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From:smarra@isda.org
To:rainslie@isda.org, yoshitaka_akamatsu@btm.co.jp,shigeru_asai@sanwabank.co.jp, kbailey2@exchange.ml.com, douglas.bongartz-renaud@nl.abnamro.com, brickell_mark@jpmorgan.com, henning.bruttel@dresdner-bank.com, sebastien.cahen@socgen.com, scarey@isda.or
Subject:ISDA PRESS REPORT FOR FRIDAY DECEMBER 1, 2000
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Date:Fri, 1 Dec 2000 02:01:00 -0800 (PST)

ISDA PRESS REPORT - FRIDAY, DECEMBER 1, 2000


* New MAS Guidelines On Credit Derivatives - Business Times
(Singapore)
* Derivatives Platform May Give CBA Edge Over Locals - Australian
Financial Review
* Kloffe Launches KLSE CI Options Contract - Business Times (Malaysia)
* CFTC Rules Could Change Futures Industry; How Is The Question -
Bridge News
* Web Bond-Trade Systems Draw Regulators' Scrutiny - The Wall Street
Journal


New MAS Guidelines On Credit Derivatives
Business Times (Singapore) - December 1, 2000
By Ling Su Ann

The Monetary Authority of Singapore yesterday issued new guidelines on the
capital treatment of credit derivatives to deal with the problem of
"excessive" capital charge for a debt asset.

Credit derivatives , first used in the United States in 1991, are used by
banks to reduce their risk exposure to certain credits or loans.

In a typical credit-linked note transaction, the protection seller (Bank A)
assumes the credit risk from the protection buyer (Bank B) in return for a
stream of regular interest payments. Bank B will then assume the default
risk for a pre-selected asset and Bank A will acquire the credit exposure
to both the reference asset (in this case, the notes) and Bank B.

Under Section 3.3.2 of MAS notice 627, the seller is required to sum up the
risk-weighted exposures to both the notes and Bank B.

A capital charge of 12 per cent is then applied to the aggregate credit
exposure, resulting in a uniform 24 per cent capital charge for protection
selling banks.

This would clearly be excessive, says the MAS, especially when the reference
assets are of very high credit quality. In June last year, the Basel
Committee for Banking Supervision proposed a more risk-sensitive
standardised approach. Pending the finalisation of this new framework,
protection selling banks should not be unduly penalised, MAS said.

To address this concern, protection sellers will now be allowed to apply the
higher of the risk charges appropriate to the reference asset or protection
buyer, subject to the condition that both are rated as being investment
grade or higher (BBB-and above).

Should the credit rating of either fall below investment grade, a dual
capital charge must be applied to both these credit exposures. Where the
reference asset or protection buyer is not rated, the MAS may waive the dual
charge rule on a case-by-case basis. However, it must be shown that the risk
faced by the seller is adequately addressed by a single capital charge. "The
rule won't impact Singapore banks right now because they don't enter into a
high amount of credit
derivatives. But it will ... make things more transparent by telling banks
how to treat the notes on their balance sheets," said Joe Toh, credit
analyst at UOB Asia.

Derivatives Platform May Give CBA Edge Over Locals
Australian Financial Review - December 1, 2000
By George Lekakis

Commonwealth Bank of Australia is hoping that a new inhouse derivatives risk
management platform will lead to a reduction of regulatory capital it is
required to hold on its balance sheet.

The new risk simulation system, known as C-SPARQ, was launched in July and
is being used to scope credit and market risk in CBA's institutional banking
arm.

Mr. Ellis Bugg, a senior risk executive, said the system would be extended
to the foreign exchange operations in the next six months.

He said the platform would give CBA a competitive edge over other local
investment banks in evaluating current and future trading exposures.

Mr. Bugg said the Reserve Bank was aware of the advantages of the inhouse
system, but was not yet prepared to allow any variation in the bank's Tier
One capital requirements.

"Up until now most risk analysis systems have simply analysed present
positions and risk exposures,'' he said. ``This system is forward looking,
allowing us to project exposures in the future over the
entire life of a five-year contract, for instance.''

The bank is also considering setting up a special unit that would take on
risk management business from corporate clients and less efficient financial
institutions.

The head of technology in the institutional bank, Mr. Bob Stribling, said
CBA was among a handful of banks that had the capability of running near
real-time credit simulation on a global basis. ``We think we have something
quite special that could be used outside the group.''

