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ISDA PRESS REPORT - MARCH 23, 2001
* EU's single financial market in the balance - The Financial Times * BIS Survey Sparks Speculation - The Wall Street Journal Europe * The inevitability of consolidation - Euromoney * Long after LTCM, hedge funds still pose concerns - Reuters EU's single financial market in the balance Financial Times - March 23, 2001 By Christopher Brown-Humes & Peter Norman Rapid development of the European Union's planned single market for financial services last night hung on just a few words of text in a draft resolution to be put to EU leaders at their summit in Stockholm, which starts today. The resolution, which would give a big political boost to the recent proposals of Baron Alexandre Lamfalussy to speed secondary legislation on financial services through the EU's decision making machinery, met continuing German opposition as finance ministers gathered in a special session of the EU's "Ecofin" council to try to resolve the issue. Before the talks, Bosse Ringholm, Swedish finance minister and chairman of last night's meeting, told the Swedish newspaper Finanstidningen: "We agree on 99 per cent." But Goran Persson, the Swedish leader and summit host, was more cautious. "I'm not confident at all. I will try and try hard," he told the press. The dispute yesterday provided an inauspicious backdrop to the two-day summit which has been called to inject new life into the EU's ambitious year-old project to turn Europe into the world's most competitive and dynamic knowledge based economy by 2010. EU member states, the European Commission and the European parliament all acknowledge that rapid development of an integrated EU market for financial services would spur economic growth and employment in the EU. Amid widespread concern that national political priorities are causing the EU to fall behind with other important reforms such as the creation of an EU-wide patent and the liberalisation of its energy and postal markets, Mr. Persson yesterday stressed the responsibility of the 15 leaders to make the summit a success. "We are meeting at a time when the economic business cycle is slowing down and that might have an impact on Europe. Our talks on structural reform are more important than ever," he said. Germany's objections to the draft resolution on the Lamfalussy report surfaced late on Wednesday after EU ambassadors in Brussels came close to agreement on unblocking a dispute in which the Commission and member states were deadlocked over how to share powers with a new EU securities committee. The immediate problems concerned differences over the ability of the Commission to adopt technical securities market legislation, to be put forward by the securities committee proposed by Mr. Lamfalussy, against the wishes of some member states. As the other states found they could accept compromise proposals to settle the dispute, it emerged that Germany's more pressing concern was to protect the interests of Frankfurt as a financial centre against a perceived "Anglo-Saxon" bias in the Commission department responsible for financial services. Last night's special meeting of the Ecofin council was confirmed after Hans Eichel, the German finance minister, said the issues needed further deliberation. BIS Survey Sparks Speculation The Wall Street Journal Europe - March 23, 2001 By John Hardy NEW YORK -- No one doubts the foreign-exchange market is the world's biggest financial market, but whether daily turnover remains at $1.5 trillion (1.675 trillion euros) is the subject of much debate among the market's professionals. After a long stretch of steady increases, daily turnover may register a decline when the Bank For International Settlements releases results of its latest survey in a few months. Every three years the Switzerland-based BIS carries out a comprehensive survey of world-wide activity in foreign-exchange and derivatives markets. Data collected this year probably won't be fully available until May 2002. However, industry participants are debating what the latest results will show. Many expect them to be very different from those in the last report in 1998-1999. That survey indicated that the foreign-exchange market generated daily turnover of about $1.5 trillion. This represented (in dollar terms) growth of 26% in the three years after the previous survey in April 1995. Growth was slowing compared with the 45% increase in the 1992-1995 period but was still very robust. Now the picture is expected to be far less vigorous. Some experts believe the next set of results will show a sharp decline in daily volumes. Economists at Merrill Lynch and Goldman Sachs predict the data will show trading has fallen by as much as 33% to around $1 trillion a day. Others see a more muted decline. "It's not anything that you predict with any certainty, but I think it'll be down a little bit," said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut. The inevitability of consolidation Euromoney - March 2000 By Jonathan Brown It took a while for the internet to have any significant impact on wholesale financial markets. While the rest of the global economy was busy diving into the dot corn pool, the largest financial institutions, especially their fixed-income departments, were cooling their heels, not wanting to commit themselves too early to the so-called new economy. But last year the leading bond market firms finally dived in. All the big players have stakes in a wide variety of platforms, seeking to ensure a presence as the winners and losers sort themselves Out. In the fixed-income markets dozens of platforms have been launched in the past year, all promising to provide buy-side institutions and issuers with the benefits that electronic trading can bring. It's becoming clear that not all will be able to survive in what is a highly competitive arena. Broadly, the main platforms can be split into two groups: multiple-dealer sites aimed at providing buyers with a range of prices, usually in a limited array of products; and single-dealer, multi-product sites where one dealer offers access to many categories of instruments but with no price comparison. An example of the latter is Credit Suisse First Boston's platform, Prime Trade. Ben Cohen, head of fixed-income e-commerce at CSFB, feels that the single-dealer model has a future, but must offer an even greater variety of products in order to have any chance of survival. As for the multi-dealer sites, Cohen believes that there is room for several platforms with a maximum of two or three in each category. CSFB has taken a position in most of the main