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ISDA PRESS REPORT - OCTOBER 19, 2001
CREDIT DERIVATIVES * Regulators Seek More Data About Credit Derivatives - Wall Street Journal LATIN AMERICA * WORLD NEWS: Brazil's weakness set 'for some time' - Financial Times OPERATIONS * Bank of New York demands back-up links from customers - Financial Times RISK MANAGEMENT * DTCC seeks to address post Sept 11op-risk concerns - Risk News Regulators Seek More Data About Credit Derivatives Dow Jones Newswire WASHINGTON-U.S. bank regulators, saying the notional amount of credit derivatives at banks has increased more than sixfold since 1997, from $55 billion to $352 billion, are proposing new reporting requirements on credit derivatives. The requirements focus on what are known as bank call reports, which banks file with the federal bank regulatory agencies each quarter; these are used to monitor the condition and risk profile of reporting banks and the industry as a whole. In a joint notice, the Federal Reserve, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. said tile new Items proposed to be added to call reports should result in a "minimal additional reporting burden" for affected banks. WORLD NEWS: Brazil's weakness set 'for some time' Financial Times; Oct 19, 2001 By Raymond Colitt in Sao Paulo Brazil's financial markets have recovered this week, halting at least temporarily the downward spiral of the Real. But few analysts support the government's hopes of asustained currency recovery that would allow interest rates to come down and economic growth to resume. With a tighter monetary policy and somewhat brighter short-term prospects after elections in neighbouring Argentina, the Brazilian portion of the JP Morgan's EMBI+, emerging markets bond index, has narrowed by 133 basis points since October 8. By mid-week, the Real had recovered to RDollars 2.70, up 4.5 per cent against the dollar from its post-attack low. Future interest rates also came down by more than 60 basis points this week. The Real had depreciated 30 per cent against the dollar since the beginning of the year, raising concerns about the country's inflation target and credit outlook. However, the currency weakness "is here to stay", says Marcelo Carvalho, chief economist with JP Morgan Chase, the investment bank, in Sao Paulo. "The fundamental problems of the Brazilian economy have not changed and the market outlook remains uncertain." Indeed, a consensus forecast published by the central bank sees the currency at RDollars 2.80 against the dollar at the end of this year and at RDollars 2.86 by the end of next year. A sustained currency weakness implies higher inflation and a larger nominal budget deficit, and subsequently slower economic growth, says Mr Carvalho. JP Morgan Chase foresees GDP growth next year of only 1 per cent, compared to the market consensus of 2.25 per cent next year. Brazil's principal problem is its dependence on international capital markets and direct foreign investment to finance a current account deficit estimated at USDollars 25bn this year, the largest of any emerging market. Total external financing requirements are estimated at just under USDollars 50bn next year, a tall order at a time of a global downturn and heightened risk aversion towards emerging markets. Earlier this month, the economic authorities issued more dollar-linked debt, increased obligatory bank deposits and reformed corporate reporting rules designed to reduce the need for currency hedging. The economic slowdown these measures helped to trigger will help improve the country's trade balance by driving down imports. As a result, the market expects the current account deficit to fall from Dollars 25bn this year to Dollars 21.7bn next year. The domestic slowdown has also helped to dampen inflationary pressure caused by the currency depreciation. On Wednesday, the central bank decided to maintain its prime interest rate at 19 per cent with a neutral bias. Yet more action to tighten monetary policy - such as a further increase of bank deposit requirements - may be necessary given the ongoing threat of an Argentine default, an escalation of the US-led war on terrorism and political noise ahead of Brazil's presidential elections next year. Bank of New York demands back-up links from customers By Joshua Chaffin in New York The Bank of New York will require some customers to have back-up communications links to its securities processing operations, and will more closely inspect its vendors' technology and communications capabilities to ensure they function in the event of disaster. Thomas Renyi, chief executive, announced the changes on Thursday when discussing the bank's third quarter earnings, which suffered more than expected from the September 11 attacks. BoNY, which specialises in securities processing, was one of the Wall Street firms hardest hit by the attacks. More than a month later, it is still