ISDA PRESS REPORT - NOVEMBER 6, 2001

EURO
	*	Italy rebuts claims over swap contract - Financial Times
(North American Edition)
	*	Rome 'did not cheat over deficit' - Financial Times
(European Edition)

EMERGING MARKETS
	*	Cavallo defends Argentina's plan for debt swap - Financial
Times

OPERATIONS
	*	After Liffe - The Economist

TRADING PRACTICE
	*	Cut Short - The Economist

Italy rebuts claims over swap contract
Financial Times (North American Edition) - November 5, 2001
By James Blitz 

The Italian Treasury firmly rebutted allegations on Monday that it had
structured a complicated swaps contract with the aim of deflating its 1997
budget deficit figure and qualifying for the single European currency. 

In a formal statement, the Treasury said that swap contracts - in which a
bond issuer can trade his obligation to make payments in one currency rather
than another - were a regular method of "improving management of public
debt". 

Privately, meanwhile, Treasury officials sought to explain why Italy had
undertaken a swap contract highlighted over the weekend by a report for the
International Securities Market Association. 

On May 15 1995 the Italian government issued a bond for Y200bn. At the time,
after the dramatic 1992 devaluation of the lira, the Italian Treasury was
gradually seeking to regain credibility in international markets, and did so
by issuing bonds in a range of currencies. 

When the Y200bn bond was issued, the yen-lira exchange rate was at L19.3. By
December 1996, however, the yen had depreciated by 30 per cent to a level of
L13.4 to the yen. The Treasury then sought to lock in its currency gains
over this period. 

Treasury officials say they could have undertaken to start buying back the
Y200bn bond issue, but given its sheer size, this was unrealistic. They
therefore decided to undertake a cross-currency swap in which the Treasury
could convert its yen liabilities into lira. 

The Treasury faced a serious technical problem, however. Under European
Union statistical rules pertaining at the time, the debt of all EU countries
could only be reported in the original currency in which the bonds had been
issued, in this case yen. 

Any swap contract agreed by the Treasury in order to close its foreign
exchange risk would thus be irrelevant when it came to calculating the
overall debt figure. 

This was highly pertinent to how the swap agreement had to be structured. 

The Italian Treasury could have simply closed the swap transaction when the
Y200bn bond matured in September 1998, realising all its exchange rate gains
at that date. But a strong appreciation of the yen during the course of 1997
might have left Italy's official debt looking higher at the end of that year
than it did at the end of 1996. This could have seriously undermined the
country's bid to enter the eurozone. 

The Treasury therefore needed to keep the formal calculation of its debt
consistent by realising their exchange rate gain during the lifetime of the
bond. Both the exchange rate and the interest rate of the swap contract were
structured to allow this. 

Treasury officials say the 30 per cent foreign exchange gain from the Y200bn
bond was highly unusual. They dismissed any notion that this could be a
regular phenomenon in debt management as absurd. 

Nor, say officials, could the swap be judged as a way of "window dressing"
the deficit figure. If window dressing had taken place, Italy would have
seen its deficit and debt shoot up after it had successfully entered the
single currency. The fact remains that Italy's deficit and debt have both
been on a steadily downward path since 1996.

Rome 'did not cheat over deficit' 
Financial Times - November 6, 2001 (European Edition)
By Peter Norman

The European Commission and Eurostat, the European Union's statistical
agency, yesterday rejected suggestions that Italy had used the
over-the-counter derivatives market to camouflage the true size of its
budget deficit and so help its admission to the European single currency. 

Gerassimos Thomas, spokesman for Pedro Solbes, the economic and monetary
affairs commissioner, said the Commission's preliminary evaluation was that
the use of interest rate swap transactions by one member state in 1997, as
highlighted in an International Securities Market Association (ISMA) report,
did not amount to cheating on the budget deficit figures. 

Mr. Thomas said the purpose of such swap transactions was to save money for
governments and they were therefore not discouraged by regulators. Although
the ISMA report referred only to an unnamed member state, it was understood
to be Italy. 

Yves Franchet, the director-general of Eurostat, said his agency knew in
1997 about the Y200bn Italian bond issue and swap transaction mentioned
anonymously in the report. The effect of that deal was to reduce Italy's
deficit of around 2.7 per cent of gross domestic product in 1997 by a
marginal 0.02 percentage points. 

