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ISDA PRESS REPORT, WEDNESDAY, SEPTEMBER 27, 2000
* Talk of Euro's Revival May Be Premature - New York Times, 9/26/00 * Basel Issues New Credit Risk Guidance - Financial Products, 9/19 - 25/00 * Community Bankers Debate FASB on Loan Loss Reserves, Fair Value - Excerpted - BNA, 9/27/00 * Armey Pushes for Compromise on Swaps - American Banker, 9/27/00 * Deals Close, But Obstacles Remain for US Commodities Bill - Dow Jones News Service, 9/26/00 Talk of Euro's Revival May Be Premature New York Times, 9/26/00 By Edmund L. Andrews PRAGUE, Sept. 25 As a show of market power, the joint intervention to rescue the euro seems not to have much impressed its audience. Today, on the first full business day after major central banks intervened in the currency markets to revive the downtrodden European common currency, and threatened to do so again, the markets barely reacted. The euro, the currency adopted by 11 European nations nearly two years ago, traded throughout the day around 88 cents to the dollar, and weakened to 87.30 cents in late New York trading, compared with 87.87 late Friday. At its high point after the intervention, the euro sold for about 90 cents. Today's rate is only around 3 cents above its low and well below what some European officials consider its true value. Indeed, as finance ministers and central bankers from around the world attended annual meetings of the International Monetary Fund and the World Bank here today, there were new signs that the American leaders are less worried than Europeans about reversing the euro's decline. The unexpected decision by the United States to join the rescue attempt on Friday surprised investors and lent further credibility to the European Central Bank's move. Japan and Canada intervened, too. But the tone of American statements was more ambivalent than that of European bankers. Secretary of the Treasury Lawrence H. Summers insisted over the weekend that the United States had not changed its view that "a strong dollar" was in the interests of the United States. Ernst Welteke, president of Germany's central bank, let it be known today that he and other German officials were frustrated by Mr. Summers's remarks, as they seemed to undermine the use of future interventions. "They thought the remarks of Larry Summers had not been very helpful," said Rolf-Ernst Breuer, chief executive of Deutsche Bank, who met with Mr. Welteke and other senior German officials here this morning. European leaders made clear that they wanted to do more than simply stop the decline of the euro, which has lost about 25 percent of its value against the dollar since its introduction in January 1999. Over the weekend, Finance Minister Laurent Fabius of France emphasized the need to achieve a higher rate. Wim Duisenberg, the European Central Bank president, talked about achieving an "orderly reversal" in the euro's decline. Because a failed intervention would do greater damage to the euro's credibility than no intervention at all, it is hard to imagine that the European Central Bank will not act again. European officials meeting here in Prague said repeatedly in the last couple of days that they would intervene again if appropriate and made clear that the euro's current value is nowhere near the level they want. But there was no hint of a follow-up campaign today, nor was there any anxious repositioning of portfolios by currency traders in anticipation of one. Adding to the pressure, European officials are preparing for the possibility of more bad publicity on Thursday, when Denmark votes on whether to adopt the euro. Polls have shown the Danes almost evenly divided, but the euro's decline in the last few weeks appears to have strengthened the opponents. While a Danish rejection of the euro might have little immediate impact on its trading value, it could increase resistance in the two bigger countries that have stayed out of the monetary union, Britain and Sweden. "Of course it would be bad news for the euro," said Klaus Friedrich, chief economist at Dresdner Bank. "Right now, all news about the euro is bad news." The more fundamental problem, analysts say, is that the euro's weakness does not lend itself to a quick fix through central bank intervention. Intervening on behalf of a currency generally works best if a large number of speculators have already been betting heavily in one direction, because central banks can often squeeze out traders with a short but intense bout of buying in the other direction. But the euro's core troubles are reflected in long-term investment flows, and may stem from the effects of corporate mergers and acquisitions as well as portfolio investments. In general, those investments have been pouring out of Europe and into the United States, reflecting higher American growth. "It is the long-term flows that are leaving the country," said Tony Norfield, chief currency analyst at ABN Amro, "not the mad speculators. There are very few positions out there to squeeze." Indeed, analysts say that money managers, particularly in Asia, bet too heavily in favor of the euro. Many did so initially because they liked the idea of having an alternative to the dollar, but then funds invested heavily on the mistaken conviction that the euro was overdue for a rebound after its early declines. Those expectations were kindled by almost all major bank and investment banks, which were overly optimistic about the euro's prospects. Axel Siedenberg, head