|
|
Enron Mail |
ISDA PRESS REPORT - MAY 24, 2001
Accounting * IASB Begins Work on Combinations Project - BNA * Banks Attack Investment Risk Accounting Plan - Financial Times Asia * Prospects for Quick Resolution of Japan's Bad Loan Problem Dim - BNA * Japanese Online Trading Service Eyes Expansion - Financial Times Regulatory * Nominations to Fed Governor Seats to be Ready Soon - BNA * Bankers Eye Impact on Agenda if Senate Control Changes Hands - BNA Risk Management * Basle Rules Could Hit Stability - Financial Times Other Issues * French Peg Hopes on Five-Year Bonds - Financial Times * LSE Float is Another Piece in Market Jigsaw - Financial Times IASB Begins Work on Combinations Project Seen as Step Toward Standards Convergence BNA - May 24, 2001 By Steve Burkholder LONDON--The International Accounting Standards Board took steps May 23 to begin a high-priority rulemaking project on business combinations in hopes of using the effort as one avenue leading to global convergence in financial reporting standards. IASB Chairman David Tweedie suggested that the newly restructured board could place the combinations effort "fairly high on our priority list" of standard-setting and associated projects. Formal decisions on the panel's agenda await consultation with the board advisory council, which is yet to be named (100 DTR G-2, 5/23/01). If the board seeks convergence in accounting standards, "this is one that we'd certainly look at," Tweedie said of the proposed project on combinations. The topic also is expected to be discussed in a special meeting May 24 with the chiefs of national accounting standard-setters from the G-8 countries. Edmund Jenkins, chairman of the Financial Accounting Standards Board, plans to attend. Tentative Approach Would End Poolings A tentative approach in IASB's proposed standard-setting effort would be to end the pooling-of-interests method of accounting, a method of reporting for "true mergers" or what are called in the United Kingdom "uniting of interests." A firm majority of the IASB appeared to favor poolings' demise. In such "unitings," the assets of combining enterprises are simply added together, leaving no impact on the income statement. Such accounting connotes that the commercial marriage is not an acquisition. Unitings are allowed under International Accounting Standard 22 on business combinations, although their occurrence is understood to be rare. A chief element in the rationale for use of such accounting is the inability to find an acquirer--a situation on which some in accounting, including IASB member James Leisenring and former SEC Chief Accountant Michael Sutton, have cast serious doubt. If poolings are not used, the purchase method of accounting is the general rule around the world. Purchase accounting typically includes writedown of goodwill, an amount that represents the premium paid over the book value of net purchased assets. In Connecticut, FASB has completed work on a set of rules for business combinations accounting built on required use of the purchase method (100 DTR G-6, 5/23/01). Poolings--prominent accounting practice in the United States--would be banned after June 30, according to FASB's latest set of decisions in the key rulemaking effort. However, FASB would not allow goodwill amortization under its proposed standard, which is expected to be issued in mid-July. Instead, the U.S. board plans to call for accounting that hinges on tests to gauge whether goodwill has been impaired--meaning its fair value dips below its book value, leading to a writedown of the intangible asset only when that occurs. Impairment Also Eyed by IASB IASB signaled that goodwill impairment "might be the way to go," as Tweedie stated in providing a summary of preliminary board opinions expressed on the second day of its four-day meeting in London. However, a number of board members are not ready to rule out goodwill amortization, as shown by comments that were noted by their chairman. Accounting standards on combinations could be better aligned around the world, but that does not mean IASB would achieve such convergence by "just slavishly following world opinion," Tweedie said. The international board plans to study the issue and accounting options thoroughly before it settles on a proposed route for merger and acquisition accounting. The research is expected to include a close reading of FASB documents chronicling that board's odyssey toward what it calls the "impairment-only approach" for goodwill. As noted by FASB members now on IASB, the U.S. board went down that path because it tries wherever possible to avoid affording choices in accounting. The impairment-only method is favored by many in commerce because it prevents the drag on earnings presented by the automatic writedown of goodwill. Tweedie Offers Project Proposals Other topics that Tweedie suggested should be in the scope of IASB's preliminary study leading to a rulemaking project on combinations are: joint