ventures in the multi-dealer field to ensure that the bank will have a say in shaping the market. Carry Jones, director of sales and marketing at BrokerTec, believes that the market will eventually be able to sustain only a few platforms in each area. "The likely winners will need market sponsorship, low costs, excellent technology and a broad product range, he says. "BrokerTec meets all of these criteria - we started by dealing in governments as these are the most liquid products, quickly added basis and repo trading and will soon be expanding into such areas as agencies, Pfandbrief and corporates. We want to be seen as a system that covers all fixed-income products, not just government bonds." As these systems multiply and develop, traders will want to minimize the number of platforms they have to deal with, so the multi-dealer, multi-product model would appear to be the likely winner. Lee Olesky, President and CEO of BrokerTec, says: "Traders don't want to have to go to five or six different places to access liquidity." Multi-dealer sites must merge The market is poised to enter a new stage of development, when multi-dealer single-product sites will come together. For the moment, the array of online platforms is bewildering. Confusion is apparent among the large banks that have backed many of them, as to which they are likely to support. Some fixed income heads seem unsure about what investments their firms have made. They got involved in the first place because online trading offers great savings in time and costs. Whereas previously, a trader or investor wishing to buy a particular type of bond would have to spend valuable time on the phone to various dealers searching for the best price, now the most advanced platforms offer the facility to compare prices from a group of dealers in a matter of seconds. Although individual savings may not seem that much, as volumes increase still further the cumulative effect could become substantial. To offer the best possible system to users, a platform must also have the best technology. Cohen says: "To be successful, a platform must offer quick updates of prices, reliability and security. The platform must always be evolving." In order to achieve this, a provider must have an efficient technology team. Bank-backed platforms generally fit into two categories: those that outsource their technology requirements and those, such as CSFB, that develop in-house teams to coordinate technological management of the site. But there is another class, typified by Prescient Markets' short-term debt new-issue platform, cpmarket.com. Prescient's management comes from a software background and the team was set up independently of the financial institutions, building its system from scratch and retaining complete control over its development. Prescient claims that this enables it to respond much more quickly to clients' needs, resulting in greater efficiency and lower costs for the end user. The marketplace would already seem to be at capacity and consolidation is inevitable. The recent takeover by Market Axess of Trading Edge is likely to be just the first of many such deals. Olesky says: "There is no more room for any new platforms. The ideal number would be two or three in each area." He also believes that any potential newcomers today would not even make it to start-up. All the major banks have stakes in a variety of platforms already, making it virtually impossible for any newcomer to find the necessary market support to join the fray. "We are going to see a move towards consolidation, not more systems," says Olesky. But who will be the winners? Euromoney reports the latest news from some of the more prominent contenders. Long after LTCM, hedge funds still pose concerns. Reuters - March 23, 2001 BASEL, Switzerland, March 23 (Reuters) - Top international regulators said this week that more work is needed on reducing risks posed by "highly-leveraged institutions" like hedge funds. A working group of top regulators warned in a study released on Thursday against backsliding on efforts aimed at preventing another near-failure like the one involving U.S. hedge fund Long-Term Capital Management in 1998. The LTCM rescue involved over 30 banks, which injected about $3.5 billion to keep the Connecticut firm from going under. Fears that problems could spread through the system prompted the New York Federal Reserve to oversee the private sector rescue. New York Fed President William McDonough welcomed the latest report by the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions, which looks at progress made since these bodies published earlier reports on the same topic in 1999. "Rather than leaving issues in the air, (they thought) it would be a good thing to have an assessment" of the progress made, said one source familiar with the report. The latest report said banks and securities firms have improved due diligence and monitoring of highly-leveraged institutions (HLIs). Meanwhile leverage overall has decreased, and with the unwinding and restructuring of some big highly-leveraged firms, concentration risk has also gone down. The latest report cites a need for more work on getting information from leveraged firms. These are not always forthcoming partly for fear of competition. LTCM for example was regarded by investors as an organisation giving out sparse information on its activities. "An important aspect of the relationship between HLIs and authorised firms is the timely flow of relevant information between counterparties and the appropriate management of the exposure in light of this information," a report summary said. "This is the area where you need a clear dialogue," the source added, saying it would be especially useful to glean more information on measures like Value-at-Risk (VaR) which estimates the maximum theoretical potential loss to a trading book over a given time span. Another area for work is seen in collecting margins on derivatives positions. While margins are common on exchange-traded instruments, they are less so in the over-the-counter markets. Here the report said competition was also a problem. While firms "have generally been able to strengthen contractual provisions with respect to the HLI sector, competitive pressures continue to affect firms' ability to insist on the full range of risk mitigants, including initial margin," the summary said. **End of ISDA Press Report for March 23, 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. Scott Marra Administrator for Policy & Media Relations ISDA 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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