of economic research at Deutsche Bank, said the goal of intervention is not so much to strengthen the euro as to keep it from sinking further. And that, he said, is an attainable goal. "The intervention was not intended to start a new trend toward a strong euro," Mr. Siedenberg said. "The message to the market is that this is the bottom." Financial Products, 9/19 - 25/00 Basel Issues New Credit Risk Guidance By Emma Davey The Basel Committee on Banking Supervision - part of the Bank for International Settlement - has issued revised guidance on credit risk management and disclosure, intended to be applicable in a wide range of jurisdictions and for banks of varying degrees of sophistication. The paper titled "Principles for the Management of Credit Risk" specifically addresses the following areas: - Establishing an appropriate credit risk environment. - Operating under a sound credit granting process. - Maintaining an appropriate credit administration, measurement and monitoring process. - Ensuring adequate controls over credit risk. The paper titled "Best Practices for Credit Risk Disclosure" aims to promote adequate and effective transparency of banks' credit risk profiles by providing guidance to banks on useful credit risk disclosures and discussing supervisory information needs with respect to credit risk in banks. The guidance covers credit risk in all types of banking activities, including lending, trading, investments, liquidity/funding management and asset management. The Basel Committee said the revised guidance had taken into account the consultative drafts issued in July last year. While these comments did not suggest fundamental changes to the papers, but rather enhancements to what was there, the treatment of proprietary information, for example, has been addressed in the disclosure paper. Roger Cole, chairman of the committee's risk management group said that banks would differ in their specific credit risk management practices, but the principles were described in the paper. "These principles should be applied in conjunction with sound practices related to the assessment of asset quality and adequacy of provisions and reserves, which have been addressed in other recent Basel Committee documents, along with [the] paper on disclosure of credit risk." Chairman of the Transparency Group Jan Brockmeijer added that the objective of the disclosure paper was to "encourage banks to provide market participants and the public with the information they need to make meaningful assessments of a bank's credit risk profile. Transparency in this area is particularly important." BNA, 9/27/00 Community Bankers Debate FASB on Loan Loss Reserves, Fair Value - Excerpted By Steve Burkholder NORWALK, Conn.--A discussion on bad debt reserves by a leading group of community bankers and the Financial Accounting Standards Board turned into sharp debate Sept. 26 as the bankers and FASB members spoke of the clash of bank regulators' concerns with the basic motive of accounting rulemakers to ensure that reporting rules are followed properly. For more than a year, accounting for loan loss allowances has been a hot topic among banks, their federal regulators, standard-setters at the American Institute of Certified Public Accountants, accountants at the Securities and Exchange Commission, and--so far peripherally, but significantly--FASB. The SEC was not mentioned in the verbal sparring between FASB members and delegates from the Independent Community Bankers of America (ICBA). However, it was SEC Chairman Arthur Levitt's comments in late 1998 about loan loss allowances that sparked the wider debate in industry, public accounting, and among regulators. Levitt cited loan loss accounting as one way by which corporate earnings reports--in this case, those of banks--can be manipulated through use of so-called "cookie jar reserves." That view led in large part to a public debate between the commission and the banking agencies, including the Office of the Comptroller of the Currency and the Federal Reserve Board, and carefully crafted interagency statements offered from Washington to calm bankers. Doubts About Utility of Fair Value Accounting Separately at the meeting with FASB, representatives of the community bankers group voiced doubts about the utility of moving to fair value-based accounting for all financial assets and financial liabilities, and more debate ensued. The accounting board has embarked on a rulemaking project that would lead to a goal of full fair value accounting for financial instruments, provided difficult measurement questions can be answered. That effort is expected to last years. "As a user" of financial statements, "I'd rather have cost-based amounts in financial statements," said Kurt Henstorf, of First National Bank, headquartered south of Omaha, Neb. "I totally disagree," said FASB's Foster. His view was buttressed by comments from Lucas, who said, as an auditor, he would rather seek to check fair value-based amounts for banks' loans that depend on current accounting for bad debt reserves. Henstorf disputed that. The board's staff project manager of the fair value effort, Ronald Lott, offered an anecdote that counters a refrain sounded by the banking community--that security analysts are not clamoring for fair values in financial statements. Lott said he took part in a recent panel discussion in which analysts appeared to voice a desire for more fair value-based information. "They seem very interested in fair