ISDA PRESS REPORT - MAY 24, 2001

Accounting
* IASB Begins Work on Combinations Project - BNA
* Banks Attack Investment Risk Accounting Plan - Financial Times
Asia
* Prospects for Quick Resolution of Japan's Bad Loan Problem Dim - BNA
* Japanese Online Trading Service Eyes Expansion - Financial Times
Regulatory
* Nominations to Fed Governor Seats to be Ready Soon - BNA
* Bankers Eye Impact on Agenda if Senate Control Changes Hands - BNA
Risk Management
* Basle Rules Could Hit Stability - Financial Times
Other Issues
* French Peg Hopes on Five-Year Bonds - Financial Times
* LSE Float is Another Piece in Market Jigsaw - Financial Times



IASB Begins Work on Combinations Project
Seen as Step Toward Standards Convergence
BNA - May 24, 2001
By Steve Burkholder

LONDON--The International Accounting Standards Board took steps May 23 to
begin a high-priority rulemaking project on business combinations in hopes
of using the effort as one avenue leading to global convergence in financial
reporting standards.

IASB Chairman David Tweedie suggested that the newly restructured board
could place the combinations effort "fairly high on our priority list" of
standard-setting and associated projects. Formal decisions on the panel's
agenda await consultation with the board advisory council, which is yet to
be named (100 DTR G-2, 5/23/01).

If the board seeks convergence in accounting standards, "this is one that
we'd certainly look at," Tweedie said of the proposed project on
combinations. The topic also is expected to be discussed in a special
meeting May 24 with the chiefs of national accounting standard-setters from
the G-8 countries. Edmund Jenkins, chairman of the Financial Accounting
Standards Board, plans to attend.

Tentative Approach Would End Poolings
A tentative approach in IASB's proposed standard-setting effort would be to
end the pooling-of-interests method of accounting, a method of reporting for
"true mergers" or what are called in the United Kingdom "uniting of
interests." A firm majority of the IASB appeared to favor poolings' demise.
In such "unitings," the assets of combining enterprises are simply added
together, leaving no impact on the income statement. Such accounting
connotes that the commercial marriage is not an acquisition.

Unitings are allowed under International Accounting Standard 22 on business
combinations, although their occurrence is understood to be rare. A chief
element in the rationale for use of such accounting is the inability to find
an acquirer--a situation on which some in accounting, including IASB member
James Leisenring and former SEC Chief Accountant Michael Sutton, have cast
serious doubt.

If poolings are not used, the purchase method of accounting is the general
rule around the world. Purchase accounting typically includes writedown of
goodwill, an amount that represents the premium paid over the book value of
net purchased assets.

In Connecticut, FASB has completed work on a set of rules for business
combinations accounting built on required use of the purchase method (100
DTR G-6, 5/23/01). Poolings--prominent accounting practice in the United
States--would be banned after June 30, according to FASB's latest set of
decisions in the key rulemaking effort.

However, FASB would not allow goodwill amortization under its proposed
standard, which is expected to be issued in mid-July. Instead, the U.S.
board plans to call for accounting that hinges on tests to gauge whether
goodwill has been impaired--meaning its fair value dips below its book
value, leading to a writedown of the intangible asset only when that occurs.


Impairment Also Eyed by IASB
IASB signaled that goodwill impairment "might be the way to go," as Tweedie
stated in providing a summary of preliminary board opinions expressed on the
second day of its four-day meeting in London.

However, a number of board members are not ready to rule out goodwill
amortization, as shown by comments that were noted by their chairman.
Accounting standards on combinations could be better aligned around the
world, but that does not mean IASB would achieve such convergence by "just
slavishly following world opinion," Tweedie said.

The international board plans to study the issue and accounting options
thoroughly before it settles on a proposed route for merger and acquisition
accounting. The research is expected to include a close reading of FASB
documents chronicling that board's odyssey toward what it calls the
"impairment-only approach" for goodwill.

As noted by FASB members now on IASB, the U.S. board went down that path
because it tries wherever possible to avoid affording choices in accounting.
The impairment-only method is favored by many in commerce because it
prevents the drag on earnings presented by the automatic writedown of
goodwill.

