ISDA PRESS REPORT - DECEMBER 19, 2001

CREDIT DERIVATIVES
	*	Bank of England warns on trading practices - IFR

LATIN AMERICA
	*	Vulture firms begin to set their sights on troubled
Argentina - Financial Times
	*	Telefonica bids to shield at-risk Brazil interests -
Financial Times

REGULATORY
	*	Armey Would Split Derivatives Issue From Stalled Bankruptcy
Reform Bill - BNA

Bank of England warns on trading practices
IFR - December 15, 2001

The Bank of England (BoE) last week sounded warnings about the increasing
use of credit derivatives to transfer credit risk and counterparty risk
management practices.  Its half-yearly financial stability review examined
the transfer of credit risk between the banking and insurance sectors. It
noted that markets for risk transfer are, in principle, beneficial because
they allow greater dispersion of risk.

However, the BoE said that it is important for regulators to track whether
or not concentrations of risk might decline in some places only to re-emerge
in others. In particular it cited unfunded risk transfer as being difficult
to monitor. "If flows of risk are not accompanied by flows of funds
(insurance or derivatives), they become harder to track in aggregate," the
report said.

The review discussed possible areas where seemingly transferred credit risk
by banks could revert to the sector. It said that some techniques used in
deals such as synthetic securitisations can leave banks with residual risks,
whether contractual or implicit.  "The credit default swap market has not
really been tested under a severe downside scenario and if the worst happens
and the whole house falls down people may well find that none of their risk
has actually been transferred," said one analyst who was sympathetic to the
BoE's line.

Credit derivatives dealers are more sanguine, however. "Often you have no
option but to use credit derivatives to back up transactions. They can be
used to get round regulatory and sourcing difficulties and some times they
are just quicker and cheaper than the alternatives," said one dealer.  The
BoE also said that even in the instances where banks have genuinely
transferred credit risk, there is a question as to whether the appetite of
the risk takers will be sustained. "General insurers, reinsurers and life
insurers might reduce their asset allocation to credit risk if losses were
to increase materially during the current economic slowdown," said the
report.

The banks active in the credit derivatives market are confident that their
risk transfer techniques work, but admit that losses for insurance company
sellers of protection could threaten the continuing growth of the market.
The BoE also questioned the extent to which the banking system can change
from being the 'originator and holder' to 'originator and distributor' of
credit risk, saying that this may be limited by the close link between
credit and provision of liquidity.

"Credit risk is being transferred from banks to insurance companies. But if
credit losses crystallise in stressed market conditions, insurance companies
may need to have recourse to the banking system in order to meet their
obligations under credit risk transfer instruments," the report said.
Elsewhere in its review, the BoE examined counterparty risk management and
found that disclosure practice is still not sufficient to facilitate
effective management. It said that banks have growing exposure to non-bank
participants in over-the-counter derivatives and other capital markets, such
as insurance companies, energy companies and large multinationals.

The recommendations of the official and private sector reports on
counterparty risk management following the LTCM crisis were addressed
particularly to banks' hedge fund exposure. However, the Enron case shows
that many apply more widely, particularly the need for counterparties to
make adequate financial disclosure.

Vulture firms begin to set their sights on troubled Argentina 
Financial Times - December 19, 2001

Edward Bozaan says he made money in Russia and Thailand soon after they
devalued their currencies in the late 1990s. Now, the New York-based fund
manager is considering buying assets in Argentina, Bloomberg reports.

"I buy into extraordinarily depressed markets, and Argentina is definitely
on my screen right now," says the 44-year old president of Waterford
Partners, a fund management company whose promotional material contains
pictures of tanks and explosions. "Its markets are really scraping bottom."

As the country nears default on most of its Dollars 132bn debt and struggles
to avert devaluation, Mr Bozaan says he and others who specialise in
investing in countries in crisis are assessing whether prices have reached
bottom after the Merval stock index fell to 10-year lows and bonds
plummeted.

Mr Bozaan's fund grew 114 per cent in 1999, helped by his purchase of
Russian companies such as Vimpelcom Communications after the country
defaulted on Dollars 40bn of debt and devalued the rouble. In the first nine
months of this year the fund lost 17.9 per cent, compared with 26.6 per cent
drop in the MSCI Emerging Market Index.

