ISDA PRESS REPORT - NOVEMBER 12, 2001

CREDIT DERIVATIVES
	*	ISDA survey reveals strong upward trend - IFR
	*	ISDA's new supplement includes converts in default swaps -
Dow Jones

RISK MANAGEMENT
	*	The Basle perplex - The Economist
	*	Supervisors review cross-sectoral practice - IFR

ISDA survey reveals strong upward trend
IFR - November 10, 2001

The global notional outstanding volume of credit derivatives transactions
hit US$631.497bn for the first half of 2001, according to the International
Swaps and Derivatives Association's first survey of credit derivatives
transactions. "While still modest in relation to interest rate products,
this figure is expected to remain on a strong upward trend compared to more
mature derivative product areas," ISDA said.

ISDA surveyed total notional outstanding volumes for single name credit
default swaps, default swaps on baskets of up to 10 credits, and portfolio
transactions of 10 credits and more. Eighty-three member firms supplied data
for the survey.

Interest rate and currency derivatives growth clocked in at just above 3.5%
in the first half of the year among members that also reported at year-end
2000, ISDA said. For these firms, total notional outstanding volumes
increased to about US$55.2trn from roughly US$53.3trn.

Total notional principal of interest rate swaps, interest rate options and
currency swaps for all surveyed firms slid to US$57.3trn from US$G3trn at
year-end last year. Among the top 10 dealers, a minor decrease in volume
from US$35.6trn to US$35.Strn was recorded, ISDA noted.

According to Thomas Montag, chair of ISDA's market survey committee, the
shifting product use reflected greater uncertainty in the global market
environment. "The market for credit protection has an obvious appeal during
times of economic downturn," he added.

ISDA's survey is compiled twice a year by Andersen. Sixty-seven of the 83
member firms that participated in this survey also participated in the
previous survey.


ISDA's new supplement includes converts in default swaps
Dow Jones - November 12, 2001
By Joe Niedzielski

NEW YORK -(Dow Jones)- The International Swaps and Derivatives Association
has published a supplement to its 1999 document for credit derivatives which
incorporates convertible bonds and zero-coupon bonds, among others, as
deliverable securities in these contracts. 

The trade group said late Friday that it had finalized and published its
Supplement Relating to Convertible, Exchangeable or Accreting Obligations.

The supplement addresses the treatment under the 1999 ISDA Credit
Derivatives Definition of certain types of convertible and exchangeable
obligations, as well as the treatment of accreting obligations, such as
zero-coupon bonds, low coupon bonds issued at a discount and non-discounted
bonds that accrete during their term, ISDA said. 

"The Convertibles Supplement represents the consensus of a diverse range of
constituents in the credit derivatives markets, including portfolio
managers, credit protection sellers and dealers," said Robert G. Pickel,
ISDA's executive director and CEO. 

Credit default swaps allow buyers to transfer the risk of a default on
obligations like bonds or loans, or other types of credit events like a debt
restructuring. They have had a growing influence in the broader fixed-income
universe, at times playing a role in the pricing of corporate bonds. 

And some convertible-bond investors will lay off the credit risk from the
fixed-income portion of a convertible security by buying credit default swap
protection. 

ISDA's supplement was expected. A group of U.S.-based dealers submitted a
proposal to ISDA a few months ago to include obligations like convertible
bonds as deliverable securities in these contracts. 

And in mid-October, ISDA told members that convertible bonds were
deliverable under standard credit derivatives contracts. The group's
memorandum to members came in response to questions from members following
the appointment of a railway administrator for Railtrack PLC (U.RTK). 

Holders of convertible bonds issued by Railtrack had complained that some
sellers of credit protection weren't paying claims on default swap contracts
on the Railtrack credit. 