Tweedie Offers Project Proposals
Other topics that Tweedie suggested should be in the scope of IASB's
preliminary study leading to a rulemaking project on combinations are: joint
ventures, which Tweedie called a "big escape route" around the negative
effects of the purchase method for combinations and goodwill amortization;
dual listings of stock of otherwise joined enterprises, said to be another
method of accounting avoidance; and acquisition provisioning, a practice in
the United Kingdom.

In Britain, where Tweedie headed the Accounting Standards Board in the 1990s
and into 2000, the impairment test for goodwill in combinations is stronger
than the mechanism planned by FASB, the IASB chairman said. However, as
Tweedie and an IASB colleague, Warren McGregor, noted, the economy largely
has been strong over the last several years. Thus, the impairment approach
hasn't undergone a "stress test" to see how well it works, as McGregor said.


Experience With Project's Concerns
At FASB, Leisenring, now on IASB, helped decide the direction of the
combinations project until he left the board in June 2000. However, he did
not take part in the redeliberations on treatment of goodwill, he
emphasized.

In comments May 23, Leisenring appeared somewhat optimistic about the
utility of the goodwill impairment test--and was more upbeat about the
better quality of financial reporting resulting from a ban on poolings. He
also predicted the new FASB standard would lead to better recognition of
intangible assets.

"I think you won't just see these impairments exist when they want to have
them," he said, adding that the reporting would be market-driven. He noted
FASB's reasoning that getting rid of poolings would require that the
purchase price be put on the books, making financial statements more useful
to investors.

Across the table from Leisenring, Geoffrey Whittington, a professor of
accounting at Cambridge University until summer 2001, suggested that a
"loose impairment test" could lead to nonamortization where such a writedown
due to a slide in value was in order. He also appeared to question whether
an acquirer could be found in every combination, as Leisenring had asserted.
IASB plans to continue to discuss business combinations at upcoming board
meetings this summer.

Banks attack investment risk accounting plan
Financial Times - May 24, 2001
By Michael Peel

Leading banks will on Thursday attack a radical international plan to make
companies reveal more about the risks associated with their investment
portfolios. A conference at the British Bankers' Association, the main
industry body, will highlight concerns that the plan could cause volatility
in profits and threaten investor confidence.

"The vast majority [of banks] think these proposals are potentially very
damaging," said Paul Chisnall, a BBA director. "There is no split in the
industry on this."  The comments highlight the controversy over "fair value"
accounting, a new approach that forces companies to adjust their profits to
take account of the economic effects of non-trading activities.

The BBA has joined other banks across Europe in condemning a plan unveiled
late last year by the Joint Working Group, a body made up mainly of
accounting standard-setters from the world's biggest economies.  The
proposals, which are being considered by national standard-setting bodies
and the European Commission, will make companies adjust earnings to take
account of rises and falls in the values of financial instruments such as
derivatives and loans to customers.
The BBA conference includes contributions from the chief accountants of
HSBC, BNP Paribas and Barclays Bank, none of whom is expected to speak
favourably about the proposals.
The banks say it is unfair to make them account for changes in the values of
instruments such as long-term customer loans, which are rarely traded and
generally held to maturity. They are worried that sharp changes in interest
rates would lead to dramatic changes in banks' accounts and confuse
consumers.

Banks argue the swings could put them at risk of breaching solvency
requirements set by regulators, forcing them to withdraw from lending that
caused volatility even though it was safe.
The standard-setters who produced the plan say it should help investors by
revealing large liabilities that remain concealed under traditional
accounting rules.

Prospects for Quick Resolution of Japan's
Bad Loan Problem Dim; Study Panel Urged
BNA - May 24, 2001
By Toshio Aritake

TOKYO--With barely a month left before the Diet (parliament) adjourns in
late June, Japanese Prime Minister Junichiro Koizumi's international pledge
to settle the bad loan problem of banks in two years appears to have
stalled.

Minister in Charge of Financial Services Hakuo Yanagisawa May 17 met Takashi
Imai, chairman of the powerful Keidanren (the Federation of Economic
Organizations of Japan) that represents all top Japanese companies.
Yanagisawa asked for Keidanren cooperation and proposed the establishment of
a joint study panel of Keidanren and Zenginkyo (the Federation of Bankers
Associations of Japan) to examine early bad loan disposal, a Financial
Services Agency official said May 21. But Imai demurred, only agreeing to
the need for prompt action, Keidanren officials said May 21.