ventures, which Tweedie called a "big escape route" around the negative effects of the purchase method for combinations and goodwill amortization; dual listings of stock of otherwise joined enterprises, said to be another method of accounting avoidance; and acquisition provisioning, a practice in the United Kingdom. In Britain, where Tweedie headed the Accounting Standards Board in the 1990s and into 2000, the impairment test for goodwill in combinations is stronger than the mechanism planned by FASB, the IASB chairman said. However, as Tweedie and an IASB colleague, Warren McGregor, noted, the economy largely has been strong over the last several years. Thus, the impairment approach hasn't undergone a "stress test" to see how well it works, as McGregor said. Experience With Project's Concerns At FASB, Leisenring, now on IASB, helped decide the direction of the combinations project until he left the board in June 2000. However, he did not take part in the redeliberations on treatment of goodwill, he emphasized. In comments May 23, Leisenring appeared somewhat optimistic about the utility of the goodwill impairment test--and was more upbeat about the better quality of financial reporting resulting from a ban on poolings. He also predicted the new FASB standard would lead to better recognition of intangible assets. "I think you won't just see these impairments exist when they want to have them," he said, adding that the reporting would be market-driven. He noted FASB's reasoning that getting rid of poolings would require that the purchase price be put on the books, making financial statements more useful to investors. Across the table from Leisenring, Geoffrey Whittington, a professor of accounting at Cambridge University until summer 2001, suggested that a "loose impairment test" could lead to nonamortization where such a writedown due to a slide in value was in order. He also appeared to question whether an acquirer could be found in every combination, as Leisenring had asserted. IASB plans to continue to discuss business combinations at upcoming board meetings this summer. Banks attack investment risk accounting plan Financial Times - May 24, 2001 By Michael Peel Leading banks will on Thursday attack a radical international plan to make companies reveal more about the risks associated with their investment portfolios. A conference at the British Bankers' Association, the main industry body, will highlight concerns that the plan could cause volatility in profits and threaten investor confidence. "The vast majority [of banks] think these proposals are potentially very damaging," said Paul Chisnall, a BBA director. "There is no split in the industry on this." The comments highlight the controversy over "fair value" accounting, a new approach that forces companies to adjust their profits to take account of the economic effects of non-trading activities. The BBA has joined other banks across Europe in condemning a plan unveiled late last year by the Joint Working Group, a body made up mainly of accounting standard-setters from the world's biggest economies. The proposals, which are being considered by national standard-setting bodies and the European Commission, will make companies adjust earnings to take account of rises and falls in the values of financial instruments such as derivatives and loans to customers. The BBA conference includes contributions from the chief accountants of HSBC, BNP Paribas and Barclays Bank, none of whom is expected to speak favourably about the proposals. The banks say it is unfair to make them account for changes in the values of instruments such as long-term customer loans, which are rarely traded and generally held to maturity. They are worried that sharp changes in interest rates would lead to dramatic changes in banks' accounts and confuse consumers. Banks argue the swings could put them at risk of breaching solvency requirements set by regulators, forcing them to withdraw from lending that caused volatility even though it was safe. The standard-setters who produced the plan say it should help investors by revealing large liabilities that remain concealed under traditional accounting rules. Prospects for Quick Resolution of Japan's Bad Loan Problem Dim; Study Panel Urged BNA - May 24, 2001 By Toshio Aritake TOKYO--With barely a month left before the Diet (parliament) adjourns in late June, Japanese Prime Minister Junichiro Koizumi's international pledge to settle the bad loan problem of banks in two years appears to have stalled. Minister in Charge of Financial Services Hakuo Yanagisawa May 17 met Takashi Imai, chairman of the powerful Keidanren (the Federation of Economic Organizations of Japan) that represents all top Japanese companies. Yanagisawa asked for Keidanren cooperation and proposed the establishment of a joint study panel of Keidanren and Zenginkyo (the Federation of Bankers Associations of Japan) to examine early bad loan disposal, a Financial Services Agency