Domingo Cavallo, Argentine economy minister, blamed foreign funds such as Mr
Bozaan's for the country's troubles, saying they drove down stock and bond
values and pushed up interest rates. That forced the government last week to
limit deposit withdrawals to prevent a collapse of the banking system, Mr
Cavallo said.

"They are the same (funds) that got rich in Russia in 1998 and who attacked
Ecuador and hurt the Ecuadorean people," Mr Cavallo said in a speech. "The
same funds have been focused on Argentina in 2001."

While many describe companies such as Waterford as vulture funds, Mr Bozaan
says he is not responsible for driving down Argentine markets. "Some see my
business as morbid, but it wasn't me who brought down the prices," says Mr
Bozaan. "I see value in markets after they've been battered."

In fact, any fund that buys Argentine securities would help the economy,
says Charles Cassel, who helps manage Dollars 450m in emerging market assets
at Standard Asset Management. "Vulture funds are a beneficiary to the
economy in that they provide an inflow of capital at a time when it
desperately needs it," he says.

Mr Bozaan uses studies of past financial crises elsewhere as a guide to when
prices may recover. "I strongly believe Argentina will become one of the
best- performing markets in the world some day and that's when we'll make
our money," says Mr Bozaan, who typically acquires shares that have dropped
60 per cent to 70 per cent in a market where the benchmark index has lost 50
per cent.

By Mr Bozaan's rule, he should already be investing in Argentina. Since
January 1, the Merval has dropped by half and leading stocks such as Grupo
Financiera Galicia, a bank holding company, have fallen more than two
thirds. The benchmark floating rate bond due in 2005 gained a second day to
yield about 60 per cent. The Merval, now trading at levels last seen in
March 1991, rose 1.5 per cent.

"There are many corporate stocks and bonds that would be extremely
interesting once uncertainty over the government's restructuring and future
is cleared up," says Richard Segal, director of research at Exotix, ICAP's
London-based debt brokerage.

Mr Bozaan says he has not yet invested because he believes the government
may devalue the peso, which was fixed at par with the US dollar in 1991 and
is a key reason, economists say, why Argentine industry is unable to compete
with cheaper imports.

"There's definitely more downside to come," says Mr Bozaan. "I want to see
some resolution in what the government will do. If Argentina devalues after
I've bought, the fund could lose a lot of money."  Mr Bozaan says his
interest in Argentina has grown as the country suffers an increase in public
protests against rising unemployment and cuts in government spending on
salaries, pensions and health.

"I bought after China's Tianenmen Square massacre, Peru's Shining Path
crisis and Thailand's riots," he says. "Argentina's not quite on that scale,
but its situation isn't good." Among shares Mr Bozaan may buy are Grupo
Financiera Galicia, Telecom Argentina Stet-France Telecom and Perez Companc,
an oil company.

Group Galicia trades at about 2.8 times past earnings compared with Banco
Bradesco, a Brazilian bank that trades at 8.1 times earnings, and Citigroup
of the US, which trades at 17 times. Telecom Argentina trades at 14 times
earnings against 27 times for Brasil Telecom. Perez Companc trades at 7.2
times earnings compared with BP's 13 per cent.  Mr Segal recommends buying
bank and utility bonds. "Grupo Galicia and Banco Rio look like good buys; so
do some of the telecom and electricity companies," he says.

Telefonica bids to shield at-risk Brazil interests 
Financial Times - December 19, 2001
By Leslie Crawford and Krishna Guha

Telefonica of Spain, the largest foreign investor in Latin America, has used
derivatives to hedge against a possible devaluation in Argentina and any
risk of that country's financial crisis spilling over into neighbouring
Brazil.  Cesar Alierta, Telefonica chairman, told the Financial Times: "The
crisis in Argentina is not a Latin American crisis. We are confident that
Brazil has decoupled from Argentina's problems."