However, Keidanren and Zenginkyo May 22 began exploring ways to form the
proposed study panel. The two organizations are preparing to hold a
top-level meeting during the week of May 27 and will try to work out a joint
guideline on debt forgiveness by banks to borrowers by the end of June, a
Keidanren official said May 23.

Yanagisawa's policy, which he explained during parliamentary testimony
earlier this month, is to encourage the private sector to voluntarily clean
up bad loans--which the FSA earlier this year said totaled as much as 150
trillion yen (about $1.3 trillion)--with market principles and encourage
banks to forgive bad loans that may not be recovered so that borrowers,
including construction companies, can continue borrowing. In this way the
banks would not fail and result in job losses for workers.

Countering Moral Hazard
The so-called moral hazard that may occur as a result of banks giving debt
forgiveness to borrowers can be prevented with restrictions under the Civil
Rehabilitation Law, Yanagisawa said. He also said in Diet testimony that the
Koizumi Cabinet needs to heed the policies of the Ministry of Land,
Infrastructure and Transport and that totally denying debt forgiveness would
arbitrarily halt industry restructuring.

Over the past several years, banks had implemented debt forgiveness to
beleaguered borrowers, such as large construction companies, supermarket
chains, and banks themselves, in what FSA officials have termed as the first
debt forgiveness program, and maintained credit lines or continued extending
new loans to the borrowers. Yanagisawa said that on the condition that
troubled borrowers seek debt forgiveness as the pre-condition to mergers and
acquisitions, that the second debt forgiveness program should be accepted.

While Keidanren's Imai is in agreement with Yanagisawa--who seems to
represent banks' stance more than that of Japanese industry as a whole--that
bad loan cleanup should be left to private sector efforts, his reluctance to
accept Yanagisawa's request stems from his long-held view that Japan needs
to quickly address the problem of excess production capacity, the Keidanren
official said. The United States and the European Union supports Imai's
position.

Imai, as well as Japan Employers Association Chairman Hiroshi Okuda, also
are concerned that debt forgiveness might resuscitate the borrowers and make
them stronger than companies that have diligently managed their businesses
and as a result the good companies might in turn be put in jeopardy.

Banking Industry Skeptical
Even the banking industry is skeptical of Yanagisawa's scheme. One senior
official of a top Japanese bank expressed concern that Yanagisawa's emphasis
on private-sector efforts might lead to a succession of something comparable
to the multi-billion-dollar failures of the Sogo retail group and Tokyo Life
Insurance last year. Both companies failed last year after suffering the
implosion of huge liabilities relative to capital and assets--despite banks'
loan restructuring and debt forgiveness. The FSA put Sogo under government
supervised corporate rehabilitation.

Debt forgiveness may not necessarily contribute to restoring health to
troubled borrowers if their stock prices remain low and earnings remain
poor, as happened to many borrowers in the past. That could mean that if the
second debt forgiveness did not work, then another debt forgiveness would
become necessary, starting a vicious cycle.

Analysts Not Impressed
David Asher, the American Enterprise Institute's associate director of Asian
studies, described such an approach at an April 25 seminar in Tokyo as
"brain dead capital injection" to borrowers.
Keio University professor Masaru Kaneko said May 21 that the whole
government approach toward bad loans reflected the ineptness of the Koizumi
Cabinet and that he and his key Cabinet members have proved that they are
failing to break the Liberal Democratic Party's faction system and the old
guard hierarchy.

If Koizumi truly is determined to resolve the bad loan problem in two years,
as he pledged in his first parliamentary speech May 7, he should inject
taxpayer money and force banks to write down bad loans and punish bankers
and borrowers severely, Kaneko said.

Analyzing Yanagisawa's Diet testimony, Kaneko said the minister is
emphasizing private sector efforts and market principles to avoid getting
accused publicly. In fact, at least two regional banks that Yanagisawa
nationalized with taxpayer money injections a few years ago had to receive
taxpayer money again last year, despite his promise to resell the banks back
to the market.

