ISDA PRESS REPORT - MARCH 7, 2001<?xml:namespace prefix = o ns =
"urn:schemas-microsoft-com:office:office" /<

_ McDonough says won't extend Basel deadline.
_ Benchmark Tipping Is Favoring Swaps Over Treasurys
_ "It brings the products to the attention..."
_ The New Forecast For Meteorologists: It's Raining Job Offers

McDonough says won't extend Basel deadline.
Reuters - March 8, 2001

LONDON, March 8 (Reuters) - William McDonough, chairman of the Basel
Committee on Banking Supervision, said on Thursday he would not extend the
consultation period for comments on the new Basel Capital Accord.

McDonough is also president of the New York Federal Reserve Bank. He was in
London for a British Bankers Association conference on the Basel accord.

A new accord designed to make capital adequacy rules for banks more risk
sensitive was launched in January. Banks and other interested groups were
given until May 31 to respond.

Many European banks have been critical of the short consultation period, but
McDonough has previously shrugged off this criticism, arguing that banks
were involved in developing the accord and a first proposal had been made in
June 1999.

"The consultation period, which we know is short...but we are not going to
extend it," McDonough told a news conference.

The Basel Committee intends to finalise the new Capital Accord by the end of
this year so it can be implemented in national jurisdictions in 2004.

Benchmark Tipping Is Favoring Swaps Over Treasurys
Dow Jones - March 8, 2001
By Michael Mackenzie

NEW YORK -(Dow Jones)- The near collapse of hedge fund Long Term Capital
Management in 1998 triggered a massive liquidity crisis in capital markets.
It also marked the beginning of the end for the role of Treasurys as a
benchmark for pricing other debt securities and hedging for duration and
volatility, according to a study by the Bank of International Settlements.
(BIS)

While the debate over alternative benchmarks for Treasurys has bounced
between the relative merits of swaps and agency debt, swaps appear to be
winning the hearts and minds of a trading community that has learnt the
lessons of hedging risk with Treasurys, a point that the BIS seems to
support.

In its report titled "Benchmark Tipping In The Money And Bond Markets," the
BIS cited the bitter lessons in the aftermath of the LTCM meltdown as a
direct cause for the ascendancy of interest rate swaps at the expense of
Treasury securities as a benchmark for capital markets.

And though the question of swaps replacing Treasurys has been discussed
since the U.S. government announced its debt buyback program, the thrust of
the BIS report is that such a move was perhaps inevitable.

"More recently the bond market has shifted away from its reliance on
government securities and might well have continued to do so even if there
had been no reduction in the stock of outstanding US government paper,"
writes the BIS.

In fact, the BIS said the burgeoning popularity of swaps is creating a
powerful vortex within capital markets.

"Each market participant who gives up using US Treasuries to hedge private
instruments subtracts liquidity from the Treasury market and adds it to the
swap market, thus raising the incentives for other market participants to do
likewise," writes the BIS.

History On Their Side

With history acting as a guide, the BIS has observed that the benchmark "is
tipping from Treasury paper to the swap."

The BIS cited two precedents for "benchmark tipping" - when market
participants migrate to using a private instrument such as an interest rate
swap instead of a Treasury security.

The most recent event - following the 1984 flight to quality rush by
investors, which resulted in the three-month Eurodollar futures contract
eclipsing the Treasury bill futures contract in terms of volume - occurred
on the heels of the LTCM near collapse.

Investors rapidly diluted their exposure to other credit securities and
flocked to the safe haven of US Treasurys, meaning that dealers shorting
Treasurys against being long spread product including corporate bonds,
agency securities and mortgages, discovered that their hedges melted down.

The lessons learned from these traumatic episodes in capital markets have
been recently observed since December when mortgage investors primarily
turned to swaps instead of Treasurys to hedge pre-payment risks of
mortgages, in what is known as the negative convexity trade.

Estimates of swap volume by several investment banks since the mortgage
hedging began, total in the region of $50 billion in terms of receiving a
fixed rate of interest via a swap contract.

