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ISDA PRESS REPORT - MONDAY, NOVEMBER 13, 2000
* Few issuers expected for first SET-50 index options; Acceptance hinges on Derivatives Act * Investment Instrument Standards Fight Grows * Derivatives Standards Need Check * Osaka and Dow To Form Derivatives Alliance * Australia Credit Derivatives Turnover At A$18.4B * Powerful Financial Services Reform Body Urged * Lamfalussy group sees the way to a golden future for an integrated market Few issuers expected for first SET-50 index options; Acceptance hinges on Derivatives Act Bangkok Post - 11/13/2000 SET-50 options will be the first derivative index launched on the Stock Exchange of Thailand next year as a new risk-management tool for investors. But a lack of firms willing to issue index options remains a challenge. Regulators will allow the issue of both call and put options based on index changes. A buyer of a call option, for instance, will receive payment for the difference in the change of the index if it rises above a set level. Similarly, a buyer of a put option is paid if the index falls. Suvit Mapaisansin, managing director of Merrill Lynch Phatra Securities, said index options would become an important risk-management tool. In overseas markets, most regulators choose to develop a futures market first to support derivative instruments. While Thailand plans to eventually develop a futures market, final passage of a new Derivatives Act is needed first. Mr Suvit said both futures and options were needed to enable investors to fully manage their risk. "The SET has sort of moved backward, developing options before futures. Under such circumstances, the market will have only buyers, with few sellers. The sentiment for market trends will be similar, both for puts and calls." Brokers would likely serve as intermediaries in processing orders, rather than taking positions themselves to limit their own risks, Mr Suvit said. "I think there is interest among investors in the instruments, but the problem is that there are no issuers yet." Full development of options would likely await the launch of the futures market. How successful derivative instruments become will hinge on overall investment sentiment. SET officials acknowledge that the lack of issuers poses problems. The draft Derivatives Act is being reviewed by the Council of State and then will be scrutinised by various agencies before final submission to Parliament. Investment Instrument Standards Fight Grows Australian Financial Review - 11/13/2000 By Roger Hogan The controversy over how Australian companies should account for financial instruments is likely to intensify during the next few weeks, when a joint working group set up by the Australian Accounting Standards Board releases a draft document designed to settle the question. According to the AASB's chairman, Mr Keith Alfredson, the document on which comments will be invited is likely to ``blow the minds'' of many in the financial markets, major corporates and the accounting profession, judging by the criticisms it has attracted even before its publication. But he said time for argument was fast running out. Whatever happened after the draft and invitation to comment were issued in the run-up to Christmas, ``Australia will have to make a choice.'' Accounting bodies worldwide have been working on standards for financial instruments to prevent the derivatives -related disasters that rocked many companies during the late 1980s and early 1990s, including US company Procter & Gamble, which lost $US157 million on interest-rate derivatives in 1994. The matter has become urgent in Australia partly because the United States has introduced its own standard Financial Accounting Standard Board statement No133 which became effective for some companies on July 1, and which will operate from January 1 for those whose financial years coincide with the calendar. FAS 133 is regarded as a nightmare by corporate treasurers in the US and here, because it requires derivatives and other financial instruments to be ``marked to market'' every quarter, rather than accounted for on a fair-value basis. Its critics claim it will lead to volatility and confusion in company financial statements. Mr Alfredson said that in the US, ``there is now a special interpretation group like the Urgent Issues Group here interpreting 133. In other words, it is so complex, readers can't just read the standard and interpret it. The group has already issued more than 100 interpretations.'' Australia has no accounting standard that deals comprehensively with the recognition and measurement of financial instruments, although it has made progress with disclosure requirements. Acknowledging the concern over the mark-to-market approach, the AASB commissioned the development of a fair-value model. The joint working group consists of representatives from Australia, Canada, France, Germany, New Zealand, the Nordic countries, Britain, the US and the International Accounting Standards Committee. IASC has incorporated elements of FAS 133 into its own much-criticised financial instruments standard, IAS 39. It remains to be seen how much simpler the fair-value approach will be. ``In fair-value accounting, you get the market value for the instruments at the time and fair value them. It sounds easy in principle, but it is much more complicated in practice,'' Mr Alfredson said. Developing the appropriate standard is only half the battle, however; the trick is to gain widespread acceptance for it. Even if Australia accepted the fair-value model, Mr Alfredson said, it would not be able to implement it alone, ``at least if I have any influence''. There would need to be a ``convergence by the major standard-setters after appropriate due processes, including field testing of its relevance and reliability to preparers and users''. Either that, or ``we may have to go to something else ... Perhaps FAS 133 and all its committees''. Derivatives Standards Need Check Australian Financial Review - 11/13/00 By Roger Hogan The Bank for International Settlements will indirectly highlight the need for appropriate accounting standards for derivatives today when it releases statistics showing global over-the-counter derivatives markets continue to grow strongly, with total notional outstandings