Japanese Online Trading Service Eyes Expansion
Financial Times - Newsbytes - May 23, 2001
By Adam Creed

EDerivative.com, a Japanese online brokerage for trade in interest rates
derivatives, is looking to expand its customer base in Japan and overseas.
The online brokerage said on Tuesday it has contracted Radianz, a Reuters
and Equant-owned networking company, to provide local and international
Internet protocol (IP) connectivity.

EDerivative.com's 24-hour real-time market trading platform will be
available to yen market dealers via their own local area networks, rather
than through an existing standalone system. The networked service also
allows the company to more effectively reach international traders.

A Radianz spokesperson said the connectivity will be provided via Equant's
global IP network.
EDerivative.com says it aims to attract one-third of the market participants
in Tokyo's yen swaps arena, a market it values at $3.3 billion.

Spokesperson Kimihiko Matsuno told Newsbytes the service currently has just
under 20 clients. "There are about 40 active players at the moment in the
Yen market and we intend to target the core 25 banks by the end of this
year," Matsuno said.

Nominations to Fed Governor Seats
To Be Ready Soon, White House Official Says
BNA - May 24, 2001
By Brett Ferguson

President Bush is expected to nominate two economists to fill the open seats
on the Federal Reserve's Board of Governors "within the next few weeks,"
Glenn Hubbard, chairman of the White House Council of Economic Advisors,
told BNA May 23.

Hubbard said the security clearance and background checks required for such
high-level positions have slowed the nomination process, but filling the
last two seats on the seven-member Board of Governors is a priority for
President Bush.  There has been no specific effort to pick candidates
working in the private sector rather than academia, but the ideal candidate
"should be someone with excellent knowledge of banking and financial issues
since banking regulation is the majority of what the Fed does," Hubbard
said.

Hubbard would not name any specific individuals under consideration for the
Board of Governors posts, but said there is a list of several names being
widely circulated.  Some of the names being circulated include Terry Jorde,
president of CountryBank USA in North Dakota, Diane Swonk, chief economist
at Bank One in Chicago, and Cynthia Glassman, a senior economist at the
accounting firm Ernst & Young.

Bankers Eye Impact on Agenda If Senate Control Changes Hands
BNA - May 24, 2001
By Adam Wasch and R. Christian Bruce

The financial services industry will move to a more defensive position on
consumer privacy, subprime lending, and other issues if Sen. James Jeffords
(R-Vt.) bolts from the Republican Party and gives Democrats control of the
Senate and its banking committee, sources told BNA May 23.

But overall, key legislative priorities for bankers will remain intact if,
as expected, Sen. Paul Sarbanes (D-Md.) replaces Sen. Phil Gramm (R-Texas)
as committee chairman, they added.
A spokesman for Sarbanes declined to comment, but Gramm told reporters May
23 that he expects good relations regardless of the committee's makeup.

"I expect the same cooperation that the banking committee has operated under
for the last two and a half years," Gramm said. A spokeswoman for Gramm
noted that funding for the committee's staffs would continue to remain
evenly split through the current session of Congress based on a resolution
passed earlier this year.

Dodd as Chairman?
Presumably, if Jeffords switches parties, Sarbanes would assume the
committee's leadership position, although one BNA source familiar with the
issue said Sen. Christopher Dodd (D-Conn.) also could be in play for the
job.

Either way, observers cautioned that it will likely take weeks before a
Senate resolution could be crafted to deal with the massive change in
committee appointments. Nevertheless, experts said that if Dodd were
appointed, it would help to assuage Republicans' concerns about the Banking
Committee adopting what they said could be a more activist agenda under
Sarbanes.

A Democratic staffer for the House Financial Services Committee predicted
that if Sarbanes takes the chair, more progress can be expected on consumer
protection issues that the staffer said are now being ignored, such as
predatory lending, abuses by credit card issuers, and so-called payday
lenders. "I would see an aggressive consumer agenda coming out," the staffer
said.

"There are a lot of banking issues that tend to be bipartisan," an industry
representative told BNA. "There will be no effect on business checking
legislation and [Federal Deposit Insurance Corporation] reform, which are
major priorities for us. Both are bipartisan."