The Basel perplex
The Economist - November 8, 2001

The arcane world of banking supervision is not usually the talk of German
chancellors on tours of Asia. Gerhard Schr?der made an exception recently
when he threatened that Germany would veto any new European directive based
on the latest proposals from the Basel committee of big-country bank
supervisors. In its present form, said Mr Schr?der in Bangalore, Basel 2 (as
the proposals are known) is "unacceptable to Germany".

Basel 2 attempts to formulate more precisely than before the levels of
"regulatory" capital that banks must hold as a cushion against the credit
and other risks that they run. After more than three years of talks, the
Basel boffins have developed rules which are still not acceptable to
commercial banks. That is strange, since they are supposed to mirror the way
the world's most sophisticated banks themselves calculate their risks. The
whole exercise has shades of Heath Robinson about it.

The banks are up in arms, this week bearding the Basel committee for its
latest draft rules, which get ever more complicated and prescriptive. By the
time they are implemented, in 2005 at the earliest, the rules look likely to
burden banks with extra costs (ie, through the need to run parallel
reporting systems) and perverse incentives to "game" the system. Basel 2
could thus aggravate the very thing it set out to correct, a distortion of
financial markets.

Germany's grouse has to do with the Mittelstand, the 3m small and
medium-sized companies that are the economy's backbone. The Basel 2 formulae
for credit risk are based on credit ratings applied to company debt, either
by rating agencies or internally by banks themselves. But few smaller
companies are rated in this way. Moreover, German companies are more than
usually dependent on medium-term bank loans, and the longer the loan the
more it is penalised under the proposals. 

The Germans-but also the Italians and the Japanese-fear that their
medium-sized companies will lose under the new capital regime. Many of the
2,800 German banks are not equipped to rate the companies to which they
lend: equipping them would drive up the cost of lending. German bank
associations plan to help by pooling credit data for their members. But Mr
Schr?der's advice to banks last week was that they should not be overhasty
in applying the new Basel principles ahead of time.

Already the committee is working on a fix. On November 5th it posted a
clutch of new suggestions on its website that included new risk weightings
for smaller companies, and proposals that physical collateral, receivables
and even leased assets be used to lessen a particular company's credit
charge. These were interim ideas, it said, which needed to be tested and
even revised.

All well and good. But the Basel committee is getting into knots trying to
address every objection as it arises. Each time, it seems, the committee
adds another layer of complexity for banks and their supervisors to master.
Most recently, after strident objections by banks, there was the shifting of
the "w-factor" (the possibly unquantifiable residual risk in a credit
derivative) from one supervisory category to another, and also the setting
of arbitrary minimum risk weights for unrated securitised assets. The figure
for operational risk (non-market risks such as the loss of data, a rogue
trader or the destruction of a bank's headquarters) has been slashed, after
objections from banks.

The November 5th pabulum came in response to a "quantitative impact study"
(a live study of how the proposed capital charges would affect a sample of
138 banks in 25 countries). The Basel committee has always said that the
scale of charges needs to be properly calibrated. In fact, it gave itself an
extra year to get the calibration right. It has invited some banks to take
part in a fresh impact study using its latest proposed adjustments.

The results should help the Basel committee to tweak its formulae to get
results. Its declared goal is not to increase or decrease the overall
capital charge imposed on the banking system, merely to allocate it more
efficiently.

But some regulators are worried that the more risk-sensitive the regime is,
the more reluctant banks will be to lend in a downturn, aggravating economic
cycles. There are attempts to fix this too. For example, Spain allows its
banks to make a provision at the inception of a loan-putting money aside for
a rainy day. Some countries need to fix their accounting regimes before they
can follow suit.

Regulators appear stoically optimistic that all these fixes will work, and
that a credible new framework will be established-not without flaws,
perhaps, but better than what exists today. The timetable may slip, but the
plan is to produce a final draft framework early next year, allowing
consultation until the end of March, which should result in a firm set of
rules by the end of 2002. That, in theory, still allows time for the
European Union to draft and finalise a matching directive on capital
adequacy for banks and financial firms, to be in force by January 2005.

