ISDA PRESS REPORT - JUNE 4, 2001

RISK MANAGEMENT
Basle II - IFR
Australia's APRA says Basel home loan rules unfair - Reuters
Asia May Not Be Reader For New Basel Pact - Ctrl Bankers - Dow Jones
Basel Accord Gets Chilly Reception - The Wall Street Journal
Derivatives industry - IFR

CREDIT DERIVATIVES
Convertible default swap proposal near - IFR
Credit Derivatives Market To Hash Out Successor Issues - Dow Jones

ENERGY
California Clash Over Power-Grid Control - The Wall Street Journal

LATIN AMERICA
Two banks pull out of Argentina debt swap over SEC rule fears - Financial
Times

OTHER
Newer options - Business Standard

Basle II
Financial Times - June 4, 2001

The process of refining the Basle capital adequacy rules is drawing to a
close. A revised set of rules will be agreed by the end of this year, to
take effect in 2004. There remains broad agreement that it is about time to
update the original 1988 formula for calculating how much capital a bank
needs. Yet there is enough disagreement on the philosophy and details of the
new proposals to suggest that their implementation will be difficult and
expensive. Perhaps this will prove to be the spur the banking industry
needed to start spending on information technology once again.

The old rules are straightforward enough. Minimum capital requirements are
set as a percentage of each bank's assets, with some broad categories of
loan, such as mortgages or government debt, assigned reduced weightings. The
new rules are a considerable improvement in this area, tying capital
requirements much more closely to the actual risk posed by individual loans.
Oddly, though, exceptional treatment is preserved for German real estate
loans. But if the measurement of credit risk becomes more sophisticated, the
addition of other, worse defined categories of risk - notably operational
risk - restores much of the crudeness of the original agreement.

It would be worth taking more time to reach agreement on the right way of
measuring operational risk. But political realities, notably the length of
time needed to get an updated European capital adequacy directive to
incorporate the new rules, mean that this is unlikely to happen. The result
is that Basle II will prove to have a much shorter shelf life than Basle I.


Australia's APRA says Basel home loan rules unfair
Reuters - June 3, 2001
By Marion Rae

SYDNEY, June 4 (Reuters) - Australia's bank regulator said on Monday it
believed proposed reforms to global capital adequacy requirements by the
Basel Committee on Banking Supervision could introduce competitive
inequalities in the Australian market. In particular, proposals for capital
backing for the residential mortgage market, a dominant and low risk area of
business for Australian institutions, needed to be modified, the Australian
Prudential Regulation Authority's (APRA) general manager of risk analysis
Wayne Byers told Reuters.

The Basel committee has proposed that exposures secured by residential
property attract a 50 percent risk weighting - the same as the current
weight - but large institutions able to follow new internal ratings-based
guidelines would be able to reflect the very low housing loss experience in
Australia with a cheaper risk weighting of five to 10 percent.

Within the proposed accord there are three methods by which banks can
calculate capital charges for credit risk - a standard method which is a
variant on the current method, and a further two methods, one simple and one
advanced, where banks use their own internal ratings systems as a means of
allocating capital.

"Overall the more advanced the method you use, there are some quite
significant capital savings," Byers said.

"The more sophisticated methods aren't restricted to big banks but obviously
they have the knowledge, the resources and the data and that means that
they're more likely to pursue them."  As a percentage of total assets as at
March 2001, APRA said housing loans amounted to an average of 38 percent for
Australia's major banks, including National Australia Bank Ltd, Commonwealth
Bank of Australia, Westpac Banking Corp and the ANZ Banking Group Ltd, and
43 percent for regional banks.

BIG BANKS STAND TO GAIN

"Given that the minimum requirement is an eight percent capital ratio, banks
have to have A$4 - which is 50 percent - for every A$100 of housing loans
they make," he said.
"It would stay the same for those banks that stay on the simplest method but
for those banks which move on to methods where they use their own internal
measures of risk, a much lower number is produced," he said.  "They're based
on an international average but Australian data shows it up to be a much
lower risk activity," he said.