value," said Lott. "They just didn't trust what's in the financial statements." Near the end of the discussion on fair value, Foster offered a prediction about the length of FASB's rulemaking project. He ventured that his colleagues would not disagree. Looking at the gathered bankers, Foster said, "All of you will be retired by the time this goes through." American Banker, 9/27/00 Armey Pushes for Compromise on Swaps By Rob Garver WASHINGTON -- In a sign that Republicans are serious about passing a bill to revise the laws governing derivatives transactions, Majority Leader Richard K. Armey met Tuesday with representatives of three House committees -- each pushing different versions of the same bill -- and urged them to hammer out a deal. A spokeswoman for Rep. Armey said, "He pulled them together to say, 'Look we need to get this done this year, so let's wrap it up.'" She added that Rep. Armey believes that the differences between the competing bills can be resolved by Thursday, in time to schedule a vote on the House floor next week. The House Agriculture, Banking, and Commerce committees have passed versions of a bill that would modernize the Commodity Exchange Act. Of the three, the Banking Committee version, sponsored by Chairman Jim Leach is most popular with the financial services industry because it would provide so-called legal certainty for swaps transactions. Swaps and other over-the-counter derivatives are private agreements under which two parties agree to exchange the risk on certain assets as a hedge against loss. Bankers have expressed concern that because swaps bear a strong resemblance to futures the Commodity Futures Trading Commission might assert regulatory authority over them. This would create a huge problem for U.S. banks -- which held swaps with more than $20 trillion in notional value at the end of June -- because futures are legal only if they are traded on an exchange. If the CFTC were to successfully argue that swaps are futures the legal enforceability of swaps could be in jeopardy, because they are not traded on an exchange but are negotiated on an individual basis. The House Banking bill would explicitly bar the CFTC from regulating swaps. Rep. Leach said in an interview with American Banker last month that passing a bill that would provide legal certainty for swaps was his top priority during his final month as committee chairman. Rep. Leach's bill is also the most likely to satisfy several requirements laid out by Senate Banking Committee Chairman Phil Gramm. The Texas Republican told reporters last week at the American Bankers Association's annual convention that legal certainty for swaps is one of his central concerns and added that a bill that protects swaps only from regulation by the CFTC would not go far enough. He wants the Securities and Exchange Commission to explicitly be barred from regulating swaps as well. "Right now, the uncertainty is about the CFTC exerting some supposed authority over swaps and casting doubt on their validity. But if the CFTC is banned -- regulation doth abhor a vacuum -- what is to keep the SEC from coming in and doing exactly the same thing? Once that is fixed then we are really going to begin in earnest to try to pass this bill. But I'm not getting on board until that's done." Sen. Gramm said that he would prefer a bill in which the SEC and the CFTC have no jurisdiction at all over swaps, but he has suggested a compromise under which the SEC would have the authority to intervene to protect consumers from price manipulation or fraud. "That's a good compromise. I think they ought to take it," Sen. Gramm said. Swaps are not the only contentious issue raised by the competing bills. Also being debated is the repeal of the Shad-Johnson accord, which for 18 years has barred the trading of futures contracts based on single stocks. The issue had been holding up all three versions of the bill, as the CFTC and the SEC debated how to regulate them. A deal between the agencies, announced Sept. 17, apparently cleared the way for the Shad-Johnson repeal, although it raised loud objections from stock and futures exchanges. Administration officials have shown a high degree of support for updating derivatives rules. The CFTC-SEC deal was brokered by Treasury Secretary Lawrence H. Summers, and in a meeting with lobbyists last week other Treasury officials said the administration was committed to lobbying lawmakers to pass a bill this session modernizing swaps and other derivatives trading. Treasury Assistant Secretary Lewis A. Sachs reiterated the administration's position on Tuesday. "It would be unfortunate if we were to miss this historic opportunity to modernize the regulatory structure of our derivatives markets," he said during a speech in New York. Dow Jones News Service, 9/26/00 Deals Close, But Obstacles Remain for US Commodities Bill By Dawn Kopecki WASHINGTON -(Dow Jones)- Lawmakers working on drafting new commodities laws have several key agreements in the works, but aren't likely to have legislation ready to go by Monday as some lawmakers predicted. House Majority Leader Dick Armey, R-Texas, told reporters Tuesday that GOP leaders expected to officially file a bill that rewrites U.S. commodities laws Thursday and vote on the legislation Monday. But interviews with lawmakers, regulators, committee staff and lobbyists indicate that they still have a lot of work left to do on a complicated bill with a limited amount of time left in this congressional session. Lawmakers