Telefonica has more than Euros 35bn (Dollars 31.6bn) invested in Latin
America. The region provides 41 per cent of its revenues, which totalled
Euros 23bn in the first nine months of the year, and almost 45 per cent of
the company's cash flow.  Telefonica would not disclose the size of its
hedging operations, but said its derivatives portfolio is significant.
Executives said: "We are not immune to the effects of a devaluation, but we
will be less affected than the market thinks."

There should be no need to write down the value of its assets in the event
of a devaluation of the Argentine peso, which has been pegged to the dollar
for a decade. Telefonica said it has budgeted for a rise in unpaid telephone
bills as the crisis in Argentina bites. Operating revenues at TASA,
Telefonica's Argentine subsidiary, were down 5 per cent in the first nine
months of the year.  Mr Alierta, however, is bullish about prospects in
Brazil, where Telefonica has invested Dollars 17bn.

Telefonica owns Telesp, which has 12m clients and is the largest fixed-line
operator in the prosperous industrial state of Sao Paulo. Early next year it
hopes to pool its mobile interests in several Brazilian states with Portugal
Telecom's big mobile operation in Sao Paulo.  "With 1,200 lines per
employee, Telesp is probably the most efficient operator in the world," Mr
Alierta said. He is particularly enthusiastic about the potential for
broadband communications in Brazil."

Armey Would Split Derivatives Issue From Stalled Bankruptcy Reform Bill 
BNA - December 19, 2001

Despite opposition from House Judiciary Committee leadership, House Majority
Leader Richard Armey (R-Texas) told BNA Dec. 18 he wants the House to take
up contract netting legislation apart from the stalled bankruptcy reform
bill (H.R. 333) to which it is attached. 

"I think it is time to move netting," Armey said, using another name for the
derivatives bill. "They [members of the Judiciary Committee], see netting as
a very important kind of a driving engine within their bill. And I
appreciate their point of view, but I think this is something that needs to
get completed, and I have talked to the committee about it repeatedly." 

House Judiciary Committee Chairman James Sensenbrenner (R-Wis.) is against
consideration of financial derivatives legislation apart from bankruptcy
reform legislation, which has been stuck in conference for months, a
Sensenbrenner aide told BNA Dec. 14. 

Contract netting language intended to reduce uncertainty and limit systemic
risk in derivatives transactions was added to the bankruptcy bill at a time
when Republican leadership was optimistic the legislation could pass this
year and that its inclusion could help speed the process, House staff told
BNA. 

"Hindsight is 20-20," a House Republican aide told BNA. "Who knew the
[bankruptcy] bill would be grounded again?" 

Sensenbrenner and House Financial Services Committee Chairman Michael Oxley
(R-Ohio) met with Federal Reserve Board Chairman Alan Greenspan Dec. 13 to
discuss the importance of legislation addressing banks' use of financial
derivatives (239 DER A-28, 12/14/01). 

Oxley strongly supports passing derivatives legislation this year, according
to his spokeswoman, especially in light of the recent collapse of Enron
Corp., which traded heavily in derivatives. 

Even if a derivatives bill fails to pass Congress again this year, its
separate consideration would indicate just what poor odds Republican
leadership places on bankruptcy reform passing in the foreseeable future. 

Presumably, if the House took up a derivatives bill, it would vote on an
independent contract netting bill (H.R. 3211) that Rep. Pat Toomey (R-Pa.)
introduced on Nov. 1. Its language is identical to language contained in
numerous contract netting bills offered as far back as 1998, when then-House
Banking Committee Chairman James Leach (R-Iowa) championed the issue. 

Currently, no companion bill exists in the Senate. Although Democrats,
particularly members of the House-Senate conference on H.R. 333 who oppose
bankruptcy reform, are likely to support passage of a contract netting bill,
it is unclear whether key Republicans would. 

A spokeswoman for Sen. Chuck Grassley (R-Iowa), a member of the bankruptcy
reform conference, told BNA that the senator is likely to oppose separating
contract netting from H.R. 333. 

Derivatives are financial contracts used by parties wishing to hedge the
risk of fluctuations in interest rates, foreign exchange rates, or indexes.
Their value is based on the performance of an underlying asset. Seven large
commercial banks account for about 96 percent of all derivatives, the most
common of which is an interest rate contract. 

**End of ISDA Press Report for December 19, 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