Valuation Versus Investment Benchmarks

Swaps are being increasingly used by traders as a benchmark for valuation
purposes - hedging, pricing and establishing relative value across different
asset classes.
"The swaps market is generally the province of the leveraged buyer - whether
hedge funds, dealers, or asset swappers," wrote analysts at Credit Suisse
First Boston in New York in a research note last month. "Because levered
investors determine the marginal bid for credit product, swap spreads and
not government securities have become the defacto benchmark for credit
valuation."

Swaps perform like a synthetic bond and involve the exchange of two cash
flow streams. One leg comprises a fixed rate of interest priced as a spread
over a Treasury security that is traded against a floating rate of interest
pegged to the three-month London Interbank Offered Rate (LIBOR).

Thus they are not a physical asset that can used as an investment benchmark
- acting as an index measuring excess returns - by money managers.

"Ultimately it will be up to money fund managers and not traders to
determine whether swaps will become a viable benchmark," said George Oomman,
derivatives strategist at Lehman Brothers.

Although the growing supply of debt issued by the Government Sponsored
Agencies, Fannie Mae and Freddie Mac - currently over $1 trillion - is a
real asset, the agencys remain susceptible to political pressure changing
their charters and reducing their better than AAA rating.

"The market is looking at swaps and should Treasurys continue to shrink, the
market will steadily move to swaps," said Robert Auwaerter, senior fixed
income portfolio manager at The Vanguard Group in Malvern PA.

"It brings the products to the attention..."
Reuters - March 7, 2001
By Tom Bergin

LONDON, March 7 (Reuters) - A legal wrangle between Swiss bank UBS and
Germany's Deutsche Bank AG over a credit derivative contract has highlighted
concerns about potential risks in a relatively new sector of the market.

News this week of a lawsuit filed by UBS in Britain's High Court of Justice,
comes at a time when the industry is trying to convince regulators to adopt
more favourable treatment of credit derivatives in the updated Basel Accord
on capital requirements.

"This is illustrative of the general uncertainty of how this market works,"
said Richard Boulton, credit risk manager at the Financial Services
Authority (FSA), the UK's financial services regulator.

"There is not absolute certainty that these techniques will work all the
time," he said, speaking earlier this week when news of the lawsuit, filed
in February, came to light.

Draft proposals updating the 1988 Basel Accord treat risks on credit
derivatives as greater than for more tried and tested means of hedging
credit risk such as bank guarantees. As a result they require more money to
be set aside to cover risk.

The market body, the International Swaps and Derivatives Association ( ISDA
), is pressing Basel regulators for talks about aspects of the proposals,
which it says, are unfair.

"The case won't help the image of credit derivatives. We'll have to see how
things develop but hopefully it won't have a negative influence on
regulators," said the head of credit derivatives at a European bank, who
declined to be named.

Regulators are concerned in particular about legal risk. Bank of England
deputy governor David Clementi said last month question marks existed over
whether players had conflicting views on details of credit derivative deals
they entered into and how the law courts would treat agreements such as
credit default swaps.

A default swap is an insurance-like instrument which allows an investor to
hedge exposure to the risk of an issuer defaulting on an underlying bond or
loan.

In the UBS case, the Swiss bank alleges Deutsche Bank is in default of its
obligations to pay the sum of $10 million in a default swap deal designed to
pay if U.S. building materials firm Armstrong World Industries Inc defaulted
on its debt.

According to documents filed at the High Court, UBS alleges written
confirmation of the swap contract with Deutsche mistakenly lists AWI's
parent Armstrong Holdings as the underlying issuer, not AWI.

UBS alleges the true contract related to AWI, which filed for Chapter 11
protection from creditors more than half a year after the swap deal was
transacted, and not to Armstrong Holdings, which has not filed for Chapter
11 and has not defaulted.

Both banks have declined to comment on the lawsuit but credit derivative
traders have been quick to reject any suggestion that the legal action
supports the argument for harsher regulatory treatment of default swaps.