have less than a month left to finish their work for the year with only two of 13 must-pass federal spending bills have been signed into law. "The Senate and House are engaged. They're engaged at the leadership level, the various exchanges are engaged, the regulators are engaged. The greatest challenge is the clock," one Treasury Department official told Dow Jones Newswires. "All parties are in the process of open and constructive dialogue." Lawmakers are rushing to finish legislation that would free over-the-counter derivatives transactions from federal oversight, ease regulations of futures exchanges and lift the 18-year ban on trading single-stock futures. GOP leaders have put the legislation on the fast track in Congress amid fears that U.S. markets are rapidly losing out to foreign rivals that operate under less stringent laws. That anxiety was intensified last week after the London International Financial Futures & Options Exchange announced that it will begin trading futures on individual U.S. and European stocks Jan. 29. Lawmakers and regulators are just about finished with a deal that would repeal the so-called Shad-Johnson accord, responsible for banning single-stock futures in the U.S. nearly two decades ago. While the Securities and Exchange Commission and the Commodity Futures Trading Commission reached their own agreement on the issue about two weeks ago, the deal prompted securities exchanges to pull their support from the bill. Equities markets felt the deal gave single-stock futures an unfair, competitive advantage over stock options with regards to margin requirements, transaction fees and tax treatment. The new deal, worked out over the last week or so, is said to even margin requirements and tax treatment for the two products and set a two-cent transaction fee on single-stock futures. The details for margin requirements were not immediately available, and House Ways and Means Chairman Bill Archer, R-Texas, is said to still be drafting the legislation that would guarantee equal tax treatment for the two products. The tax issue is said to still be "open." A number of other issues similarly remain unresolved. Lawmakers and regulators have yet to solve differences of opinion over how to regulate energy and metal swaps. And Senate Banking Chairman Phil Gramm, R-Texas, said he still isn't satisfied with how the legislation treats other swaps agreements. It is not clear that most swaps contracts, used by institutional investors to hedge interest rate, currency or other types of risk, are legally enforceable if challenged in court. Sen. Gramm told reporters last week that he wants legislation that would essentially bar the SEC and CFTC from regulating swaps transactions except in cases of fraud or price manipulation. But regulators are trying to strike a balance that doesn't diminish the authority of the CFTC and SEC to regulate other products or markets. There are also still disagreements over whether or not swaps agreements based on bank products should be overseen by bank regulators. "Some concerns have been raised about the language which the banking committee approved," said David Runkel, spokesman for the House Banking Committee, referring to a provision that requires bank regulators to oversee those products. "No one wants to talk about specifics when they're still trying to work out an agreement on the bill," Runkel added, eluding to give any other details. The CFTC and Treasury are said to have problems with that aspect of the bill. While regulators and lawmakers agree it's important to limit onerous regulations of swaps for large institutional investors, no one can agree on what to do with the possibility of selling swaps to small retail investors. The House Banking Committee added a provision to their version of the bill that opens the door to that new market. The product doesn't currently exist. And the prospect of allowing institutions to sell derivatives products to the general public makes many in Washington a little queasy. "We'd love to have it. But we've told everyone that we don't want it if it blows up the bill," one derivatives industry source said in an interview. "It doesn't do anyone any good if we don't get a bill." Still, lawmakers and regulators are working day and night to try to beat the clock and get a bill passed before lawmakers dash out of town to campaign for November's federal elections. The dilemma lawmakers face in getting the bill passed this year is the many constituencies that have a stake in the issue. Because Congress has so little time left, the bill has to garner nearly unanimous approval from the House agriculture, banking, commerce and ways and means committees as well as the Senate agriculture and banking committees; the securities and futures exchanges, brokerage firms, banks and the rest of Wall Street. Then there are the securities, bank and futures regulators who all have to sign off on the bill to give it even the slimmest chance of passing before the end of this year. But, everyone is remaining optimistic. "There's a genuine effort from all sides to get together and work this thing out," said a spokesman for House Commerce Chairman Tom Bliley, R-Va. Bliley had previously promised to block the bill. Negotiations are ongoing, lawmakers and regulators are scheduled to meet again early Wednesday. End of ISDA Press Report for Wednesday, September 27, 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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