official said May 21. But Imai demurred, only agreeing to the need for prompt action, Keidanren officials said May 21. However, Keidanren and Zenginkyo May 22 began exploring ways to form the proposed study panel. The two organizations are preparing to hold a top-level meeting during the week of May 27 and will try to work out a joint guideline on debt forgiveness by banks to borrowers by the end of June, a Keidanren official said May 23. Yanagisawa's policy, which he explained during parliamentary testimony earlier this month, is to encourage the private sector to voluntarily clean up bad loans--which the FSA earlier this year said totaled as much as 150 trillion yen (about $1.3 trillion)--with market principles and encourage banks to forgive bad loans that may not be recovered so that borrowers, including construction companies, can continue borrowing. In this way the banks would not fail and result in job losses for workers. Countering Moral Hazard The so-called moral hazard that may occur as a result of banks giving debt forgiveness to borrowers can be prevented with restrictions under the Civil Rehabilitation Law, Yanagisawa said. He also said in Diet testimony that the Koizumi Cabinet needs to heed the policies of the Ministry of Land, Infrastructure and Transport and that totally denying debt forgiveness would arbitrarily halt industry restructuring. Over the past several years, banks had implemented debt forgiveness to beleaguered borrowers, such as large construction companies, supermarket chains, and banks themselves, in what FSA officials have termed as the first debt forgiveness program, and maintained credit lines or continued extending new loans to the borrowers. Yanagisawa said that on the condition that troubled borrowers seek debt forgiveness as the pre-condition to mergers and acquisitions, that the second debt forgiveness program should be accepted. While Keidanren's Imai is in agreement with Yanagisawa--who seems to represent banks' stance more than that of Japanese industry as a whole--that bad loan cleanup should be left to private sector efforts, his reluctance to accept Yanagisawa's request stems from his long-held view that Japan needs to quickly address the problem of excess production capacity, the Keidanren official said. The United States and the European Union supports Imai's position. Imai, as well as Japan Employers Association Chairman Hiroshi Okuda, also are concerned that debt forgiveness might resuscitate the borrowers and make them stronger than companies that have diligently managed their businesses and as a result the good companies might in turn be put in jeopardy. Banking Industry Skeptical Even the banking industry is skeptical of Yanagisawa's scheme. One senior official of a top Japanese bank expressed concern that Yanagisawa's emphasis on private-sector efforts might lead to a succession of something comparable to the multi-billion-dollar failures of the Sogo retail group and Tokyo Life Insurance last year. Both companies failed last year after suffering the implosion of huge liabilities relative to capital and assets--despite banks' loan restructuring and debt forgiveness. The FSA put Sogo under government supervised corporate rehabilitation. Debt forgiveness may not necessarily contribute to restoring health to troubled borrowers if their stock prices remain low and earnings remain poor, as happened to many borrowers in the past. That could mean that if the second debt forgiveness did not work, then another debt forgiveness would become necessary, starting a vicious cycle. Analysts Not Impressed David Asher, the American Enterprise Institute's associate director of Asian studies, described such an approach at an April 25 seminar in Tokyo as "brain dead capital injection" to borrowers. Keio University professor Masaru Kaneko said May 21 that the whole government approach toward bad loans reflected the ineptness of the Koizumi Cabinet and that he and his key Cabinet members have proved that they are failing to break the Liberal Democratic Party's faction system and the old guard hierarchy. If Koizumi truly is determined to resolve the bad loan problem in two years, as he pledged in his first parliamentary speech May 7, he should inject taxpayer money and force banks to write down bad loans and punish bankers and borrowers severely, Kaneko said. Analyzing Yanagisawa's Diet testimony, Kaneko said the minister is emphasizing private sector efforts and market principles to avoid getting accused publicly. In fact, at least two regional banks that Yanagisawa nationalized with taxpayer money injections a few years ago had to receive taxpayer money again last year, despite his promise to resell the banks back to the market. Japanese Online Trading Service Eyes Expansion Financial Times - Newsbytes - May 23, 2001 By Adam Creed EDerivative.com, a Japanese online brokerage for trade in interest rates derivatives, is looking to expand its customer base in Japan and overseas. The