ISDA PRESS REPORT - MONDAY, NOVEMBER 13, 2000


* Few issuers expected for first SET-50 index options; Acceptance
hinges on Derivatives Act
* Investment Instrument Standards Fight Grows
* Derivatives Standards Need Check
* Osaka and Dow To Form Derivatives Alliance
* Australia Credit Derivatives Turnover At A$18.4B
* Powerful Financial Services Reform Body Urged
* Lamfalussy group sees the way to a golden future for an integrated
market


Few issuers expected for first SET-50 index options; Acceptance hinges on
Derivatives Act
Bangkok Post - 11/13/2000

SET-50 options will be the first derivative index launched on the Stock
Exchange of Thailand next year as a new risk-management tool for investors.

But a lack of firms willing to issue index options remains a challenge.

Regulators will allow the issue of both call and put options based on index
changes. A buyer of a call option, for instance, will receive payment for
the difference in the change of the index if it rises above a set level.
Similarly, a buyer of a put option is paid if the index falls.

Suvit Mapaisansin, managing director of Merrill Lynch Phatra Securities,
said index options would become an important risk-management tool.

In overseas markets, most regulators choose to develop a futures market
first to support derivative instruments. While Thailand plans to eventually
develop a futures market, final passage of a new Derivatives Act is needed
first.

Mr Suvit said both futures and options were needed to enable investors to
fully manage their risk.

"The SET has sort of moved backward, developing options before futures.
Under such circumstances, the market will have only buyers, with few
sellers. The sentiment for market trends will be similar, both for puts and
calls."

Brokers would likely serve as intermediaries in processing orders, rather
than taking positions themselves to limit their own risks, Mr Suvit said.

"I think there is interest among investors in the instruments, but the
problem is that there are no issuers yet."

Full development of options would likely await the launch of the futures
market. How successful derivative instruments become will hinge on overall
investment sentiment.

SET officials acknowledge that the lack of issuers poses problems. The draft
Derivatives Act is being reviewed by the Council of State and then will be
scrutinised by various agencies before final submission to Parliament.

Investment Instrument Standards Fight Grows
Australian Financial Review - 11/13/2000
By Roger Hogan

The controversy over how Australian companies should account for financial
instruments is likely to intensify during the next few weeks, when a joint
working group set up by the Australian Accounting Standards Board releases a
draft document designed to settle the question.

According to the AASB's chairman, Mr Keith Alfredson, the document on which
comments will be invited is likely to ``blow the minds'' of many in the
financial markets, major corporates and the accounting profession, judging
by the criticisms it has attracted even before its publication.

But he said time for argument was fast running out. Whatever happened after
the draft and invitation to comment were issued in the run-up to Christmas,
``Australia will have to make a choice.''

Accounting bodies worldwide have been working on standards for financial
instruments to prevent the derivatives -related disasters that rocked many
companies during the late 1980s and early 1990s, including US company
Procter & Gamble, which lost $US157 million on interest-rate derivatives in
1994.

The matter has become urgent in Australia partly because the United States
has introduced its own standard Financial Accounting Standard Board
statement No133 which became effective for some companies on July 1, and
which will operate from January 1 for those whose financial years coincide
with the calendar.

FAS 133 is regarded as a nightmare by corporate treasurers in the US and
here, because it requires derivatives and other financial instruments to be
``marked to market'' every quarter, rather than accounted for on a
fair-value basis.

Its critics claim it will lead to volatility and confusion in company
financial statements.

Mr Alfredson said that in the US, ``there is now a special interpretation
group like the Urgent Issues Group here interpreting 133. In other words, it
is so complex, readers can't just read the standard and interpret it. The
group has already issued more than 100 interpretations.''

Australia has no accounting standard that deals comprehensively with the
recognition and measurement of financial instruments, although it has made
progress with disclosure requirements. Acknowledging the concern over the
mark-to-market approach, the AASB commissioned the development of a
fair-value model.