for the first half of the year at $US94 trillion ($181 trillion). This represents a 6.6 per cent increase on the $US88.2 billion at December 31 and reflects an overall buoyancy of the market which contrasts sharply with the stagnation of volumes on derivatives exchanges. The notional value of exchange-traded contracts during the first half was $US13.9 trillion, the same as December 31, 1998. Another trend picked out by the BIS data is the rise of the euro as a key currency in the derivatives market. It extended its already dominant position in the interest rate derivatives markets, where it accounted for the equivalent of $US22.9 trillion, or 35.7 per cent of the total, compared with $US20.7 trillion (34.4 per cent) in the previous period. Growth during the first half was led by forward-type contracts, particularly interest rate swaps, outright forwards and foreign exchange swaps, said the BIS. The biggest segment, interest rate derivatives, grew by 7 per cent to $US64.1 trillion. Most of the growth was in swaps, which expanded 9 percent to $US48 trillion. Swaps have grown more quickly than other interest rate derivatives for the past few years, a trend the BIS said might be explained by the development of various swap structures, which might have enabled the market to respond to end-users' needs in a more flexible way than exchange-traded interest derivatives. Other reasons included the introduction of the euro and its stimulus to the growth of European capital markets issuance, some exposure to which was likely to have been hedged in the interest rate swap market; and reduced government bond issuance, which would have made government bond futures less useful as hedging instruments. Not surprisingly, given the currency volatility during the first half, the value of contracts outstanding in various currency instruments increased 8 per cent to $US15.5 trillion. This included a very sharp 26 per cent rise in contracts involving the euro; the value of $US and sterling contracts rose 9 and 11 per cent respectively. Activity in the equity-linked sector fell by 8 per cent to $US1.7 trillion, while that in commodity derivatives markets increased by 7 per cent to $US584 billion. Looking behind these face values, the actual credit exposures of financial institutions to derivatives fell by 8.4 per cent, from $US1.03 trillion to $US937 billion. Osaka and Dow To Form Derivatives Alliance Financial Times - October 25, 2000 By Bayan Rahman Osaka Securities Exchange, Japan's second-largest stock exchange, and Dow Jones & Co, the US index provider, will on Thursday sign an agreement to list the US company's derivatives products on the OSE early next year. Osaka will develop futures and options contracts, whose value will be linked to the performance of the Dow Jones Industrial Average. Goro Tatsumi, OSE president, and David Moran, president of Dow Jones Indexes, will sign a memorandum of understanding in Osaka on Thursday. The OSE is seeking derivatives-related tie-ups to expand its range of global products to attract international clients. The move is also designed to help the exchange defend its market share against the threat from 24-hour and internet trading. The agreement between the Osaka exchange and Dow Jones follows another one between the OSE and Nasdaq of the US to list derivatives products based on the Nasdaq-100 index. The OSE is also in talks with the Chicago Board Options Exchange and is considering talks with Eurex, the Swiss-German derivatives exchange. Australia Credit Derivatives Turnover At A$18.4B Dow Jones International News - 11/12/00 By Adam Bradbery SYDNEY -(Dow Jones)- The Australian credit derivatives market saw total turnover for the 1999-2000 financial year of A$18.4 billion, up substantially from 1998-1999, the Australian Financial Markets Association said Monday. This is the first year the AFMA has surveyed the credit derivatives market, but it estimates turnover was A$3 billion to A$5 billion in 1998-1999. Credit derivatives are instruments that allow market participants to manage the credit risk within their assets or to take exposure to such risk to boost returns. "This shows that the market has liquidity and depth," said AFMA credit derivatives committee chairman, Pierre Katerdjian. The findings are the result of a survey conducted by AFMA and the Securities Industry Research Centre of Asia-Pacific. "It's very encouraging, particularly as there are still a number of offshore banks and investment houses which trade Australian name default swaps but which were not captured by the AFMA survey," Katerdjian said. AFMA Chief Executive Ken Farrow says that the growth in the market is good for Australia's lenders and helpful in lowering systemic risk in Australian financial markets. Katerdjian says most market participants expect turnover of credit derivatives to increase 50% this financial year from last year, with the global reduction in government debt on issue and the increased liquidity of corporate bond markets encouraging this trend. "There is a greater need to hedge credit risk and these instruments are the most efficient way to do that," he said. Powerful Financial Services Reform Body Urged Financial Times - November 10, 2000 By Peter Norman The European Union needs a powerful new EU securities committee to help speed regulatory reform In markets for financial services and capital, a special EU group on securities regulation proposed yesterday. The group rejected the idea of a single EU regulatory agency "at his stage of the development of the EU's securities markets". This idea, which would require changes to EU treaties, gained little support from market practitioners. But Alexandre Lamfalussy, the former Belgian central banker who chaired the so called wise men's group, urged EU leaders at next March's summit in Stockholm to agree to proposals for a new faster method of regulatory reform and make commitments for it to be in place in the EU by 2002. "We can no longer afford the luxury of regulatory inefficiency in the instantaneous internet age," declared Mr Lamfalussy. "Financial markets are changing by the week and European regulation is simply not up to speed." The report said an efficient regulatory process for financial services and capital markets was "crucial" for the EU and its citizens, because