online brokerage said on Tuesday it has contracted Radianz, a Reuters and Equant-owned networking company, to provide local and international Internet protocol (IP) connectivity. EDerivative.com's 24-hour real-time market trading platform will be available to yen market dealers via their own local area networks, rather than through an existing standalone system. The networked service also allows the company to more effectively reach international traders. A Radianz spokesperson said the connectivity will be provided via Equant's global IP network. EDerivative.com says it aims to attract one-third of the market participants in Tokyo's yen swaps arena, a market it values at $3.3 billion. Spokesperson Kimihiko Matsuno told Newsbytes the service currently has just under 20 clients. "There are about 40 active players at the moment in the Yen market and we intend to target the core 25 banks by the end of this year," Matsuno said. Nominations to Fed Governor Seats To Be Ready Soon, White House Official Says BNA - May 24, 2001 By Brett Ferguson President Bush is expected to nominate two economists to fill the open seats on the Federal Reserve's Board of Governors "within the next few weeks," Glenn Hubbard, chairman of the White House Council of Economic Advisors, told BNA May 23. Hubbard said the security clearance and background checks required for such high-level positions have slowed the nomination process, but filling the last two seats on the seven-member Board of Governors is a priority for President Bush. There has been no specific effort to pick candidates working in the private sector rather than academia, but the ideal candidate "should be someone with excellent knowledge of banking and financial issues since banking regulation is the majority of what the Fed does," Hubbard said. Hubbard would not name any specific individuals under consideration for the Board of Governors posts, but said there is a list of several names being widely circulated. Some of the names being circulated include Terry Jorde, president of CountryBank USA in North Dakota, Diane Swonk, chief economist at Bank One in Chicago, and Cynthia Glassman, a senior economist at the accounting firm Ernst & Young. Bankers Eye Impact on Agenda If Senate Control Changes Hands BNA - May 24, 2001 By Adam Wasch and R. Christian Bruce The financial services industry will move to a more defensive position on consumer privacy, subprime lending, and other issues if Sen. James Jeffords (R-Vt.) bolts from the Republican Party and gives Democrats control of the Senate and its banking committee, sources told BNA May 23. But overall, key legislative priorities for bankers will remain intact if, as expected, Sen. Paul Sarbanes (D-Md.) replaces Sen. Phil Gramm (R-Texas) as committee chairman, they added. A spokesman for Sarbanes declined to comment, but Gramm told reporters May 23 that he expects good relations regardless of the committee's makeup. "I expect the same cooperation that the banking committee has operated under for the last two and a half years," Gramm said. A spokeswoman for Gramm noted that funding for the committee's staffs would continue to remain evenly split through the current session of Congress based on a resolution passed earlier this year. Dodd as Chairman? Presumably, if Jeffords switches parties, Sarbanes would assume the committee's leadership position, although one BNA source familiar with the issue said Sen. Christopher Dodd (D-Conn.) also could be in play for the job. Either way, observers cautioned that it will likely take weeks before a Senate resolution could be crafted to deal with the massive change in committee appointments. Nevertheless, experts said that if Dodd were appointed, it would help to assuage Republicans' concerns about the Banking Committee adopting what they said could be a more activist agenda under Sarbanes. A Democratic staffer for the House Financial Services Committee predicted that if Sarbanes takes the chair, more progress can be expected on consumer protection issues that the staffer said are now being ignored, such as predatory lending, abuses by credit card issuers, and so-called payday lenders. "I would see an aggressive consumer agenda coming out," the staffer said. "There are a lot of banking issues that tend to be bipartisan," an industry representative told BNA. "There will be no effect on business checking legislation and [Federal Deposit Insurance Corporation] reform, which are major priorities for us. Both are bipartisan." Bankruptcy Reform Could Move Another issue that could benefit from a shift in power is bankruptcy reform (H.R. 333, S. 420), which passed both houses by a large margin in March. However, since its passage, the bill has remained stalled due to the Republican leadership's inability to agree upon party representation in conference. A Democratic Senate clearly would break that logjam, and some industry observers see the legislation moving more easily if the Democrats take