The joint working group consists of representatives from Australia, Canada,
France, Germany, New Zealand, the Nordic countries, Britain, the US and the
International Accounting Standards Committee. IASC has incorporated elements
of FAS 133 into its own much-criticised financial instruments standard, IAS
39.

It remains to be seen how much simpler the fair-value approach will be.

``In fair-value accounting, you get the market value for the instruments at
the time and fair value them. It sounds easy in principle, but it is much
more complicated in practice,'' Mr Alfredson said.

Developing the appropriate standard is only half the battle, however; the
trick is to gain widespread acceptance for it. Even if Australia accepted
the fair-value model, Mr Alfredson said, it would not be able to implement
it alone, ``at least if I have any influence''.

There would need to be a ``convergence by the major standard-setters after
appropriate due processes, including field testing of its relevance and
reliability to preparers and users''. Either that, or ``we may have to go to
something else ... Perhaps FAS 133 and all its committees''.

Derivatives Standards Need Check
Australian Financial Review - 11/13/00
By Roger Hogan

The Bank for International Settlements will indirectly highlight the need
for appropriate accounting standards for derivatives today when it releases
statistics showing global over-the-counter derivatives markets continue to
grow strongly, with total notional outstandings for the first half of the
year at $US94 trillion ($181 trillion).

This represents a 6.6 per cent increase on the $US88.2 billion at December
31 and reflects an overall buoyancy of the market which contrasts sharply
with the stagnation of volumes on derivatives exchanges. The notional value
of exchange-traded contracts during the first half was $US13.9 trillion, the
same as December 31, 1998.

Another trend picked out by the BIS data is the rise of the euro as a key
currency in the derivatives market. It extended its already dominant
position in the interest rate derivatives markets, where it accounted for
the                                 equivalent of $US22.9 trillion, or 35.7
per cent of the total, compared with $US20.7 trillion (34.4 per cent) in the
previous period.

Growth during the first half was led by forward-type contracts, particularly
interest rate swaps, outright forwards and foreign exchange swaps, said the
BIS.

The biggest segment, interest rate derivatives, grew by 7 per cent to
$US64.1 trillion. Most of the growth was in swaps, which expanded 9 percent
to $US48 trillion.

Swaps have grown more quickly than other interest rate derivatives for the
past few years, a trend the BIS said might be explained by the development
of various swap structures, which might have enabled the market to respond
to end-users' needs in a more flexible way than exchange-traded interest
derivatives.

Other reasons included the introduction of the euro and its stimulus to the
growth of European capital markets issuance, some exposure to which was
likely to have been hedged in the interest rate swap market; and reduced
government bond issuance, which would have made government bond futures less
useful as hedging instruments.

Not surprisingly, given the currency volatility during the first half, the
value of contracts outstanding in various currency instruments increased 8
per cent to $US15.5 trillion. This included a very sharp 26 per cent rise in

contracts involving the euro; the value of $US and sterling contracts rose 9
and 11 per cent respectively.

Activity in the equity-linked sector fell by 8 per cent to $US1.7 trillion,
while that in commodity derivatives markets increased by 7 per cent to
$US584 billion. Looking behind these face values, the actual credit
exposures of financial institutions to derivatives fell by 8.4 per cent,
from $US1.03 trillion to $US937                                 billion.

Osaka and Dow To Form Derivatives Alliance
Financial Times - October 25, 2000
By Bayan Rahman

Osaka Securities Exchange, Japan's second-largest stock exchange, and Dow
Jones & Co, the US index provider, will on Thursday sign an agreement to
list the US company's derivatives products on the OSE early next year.

Osaka will develop futures and options contracts, whose value will be linked
to the performance of the Dow Jones Industrial Average.

Goro Tatsumi, OSE president, and David Moran, president of Dow Jones
Indexes, will sign a memorandum of understanding in Osaka on Thursday.