A string of derivatives -driven disasters in global banks since the
mid-1990s has prompted cross-border regulators, led by the Bank of
International Settlements, to clamp down on the measurement and reporting of
derivative risk in banking.

CBA embarked on a complete overhaul of its risk management system in its
investment bank in November 1998 and launched the new platform in July.

At the height of the Asian economic crisis in 1997, shortcomings in the risk
management systems of institutions such as ANZ and Caspian Securities were
highlighted, with the companies reporting big losses from derivatives
-related activities in emerging markets.

Since then local regulators have paid more attention to the risk management
tools and disclosure of the big four Australian banks National, CBA, Westpac
and ANZ on their derivatives -based exposures.

Mr. Bugg said no other bank in Australia had developed such risk management
capabilities. CBA was aware of only three North American banks that were
using similar methodologies.

Kloffe Launches KLSE CI Options Contract
Business Times (Malaysia) - December 1, 2000
By Debra Moreira

The Kuala Lumpur Options and Financial Futures Exchange Bhd (Kloffe) today
launches its second product - the KLSE CI (Kuala Lumpur Stock Exchange
Composite Index) options
contract. The move is part of the plan to increase the number of products
and enhance liquidity in the market.

Kloffe is hoping the product will attract local and foreign institutional
support which will subsequently assist towards building and attracting
liquidity.

Kloffe, a wholly-owned subsidiary of the KLSE, is the first derivatives
exchange in Malaysia. Executive chairman Ramli Ibrahim
has said that the new product is a step in he right direction to woo foreign
investors back in the country citing as one of the reasons investors were
staying out was due to a lack of choice in products.

Kloffe will also be introducing an additional two products by the first
quarter of 2001, placing high importance on futures products based on
Islamic index. "It (the options contract) is a good step forward in
developing an interest and hopefully bring back the foreign investors. It is
a step in the right direction," Ramli said.

Although a huge initial demand for the product is not expected, Kloffe
expects the product to grow gradually as people get used to it.

"Kloffe recognises that it is critical for all market participants to be
properly educated to ensure that they have sufficient understanding of the
use of derivatives products and are fully equipped to manage their
investment portfolios," said Ramli.

As such, Kloffe is currently undertaking a comprehensive marketing and
educational programme for the KLSE CI Options launch and to promote the
existing product. An option provides the holder/buyer the right, without
the obligation, to purchase (call) or sell (put) a quantity of a
specific underlying instrument at a stipulated price within a specific
period of time. To acquire this right, the holder/buyer pays a minimal price
known as the option premium to the seller (also called the writer) of the
option.

A futures contract however, is an agreement between two parties to buy or
sell the underlying instrument at a specific time in the future for a
specific price determined today.

CFTC Rules Could Change Futures Industry; How Is The Question
Bridge News - November 29, 2000
By Mary Haffenberg

After months of anticipation, new regulatory rules were released last week
that pave the way for changes in how exchanges list derivatives contracts.
The proposals also open the door for new electronic trading platforms and
clearing organizations to jump into the derivatives listing and clearing
business. But how these rules will be interpreted without making them into
law is leaving some industry players wary.
The Commodity Futures Trading Commission, the regulator of U.S. derivatives
markets, last week approved rules first proposed in February that create a
new regulatory framework for futures markets.
The rules, which go into effect 60 days after they first
appear in the Federal Register, create three regulatory tiers under which
various futures contracts and swaps products in established markets will
fall. The idea is that the three tiers will match the degree of regulation
to the varying nature of
the products and the customers trading in the markets.

Under the new rules, the three regulatory tiers are
recognized futures exchanges, derivatives transactions facilities and exempt
multilateral transaction execution facilities. Products within the RFE
category, for example, will allow for retail participation and those
contracts will have the most customer protection and regulatory safeguards
attached to them.

A bill that passed the House of Representatives in October
but is stalled in the Senate would make into law most of these CFTC rule
changes. The bill also would legalize single stock futures, provide legal
certainty to over-the-counter markets, take the CFTC rule changes even
farther in some areas and make other changes not within the power of the
CFTC.