over in the Senate although abortion and homestead exemption issues could still provide barriers during conference. No one interviewed by BNA expected a flood of legislation to move out of a Democratically controlled Senate. Democrats would have too narrow a majority and each senator's individual power in the legislative process is too great for that. For example, issues related to regulation of secondary mortgage firms Fannie Mae and Freddie Mac will remain as politically complex as ever, sources said. "There is still going to be a very tenuous division of power," one source said. "I don't think people should now expect some big Democratic banking agenda." Oxley's Role Could Change Perhaps the most immediate effect of a Democratic takeover in the Senate is the increased pressure it could bring to bear upon House Financial Service Committee Chairman Michael Oxley (R-Ohio). Although banking industry representatives stressed to BNA how eager they are to work with members of either party, congressional sources told BNA the Republican party is their traditional ally. "This elevates Oxley's prestige considerably," one Republican staffer told BNA. "He's who they'll look to with their issues." Sources also said the industry will depend on Oxley to stop any unfavorable bills that clear the Senate. "We have to figure out if he's a good [bill] stopper and how far he'll go before he has to put pressure on the president to veto legislation," one lobbyist said. However, a committee chairman can have an impact even without passing legislation, said Joe Belew, president of the Consumer Bankers Association. If Sarbanes takes control of the Senate Banking Committee, he said, the senator from Maryland--or any other Democrat who ascends to the post--will be able to use the committee to set the agenda by using hearings and other actions to call attention to key issues. "Every chairman uses the gavel to highlight his own issues," Belew said. Democratic 'Ripple' Effect A Democratic staffer on the House side said ripple effects could be felt there if Sarbanes becomes chairman. Even though Republicans still control the House, the staffer said, they would have to take Democratic issues and positions more seriously, knowing that Senate Democrats might lend support. "All of a sudden the Democratic minority here becomes more relevant," the staffer told BNA. "For example, until a few days ago, predatory lending was a non-issue. If Sarbanes starts holding hearings on predatory lending, it's harder to push aside those concerns in the House." Jim McLaughlin, director of trust affairs for the American Bankers Association, said much the same. "It will change the direction of the chair about 178 degrees," he said. Agency Nominations Affected Another area that stands to be affected is the nomination process, McLaughlin added. Currently, the Federal Reserve Board has two vacant seats, and industry experts have assumed that the White House will move to replace the current leadership at the Office of the Comptroller of the Currency and the Office of Thrift Supervision. Now, the administration will have to plan those nominations with an eye toward candidates acceptable to a Democratic chairman, McLaughlin said. "It will probably be a pretty significant issue," he said. However, McLaughlin predicted that Don Powell, who has been named to chair the FDIC, is likely to be confirmed. "I wouldn't think he'd be in danger. He's a friend of Phil Gramm, but he's a banker, and he's knowledgeable," McLaughlin said. Evenly Split Lobbying Lastly, there is potentially some sense of the status quo for the banking industry, sources said. Although the financial services industry is known to give larger campaign dollars to Republicans, this does not mean Democrats have been left out in the cold and are estranged from the banking industry's interests. "We know both of these men," an industry lobbyist told BNA. "It's not like Sen. Sarbanes's agenda is a mystery to us. We can work with anyone we have to." The Financial Services Roundtable, a prominent trade group that represents some the largest financial services corporations in the country, told BNA it is prepared for what political changes may come. "We've been pretty balanced in the distribution of our lobbying efforts," a Roundtable spokeswoman told BNA. "Furthermore, It's been 50-50 [in the Senate] for some time now. We feel comfortable on either side." Basle rules could hit stability Financial Times - May 24, 2001 By John Willman The Bank of England on Wednesday warned that the stability of the world's financial institutions could be undermined by new rules designed to reduce the risk of bank failures. David Clementi, deputy governor, said the new Basle accord linking the amount of capital banks have to hold more closely to the riskiness of their loans could amplify the economic cycle. Downturns would be accentuated if bank credit dried up because the increased risk of loan default required banks to hold more