The OSE is seeking derivatives-related tie-ups to expand its range of global
products to attract international
clients. The move is also designed to help the exchange defend its market
share against the threat from 24-hour and internet trading.

The agreement between the Osaka exchange and Dow Jones follows another one
between the OSE and Nasdaq of the US to list derivatives products based on
the Nasdaq-100 index.

The OSE is also in talks with the Chicago Board Options Exchange and is
considering talks with Eurex, the
Swiss-German derivatives exchange.

Australia Credit Derivatives Turnover At A$18.4B
Dow Jones International News - 11/12/00
By Adam Bradbery

SYDNEY -(Dow Jones)- The Australian credit derivatives market saw total
turnover for the 1999-2000 financial year of A$18.4 billion, up
substantially from 1998-1999, the Australian Financial Markets Association
said Monday.

This is the first year the AFMA has surveyed the credit derivatives market,
but it estimates turnover was A$3 billion to A$5 billion in 1998-1999.

Credit derivatives are instruments that allow market participants to manage
the credit risk within their assets or to take exposure to such risk to
boost returns.

"This shows that the market has liquidity and depth," said AFMA credit
derivatives committee chairman, Pierre Katerdjian. The findings are the
result of a survey conducted by AFMA and the Securities Industry Research
Centre of Asia-Pacific.

"It's very encouraging, particularly as there are still a number of offshore
banks and investment houses which trade Australian name default swaps but
which were not captured by the AFMA survey," Katerdjian said.

AFMA Chief Executive Ken Farrow says that the growth in the market is good
for Australia's lenders and helpful in lowering systemic risk in Australian
financial markets.

Katerdjian says most market participants expect turnover of credit
derivatives to increase 50% this financial year from last year, with the
global reduction in government debt on issue and the increased liquidity of
corporate bond markets encouraging this trend.

"There is a greater need to hedge credit risk and these instruments are the
most efficient way to do that," he said.

Powerful Financial Services Reform Body Urged
Financial Times - November 10, 2000
By Peter Norman

The European Union needs a powerful new EU securities committee to help
speed regulatory reform In  markets for financial services and capital, a
special EU group on securities regulation proposed yesterday.

The group rejected the idea of a single EU regulatory agency "at his stage
of the development of the EU's
securities markets".

This idea, which would require changes to EU treaties, gained little support
from market practitioners.

But Alexandre Lamfalussy, the former Belgian central banker who chaired the
so called wise men's group,
urged EU leaders at next March's summit in Stockholm to agree to proposals
for a new faster method of regulatory reform and make commitments for it to
be in place in the EU by 2002.

"We can no longer afford the luxury of regulatory inefficiency in the
instantaneous internet age," declared Mr Lamfalussy.

"Financial markets are changing by the week and European regulation is
simply not up to speed."

The report said an efficient regulatory process for financial services and
capital markets was "crucial" for the
EU and its citizens, because it would boost growth, competitiveness and
jobs.

Mr Lamfalussy said the proposed system, which would have the securities
committee work out the detailed implementation of new regulations, could cut
the time needed to complete reforms "substantially" and
possibly by a half.

The committee, which would consist of representatives of the Commission and
member states, would be able to adapt existing legislation to changed
circumstances "very quickly", he added.

Mr Lamfalussy made clear that the fast track system being proposed would
have to be monitored carefully and reviewed promptly if found to be
"manifestly failing" to secure progress.

The interim report was welcomed by representatives of the financial sector.
Some bankers said it was
auspicious that the final recommendations would be delivered in February
during EU presidency of Sweden,
which is known to favour speeding the development of the single financial
market.

Adam Ridley, direcxtor general of the London Investment Banking Association
said the report proposed a sensible institutional structure.  He welcomed
the decision to initiate a wide debate on the proposals before production of
the group's final report.

