ever been so I don't think the debate is having a
significant impact." But, according to another trader, "If there was a
universally accepted contract for credit default swaps, volumes would
explode."

But whatever ISDA announces, this is likely to be some way off. "If people
are expecting credit swaps to be as vanilla as interest rate swaps then they
are sadly mistaken," says Frost at JP Morgan. "I expect to have retired
before there is one standard contract that everybody around the world uses."

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