ISDA PRESS REPORT - March 6, 2001 (Supplemental)

* CFTC Proposes Rules Implementing Commodity Futures Modernization Act
of 2000
*     CFTC Rule Proposal Would Establish Three-Tier Regulatory Regime for
Markets
* Meyer Promotes Basel Committee Proposal

CFTC Proposes Rules Implementing Commodity Futures Modernization Act of 2000
www.cftc.gov <http://www.cftc.gov> - March 6, 2001

Washington -- The Commodity Futures Trading Commission (CFTC) today
announced that it is proposing rules relating to trading facilities to
implement the Commodity Futures Modernization Act of 2000 (CFMA). Congress,
on December 15, 2000, passed, and the President, on December 21, 2000,
signed into law, the CFMA, which substantially altered the Commodity
Exchange Act. The CFMA amended the law to establish three categories of
markets, designated contract markets, derivative transaction execution
facilities and markets exempt from CFTC regulation. The three categories
match the degree of regulation to the varying nature of the products and the
nature of the participant having access to the market.

The proposed new rules and rule amendments are being published in the
Federal Register for a 30-day comment period. The Commission, in its Federal
Register notice, urges commenters to submit their comments as early as
possible during the comment period so that the statutory changes may be
effectuated without delay.

Acting Chairman Newsome stated, "Today's release of these proposed revisions
is an important step in fulfilling Congress's mandate to implement the
CFMA's provisions without delay. We look forward to a productive discussion
of this release over the next 30 days."

Copies of these documents can be obtained by contacting the Office of the
Secretariat, Three Lafayette Centre, 1155 21st Street, N.W., Washington, DC
20581, (202) 418-5100 or by accessing the Commodity Futures Trading
Commission website.

CFTC Rule Proposal Would Establish Three-Tier Regulatory Regime for Markets
BNA - March 6, 2001

The Commodity Futures Trading Commission began the task of implementing the
2000 Commodity Futures Modernization Act (CFMA) by proposing a set of rules
March 5 aimed at making the commission more of an oversight agency than a
front-line regulator.

The rule proposal would implement the new statutory framework establishing
three new market categories, including exempt markets and two categories of
markets subject to CFTC regulatory oversight.

"The remaining parts of the framework relating to clearing organizations and
to intermediaries will be reproposed shortly," the agency stated.


Core Principles

The proposal establishes what the CFTC deems "core principles" that the
exchanges would operate under. It is meant to replace a "one-size-fits-all"
regulatory scheme that critics say hampers the U.S. markets by making them
over-encumbered and plodding--unable to compete with a fast-shifting
international marketplace. Now, the exchanges will be segregated according
to who trades on them and what is sold, with varying degrees of oversight
for the different tiers.
The hope is that the exchanges with the most sophisticated traders will be
able to govern their own houses, with the CFTC staying clear of most
regulation. The proposals effectively replace rules that were passed in
December, but that were rendered moot and withdrawn when Congress later that
month passed similar legislation.

In effect, the proposed rules establish three tiers of oversight for the
various futures and options markets: designated contract markets,
derivatives transaction execution facilities, and exempt markets. The
designated contract markets are "approved boards of trade or trading
facilities on which contracts for future delivery on any commodity may be
traded by any type of market participant," according to the CFTC's Federal
Register notice.

The next tier would consist of derivatives transaction execution facilities
and would be open to "traders of futures and option contracts on commodities
that have a nearly inexhaustible delivery supply, are highly unlikely to be
susceptible to manipulation, have no cash market, and are security futures
products." This tier would have an intermediate level of oversight,
according to the proposal.

Finally, commercial markets and boards of trade would be exempt, signifying
their relative sophistication in the markets.

Comments on the proposal are due 30 days after Federal Register publication.


Innovation, Competition

The announcement makes clear the CFTC's intention to go from front-line
regulator to a more behind-the-scenes oversight role. Since his appointment,
acting Chairman James Newsome has stressed his belief in free-market
principles and the idea that freeing the exchanges from over-zealous
oversight would help them compete in the global marketplace.
In its release, the commission said the proposal "was intended to promote
innovation, maintain U.S. competitiveness, and at the same time reduce
systemic risk and protect customers." The commission also said the proposal
would allow U.S. exchanges greater flexibility in competing with
technological innovations involving foreign competitors.