Paul Ariman, the secretary general of the Federation of European Stock
Exchanges, praised the report's "very pragmatic" approach, noting that it
would have taken at least three years to set up a single European regulator.

Mr. Lamfalussy said regulatory changes were "especially urgent"" if the EU
was to create a real single market for financial services.

He endorsed the proposals of the EU's financial services action plan, but
urged that it be completed by 2004.  The present target of 2005 could be
missed unless the EU adopted the groups fast track approach on legislation,
he warned.

Lamfalussy group sees the way to a golden future for an integrated market
Financial Times - 11/10/00
By Peter Norman

The average US investment fund is six times larger than its European
equivalent.

Venture capital per head of population in the European Union is one-fifth of
US levels.

The average annual real return on US pension funds was 10.5 per cent between
1984 and 1998 against 6.3 percent in the EU.

With these facts Baron Alexandre Lamfalussy and his group of wise men
highlighted the deficiencies of
the EU's financial market, in yesterday's interim report on the regulation
of European securities markets.

The prize of creating a properly integrated European financial services and
capital market, that would
virtually complete the EU's single market for goods and services, was
couched in correspondingly glittering
terms.

Financial market integration, Mr Lamfalussy said, would lead to increased
productivity of both capital and
labour, enabling the Europe's economy to grow faster and create more jobs.

It would bring benefits to consumers, through higher returns; to small and
medium-sized enterprises, through more venture capital; and to large
companies, through lower capital costs.

The reforms needed to create such a market have long been identified and
cover issues such as new rules for regulated and non regulated markets; a
single "passport" to ease the raising of capital across borders and updating
investment rules for pension and investment funds. They form the EU's
financial services action plan, due to be implemented by 2005, but which the
Lamfalussy group wants completed by 2004.

The problem so far has been putting in place the regulatory conditions to
police such a market in a period of rapid technological and market change.

As Mr Lamfalussy's report recalled, it takes an average three years to agree
an EU regulation or directive and delays can be much longer. The EU takeover
directive has been under discussion for 11 years and still to be enacted.

The report called for a regulatory system that "can adjust continuously,
flexibly and rapidly to future developments, which are unpredictable today".
It must "not inhibit legitimate market development" and be "neu-
tral as regards competition between different service providers".

The current system, Mr Lamfalussy complained, "is too slow, too rigid and
contains too much ambiguity
and inconsistent implementation".

The novelty of yesterday's report is in the way it draws on a little used
element of the EU's legislative
procedure to propose a faster way of introducing and implementing
legislation governing financial markets.
At first sight its "four level" approach for securities legislation appears
technical and undramatic. But by using the process known as comitology it
offers a chance of halving the time needed to introduce financial
market rules.

Mr Lamfalussy's group proposed that future EU securities legislation should
concentrate on principles rather than details. The legislation, which would
be agreed in the usual way by the council of ministers and the European
parliament on a proposal of the Commission would ideally be framed as EU
regulations, which do
not require transposing into national law.

A new EU securities committee would define how these principles would be
implemented. It would comprise Commission officials and representatives of
member states, who would decide technical details and update
them when necessary.

EU member states would be responsible for implementing the legislation,
ensuring that it was "consistent and equivalent" throughout the KU. This
would entail much greater co-operation between regulators and the
Commission.

The attraction of the plan is that it could be enacted without changing the
EU treaties and in force by the
beginning of 2002. It would be closely monitored and reviewed around 2004.

However, Mr Lamfalussy made clear the new procedure would need political
endorsement at the highest
level and suggested EU leaders at their Stockholm summit in March next year
should pass a resolution
agreeing a series of commitments to be delivered by 2002.

His fast track method would also have to win the support of the European
parliament, which has adopted
a generally hostile approach to comitology because it pares its powers.

Stressing that yesterday's report was an interim proposal, Mr Lamfalussy
said his group would now seek
political and market reactions.

End of ISDA Press Report for Thursday, November 2, 2000.

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