APRA has proposed lowering the standardised housing risk weighting to 20
percent or allowing individual countries to allow a weighting lower than
Basel requirements where historical loss rates and market characteristics
made this appropriate.  "I don't think the committee envisaged the big gaps
that have turned out so I would expect they would certainly look to reduce
those gaps between the different methods. I'm less sure that they will deal
with product-level issues," Byers said.

"Housing loans in Australia are a very low risk activity, they're not
necessarily that in other markets where housing prices are volatile and
where banks don't necessarily use conservative LVR (loan-to-value) rates,"
he said.  Capital adequacy rules in Australia required LVRs of less than 80
percent, unless backed by mortgage insurance.  "It may be that we have to do
something ourselves to tackle that issue. The final proposals will be out at
the end of the year and we're waiting to see how they look before we commit
ourselves to any action," Byers said.


Asia May Not Be Ready For New Basel Pact - Ctrl Bankers
Dow Jones International News - June 3, 2001

SINGAPORE (AP)--Asian central bankers Saturday said their countries may not
be ready for the Bank of International Settlements' new Capital Accord
planned for 2004.
"In particular, infrastructure and internal capacities in some member
countries could limit their ability to fully implement the accord by then
(2004)," the Governors of the Southeast Asian Central Banks said in a
communique after a two-day meeting in Singapore.

Asia's 1997-98 financial meltdown rocked banks and economies worldwide,
drawing intense international pressure for reform among Asian financial
institutions.  The Basel -based Bank for International Settlements, or BIS,
hopes to implement by 2004 its new Capital Accord, which would give banking
regulators more power to assess whether banks have the capital to weather
bad loans.

The BIS acts as the banker for central banks, providing financial services
for managing their external reserves.  The new Basel accord poses challenges
to Asian banks and regulators, Singapore's second minister for finance Lim
Hng Kiang said earlier in opening remarks at the Singapore conference.

Asian banks "would have to develop more sophisticated risk management
capability" under the new accord, and regulators would "need to build up
technical knowledge" to handle the accord, Lim said in the opening speech.

The Asian central bankers also said in their communique that there is a need
to use policies that prevent "excessive exchange rate volatility," which can
"have severe consequences for small, open economies."  Central bank
representatives at the Singapore meeting came from Indonesia, South Korea,
Malaysia, Mongolia, Myanmar, Nepal, the Philippines, Singapore, Sri Lanka,
Taiwan and Thailand.  The meeting also included observers from Cambodia,
Fiji, Laos, Papua New Guinea, Tonga and Brunei's Ministry of Finance.


Basel Accord Gets Chilly Reception
The Asian Wall Street Journal - June 4, 2001
By Jason Booth

The international banking community has given its opinion on the new Basel
Capital Accord. But it isn't encouraging.  Over the last five months,
bankers from around the world have been submitting views on the accord,
dubbed Basel 2, which is designed to set the benchmark for bank operations
and risk management. By replacing the original 1988 Basel Accords, the new
agreement aims to promote better allocation of the money banks must put
aside for bad loans through the use of more scrupulous risk analysis.

On Friday, reaction to the new pact was made public on the Web site of the
Bank for International Settlements. The Basel, Switzerland, organization,
which promotes cooperation among central banks, authored the accord. Big
banks called the plan too conservative, while smaller institutions said it
will increase their cost of capital and warned it could deepen the divide
between rich and poor nations. Most felt the regulations were onerously
complex and that the planned 2004 launch date was too ambitious.

The Institute of International Finance, a private association of the world's
biggest banks based in Washington, weighed in Friday with perhaps the most
influential assessment. "The proposal includes at every step of the
credit-assessment process an element of conservatism," said Jan Kalff,
chairman of the IIF steering committee on Basel 2 and former chairman of ABN
Amro Bank, who was on a visit to Hong Kong.