Disagreements between counter parties over the interpretation of what
constitutes a default event have resulted in court action on a number of
occasions. In a notable case last year, involving the U.S. insurer Conseco,
counterparties disagreed over whether the insurer's restructuring of debt
constituted a default event.

The market is a relatively new industry and regulators are concerned some
aspects of it, like contract documentation, have not been fully
standardised, leaving participants open to the risk of contractual disputes.

Banks and ISDA have worked to improve documentation. ISDA is currently
trying to nail down a definitive description of debt restructuring, which
has proven a particularly tricky issue.

While some market participants fear the market may be harmed by fallout from
legal actions, other experts in the sector are more sanguine.

"The momentum of the credit derivative market is such that it will require
more than these small problems to stop the market growing," said Jonathan
Davies, head of credit derivatives at PricewaterhouseCoopers.

Thesetypes of cases made firms address the issues involved, Davies said,
adding: "It brings the products to the attention of senior management and
accelerates the evolution of the market."

The New Forecast For Meteorologists: It's Raining Job Offers
The Wall Street Journal - March 8, 2001
By Chip Cummins

Two years ago, Bradley Hoggatt was heading for an academic career in
meteorology, intent on discovering more about how hurricanes form. But just
before he started working on a doctorate, a very different opportunity blew
in.

Now Mr. Hoggatt forecasts weather for a floor full of M.B.A.s who trade
billions of dollars in weather-sensitive energy commodities such as natural
gas and electricity for Aquila Inc., the trading subsidiary of a big Midwest
utility.

With no business background himself, Mr. Hoggatt is also trading complex
financial contracts based on his predictions. "I'm putting my money where my
mouth is," says the tall, square-shouldered 28-year-old.

Weathermen and women have become a hot commodity in the exploding
energy-trading business. While off-target forecasts on television may
frustrate parents and schools and embarrass politicians, as they did this
week on the East Coast, they can lose bundles for electricity and
natural-gas traders. So as trading has boomed, so has demand for trained
meteorologists, a profession that traditionally hasn't paid all that well
and is often the butt of jokes.

From Wall Street to Houston's Louisiana Street, where many energy companies
have set up shop, recent graduates are earning twice what they would earn at
the National Weather Service or in academia. "The appetite for weather is
insatiable," says James L. Gooding, director of meteorology at Duke Energy
Corp. A former NASA scientist, Dr. Gooding will be adding a fourth
forecaster to his Houston team in the next year.

Enron Corp., an energy-trading giant based in Houston, has more than doubled
its staff of weather forecasters to nine in the past three years, plucking
talent from places like the Weather Channel. Williams Cos., a Tulsa, Okla.,
competitor, is endowing university fellowships to lure meteorology students.
And since 1999, Aquila, which is owned by UtiliCorp United Inc., of Kansas
City, Mo., has hired two other meteorologists from Mr. Hoggatt's alma mater,
the University of Wisconsin, plus another scientist with a Ph.D. in
climatology.

That hiring paid off a bit during this week's winter storm in the Northeast.
While many on the East Coast were getting miscues from TV weathermen on a
pending, possibly historic blizzard that fizzled in New York and other
cities, traders at Aquila simply looked to Mr. Hoggatt.

Last Friday, Scott Macrorie, an electricity trader for the Mid-Atlantic
region at Aquila, stopped by to see how the storm was progressing. Mr.
Hoggatt's team told him temperatures in his region of interest would be
lower because of the storm, though the snowfall forecast on TV seemed a
little high. Sure enough, temperatures fell and snowfall in many cities was
less than predicted, lifting electricity prices and making Mr. Macrorie a
profit that he says was in the tens of thousands of dollars.

About 500 university students in the U.S. graduate each year with bachelor's
degrees in meteorology, according to the American Meteorological Society. An
additional 300 or so graduate with masters degrees or doctorates. Until just
a few years ago, those graduates didn't typically have many options: TV for
those who had the blow-dried look, back-office jobs with the government or a
handful of private consultants for those who didn't. Research was an option.
And some airlines and utilities kept a few meteorologists on staff to help
position airplanes or power-line repair trucks during storms.

