ISDA PRESS REPORT - MARCH 6, 2001

* SEC to toughen reports' scrutiny - Financial Times
*     "Few" Banks Could Meet New Basel Rqmts Now - Dow Jones
*     A ragbag of reform - The Economist
* No taste for risk: Are markets rejecting their traditional role? -
Financial Times

SEC to toughen reports' scrutiny
Financial Times - March 6, 2001
By John Labate

Securities regulators in the US plan to step up their scrutiny of company
financial reports in response to changes in economic and corporate
conditions.

The move comes as the Securities and Exchange Commission (SEC) finds its
accounting review resources freed up by the slowdown in filings for initial
public offerings that were once the agency's main target. Last year
companies faced a one-in-15 chance of being reviewed by SEC accountants, but
the aim this year is to review as many as one in three reports.

The change could mean companies face tougher inspection on a range of
accounting issues that in the past might have gone unnoticed.

Among the issues to get a heightened review are revenue disclosures, credit
risk reporting, hedging techniques and derivatives exposures. SEC
enforcement officials are also expected to raise their surveillance of
financial fraud as new trends in manipulation of earnings have begun to
emerge.

"Annual reports are more likely to be selected for review this year," said
Robert Bayless, chief accountant at the SEC's division of corporate finance.
"We're returning to the historical norm after a two-year period of focusing
on initial public offering issues."

In the last five years some of the biggest financial frauds have been
uncovered against companies such as Cendant and McKesson HBOC. Tens of
billions of dollars in market value have been lost as a result.

SEC officials have disclosed that more than 100 financial fraud
investigations are under way and that more high-profile cases are likely to
be announced soon. "We are finding more ingenious ways that revenues are
being improperly enhanced. . . ," said Charles Niemeier, chief accountant at
the SEC's division of enforcement.

Another area of investigation involves corporate earnings warnings and how
long a company might wait before disclosing news to investors. One unnamed
company being investigated is said to have waited nine months before
revealing a warning.


"Few" Banks Could Meet New Basel Rqmts Now
Dow Jones - March 5, 2001
By Jonathan Nicholson

WASHINGTON -(Dow Jones)- Federal Reserve Gov. Laurence Meyer on Monday
criticized the internal risk-assessment capabilities of U.S. banks.

Meyer, in prepared remarks to be delivered to a meeting of the Institute of
International Bankers here, also said few U.S. banks would qualify now for
the relaxed treatment proposed under a new international agreement on how
banks are regulated. That proposed update to the so-called Basel Capital
Accord is expected to be effective in 2004.

Meyer's prepared remarks didn't touch on monetary policy or the economic
outlook.

The proposed update to the Basel Accord was released in January. It calls
for a three-pronged approach to bank regulation involving a new capital
standard, increased scrutiny of a bank's own internal assessment of its
capital levels and increased disclosure of risks to the marketplace.

Banks would be allowed to use an internal ratings-based approach for some
capital requirements. But Meyer said that would only work for banks with
good risk-measuring capabilities.

"As bankers, you should ask yourselves whether you are truly ready. The
quick answer, 'we're there,' is probably wrong," Meyer said.

"Based on our examinations of U.S. banks' internal risk-rating processes, I
suspect that few banks would or should get a clean sign-off from their
supervisor today."
Meyer said banks have been "surprisingly slow" to link acceptable credit
risks and assessments of capital adequacy, he said. The processes banks use
to make internal grades of credit risks are also lacking, he said.

"Most significantly, the rigor and internal consistency of the internal
risk-rating process is often handicapped by insufficient or unclear rating
criteria or by limited resources dedicated to independent reviews of
risk-rating assignments," he said.

Meyer urged banks to comment on the proposal now, while it is still
undergoing development. Once adopted by the Basel Committee on Banking
Supervision, it will be submitted to the central banks of the world's
largest economic powers, Meyer said. After that, in the U.S., it will go
through the usual rulemaking process.

"The proposal may be complex and at times confusing, but I believe we are on
the right track. We need regulatory capital standards that are far more risk
sensitive than the one we have now and that provide the industry greater
incentives to measure and manage risk," he said.


A ragbag of reform
The Economist - March 3, 2001

Across Europe's financial markets lies a colourful patchwork of regulation.
In Austria, a government department watches over the markets, a task that
the Irish leave to their central bank. The French have two main regulators
for their markets while the Germans have three. With many countries still
separating the regulation of banks, insurers and securities firms, there are
about 40 different authorities currently tying up EU member states with red
tape.