Bankruptcy Reform Could Move
Another issue that could benefit from a shift in power is bankruptcy reform
(H.R. 333, S. 420), which passed both houses by a large margin in March.
However, since its passage, the bill has remained stalled due to the
Republican leadership's inability to agree upon party representation in
conference. A Democratic Senate clearly would break that logjam, and some
industry observers see the legislation moving more easily if the Democrats
take over in the Senate although abortion and homestead exemption issues
could still provide barriers during conference.

No one interviewed by BNA expected a flood of legislation to move out of a
Democratically controlled Senate. Democrats would have too narrow a majority
and each senator's individual power in the legislative process is too great
for that. For example, issues related to regulation of secondary mortgage
firms Fannie Mae and Freddie Mac will remain as politically complex as ever,
sources said.

"There is still going to be a very tenuous division of power," one source
said. "I don't think people should now expect some big Democratic banking
agenda."

Oxley's Role Could Change
Perhaps the most immediate effect of a Democratic takeover in the Senate is
the increased pressure it could bring to bear upon House Financial Service
Committee Chairman Michael Oxley (R-Ohio). Although banking industry
representatives stressed to BNA how eager they are to work with members of
either party, congressional sources told BNA the Republican party is their
traditional ally.

"This elevates Oxley's prestige considerably," one Republican staffer told
BNA. "He's who they'll look to with their issues."  Sources also said the
industry will depend on Oxley to stop any unfavorable bills that clear the
Senate. "We have to figure out if he's a good [bill] stopper and how far
he'll go before he has to put pressure on the president to veto
legislation," one lobbyist said.

However, a committee chairman can have an impact even without passing
legislation, said Joe Belew, president of the Consumer Bankers Association.
If Sarbanes takes control of the Senate Banking Committee, he said, the
senator from Maryland--or any other Democrat who ascends to the post--will
be able to use the committee to set the agenda by using hearings and other
actions to call attention to key issues. "Every chairman uses the gavel to
highlight his own issues," Belew said.

Democratic 'Ripple' Effect
A Democratic staffer on the House side said ripple effects could be felt
there if Sarbanes becomes chairman. Even though Republicans still control
the House, the staffer said, they would have to take Democratic issues and
positions more seriously, knowing that Senate Democrats might lend support.
"All of a sudden the Democratic minority here becomes more relevant," the
staffer told BNA. "For example, until a few days ago, predatory lending was
a non-issue. If Sarbanes starts holding hearings on predatory lending, it's
harder to push aside those concerns in the House." Jim McLaughlin, director
of trust affairs for the American Bankers Association, said much the same.
"It will change the direction of the chair about 178 degrees," he said.

Agency Nominations Affected
Another area that stands to be affected is the nomination process,
McLaughlin added. Currently, the Federal Reserve Board has two vacant seats,
and industry experts have assumed that the White House will move to replace
the current leadership at the Office of the Comptroller of the Currency and
the Office of Thrift Supervision.

Now, the administration will have to plan those nominations with an eye
toward candidates acceptable to a Democratic chairman, McLaughlin said. "It
will probably be a pretty significant issue," he said.  However, McLaughlin
predicted that Don Powell, who has been named to chair the FDIC, is likely
to be confirmed. "I wouldn't think he'd be in danger. He's a friend of Phil
Gramm, but he's a banker, and he's knowledgeable," McLaughlin said.

Evenly Split Lobbying
Lastly, there is potentially some sense of the status quo for the banking
industry, sources said. Although the financial services industry is known to
give larger campaign dollars to Republicans, this does not mean Democrats
have been left out in the cold and are estranged from the banking industry's
interests.

"We know both of these men," an industry lobbyist told BNA. "It's not like
Sen. Sarbanes's agenda is a mystery to us. We can work with anyone we have
to."
The Financial Services Roundtable, a prominent trade group that represents
some the largest financial services corporations in the country, told BNA it
is prepared for what political changes may come.

"We've been pretty balanced in the distribution of our lobbying efforts," a
Roundtable spokeswoman told BNA. "Furthermore, It's been 50-50 [in the
Senate] for some time now. We feel comfortable on either side."

Basle rules could hit stability
Financial Times - May 24, 2001
By John Willman

The Bank of England on Wednesday warned that the stability of the world's
financial institutions could be undermined by new rules designed to reduce
the risk of bank failures.