regulatory capital. Mr Clementi said there was evidence of such consequences during the 1997 Asian crisis, when leading banks with sensitive risk-measurement procedures had suddenly enforced loss limits. Risk-adjusted capital requirements should be based on long-term measures that include the possibility of future economic downturns in assessing credits. "No one is suggesting that risk-insensitive capital measures are the answer," he said. "Rather we need to ensure that, in so far as we can, we avoid sudden perceptions of changed risk." Speaking at a conference organised by the UK central bank on systemic risk, Mr Clementi said that banking crises had become more common. Four of the G10 leading economies had suffered a banking crisis during the last 10 years. He warned that attempts to impose stronger banking regulation could be undermined if risk shifted to more lightly regulated financial institutions such as insurers. "We may find that our new rules are simply arbitraged away, for example using credit risk transfers to insurance subsidiaries, or asset securitisation sales to third-party insurers, or credit insurance and derivatives sold by insurers," he said. Mr Clementi said he would welcome international discussion of whether the trend towards risk-based measures in banking should be mirrored in non-life insurance regulation. French peg their hopes on five-year bonds- An alternative to futures traded on the Eurex could prove the deciding factor in a long-running debate Financial Times - May 23, 2001 By Aline van Duyn The long-standing competition between Germany and France to be the benchmark for the euro-zone bond markets is heating up again. The latest instalment of the debate is being played out in the futures market, where Euronext, the European exchange that runs the French derivatives market, last week relaunched its five-year European bond futures contracts. The contracts are being presented as an alternative to the five-year futures traded on the Swiss-German Eurex exchange, which have come under scrutiny from banks active in the market following a successful "squeeze" operation in March. Although the products traded on the exchanges are not directly related to the debt borrowing programmes of their respective governments, the outcome of their jostle for position could affect the price each country has to pay for its bonds. Herve Cros, bond strategist at BNP Paribas, which is one of 11 banks which will act as a market maker for the new Euronext contracts, said the squeeze experienced on the Eurex exchange - which led to losses for many banks - offered an opportunity to try to create an alternative. "For this reason, Euronext decided to relaunch its future on behalf of, and in collaboration with, numerous international players," Mr Cros said. When a bond future matures, the owner has the right to receive a certain number of underlying government bonds. This creates more demand for the underlying debt and can therefore push up its price. At the moment, French five-year bonds yield more than German five-year bonds. Reducing this gap would benefit the French treasury, because it could reduce its cost of borrowing. Because the amount of futures traded can be much larger than the size of the underlying cash market, shortage of deliverable bonds can occur. If an investor secretly buys up the deliverable bonds, the conditions for a market "squeeze" are created, because others will need to pay a premium to obtain the debt when the futures expire. There is a particular risk of a squeeze when there is a shortage of bonds in the cash market. For the June five-year bond, or Bobl, contract traded on Eurex there are more deliverable bonds than for the September contract. "There are concerns about a possible squeeze in the September Bobl future," said Kim Rosenkilde, global head of government bonds at ABN Amro, which is also a market maker for the Euronext future. In the coming weeks, traders will start to roll over their positions from June to September. The next three weeks will therefore be be a key period for determining the success or otherwise of Euronext's efforts to capture a share of the five-year futures market, which has been growing in importance in recent years. Banks have asked Eurex to consider changing its trading rules to make squeezes less likely, but so far the exchange's board has not responded to these demands. Euronext's contracts have two elements which could reduce the chance of a squeeze. First, positions are limited to 50,000 contracts. Second, the French treasury is able to temporarily increase the number of bonds available via the repurchase, or repo, market. Mr Rosenkilde said the contract would need to prove itself over the next six to 12 months if it was to become a viable alternative to the Eurex future. It can be difficult for liquidity to shift from one exchange to another, but it has been done before. There are other alternatives to using either the Eurex or Euronext