it would boost growth, competitiveness and jobs. Mr Lamfalussy said the proposed system, which would have the securities committee work out the detailed implementation of new regulations, could cut the time needed to complete reforms "substantially" and possibly by a half. The committee, which would consist of representatives of the Commission and member states, would be able to adapt existing legislation to changed circumstances "very quickly", he added. Mr Lamfalussy made clear that the fast track system being proposed would have to be monitored carefully and reviewed promptly if found to be "manifestly failing" to secure progress. The interim report was welcomed by representatives of the financial sector. Some bankers said it was auspicious that the final recommendations would be delivered in February during EU presidency of Sweden, which is known to favour speeding the development of the single financial market. Adam Ridley, direcxtor general of the London Investment Banking Association said the report proposed a sensible institutional structure. He welcomed the decision to initiate a wide debate on the proposals before production of the group's final report. Paul Ariman, the secretary general of the Federation of European Stock Exchanges, praised the report's "very pragmatic" approach, noting that it would have taken at least three years to set up a single European regulator. Mr. Lamfalussy said regulatory changes were "especially urgent"" if the EU was to create a real single market for financial services. He endorsed the proposals of the EU's financial services action plan, but urged that it be completed by 2004. The present target of 2005 could be missed unless the EU adopted the groups fast track approach on legislation, he warned. Lamfalussy group sees the way to a golden future for an integrated market Financial Times - 11/10/00 By Peter Norman The average US investment fund is six times larger than its European equivalent. Venture capital per head of population in the European Union is one-fifth of US levels. The average annual real return on US pension funds was 10.5 per cent between 1984 and 1998 against 6.3 percent in the EU. With these facts Baron Alexandre Lamfalussy and his group of wise men highlighted the deficiencies of the EU's financial market, in yesterday's interim report on the regulation of European securities markets. The prize of creating a properly integrated European financial services and capital market, that would virtually complete the EU's single market for goods and services, was couched in correspondingly glittering terms. Financial market integration, Mr Lamfalussy said, would lead to increased productivity of both capital and labour, enabling the Europe's economy to grow faster and create more jobs. It would bring benefits to consumers, through higher returns; to small and medium-sized enterprises, through more venture capital; and to large companies, through lower capital costs. The reforms needed to create such a market have long been identified and cover issues such as new rules for regulated and non regulated markets; a single "passport" to ease the raising of capital across borders and updating investment rules for pension and investment funds. They form the EU's financial services action plan, due to be implemented by 2005, but which the Lamfalussy group wants completed by 2004. The problem so far has been putting in place the regulatory conditions to police such a market in a period of rapid technological and market change. As Mr Lamfalussy's report recalled, it takes an average three years to agree an EU regulation or directive and delays can be much longer. The EU takeover directive has been under discussion for 11 years and still to be enacted. The report called for a regulatory system that "can adjust continuously, flexibly and rapidly to future developments, which are unpredictable today". It must "not inhibit legitimate market development" and be "neu- tral as regards competition between different service providers". The current system, Mr Lamfalussy complained, "is too slow, too rigid and contains too much ambiguity and inconsistent implementation". The novelty of yesterday's report is in the way it draws on a little used element of the EU's legislative procedure to propose a faster way of introducing and implementing legislation governing financial markets. At first sight its "four level" approach for securities legislation appears technical and undramatic. But by using the process known as comitology it offers a chance of halving the time needed to introduce financial market rules. Mr Lamfalussy's group proposed that future EU securities legislation should concentrate on principles rather than details. The legislation, which would be agreed in the usual way by the council of ministers and the European parliament on a proposal of the Commission would ideally be framed as EU regulations, which do not require transposing into national law. A new EU securities committee would define how these principles would be implemented. It would comprise Commission officials and representatives of member states, who would decide technical details and update them when necessary. EU member states would be responsible for implementing the legislation, ensuring that it was "consistent and equivalent" throughout the KU. This would entail much greater co-operation between regulators and the Commission. The attraction of the plan is that it could be enacted without changing the EU treaties and in force by the beginning of 2002. It would be closely monitored and reviewed around 2004. However, Mr Lamfalussy made clear the new procedure would need political endorsement at the highest level and suggested EU leaders at their Stockholm summit in March next year should pass a resolution agreeing a series of commitments to be delivered by 2002. His fast track method would also have to win the support of the European parliament, which has adopted a generally hostile approach to comitology because it pares its powers. Stressing that yesterday's report was an interim proposal, Mr Lamfalussy said his group would now seek political and market reactions. End of ISDA Press Report for Thursday, November 2, 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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