David Clementi, deputy governor, said the new Basle accord linking the
amount of capital banks have to hold more closely to the riskiness of their
loans could amplify the economic cycle. Downturns would be accentuated if
bank credit dried up because the increased risk of loan default required
banks to hold more regulatory capital.

Mr Clementi said there was evidence of such consequences during the 1997
Asian crisis, when leading banks with sensitive risk-measurement procedures
had suddenly enforced loss limits. Risk-adjusted capital requirements should
be based on long-term measures that include the possibility of future
economic downturns in assessing credits.

"No one is suggesting that risk-insensitive capital measures are the
answer," he said. "Rather we need to ensure that, in so far as we can, we
avoid sudden perceptions of changed risk."
Speaking at a conference organised by the UK central bank on systemic risk,
Mr Clementi said that banking crises had become more common. Four of the G10
leading economies had suffered a banking crisis during the last 10 years.

He warned that attempts to impose stronger banking regulation could be
undermined if risk shifted to more lightly regulated financial institutions
such as insurers. "We may find that our new rules are simply arbitraged
away, for example using credit risk transfers to insurance subsidiaries, or
asset securitisation sales to third-party insurers, or credit insurance and
derivatives sold by insurers," he said.

Mr Clementi said he would welcome international discussion of whether the
trend towards risk-based measures in banking should be mirrored in non-life
insurance regulation.

French peg their hopes on five-year bonds- An alternative to futures traded
on the Eurex could prove the deciding factor in a long-running debate
Financial Times - May 23, 2001
By Aline van Duyn

The long-standing competition between Germany and France to be the benchmark
for the euro-zone bond markets is heating up again.  The latest instalment
of the debate is being played out in the futures market, where Euronext, the
European exchange that runs the French derivatives market, last week
relaunched its five-year European bond futures contracts.

The contracts are being presented as an alternative to the five-year futures
traded on the Swiss-German Eurex exchange, which have come under scrutiny
from banks active in the market following a successful "squeeze" operation
in March.

Although the products traded on the exchanges are not directly related to
the debt borrowing programmes of their respective governments, the outcome
of their jostle for position could affect the price each country has to pay
for its bonds.

Herve Cros, bond strategist at BNP Paribas, which is one of 11 banks which
will act as a market maker for the new Euronext contracts, said the squeeze
experienced on the Eurex exchange - which led to losses for many banks -
offered an opportunity to try to create an alternative.
"For this reason, Euronext decided to relaunch its future on behalf of, and
in collaboration with, numerous international players," Mr Cros said.

When a bond future matures, the owner has the right to receive a certain
number of underlying government bonds. This creates more demand for the
underlying debt and can therefore push up its price.

At the moment, French five-year bonds yield more than German five-year
bonds. Reducing this gap would benefit the French treasury, because it could
reduce its cost of borrowing.
Because the amount of futures traded can be much larger than the size of the
underlying cash market, shortage of deliverable bonds can occur. If an
investor secretly buys up the deliverable bonds, the conditions for a market
"squeeze" are created, because others will need to pay a premium to obtain
the debt when the futures expire.

There is a particular risk of a squeeze when there is a shortage of bonds in
the cash market. For the June five-year bond, or Bobl, contract traded on
Eurex there are more deliverable bonds than for the September contract.

"There are concerns about a possible squeeze in the September Bobl future,"
said Kim Rosenkilde, global head of government bonds at ABN Amro, which is
also a market maker for the Euronext future.

In the coming weeks, traders will start to roll over their positions from
June to September. The next three weeks will therefore be be a key period
for determining the success or otherwise of Euronext's efforts to capture a
share of the five-year futures market, which has been growing in importance
in recent years.

Banks have asked Eurex to consider changing its trading rules to make
squeezes less likely, but so far the exchange's board has not responded to
these demands. Euronext's contracts have two elements which could reduce the
chance of a squeeze. First, positions are limited to 50,000 contracts.
Second, the French treasury is able to temporarily increase the number of
bonds available via the repurchase, or repo, market.

