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ISDA PRESS REPORT - NOVEMBER 12, 2001
CREDIT DERIVATIVES * ISDA Publishes Credit Publishes Credit Derivatives Convertibles Supplement - ISDA Press Release * ISDA Debuts Credit Derivatives Number At $631.5 Billion In OTC Market Survey - ISDA Press Release * ISDA reports growth in credit protection - Financial News * Supranational Studies First Use Of Credit Derivatives - Derivatives Week RISK MANAGEMENT * Basle study suggests changes to the Accord - IFR ISDA Publishes Credit Publishes Credit Derivatives Convertibles Supplement ISDA Press Release - November 9, 2001 <http://www.isda.org/whatsnew/index.html<; NEW YORK, Friday, November 9, 2001 - The International Swaps and Derivatives Association announced today that it has finalized and published the Supplement Relating to Convertible, Exchangeable or Accreting Obligations. The Supplement and Commentary can be accessed under the What's New section of the ISDA's web site. The Convertibles Supplement addresses the treatment under the 1999 ISDA Credit Derivatives Definition of certain types of convertible and exchangeable obligations, as well as the treatment of accreting obligations, such as zero-coupon bonds, low coupon bonds issued at a discount and non-discounted bonds that accrete during their term. "The Convertibles Supplement represents the consensus of a diverse range of constituents in the credit derivatives markets, including portfolio managers, credit protection sellers and dealers," said Robert G. Pickel, Executive Director and CEO of ISDA. ISDA Debuts Credit Derivatives Number at $631.5 billion in OTC Market Survey ISDA Press Release - November 9, 2001 <http://www.isda.org/whatsnew/index.html<; NEW YORK, Friday, November 9, 2001 - The International Swaps and Derivatives Association (ISDA) announced today that the global notional outstanding volume of credit derivatives transactions was $631.497 billion for the first half of 2001. While still modest in relation to interest rate products, this figure is expected to remain on a strong upward trend compared to more mature derivative product areas. Polling member firms for the first time on credit derivatives transactions, ISDA surveyed total notional outstanding volumes for single name credit default swaps, default swaps on baskets of up to ten credits, and portfolio transactions of ten credits and more. 83 ISDA member firms supplied data on these products. Interest rate and currency derivatives growth was 3.573% in the first half of the year among members that also reported to ISDA at year-end 2000. For these firms, total notional outstanding volumes increased from $53.267 trillion to $55.170 trillion. Total notional principle of interest rate swaps, interest rate options and currency swaps for all surveyed firms dipped to $57.305 trillion from $63.009 trillion last year. Among top ten dealers, there was also a minor decrease in volume from $35.648 trillion to $35.532 trillion. "Shifting product use is a reflection of a more uncertain global market environment," said Thomas K. Montag, Vice-Chairman of ISDA and Chair of the Association's Market Survey Committee. "The market for credit protection has an obvious appeal during times of economic downturn," said Mr Montag, a Managing Director of Global Interest Rate Products and Asia FICC, and Co-President of Goldman Sachs (Japan), Ltd. The survey, which is compiled twice yearly by Andersen LLP, is performed on a confidential basis. It is complemented by the more comprehensive survey produced quarterly by the Bank for International Settlements. Of the 83 member institutions providing outstanding notional volumes figures in the ISDA interest rate and currency derivatives survey, 67 were participants in the previous semi-annual survey. Isda reports growth in credit protection Financial News - November 12, 2001 Available upon request - smarra@isda.org <mailto:smarra@isda.org< Supranational Studies First Use Of Credit Derivatives Derivatives Week - November 12, 2001 The European Investment Bank, a multinational lender with a EUR215 billion (USD192 billion) loan portfolio, is considering using credit derivatives for the first time as a means of hedging its credit risks next year. Officials at the EIB in Luxembourg said the lender is currently conducting an internal review on the credit derivatives market and is weighing whether it makes sense to use products such as single-name default swaps to mitigate risk. "Credit [derivatives] would be a completely new field for us," said Luis Pacheco, an official in the credit-risk department in Luxembourg, noting the bank has used foreign exchange swaps in the past on the back of its bond offerings but has not used any derivatives on its loan portfolio. The lender hands out EUR36 billion per year, EUR30 billion of which is within the European Union, to highly rated banks and corporates. Two-thirds of the loans go to highly-rated banks with credit ratings in the A range with maturities of 15-25 years, which then loan money to small and