These old structures, however, are changing. The British set a brand new
example last year when they introduced a single all-powerful regulator, the
Financial Services Authority (F5A), to watch over all their financial
markets. And in February, an influential EU group of "wise men", headed by
Alexandre Lamfalussy, a former chairman of the EMI, forerunner of the
European Central Bank, endorsed the British model and recommended a single
national regulator for each EU country. That led some to wonder whether
what's good for Britain might be good for Europe too. Would the EU benefit
from having a single "super-regulator"?

The Lamfalussy group says that a single authority in each member state would
bring economies of scale, more streamlined management, greater transparency
and clearer accountability. Most EU countries say they are heading towards
that goal, though so far only Denmark and Sweden have gone as far as
Britain. Belgium, Luxembourg and Finland have merged the supervision of
securities and banking, but in seven EU countries a separate institution
still regulates the securities markets.

The main motive for reform is clear: a broader constituency for each
regulator is expected to reduce the inefficiencies in Europe's fragmented
financial markets. This fragmentation diminishes the depth and liquidity of
the markets and makes the cost of capital in Europe persistently higher than
it is in America. It also makes it more difficult for entrepreneurs to find
start-up funds. Per head of population, there is five times as much venture
capital available in America as there is in Europe.

America has one national regulator for its securities markets-the Securities
and Exchange Commission (SEC). But it has several regulators for other parts
of the financial system. The Office of the Comptroller of the Currency, the
Federal Deposit Insurance Corporation, the Federal Reserve Board and the
various state banking commissions all keep an eye on banks, while state
insurance commissions regulate insurance firms. The regime is a mix of
monopoly and fragmentation.

Debate on the reform of financial regulation in America has emerged at
irregular intervals, usually after the shock of a financial scandal.
Whenever something goes seriously wrong-the stock market crash in 1987, the
collapse of the notorious Bank of Credit and Commerce International, or the
crash of Long-Term Capital Management in 1998- reform of financial
regulation is hotly debated. Until now, though, no evidently superior
solution for the regulatory conundrum has prevailed. So each country has
been left to devise its own system.

American markets have, by and large, pioneered those developments in recent
years that have made the regulators' job much tougher-rapid innovation,
internationalisation, and the broadening range of businesses in which
individual firms take part. But none of these has led to radical reform. The
American regulatory system has not changed fundamentally since 1934 when the
SEC was set up.

Two heads better than one?
Discussion of regulatory reform in Europe has a shorter history. Most
European regulators have not been established for long, and change in
financial markets has been slower than in America. The pressure for reform
has accelerated with the recent introduction of the single European currency
and with technological progress. The euro (in effect, a single financial
market for cash) has integrated national bond markets in the euro area, and
has begun to do the same for equities. Investment managers now do their
research on European bonds and equities by sector, rather than by country.
At the same time, changes in technology have replaced many of the old
high-decibel trading floors with electronic trading platforms. Supervising
such markets is forcing regulators to rethink their traditional methods of
regulation.

The British government, eager to preserve the City of London's leading role
in financial services, announced a reform of its system of regulation in
1997. For years, the City had policed itself with self-regulatory
organisations that covered both wholesale and retail financial services.
After a protracted debate about the wisdom of merging all these bodies into
one super-supervisor, the British parliament finally passed the unwieldy
Financial Services and Markets Bill last year. It is this legislation that
established the pioneering FSA.

The idea of a single regulator is now spreading across Europe. Hans Eichel,
the German finance minister, wants to merge his country's three regulatory
bodies (one each for banks, insurers and securities houses) into one Federal
Agency for Financial Market Supervision. However, his plan is unpopular with
state governments, always sensitive to incursions into their prerogatives.
At the moment, they oversee Germany's eight bourses: the government of Hesse
keeps an eye on the Frankfurt stock exchange, for example, while
Baden-W_rttemberg watches over the bourse in Stuttgart.

The French too are talking about merging their regulators. France's main
supervisory authority is the Commission des Operations de Bourse (COB), but
it shares responsibility with two other bodies: the Conseil des March,s
Financiers, a self regulatory organisation that oversees market
transactions, and the Commission Bancaire, the watchdog for the banking
industry.