While the risk-analysis procedures mandated by Basel 2 might lower the
amount of money some banks need to set aside for bad loans, those savings
would be offset by added costs, the IIF said. The hiring and training of new
staff, new software and a general slowing down of the lending process would
generate those costs.

"Some bankers have mentioned to me that the costs are going to be of the
same magnitude as Y2K implementations. But Y2K was only one-off, this will
be a year after year costly thing," said Mr. Kalff. The IIF report estimated
a total cost to 30,000 banks of $2.25 trillion over five years. Mr. Kalff
added that such costs wouldn't be incurred by nonbanking financial
institutions, giving them a competitive advantage against traditional banks.

Asian central bankers Saturday said their countries may not be ready for the
BIS accord. "In particular, infrastructure and internal capacities in some
member countries could limit their ability to fully implement the accord by
then (2004)," the Governors of the Southeast Asian Central Banks said after
a two-day meeting in Singapore.

Meanwhile, smaller banks, especially those in the developing world, had
other concerns over the Basel 2 draft. "The proposed approach will result in
fostering or even deepening the division into highly developed and
underdeveloped countries, both with respect to external funding and capital
costs," wrote Leszek Balcerowicz of the Polish Commission for Bank
supervision.

The problem for emerging-market banks is that their client base typically
has lower credit ratings than those of major banks do. As such, under the
new rules, these banks will have set aside a greater portion of their
capital to cover possible losses. If they don't, they will be punished by
higher costs when they borrow money in international capital markets.

And borrowers, especially smaller and less credit-worthy ones, will likely
pay the price with higher capital costs. Again, less-developed nations are
likely to suffer most, since higher capital costs could slow development of
higher-risk small and midsize enterprises.

One complaint shared by big and small banks was Basel 2's insistence that
banks be more widely reviewed by credit-rating agencies to determine asset
risk. In addition to expressing concerns over the added costs of this
policy, some felt it would be counterproductive.

"The increasing reliance on external rating agencies would undermine the
initiatives of banks in enhancing their risk-management policies and
practices and internal control," said the Reserve Bank of India.  There was
also a general call for more physical collateral, such as property and
accounts receivable, to be factored into banks' credit risks. "There is
ample evidence to show that such collateral is effective in mitigating
risk," said Mr. Kalff of the IIF.

In light of such wide-ranging concerns, many felt that it would be difficult
to meet Basel 2's scheduled 2004 launch date. The IIF felt that parts of the
accord would require at least 18 to 24 months of further negotiations, even
though the BIS has been hoping to finalize the accord by the end of this
year. Developing nations suggested that the accord be phased in over a
longer period of time.  In the words of Adrian Byrne of the Central Bank of
Ireland: "This time frame is still too short given the range of information
not available."


Derivatives industry
IFR - June 2, 2001

Derivatives industry officials are optimistic that some of their criticisms
of the draft of the new Basle II Capital Accord will be taken on board by
regulators. They believe there is a good chance that their input on the
calibration of the internal ratings-based function will result in a change
in the accord, for example.

However, there is no sign yet that their input on the "W" factor charge on
credit derivatives will result in a revision.  The Basle Committee on
Banking Supervision will next month release exposure drafts on operational
risk and the internal ratings based approach for treatment of equities,
retail portfolios, project finance and securitisation as areas for
additional consultation and interim papers for its new global capital
adequacy rule proposals, dubbed Basle II.  "These were all green areas when
the consultation came out in January," said a Bank for international
Settlements official.

It still remains unclear whether the "W" factor will be eliminated, he
noted. "There are some strong proponents for it on the committee. So, it
depends on the nature of the comment letters," he said.  William McDonough,
the chairman of the Basle Committee, is widely viewed as having backed away
from the keeping the "W" charge in the new accord, but Oliver Page - the
head of regulatory policy at the UK Financial Services Authority and a
member of the committee - is believed to remain a proponent. Page said that
he is keeping an open mind about the issue, however. "This is a genuine
consultation process, we have got to weigh up the contributions," he said
last Friday, the day after the deadline for comments on the new accord
passed.