medium-sized enterprises. The remaining third goes to corporates across the credit spectrum in five to 15-year tenors. Pacheco said the EIB will accept default swaps in place of bank guarantees, which it now requires as a means of hedging risk on the bulk of its long-term lending, if the market is deemed liquid enough. Officials were unable to quantify potential usage of credit derivatives given the early stage of the discussions. Credit derivatives pros were excited to hear of the EIB's discussions. "It's just a matter of time until the credit derivatives market becomes more like the interest-rate swaps market and what we're seeing now is the initial phase," said one trader, adding, "I'm not surprised." Pacheco and other EIB officials said the reason behind the review is because the default swap market is more liquid and as a result may offer more attractive pricing for debtors. "The advantage is the portfolio approach," commented one official. The EIB has considered using credit derivatives in the past, although it found "the market was not developed enough and so we were not interested," said Pacheco. The supranational is analyzing the market now to see if that has changed in terms of liquidity and critical mass in the last year as is expected. "Now we want to see the new situation of the market and to see if we can use it in our business," he said. He declined comment on potential counterparties. Basle study suggests changes to the Accord IFR - November 10, 2001 Banks could face higher capital charges under Basle II's internal ratings based (IRB) foundation approach to credit risk reserving than its more advanced, standardised approach. Contrary to the Baste Committee on Banking Supervision's desired results, the IRB foundation approach's minimum capital requirements would be 14% higher among large G-1O banks, the regulators' quantitative impact study (QIS) found. Under the standardised approach, these banks would see their requirements increase 6% on average. An average change of - 5% was reached when banks were asked to calibrate credit risk using the IRB advanced approach laid out in the Committee's January proposal, according to the QIS released last week. To address the fact that the approach slated as the less intensive yielded higher charges, and to understand better the impact that the January proposal would have on small and medium-sized enterprises (SMEs), the Committee is conducting a follow-on impact study. The January proposal's corporate and retail risk weight curves and its method for recognition of physical collateral and receivables may be modified as a result of this study, the regulator said last week. The January draft was not balanced because it was biased towards the views of large banks engaged in large corporate lending activities, noted one industry official. The corporate risk weight curve under the new QIS is likely to reduce the capital requirements for many SME borrowers relative to the January proposal, the Committee said. Additional work is also under way aimed at assessing the probable impact of applying separate risk weight curves for residential mortgage exposures and for other retail exposures. Under the Committee's January proposal, the IRB approach treated all retail exposures using the same risk weight curve. The impact of assuming a 45% loss-given default (LGD) for loans fully secured by non-property physical collateral and a 40% LCD for loans fully secured by receivables will be examined in the new QIS. "Under the January proposal banks with the foundation approach have no incentive to use most forms of collateral," said Marc Intrater, managing director at Oliver, Wyman in New York. Other than commercial and residential property collateral, the January proposal did not recognise physical collateral or trade receivables as collateral. As such, loans fully secured by either received a 50% LGD. Banks that use collateral for their secured lending and do it well generally experience a reduction in credit risk. The Committee's decision to undertake a follow-up impact exercise is widely viewed as revisionist, say market participants. Similar moves earlier this year appear poised to result in changes to the January proposal, they note. "There is a lot of waiting until the final accord. But most banks realise that even though the accord does not come into effect until 2005, getting ready for it requires a lot of lead time," said Intrater. The Baste Committee plans to release a final version of its proposed accord in February. **End of ISDA Press Report for November 12, 2001** THE ISDA PRESS REPORT IS PREPARED FOR THE LIMITED USE OF ISDA STAFF, ISDA'S BOARD OF DIRECTORS AND SPECIFIED CONSULTANTS TO ISDA ONLY. 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. Scott Marra Administrator for Policy and Media Relations International Swaps and Derivatives Association 600 Fifth Avenue Rockefeller Center - 27th floor New York, NY 10020 Phone: (212) 332-2578 Fax: (212) 332-1212 Email: smarra@isda.org
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