If the bill, the Commodity Futures Modernization Act of 2000, does overcome
significant obstacles in the Senate and pass when Congress returns next
month to finish up its work, the bill would supercede any CFTC rules.
Because the CFTC rules don't go into effect until at least the end of
January or the beginning of February (as of Wednesday, they still had not
been listed on the Federal Register), lawyers and others reading the rules
have been in no hurry to digest and interpret them. In addition, a lot could
change if lawmakers pass the futures modernization act.

WIDESPREAD PRAISE FOR RULE CHANGES

To be sure, the rule changes that have been spurred on by
CFTC Chairman William Rainer have received widespread praise. Market
participants and established exchanges like the idea that in the less
regulated markets costs to do business are expected to decrease. Also,
less regulation could lead to more flexibility in listing and trading
contracts and more experimentation in the futures markets, which in recent
years have been sorely lagging when compared with the growth of cash and
securities markets.

There also is a double-edged sword of changes. The rules
make it significantly easier for a new electronic trading platform, similar
to electronic communications networks popular in the equities markets, to
come in and list futures contracts, taking on the established futures
exchanges that
for decades have had a virtual contract-listing monopoly.

The rules also allow, for the first time, non-CFTC regulated
organizations to clear exempt MTEF and bilateral contracts. However, these
clearing groups still must be regulated under banking laws, foreign
regulators or the Securities and Exchange Commission. Established clearing
organizations and futures exchanges already are expressing concern that
these new expected competitors will be able to become more nimble because
they should be able to operate under less regulation.

The established exchanges and clearing organizations are
expected to fall under the most regulated CFTC tier of regulations if they
are to continue to serve retail customers. "If we're a provider of a broad
series of markets, it's unclear as to the net savings," said Dennis
Dutterer, interim president and CEO of the Chicago Board of Trade.

By some estimates, more than 90% of futures market
participants are institutional or commercial customers. With that figure in
mind, ECNs could come in and list contracts under the DTF category. That
would prohibit retail customer participation unless the ECN got special CFTC
approval that would allow retail trading through futures commission
merchants that have at least
$20 million in adjusted net capital.

The exchanges, which to date have had at least some retail
participation in most of their contracts, would have to continue under RFE
rules. Some industry watchers suggested that some exchanges, to combat ECN
competition yet retain retail customers, could list two contracts. For
example, the New York Board of Trade could have an RFE sugar pit and an
all-electronic DTF sugar pit.

NYBOT President and CEO Mark Fichtel said his exchange was
expected to request that its sugar and cocoa contracts fall under the DTF
category. "I'm not saying this will happen, but based on what they're
talking about, they have to be careful about compartmentalizing the
markets," said Joseph Murphy, CEO of Refco Global Futures, one of the
country's largest FCMs.
"A probable solution would be to put it on the backs of FCMs. We could
become 'market makers' to give access to our retail customers, like the FX
markets," referring to the cash foreign exchange markets in which the
interbank markets commonly take the other side of a customer trade instead
of routing it to outside customers.
Others question whether that is the course of the futures markets as a
result of the rule changes and whether it is good for the markets to have
"peripheral markets" proliferating.
However, it's still too early to determine how the traditional exchanges
will list their contracts under these new rules. Although no one is
suggesting that the exchanges will close their doors to easy access for
retail customers, allowing them in their markets may not be cheap. "I would
hope that the CFTC would continue the concept of trying to ensure that our
markets are competitive with competing markets when the exchanges are
looking for flexibility to respond to competitive possibilities," Dutterer
said.
SWAP MARKETS CONTINUE WITH EXEMPTIONS

For their part, participants in swaps are basically happy
with what the CFTC has done within their limited powers with the exempt MTEF
rules. For example, new entities, such as insurance companies, can
participate in the swaps markets. These markets will continue to operate
under an exemption of the
commodities act and will continue on without legal certainty, but a
spokeswoman for the International Swaps and Derivatives Association said the
rule changes were an improvement over current conditions.
However, the ISDA is unhappy that only financial products can be included in
the exempt MTEF category. The CFTC said metals and energy contracts cannot
qualify for exempt MTEF, the least regulated tier, because the markets are
not sufficiently deep and liquid and there are concerns related to the
exhaustibility of supply and market manipulation.
As a result, multilateral electronic executing trading facilities will fall
under the DTF category, which has led to concerns that the regulations may
stymie innovation in these markets.
Once the rules do come into play, and assuming Congress does
not codify them, there is still another underlying concern. Because the CFTC
rules are not law, some in the industry worry how they will be interpreted
in the upcoming years and under different CFTC heads. After all, the
regulator has had its share of leaders with vastly different philosophies
from each other.