struggling to reconcile trades that clients executed after September 11. As a result, its disaster recovery plans have been among the most scrutinised by the financial services industry as it tries to prepare for future disasters. BoNY executives had contended that much of the disruption was due to damaged telecommunications lines. Mr Renyi reiterated Wall Street's new-found appreciation of "how important telecommunications are to the smooth operation of the capital markets". But he also pointed to problems with computer and communications systems at BoNY's vendors that may have hindered the bank's recovery. "Some of the things just didn't work as billed by our vendors," he said. Mr Renyi also said that he and other Wall Street executives would re-evaluate the practice of out-sourcing large volumes of business to a small number of companies. His comments are notable because BoNY has aggressively promoted itself to customers as a single provider for all back-office needs, from trade processing to accounting. Overall, losses from the disaster cut BoNY's third-quarter earnings by one-third from last year's levels to $243m, or 33 cents a share. BoNY pointed out that excluding the disaster, earnings rose 6 per cent from last year. BoNY recorded a $140m charge related to the disaster. This covers a variety of expenses, from renting office space in mid-town Manhattan to buying computers. BoNY estimated it lost about $29m in fees from the closure of the markets and problems with its automatic teller machines, and paid about $45m to compensate customers for trades that failed or were slow. However, it expected that a "substantial amount" would be covered by insurance. DTCC seeks to address post Sept 11op-risk concerns By Gallagher Polyn 18 October - The Depository Trust & Clearing Corporation (DTCC), the world's largest clearing company, has seized the initiative to address the issue of systemic operational risk concerns raised in the aftermath of the US terrorist attacks of September 11. DTCC chairman and chief executive Jill Considine held the first in a series of discussions with representatives of the Securities Exchange Commission, the Federal Reserve Board and the Federal Reserve Bank of New York, yesterday, to address operational risks exposed by the attacks on the World Trade Center. In a speech to the Bond Market Association in New York prior to the meeting, Considine said the major systemic risk posed by the September 11 attack stemmed from over-centralisation of physical assets - people and facilities - related to financial markets in New York. Bond market settlement banks, the New York telephone carrier Verizon's network in lower Manhattan, and numerous market makers on the New York Stock Exchange (NYSE) and Nasdaq were briefly incapacitated by the attack. US fixed-income markets did not resume trading until September 14, while trading on NYSE and Nasdaq did not resume until September 17. The Bank of New York, a large custodian and securities settlement bank, had major problems paying out funds due to failed communications lines, with some market sources indicating that Bank of New York's payments backlog reached $130 billion on Thursday September 13, leaving a number of large European institutions with large overdrafts with other banks. After a 'breather' from weeks of intensive recovery efforts by US regulatory authorities subsequent to the attack, Considine said the DTCC would look to take a leadership role in helping the US financial industry adopt new best practices to manage the newly exposed risks. Comments made by Considine during her speech suggested the DTCC would hold discussions with regulators, broker-dealers, electronic trading network service providers, clearing houses, and even public utilities like phone companies. Asked whether new awareness of the risks stemming from spatial concentration would result in calls to disperse financial market operations over wider areas, Considine said, "I think people are looking at that very seriously." But it was unclear whether Considine was referring to regulatory authorities. Neither the SEC nor the Federal Reserve Bank of New York have yet issued any new regulations related to the attacks, though impact assessment is ongoing, spokespersons for the two organisations said. The DTCC is the world's largest post-trade infrastructure organisation, providing clearance, settlement and custody services for equities, corporate and municipal debt, exchange-traded funds, mutual funds, ADRs, money market instruments, unit investment trusts and insurance products. **End of ISDA Press Report for October 19, 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 Ms. Barbara Hanlon Database Administrator International Swaps and Derivatives Association, Inc. 600 Fifth Avenue, 27th Floor Rockefeller Center New York, New York 10020-2302 Phone: (212) 332-1200 Fax: (212) 332-1212
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