The French government is a strong proponent of the so-called "twin heads"
model of regulation-having one regulator for prudential supervision and
wholesale business (the markets for financial products between
professionals), and one for the retail markets, where financial products are
sold to consumers. The head of the COB, Michel Prada, says that two separate
regulatory bodies are preferable to one for two main reasons. In the first
place, they reduce the risk of the retail market regulator being
"contaminated" by its wholesale counterpart, and vice versa. And, secondly,
they reduce the huge management burden that is imposed on a single
regulator. The COB has fewer than 300 staff; the FSA has around 2,000.

The EU'S bureaucrats have been pursuing reform for much longer than their
national counterparts-and with little to show for it so far. In theory, EU
financial markets were supposed to be one single market from the first day
of 1993. (Remember the 1992 "single market" programme of directives?) At the
time, many of the measures that were required to create a single market in
financial services, together with more streamlined regulation, were put in
place. Restrictions on capital movements had been largely dismantled, and
the European Commission had launched a series of "passport" directives
designed to let banks, insurers and stockbrokers offer their services
directly across borders without setting up local subsidiaries. All was in
place for the single market in financial services to take off.

In practice, however, member states delayed the implementation of the
directives, or did not implement the bits that they did not like. At first,
the commission reacted timidly to their recalcitrance, setting up a feeble
Forum of European Securities Commissions (FE5C0) in 1997 to promote
co-operation among securities regulators. FESCO's work has been
inconsequential though, largely because it does not have any official
status. It is further handicapped by being obliged to work by consensus, and
by being unable to make recommendations that are binding.
In the aftermath of the launch of the euro, Europe's leaders decided to take
more robust action to tackle other financial markets. They endorsed the
European Commission's Financial Services Action Plan (FSAP) at their Lisbon
summit in March 2000, a blueprint for integrated capital and
financial-services markets across the EU. The F5AP recommends 42 measures to
streamline the regulation of retail and wholesale financial markets. The
latest deadline for their implementation is 2005.

Not content with this deadline, nor with the contents of the plan, the
French government decided to try both to tinker with it and to speed it up.
In the second half of last year, when France held the presidency of the
Council of Ministers, Laurent Fabius, the French finance minister, suggested
setting up a small committee to study the possibility of a more radical
plan. In it he wanted to include the establishment of a pan-European
regulator to be headquartered (not surprisingly) in Paris.

Britain was staunchly opposed to the setting up of such a committee and
tried unsuccessfully to block it. To calm Britain's worries, a British
treasury official, Sir Nigel Wicks, was made a member of the committee that
was eventually formed under Mr. Lamfalussy's chairmanship. It produced an
interim report last November and a final report in mid-February.

Competing visions
Despite all this activity, neither national governments nor policymakers in
Brussels have made up their minds about the best form of financial
regulation for Europe. Most EU member states now consider a single
supervisor for all financial services to be the best solution within their
own domain, although there are those who want to keep regulation of the
wholesale market apart from regulation of the retail side.

By the same token, a pan-European regulator would seem to be the most
efficient way to put an end to Europe's regulatory ragbag. Yet the idea of
competition between different jurisdictions offering their own brand of
regulation has its supporters. While the French campaign for a single
European regulator, Britain's chancellor of the exchequer, Gordon Brown, is
fiercely opposed to the idea. The Germans are also in favour of a
pan-European regulator, though they are less keen than the French. Caio
Koch-Weser, a state secretary at the German finance ministry, has said that
at some stage a pan-European regulator will be on the agenda. By reforming
its regulatory set-up, his country is to "foreshadow" that development.

Mr. Lamfalussy's group stops short of proposing a single regulator (or even
"twin heads") for the whole of the EU-although its recommended creation of a
securities committee to speed up the Eu's cumbersome legislative procedures
has been seen by some as an embryonic SEC. "This is an open-ended process,"
says Mr. Lamfalussy. His committee's report has only proposed measures that
it thinks can be implemented in the next few years. Mr. Lamfalussy is, he
concedes, a federalist-but a pragmatic one.

His group was not asked to come up with a counterproposal to the
commission's FSAP. Rather, it was expected to highlight the most urgent
measures needed to streamline the regulation of securities markets in the
EU. Hence the group's final report focuses on the modernisation of rules for
investment and pension funds, on the adoption of international accounting
standards, and on a single "passport" for stockmarkets. Mr. Lamfalussy wants
all these reforms implemented by 2003, although he admits it "will be
tricky". Other priorities on the list are less controversial-a single
prospectus for issuers; the principle of mutual recognition for wholesale
markets; and the modernisation of exchanges' listing requirements.
Ironically, many of the group's recommendations have been under discussion
for years, or are in some cases already part of an EU directive. Many of
these proposals, however, came out half-baked. The key investment-services
directive, for instance, which sets conditions for a single EU-wide license
for investment firms, and which empowers stock exchanges to operate across
borders, was watered down and implemented belatedly. Although the directive
was approved in 1992 (after three years of tortuous wrangling), many
governments waited until 1996 to implement it. In order to get it approved
at all, the commission had to tolerate many ambiguities in the text. For
instance, something as basic as the definition of a professional investor is
unclear.