The proposal is the first portion of the 2000 CFMA to be taken up by the
commission. The legislation was passed in the waning moments of the previous
Congress, and it promises to drive much of the commission's agenda this
year.


Meyer Promotes Basel Committee Proposal
BNA - March 6, 2001
By Richard Cowden

Addressing a group of banking officials in Washington, D.C., March 5,
Federal Reserve Governor Laurence H. Meyer actively promoted the new
approach to international banking regulation represented by the recent
proposal for major revisions to the Basel Accord.

In remarks to the Institute of International Bankers, Meyer at once conceded
that the Jan. 16 proposal by the Basel Committee on Banking Supervision "is
still very much a work in progress, with important issues still unresolved,"
while defending it as a necessary initiative to keep up with the times.

The 1988 Basel Accord has served its purpose, Meyer said. "But technology
and business practices have moved on, and for the larger institutions this
decade-old rule has developed critical shortcomings. Risk-measurement
practices have improved, and capital markets have become more tightly
intertwined. Assumptions and shortcuts taken in the current accord are far
too crude, given practices today."

A new regimen for setting international capital standards is needed, he
said, because many large, complex financial institutions today structure
portfolios to arbitrage around the existing standard, undercutting one of
the original intents of the Basel Accord to establish capital ratios that
reflect a bank's actual strength.

"Thus, we need a capital framework that is more risk-sensitive and
compatible with current market practices," Meyer said. "Absolute levels of
capital must be consistent with risk in order not to shift risk-taking
either away from or to banks, but we also need a standard that better
reflects relative levels of risk."

Meyer outlined the Basel Committee's proposal, which relies on a
"three-pillar" approach, involving a new capital standard, heightened
supervisory review of banks' own internal assessments of their capital
ratios, and increased public disclosures of risk portfolios. "The new
proposal, in effect, increases the emphasis on the supervisors' oversight of
the institution's economic capital needs, as it refines the calculation of
the regulatory minimum," he said.


Backs Controversial 'Pillar 2.'

One of the innovative features of the proposal is that it would give banks
the option of developing their own internal models for calculating capital
adequacy, Meyer said. However, such methods are expected to rely heavily on
proper supervision. During a recent meeting of the Shadow Financial
Regulatory Committee, this "pillar" of the Basel Committee proposal was
called into question as a factor that could be compromised by pressures on
individual national supervisory authorities.

Meyer said, " ... for some--and perhaps for many--supervisors abroad,
implementing pillar 2 will be an even greater challenge and a more
significant event, potentially introducing a material change in their role.
For all of us, though, it is the right approach--relying more than before on
the internal measures and management practices of banks, giving them more
incentives to invest in better information systems and controls ... "

In regard to disclosure issues, Meyer acknowledged the formative nature of
the proposal. He said, " ... we recognized that we still have more work to
do in fashioning a more disciplined and prioritized set of disclosure
requirements, one that balances the cost of compliance against the benefits
of disclosure. This ... is an area in which bank comments [on the Basel
Committee's proposal] would be particularly helpful."

Jochen Sanio, president of the Federal Banking Supervisory Office of
Germany, called the proposed revision of the Basel Accord a "radical
departure" from a conventional approach to international banking regulation
that relies almost entirely on standards that are set by regulators. He
predicted the new Basel Accord will take effect early in 2004.

"Basel II is not the end of the story. Basel II is a first step, a very big
step forward ... but the revolution, to quote ... Trotsky, the revolution
will be a permanent one ... . And after Basel II there will be Basel III and
IV. And that's when we will talk about credit risk models ... I am convinced
it will take the academics only some years to really perfect credit risk
modeling, and then it will be accepted."







Scott Marra
Administrator for Policy & Media Relations
ISDA
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Email: smarra@isda.org