The "W" charge is a 15~~ levy on credit derivatives when they are used for
credit risk mitigation by banks, which contrasts with the zero weighting
given to guarantees.  The BIS's strategy of weeding out measures that
require more attention is aimed at enabling the regulator to push ahead with
certain issues and finish formulating its positions on others, while keeping
to its 2004 deadline for implementing the new rules, the BIS official said.
"The last thing that they want to do is push ahead with everything and then
reopen structural issues," said Simon Gleeson, a partner at Allen & Overy in
London. On the flip side, keeping everything on hold would make it
impossible for it to work within its deadline, he added.

"As far as the European Union is concerned, the problem that they face is
the timing. It took seven years to get [the last Basle Accord] through and
into directive form. The idea that the EU's implementation will get finished
by 2004 is absurd," a derivatives industry consultant in London said.  The
challenge is exacerbated by the fact that when the EU writes directives they
apply to all financial institutions, not just internationally active banks.
This means that in addition to implementing the new rules it will have to
draw lines between institutions and decide how to ensure that the system
does not put small and medium-sized institutions at a disadvantage.

"The Fed wants to start [enforcing new rules] as soon as possible. If they
do, we will get a situation in which we have two completely different
capital adequacy systems," the consultant added. The start of 2004 was set
as a compromise due date between the US Federal Reserve and the UK's
Financial Services Authority for enforcing the new rules. Basle II's initial
industry comment period closed last Thursday.

The International Swaps and Derivatives Association focused its criticisms
on three areas. It argued that the introduction of rigid capital floors
would increase costs, that the proposed operational risk and "W" factor
charges are arbitrary, and that the proposed calibration of the internal
ratings based function does not reflect market practice.

"The accord takes significant steps toward defining an approach to setting
banks' capital requirements, which is risk-sensitive, granular and flexible,
yet there are several areas that are inconsistent with the overall goals of
the accord and existing bank best practices," said Emmanuelle Sebton, head
of risk management for ISDA.

ISDA officials are due to meet the FSA's Page and other members of the
capital group within the Basle Committee in New York in mid July, at which
stage ISDA will press the case for abandonment of the 15% "W" factor charge
on use of credit derivatives.


Convertible default swap proposal near
IFR - June 2, 2001

An informal working group within the International Swaps and Derivatives
Association's credit derivatives market practice group is nearing the
completion of a preliminary proposal aimed at creating standardised
documentation for swaps based on convertible bonds and zero coupon
convertible issues.

The surge in convertible and zero coupon convertible issuance this year and
the trend towards stripping the equity and credit components out of large
issues are heightening the need for the documentation.  "Right now, there
isn't a standard. That's the problem. Each firm uses different language.
Resolving this will enhance liquidity in an already well-functioning
market," said Derek Smith, head of credit derivatives trading at Goldman
Sachs in New York.

Credit derivatives market participants would benefit from standardisation,
as it would improve liquidity. "If you strip a convertible with one dealer
and want to unwind with another dealer you might come across dealers that
don't like the documentation. So, they are unlikely to bid, and you are
forced to go back to the first dealer," said John Tierney, head of credit
derivatives research at Deutsche Bank in New York.

Even though only a portion of investment grade convertibles are stripped and
stripping typically covers between a third and a quarter of a stripped
convertible, the activity still generates vast amounts of credit default
swaps business.  On a US$3bn issue, for instance, in excess of US$750m can
be stripped, which is time consuming to offset, given that credit default
swaps usually trade in US$10m blocks. Standard documentation is also needed
because stripping often causes a 30-50% jump in the price of the issuer's
single name credit default swap.

"It's more technical than controversial. Creating documentation that works
is the challenge," said Smith. Before the group's proposal is available for
general use, it will need to be approved by ISDA's documentation committee
and vetted by the industry.