futures, although none is likely to take over fully. The London International Financial Futures and Options Exchange has futures based on five-year swaps. Traders can also use the swaps market directly or cash government bonds to hedge their debt positions. Even though futures markets are a derivative of the underlying market, they are particularly important in Europe. Despite the existance of the single currency, the cash bond markets remain fragmented as each euro-zone country issues its own bonds. "Futures play a more critical role in the European market than they do in the US," said Bernd Hoefel, head of financial strategies at Lehman Brothers, also a market maker for the Euronext future. "The future is the big unifier for debt market participants, and this is why it is so important to have the future functioning smoothly." LSE float is another piece in market jigsaw Financial Times - May 24, 2001 By David Holmes and Braden Reddall LONDON (Reuters) - It may be a giant leap for the London Stock Exchange (LSE), but its public flotation detailed is no more than a small step on the path towards the unified European equity market that investors desire. Having set a July date for its long-awaited market debut, the London institution was poised on Thursday for one of the most fundamental changes in its 200-year history. Yet the flotation is only one part of the stock market jigsaw coming together across Europe, as bourses from Amsterdam to Frankfurt list their own shares and change the whole structure of European markets. As listed companies, exchanges should in theory be more able to make takeovers and alliances to rationalise the complex structure of the markets. The LSE pitched its flotation around such a claim -- that it would shake itself free of the constraints of mutuality and act in a commercial way, putting its shareholders' interests first. It should, after all, be well placed as the leading European bourse. The 2.7 trillion euro (1.64 trillion pounds) market capitalisation of its listed stocks is nearly double that of either Frankfurt or Paris. London is the largest global centre for the management of institutional equities, with 1.7 trillion pounds of equities under management. And around 500 foreign companies are listed on the London exchange, more than on any other. Yet the LSE has still given scant detail of its future strategy, beyond some generalisations about being Europe's leading exchange and forming unspecified technology links and partnerships. CHANGE IN FORTUNES The more important aspect of the LSE's flotation, at least in the short term, may simply be a pointer to a potential change in its fortunes. At the beginning of last year, the LSE was a mutually owned organisation struggling against a legacy of internal conflict and strategic uncertainty. Subsequently, an abortive plan to merge with the Deutsche Boerse led to the departure of Chief Executive Gavin Casey and left an impression of division between the exchange and some of its members. Just a few months later, the LSE stands poised to secure a near one billion pound flotation that it hopes will return it to the forefront of Europe's capital markets. It even seems to have gained the support of smaller brokerages with its more conciliatory approach. Brian Winterflood, chief executive of Winterflood Securities, told Reuters Television: "Isn't it nice to hear everyone on the same side.... They are listening to people, which is marvellous." The multi-billion pound valuations hung on traditional exchanges show that they have a future, despite potential threats to their way of doing business. Brokerages have deployed their own systems to trade shares between different clients, allowing those clients to trade directly with each other -- a process known as disintermediation. The Internet offers a medium for share trading that could yet emerge as a serious contender, yet investors still seem to believe that exchanges have a future. Behind the lofty valuations of the LSE and the Deutsche Boerse, which runs Frankfurt, are hopes that they will ultimately unite to offer investors a seamless route to trading shares across Europe, cementing their central market position and their value. Hopes that the LSE could itself be a bid target have already helped inflate its shares, which are traded on an unofficial "matched bargain" basis by investment bank Cazenove. They rose 330 pence or 9.8 percent to 3,575p by 3pm, having hit a record peak of 3,690p -- almost double their level at last July's debut. But the route to consolidation is little clearer after the LSE's flotation announcement, as Chief Executive Clara Furse conceded. Flotation gives the LSE an acquisition currency, but how it intends to spend it is unclear. "Trading is going global and geographic boundaries are becoming irrelevant," Furse said. "But how it will all pan out is difficult to predict". **End of ISDA Press Report for May 24, 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.
|