Mr. Lamfalussy makes much of the damage that has been done by the delays in
tack ling what he calls "priority" measures. National governments still
stick to protectionist investment rules for investment and pension funds,
for example. The Italian government requires that pension funds invest a
considerable portion of the money that they manage in government bonds. And
multi national companies are obliged to run a different pension plan for
their employees in each member state of the union.

As a result, the average American investment fund is six times bigger than
its European equivalent, and between 1984 and 1998 the average real return
on pension funds was 10.5% in America and 6.3% in EU countries that impose
strict restrictions. The people who suffer most from Europe's protectionist
rules are pensioners themselves. And as more and more of them come to rely
on private-sector schemes, their loss will be even greater.

Mr. Lamfalussy is also concerned about the damage that is being done by the
continuing failure of most EU member countries to introduce rules on
disclosure comparable to American standards. This failure means that
investors in the EU are not properly protected. For instance, information on
the stock options granted to the directors of Lernout & Hauspie, a troubled
Belgian company developing speech-recognition technology, could only be
found at the SEC'S "EDGAR", an electronic register in America that gathers
and analyses data on companies flies. Even the Belgian authorities that are
investigating Lernout for allegedly inventing revenues had to turn to the
SEC for help. Karel Lannoo at the Centre for European Policy Studies in
Brussels is among those in favour of introducing a European EDGAR once the
single European prospectus is a reality, and once EU accounting standards
are more homogeneous.

Almost stronger than the Lamfalussy committee's desire to give new impetus
to proposals for reform that, in many cases, have been discussed for years,
is its desire to accelerate decision-making procedures within the EU, and to
control more tightly the implementation of directives by member states. At
present, the commission makes a legislative proposal to the Council of
Ministers and the European Parliament. They then shunt it around in a
complex co-decision procedure that takes on average more than two years. The
takeover directive has been in the works for 12 years (and has still not
been adopted), while the European company statute has been discussed, on and
off, for more than 30 years.

Mr. Lamfalussy calls for a four-level approach to decision-making and the
implementation of financial-market proposals. At the first level, the
Council of Ministers, the -, European Commission and the European Parliament
would agree on "framework" legislation and would decide which of the
measures to be implemented should be passed to the next level.

At this second level, a newly created "securities committee", made up of
representatives of the commission and of member states, would reach
agreement within three months on the technicalities of the new legislation.
This they would do after consulting market participants and consumers. "The
-government representatives on the securities committee should be just under
the finance minister," says Mr. Lamfalussy. Predictably, the idea of such a
committee has aroused the wrath of the European Parliament. It worries that
the committee will be come a means for removing important decisions from
democratic accountability.

Levels three and four of the Lamfalussy approach to decision-making involve
cooperation among national regulators via a "regulators' committee". Its
purpose will be to improve the implementation of EU legislation by the
better enforcement of EU rules.

The timetable for the Lamfalussy plan is ambitious. It is to be debated by
the European Parliament in mid-March, where it is unlikely to have a
comfortable ride, and it will then come before the European Council at its
meeting in Stockholm at the end of March. There, the list of priorities in
the plan is due to get the community's stamp of approval. The commission is
then to begin setting up the securities committee and the regulators'
committee in April and May, and by December the two committees should be in
operation. All Mr. Lamfalussy's recommendations are due to be implemented by
2004, -a year earlier than the deadline of the commission's own action plan.

This is ambitious. Even if Mr. Lamfalussy's four-level approach is simpler
than the Kafkaesque
co decision procedure currently in place, it is still a complicated
structure. Moreover, some of the measures on his priority list (such as the
move to international accounting standards) are very likely to take more
than two years to implement.