The swap deal was therefore not of a size to influence significantly Italy's
ability to produce a deficit well below the 3 per cent ceiling set in the
Maastricht Treaty. 

Mr. Franchet said Eurostat consulted widely on how to treat swaps before
defining the deficit of Italy and other member states. The agency had to
work out the public deficits of member states for economic and monetary
union at a time of statistical transition between national accounts based on
a standard known as ESA79, which took no account of swaps, and before formal
adoption of the ESA95 system, which recognised swaps. 

After consulting with expert committees, Eurostat decided to apply the ESA95
standard in calculating member states' suitability for Emu. Aware that swaps
could have a positive or negative effect on deficits, Eurostat also
conducted a survey of swap use by member states. According to Mr. Franchet,
the practice was not widespread. 

Cavallo defends Argentina's plan for debt swap 
Financial Times - November 6, 2001
By Thomas Catan

Domingo Cavallo, Argentina's economy minister, yesterday mounted a defence
of his country's controversial debt swap plan, saying investors must accept
lower interest payments if his country was to avoid an outright default on
its Dollars 132bn debt. 

"Any reasonable person knows that Argentina cannot grow if it has to pay
interest on its debt that ranges between 11 per cent to 25 per cent - and in
the case of some provinces, up to 30 per cent a year," he told an audience
of businessmen. 

"We . . . seek to ensure payment on the basis that Argentina is viable and
to stop trying to pay (interest rates) that only reflect the march of
Argentina towards default. It's a question of telling the truth." 

Starting today, Argentina will offer private creditors new bonds backed by
future tax revenues that will pay a maximum of 7 per cent. Repayment on
bonds coming due in the next 10 years will also be pushed forward by three
years, Mr. Cavallo said. 

This leg of the debt restructuring appears to be aimed mainly at domestic
investors - local pension funds, insurance companies and banks - that hold
at least a third of Argentina's Dollars 95bn in bonds. These local
institutions, often units of international banks, are heavily exposed to
Argentine debt and are seen as more susceptible to government pressure. 

A second "global exchange" for all of Argentina's bonds should be ready
within 2-4 months, Mr. Cavallo said. By then, Argentine officials hope to
have additional guarantees from multilateral lending agencies to offer
foreign investors in return for accepting lower-interest bonds. Argentina
hopes this will enable it to avoid an outright default on its debt. 

Investors entering the first, mainly local, exchange will be entitled to
enter any subsequent deal, Mr. Cavallo said. Pension fund managers had
feared being taken to court by future retirees for having acted against
their interests. 

"Those who have confidence in Argentina are going to have two opportunities
because no one knows if the global exchange will have better or worse
terms," Mr. Cavallo said. 

Argentina is attempting to cut its annual interest bill by at least Dollars
4bn to free up resources to restart its ailing economy, now in its fourth
year of recession. To do so, the government is implementing a range of tax
cuts and other measures to spark spending, such as cutting employees'
private pension contributions. 

Investors remain concerned that Argentina's debt proposal effectively
constitutes a default. However, Mr. Cavallo is now putting them on notice
that they must accept lower interest payments if the country is to continue
to service its debt.  The government is also pressing the 23 provinces to
accept a cut in their guaranteed monthly tax transfers.

After Liffe
The Economist - November 1, 2001

JEAN-FRANCOIS THEODORE, the head of Euronext, is a surprise winner. The
London Stock Exchange (LSE) was widely expected to triumph in the bidding
for Liffe, London's derivatives exchange. Yet on October 29th the board of
Liffe recommended that its shareholders accept a ?555m ($806m) offer from
Euronext, the three-way merger between the Paris, Amsterdam and Brussels
stock exchanges. Although Euronext's offer was less than the LSE's, it was
all in cash (not in combination with shares). It also promised to retain
Liffe's management, and to shift all of Euronext's derivatives business to
London to trade on Connect, Liffe's trading system. That combination made it
unbeatable.

Euronext's coup is a blow for the LSE, which had hoped that buying Liffe
would strengthen its position in the forthcoming consolidation of European
stock exchanges. But the LSE misplayed its hand, advertising its interest
for too long in advance and then quibbling over too many details with
Liffe's management. It will now have to find some other strategic option if
it is not to become prey to one of its rivals. Setting up its own
derivatives business will be hard: it might instead seek to buy one of the
American exchanges, perhaps the Chicago Mercantile.