With Basel 2, bank supervisors are trying to do three main things. They want
to devise formulae that bring capital charges closer to the banks' own
measures of risk. They want to establish continuous review of banks'
management, and especially of their risk management, as a factor in
adjusting the capital charge. And they want to create incentives for greater
public disclosure of banks' risk exposures. This is an attempt to let
markets take on more of a supervisory role. Yet, in reality, the supervisors
are becoming micro-managers.

A member of the Basel committee insists that most of the world's 36,000
banks will be governed by a regime no more complex than Basel 1, in force
today. The more sophisticated financial groups that aspire to a so-called
"advanced" approach will be treated differently. "We'll be crawling all over
them initially," says the supervisor, "because ultimately we're giving them
more freedom."

All the same, in between the lowest and the highest, thousands of banks will
be graduating from a standardised to a more sophisticated approach, with
heavy demands on supervisors' time. Only America and Britain already have a
culture of continuous review by supervisors. Most other regimes are either
less sophisticated, or they are hamstrung by non-adjustable capital charges
that are set at a minimum by law.

Then there is the Brussels hurdle. Whatever the Basel committee decides
works for banks must be applied in the European Union to all investment
firms, including broker-dealers and asset managers. The scope is huge for
further descent into mind-boggling detail. Supervisors and financial firms
may well end up thanking Mr Schr?der if he vetoed the lot.


Supervisors review cross-sectoral practice
IFR - November 10, 2001

The Basle Committee on Banking Supervision, the International Organisation
of Securities Commissions and the International Association of Insurance
Supervisors last week released, under the banner of the Joint Forum, two
reports comparing risk management practices and principles in the sectors
they supervise.

Both reports were principally aimed at the supervision of conglomerates that
incorporate businesses in banking, securities and insurance, but one also
took a close look at risk transfer practices.

The first report, Risk Management Practices and Regulatory Capital, compared
the approaches in each sector in an effort to "gain a better understanding
of current industry practices in all three sectors". The main sections of
the report focus on: differences in core business activities, similarities
and differences in risk management tools, approaches to capital regulation
in the three sectors and cross-sectoral risk transfers and investments.

It is in relation to the latter two sections that the report provided what
some may regard as its sting. The Joint Forum suggested that as supervisors
evaluate the extent of cross-sectoral activity, in terms of risk transfer
using derivatives, securitisation and other techniques: "It may become
important for the individual sectoral frameworks to be updated to better
reflect the contemporary risk profiles of the firms subject to those
frameworks. It would not be surprising, for example, for some jurisdictions
in the near future to consider greater convergence in the frameworks applied
to the different sectors."

The report explained that supervisors should consider the potential for
existing capital regulations to provide incentives for capital arbitrage.
"To the extent that some firms are engaging in activities that are not
addressed through capital requirements, supervisors need to ensure that
other measures are in place to ensure that the associated risks are being
appropriately managed and are supported by sufficient economic capital," it
added.

As a result, the report said, supervisors should continue to evaluate
approaches that could be taken to address crosssectoral investments within
the various capital frameworks.  The second report, Core Principles,
compared the core principles each supervisor has issued to its respective
sector as risk management guidelines.

The Joint Forum found that each set of core principles provided an overview
of the essential elements of the supervisory regime in that sector at the
time they were written (1997-2000).  However, the pace of developments in
the financial sector since then has required consideration of the need to
keep the core principles updated.  The report found no evidence of
underlying conflict or contradiction between the three sets of core
principles at the highest levels. However, in some cases there are
significant differences in the application of similar principles.


**End of ISDA Press Report for November 13, 2001**

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Scott Marra 
Administrator for Policy and Media Relations
International Swaps and Derivatives Association 
600 Fifth Avenue 
Rockefeller Center - 27th floor 
New York, NY 10020 
Phone: (212) 332-2578 
Fax: (212) 332-1212 
Email: smarra@isda.org