Web Bond-Trade Systems Draw Regulators' Scrutiny
The Wall Street Journal - December 1, 2000
By Randall Smith and Gregory Zuckerman

Antitrust regulators launched an investigation of online bond-trading and
foreign-exchange systems owned by several of Wall Street's biggest
securities firms to examine whether the
trading platforms are used to limit competition.

Several top securities firms, including Goldman Sachs Group Inc., Merrill
Lynch & Co., Morgan Stanley Dean Witter & Co., and the Salomon Smith Barney
unit of Citigroup Inc. have received requests for information as part of the
investigation, which is being conducted by the antitrust
division of the U.S. Department of Justice. The firms either had no comment
or said they are cooperating.

A Justice Department spokesman said the agency is "looking at the
competitive effects of certain joint ventures in the online bond-trading
industry and in online foreign exchange." The inquiry was reported Thursday
by the Bond Buyer newspaper and the Web site of Industry Standard, a
magazine that covers Internet economic issues.

Ralph C. Ferrara, a lawyer specializing in securities regulation at the New
York law firm of Debevoise & Plimpton, said the probe raises "an interesting
issue," because a commonly owned utility that boosts price transparency for
the entire market, but simultaneously gives firms a look at each other's
market strategies "is something that is a Jekyll and a Hyde."

The requests for information, known as civil investigative demands, involve
the recent formation of several online bond and foreign-exchange portals by
Wall Street's biggest firms in various combinations, people familiar with
the matter say.

"I think their interest is because the largest firms are involved" together,
said John Ladensack, bond chief for the Schwab Capital Markets unit of San
Francisco discount brokerage firm Charles Schwab Corp. Schwab, which is
forming its own bond-trading portal, has avoided participation in some
online marketplaces "because of the dominance of the big players," Mr.
Ladensack said.

The probe isn't the only Justice Department investigation into the inner
workings of Wall Street. Another pending inquiry, disclosed in early 1999,
is focusing on the prevalence of a 7%
underwriting fee for initial public offerings of less than $100 million in
size.

Federal regulators have looked at the antitrust implications of a wide range
of other Internet marketplaces, from cars to real estate to airline tickets.
The American Society of Travel
Agents, for example, asked the Justice Department to investigate an online
service owned by several airlines, saying it would drive travel agents out
of business. The Federal Trade Commission has approved a car-parts Web site
set up by the Big Three auto makers.

Electronic bond trading is growing, but has yet to catch on. Such activity
represents just 3% to 6% of overall bond trading, according to Tower Group,
a technology-research firm, up from about 2% last year.

"It's worth investigating the area. There are questions about how these
markets will turn electronic and whether these dealers will control the
market place," says Larry Tabb, group director at Tower
Group. "The concern is that they see each other's bids and can artificially
manipulate prices, and that they will create an electronic market that's not
open to all
participants, but so far it looks like they're letting others in."

Two of the best-known upstart online-bond systems sponsored by leading Wall
Street firms that deal with corporate bonds are BondBook LLC and Market
Axess LLC. Another of the big online trading firms is TradeWeb LLC, owned
by a group including Goldman Sachs, Lehman Brothers Group Holdings Inc. and
the Credit Suisse First Boston unit of Credit Suisse Group. TradeWeb's
trading volume represents between 7% and 10% of all dealer-to-customer
transactions in the U.S. Treasury market, up from 2% a year ago, according
to Tower Group, although TradeWeb officials say the figure is higher.

With TradeWeb's online system, investors can contact as many as five dealers
at a time and send them orders to buy or sell Treasurys or government-agency
securities. Investors also can
compare prices from the five firms. The dealers can't see bond quotes from
their rivals, according to Tom Eady, chief operating officer at TradeWeb.
Mr. Eady says the firm hasn't been contacted by the Department of Justice;
securities executives said the Justice probe doesn't appear to encompass
Treasury bonds.

End of ISDA Press Report for Friday, December 1, 2000.

THE ISDA PRESS REPORT IS PREPARED FOR THE LIMITED USE OF
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