The role of the regulator
The debate about financial-market regulation in Europe has moved from
considering the merits of self-regulation versus statutory regulation, to
whether a single regulator should police all financial services. The
Lamfalussy report has done nothing to help resolve this dilemma.
Financial regulation exists for three main reasons. It is there to provide a
safety net that will prevent the collapse of one bank, insurer or investment
manager triggering the failure of others. It is also there to supervise the
integrity of financial institutions and to protect individual consumers from
malpractice and fraud. And it is there to act as the watchdog of financial
markets, policing insider dealing, malpractice and other offences.

If it is tricky for a single national authority to combine these different
objectives of regulation, it is even harder for a supranational regulator.
How can a single organisation hope to protect investors, police financial
institutions, and watch markets in 15 different jurisdictions? Even if it
were desirable to try, some form of common jurisdiction would be essential.
On top of everything else, a regulator has to be firm and effective to gain
credibility. If the EU'S track record in enforcing its directives on
financial regulation is anything to go by, a pan European regulator would be
neither.


No taste for risk: Are markets rejecting their traditional role?
Financial Times - March 6, 2001
By Philip Coggan

The collapse of Barings, the Asian financial crisis of 1998, the dotcom
mania of 1999-2000 - these events have created the idea that the financial
markets are a Frankenstein's monster, wreaking havoc on the societies that
created them.

Not so, according to the author of this polemic. Far from being a giant
casino, the financial system has become obsessed with controlling risk at
the expense of fulfilling its proper function - providing capital for
business. As a consequence "the era of financial growth has coincided with
that of a secular economic slowdown".

This is, at the very least, a refreshingly different take on the events of
the past 25 years. The world, in the author's view, has too few risk-takers,
not too many.

And Mr. Ben-Ami assembles some solid building blocks for his case. He points
out, quite rightly, that equity markets have been taken over by fund
managers who are obsessed with the business risk of matching the index (and
their peers) rather than achieving the maximum return.

Banks have retreated from their function of providing risk capital to
business in favour of the fee-earning function of arranging bond issues. The
rise of the derivatives industry illustrates the extent to which companies
and financial professionals have become obsessed with the aim of avoiding
risk, whether it comes in the form of interest rate and currency movements
or changes in the weather.

Ben-Ami also points out that, in the US and the UK at least, stock markets
have almost ceased to perform the function of providing capital to business.
In net terms, capital has been returned to investors in the form of
takeovers and share buy-backs.

But just when you feel Mr. Ben-Ami has the basis of a good case, nagging
doubts start to enter your mind. How is he going to deal with the rise of
the venture capital industry? Or with the use of share options to motivate
executives? Or with the growth of day trading?

The answer is that he doesn't really address those issues. In fact, the case
that the financial system is starving industry of funds has been made at
various times over the last century but it has been extremely difficult to
prove.

It seems a particularly ropey argument when one considers the events of the
last decade. Arguably, the financial system was ludicrously keen to fund
anyone with a laptop and a new economy idea; the economy may now face a
crisis of over-investment.

There has been no shortage of funds for start-ups. The amount of money
invested by US venture capital groups rose from Dollars 5bn in 1988 to
Dollars 48bn in 1999. And established groups have had no problems raising
capital either: international bond issuance in 2000 reached a record high of
Dollars 1,430bn. Arguably the decline of government bond issuance (thanks to
the improved finances of European and US governments) has freed capital for
industry.

It is also pretty hard to argue that risk-taking in society has declined
when one recalls how many executives and employees have left established
companies for dotcom start-ups over the last couple of years. Old economy
businesses have also been happy to "gear up", taking on extra debt either
through management buyouts or to increase the return on equity and satisfy
the stock market.

Individuals have also been happy to take on greater debt in the UK and the
US and to put a greater proportion of savings into equities (albeit via
collective schemes such as mutual funds). Neither development suggests a
risk-averse culture.

And, while enthusiasm for developments such as online trading and spread
betting may be confined to a small minority, it still points to the
existence of a strong gambling mentality. Arguably, the long bull market has
blinded investors to the risks inherent in equity investment, rather than
making them too cautious.

It is also pretty hard, looking at the record of the US over the last five
years, to say that economic growth has been sluggish. One can argue about
some of the productivity statistics, and about the causes of the
improvement, but the US has nevertheless grown faster, at a lower
unemployment level and with scarcely any inflationary pressure, than most
economists would have thought possible a few years ago. Mr. Ben-Ami's case
might make more sense applied to Europe or the UK but the US is at the heart
of financial market change; if this thesis doesn't work there, it doesn't
work at all.

In short, the author makes a much better case for the defence of the
financial system than he does when attacking its pusillanimity.






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