The third big European stock exchange, Deutsche B?rse, which had also bid
for Liffe, will also have to find an alternative. Yet one obvious idea, to
resurrect last year's abortive marriage between it and the LSE, will be hard
to do under the two exchanges' present management, because the bust-up was
so acrimonious. That may put Euronext in the best position to become the
dominant European exchange.

Europe's investors may not care so long as trading becomes cheaper and
easier. Anyway, most of them fret more about improving clearing and
settlement in Europe, which is much more expensive than in America and so
offers greater scope for savings. The Liffe/Euronext deal immediately
triggered speculation about which European clearing houses might now merge.
The London Clearing House (LCH), which clears trades on Liffe, had
inconclusive talks last year with Clearnet, which clears Euronext trades. A
merger would now be logical. Less obvious is which way the Luxembourg-based
Clearstream will jump. On October 31st it received offers from Deutsche
B?rse (which already owns 50%) and Brussels-based Euroclear, the biggest
clearer of international bonds.

Deutsche B?rse is keen to own all of Clearstream. This would create the
first big European "silo", in which trading, clearing and settlement have a
single owner. Werner Seifert, chairman of Deutsche B?rse, has long
championed silos, which he thinks provide the reliability required by the
market. Critics reckon vertical silos distort competition. Benn Steil at the
Council on Foreign Relations in New York says that Deutsche B?rse might
impose discriminatory tariffs on non-German-based traders in German shares
if it were to own all of Clearstream. Others point to possible cross-subsidy
from the monopolised settlement arm to the trading platform.

One alternative is the horizontal integration of settlement agencies and
clearing-houses, to create large central counterparties-maybe two or three
for the whole of Europe. Traders would then be able to net their cash and
derivatives positions on several exchanges with a single clearing house,
saving capital. Don Cruickshank, chairman of the LSE, thinks the European
Commission in Brussels should go further and impose a single European
clearing and settlement system like America's. 

That is a very long shot. It took the intervention of Congress and the
Securities and Exchange Commission to set up the Depository Trust and
Clearing Corporation-which moved American non-government securities markets
from seven settlement agencies to one settlement organisation and one
central counterparty. Besides the defenders of silos, the European
Commission would have to contend with a different regulatory and legal
system in each member country. More realistically, market forces will drive
clearing and settlement houses to join forces, because it is more
cost-efficient when buyer, seller and security are linked.

Cut short
The Economist - November 1, 2001

The American Treasury's announcement that it will issue no more 30-year
bonds should delight corporate treasurers and depress fund managers. Cynics
also suggest that Peter Fisher, under-secretary at the Treasury, made this
move to help Alan Greenspan, chairman of the Federal Reserve Board, bring
down long-term interest rates, in a fair imitation of a bull market.

The 30-year Treasury bond has been illiquid for some time because until
recently America had been retiring debt. Now that the country is a net
borrower again, it is the wrong time to take long-term debt off the menu,
say Mr. Fisher's critics. Many have a vested interest, however. The Chicago
Board of Trade, which usually carries great clout in Washington, immediately
protested that economic uncertainty since September 11th obliges the
Treasury to keep all its funding options open, including at the long end. It
is worried about losing its flagship 30-year-bond futures market. 

Bond traders, as well as inter-dealer brokers, such as Cantor Fitzgerald,
will now have to satisfy themselves with shorter maturities-these are more
liquid, but with less of the volatility that dealers love. Those traders and
investment banks that cover their 30-year trading positions with repos (bond
sales and repurchases) will find life more expensive-they will ultimately
have to buy and sell corporate bonds, which carry credit risk, rather than
supposedly risk-free government bonds. Perhaps they will use British 30-year
gilts instead.

There are winners. Swap dealers and long-term bond issuers, notably two
government agencies, Fannie Mae and Freddie Mac, should find more demand for
their 30-year bonds. It will please, too, those who think interest-rate swap
rates a better benchmark than Treasuries for pricing fixed-income
securities.

The biggest gripe will come from insurance companies and pension funds with
long-term liabilities-especially defined-benefit pension plans. Long-term
rates may be lower but will now come with credit risk attached. Surely Mr.
Fisher read a paper published in July by the American Academy of Actuaries
entitled "The Impact of Inordinately Low 30-year Treasury Rates on Defined
Benefit Plans"? If he did, this plea to spare the life of 30-year Treasuries
failed to move the man of steel.

**End of ISDA Press Report for November 6, 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