Mr Rosenkilde said the contract would need to prove itself over the next six
to 12 months if it was to become a viable alternative to the Eurex future.
It can be difficult for liquidity to shift from one exchange to another, but
it has been done before. There are other alternatives to using either the
Eurex or Euronext futures, although none is likely to take over fully. The
London International Financial Futures and Options Exchange has futures
based on five-year swaps. Traders can also use the swaps market directly or
cash government bonds to hedge their debt positions.

Even though futures markets are a derivative of the underlying market, they
are particularly important in Europe. Despite the existance of the single
currency, the cash bond markets remain fragmented as each euro-zone country
issues its own bonds.  "Futures play a more critical role in the European
market than they do in the US," said Bernd Hoefel, head of financial
strategies at Lehman Brothers, also a market maker for the Euronext future.

"The future is the big unifier for debt market participants, and this is why
it is so important to have the future functioning smoothly."

LSE float is another piece in market jigsaw
Financial Times - May 24, 2001
By David Holmes and Braden Reddall

LONDON (Reuters) - It may be a giant leap for the London Stock Exchange
(LSE), but its public flotation detailed is no more than a small step on the
path towards the unified European equity market that investors desire.

Having set a July date for its long-awaited market debut, the London
institution was poised on Thursday for one of the most fundamental changes
in its 200-year history.
Yet the flotation is only one part of the stock market jigsaw coming
together across Europe, as bourses from Amsterdam to Frankfurt list their
own shares and change the whole structure of European markets.

As listed companies, exchanges should in theory be more able to make
takeovers and alliances to rationalise the complex structure of the markets.
The LSE pitched its flotation around such a claim -- that it would shake
itself free of the constraints of mutuality and act in a commercial way,
putting its shareholders' interests first.

It should, after all, be well placed as the leading European bourse.
The 2.7 trillion euro (1.64 trillion pounds) market capitalisation of its
listed stocks is nearly double that of either Frankfurt or Paris. London is
the largest global centre for the management of institutional equities, with
1.7 trillion pounds of equities under management. And around 500 foreign
companies are listed on the London exchange, more than on any other.

Yet the LSE has still given scant detail of its future strategy, beyond some
generalisations about being Europe's leading exchange and forming
unspecified technology links and partnerships.

CHANGE IN FORTUNES
The more important aspect of the LSE's flotation, at least in the short
term, may simply be a pointer to a potential change in its fortunes.  At the
beginning of last year, the LSE was a mutually owned organisation struggling
against a legacy of internal conflict and strategic uncertainty.

Subsequently, an abortive plan to merge with the Deutsche Boerse led to the
departure of Chief Executive Gavin Casey and left an impression of division
between the exchange and some of its members. Just a few months later, the
LSE stands poised to secure a near one billion pound flotation that it hopes
will return it to the forefront of Europe's capital markets.

It even seems to have gained the support of smaller brokerages with its more
conciliatory approach. Brian Winterflood, chief executive of Winterflood
Securities, told Reuters Television: "Isn't it nice to hear everyone on the
same side.... They are listening to people, which is marvellous."  The
multi-billion pound valuations hung on traditional exchanges show that they
have a future, despite potential threats to their way of doing business.

Brokerages have deployed their own systems to trade shares between different
clients, allowing those clients to trade directly with each other -- a
process known as disintermediation.  The Internet offers a medium for share
trading that could yet emerge as a serious contender, yet investors still
seem to believe that exchanges have a future.

Behind the lofty valuations of the LSE and the Deutsche Boerse, which runs
Frankfurt, are hopes that they will ultimately unite to offer investors a
seamless route to trading shares across Europe, cementing their central
market position and their value. Hopes that the LSE could itself be a bid
target have already helped inflate its shares, which are traded on an
unofficial "matched bargain" basis by investment bank Cazenove. They rose
330 pence or 9.8 percent to 3,575p by 3pm, having hit a record peak of
3,690p -- almost double their level at last July's debut. But the route to
consolidation is little clearer after the LSE's flotation announcement, as
Chief Executive Clara Furse conceded. Flotation gives the LSE an acquisition
currency, but how it intends to spend it is unclear.

"Trading is going global and geographic boundaries are becoming irrelevant,"
Furse said. "But how it will all pan out is difficult to predict".

**End of ISDA Press Report for May 24, 2001.**

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