Now, deep-pocketed trading companies are offering many meteorologists with
graduate degrees salaries ranging from $60,000 to $90,000. Performance and
trading bonuses can double or even triple the figure. That compares with the
roughly $33,000 the National Weather Service pays a junior forecaster with a
graduate degree.

"It's a bit unusual for meteorologists to have the prospect of lucrative
employment after graduation," says John Nielsen-Gammon, a professor of
atmospheric sciences at Texas A&M University. "This is a bit of a switch."

So far, there has been no dearth of meteorological talent available, partly
because the National Weather Service wrapped up a big expansion project in
the mid-1990s and slowed hiring. It hires only to replace people who leave,
about 30 to 50 meteorologists a year.

And the high-pressure world of billion-dollar commodity bets isn't for
everyone. When Carl Altoe graduated from Penn State, one of the nation's top
meteorology programs, he got a heavy sales pitch from Enron. "It's quite an
impressive place," he says of Enron's trading floor, but he wasn't sure
forecasting skills alone would be enough to make the grade. "I would be
afraid that if money wasn't made in a hurry, I'd be tossed," says Mr. Altoe,
who accepted a position with the National Weather Service in Marquette,
Mich.

For others, having forecasts count puts a new thrill in the old art. After
two years as a manager at the Weather Channel's Latin American division in
Atlanta, Jose Marquez posted his resume on an Internet job site run by the
American Meteorological Society. Enron called.

"Have you heard about Enron?" Mr. Marquez remembers being asked. "And I
said, honestly, `No.'"

During a visit, Mr. Marquez, a 33-year-old Navy-trained meteorologist, found
Enron's trading floor exhilarating. Enron courted Mr. Marquez heavily,
tracking him down three times during his Christmas vacation in Puerto Rico.
Mr. Marquez decided the sprawling trading floor was just the sort of active
work place he was looking for. Also, he'd be getting a 10% to 15% boost over
his Weather Channel salary, before potential bonuses from Enron.

"I'm getting more money than I would anywhere else," he says.

Weather has long affected prices of everything from grain at Chicago's early
commodity markets to the stocks of retail companies on Wall Street. Jon
Davis, a meteorologist for Salomon Smith Barney in Chicago, started
forecasting the weather for agriculture traders back in 1985.

But volatile energy prices have raised the stakes for forecasters who are
able to gauge air-conditioning use in the summer or natural-gas demand
during the winter heating season. Meanwhile, all sorts of companies are
turning to energy traders and Wall Street for " weather derivatives ,"
complex contracts used to hedge financial risks associated with the weather.
"With every passing year, you do more energy and more energy," Mr. Davis
says.

Despite big advances in data collection and modeling, betting millions of
dollars on weather forecasts can still be tricky business. Short-term
forecasts are pretty good. Predicting weather two weeks from now is chancy.
Most meteorologists get their data from the government, particularly the
National Weather Service. Many then tweak it with their own interpretations
or forecasting models.

Disappointed last year by poor long-term forecasts from 11 private
consultants, Aquila has a contest offering $100,000 to the meteorologist or
team that can best predict temperatures in 13 major U.S. cities over the
course of a year. "I call it the forecast bakeoff," says Mr. Hoggatt.

The high stakes also mean more pressure on forecasters. WSI Corp., a
Billerica, Mass., weather-forecasting firm, started an energy service last
year, and Jeffrey A. Shorter, a WSI vice president, says energy clients can
be less forgiving than his other clients in TV and aviation, especially when
the forecasts are wrong. But, he adds, "presumably, more often than not,
we're right."

**End of ISDA Press Report for March 8, 2001.**

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Scott Marra
Administrator for Policy & Media Relations
ISDA
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New York, NY 10020
Phone: (212) 332-2578
Fax: (212) 332-1212
Email: smarra@isda.org

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