Credit Derivatives Market To Hash Out Successor Issues
Dow Jones - June 4, 2001
By Joe Niedzielski

NEW YORK -(Dow Jones)- Credit derivatives professionals are working on a
solution to the vexing question of how these contracts should be treated
when companies spin off units or restructure into separate entities.  These
demerger or successor issues are expected to take some months to resolve and
the International Swaps and Derivatives Associations new subcommittee of the
credit derivatives market practice group has given the question priority
among a host of other long-term issues.

Adding some momentum to the discussions is the pending restructuring of AT&T
Corp. (T). AT&T is among the more actively-traded credits in the single name
credit default swap market.  These over-the-counter derivatives contracts
let buyers transfer the default risk on loans or bonds by selling it to a
third party for a premium that's derived from the notional amount of the
contract.

AT&T's plan, first unveiled last fall, would split the company into a
business and consumer long-distance unit, as well as broadband and wireless
units. AT&T is expected to go ahead with the plan in the coming months.
"People seem motivated about resolving this," said one credit derivatives
official in New York. "As AT&T gets closer, I would imagine that would
galvanize people further on this side of the Atlantic."

When companies split up, spin off units, or "demerge," the successor
entities are allocated different portions of the previous entities
outstanding debt obligations and publicly-issued bonds.  ISDA's 1999
document governing credit derivatives essentially calls for the default swap
to follow the entity that takes on the majority of the obligations in a
merger, consolidation, or transfer.  This "all or substantially all" clause
in the documentation, though, can be interpreted differently in other legal
jurisdictions. And that could pose a problem if a market participant has
contracts on a particular credit with U.S. and English counterparties.

Still Fallout From National Power

A number of market participants are attempting to negotiate a resolution to
default swaps written on the U.K.'s National Power PLC, which demerged late
last year.  In the split, Innogy Holdings PLC (IOG) received the former
company's U.K.-based power and generating assets. National Power changed its
name to International Power PLC (IPR) and took the international power
assets.

Innogy Holdings was also allocated with about 60% of the former company's
debt obligations and about 88% of its public bonds. International Power kept
about 40% of the former company's debt obligations and about 12% of its
public bonds.  The credit derivatives official in New York said there are
theoretical ways of hashing out the successor issue. One possible approach
would be to have multi-name default swaps after a demerger for participants
that held contracts on the single name corporate prior to the demerger.

Essentially, the trade would be split into a series of trades on the
demerged entities, though it would likely be difficult to calculate the
relevant notional amounts that should be allocated among those new default
swaps, this person said.


Two banks pull out of Argentina debt swap over SEC rule fears
Financial Times - Jun 2, 2001
By Thomas Catan

Two investment banks unexpectedly pulled out of managing Argentina's record
debt exchange yesterday because of worries they may have violated US
securities regulations, placing at risk millions of dollars in fees.
On the advice of their lawyers, Deutsche Bank and ABN-Amro yesterday
withdrew from a group of 12 banks chosen by the Argentine government to
manage the multi-billion dollar transaction. It is understood that Banco de
Galicia, an Argentine bank, will also exclude itself from offering the bonds
in the US.

People close to the banks said company lawyers had become concerned that
some pieces of research in the run-up to the transaction may have breached
US securities regulations. A spokesman for the Securities and Exchange
Commission in Washington would neither confirm nor deny it had warned
investment banks.

In an effort to buy time to restart its struggling economy, Argentina hopes
to exchange bonds coming due before 2006 for longer-dated paper. The
government stopped taking offers from bondholders yesterday and is due to
announce the results of the massive operation on Monday. Market analysts
expect the government will succeed in swapping around Dollars 20bn, by far
the largest transaction of its type.

If that is the case, the group of investment banks would earn Dollars 110m,
which is considered to be a juicy fee for relatively light work. However,
concerns that the "Chinese wall" between analysts and sales people had been
breached may have cost several banks their share of the fees.

Some bankers suggested it was not the SEC that had raised the initial
objection, but rather investment banks threatening each other to maximise
their proportion of the fees. According to an Argentine official, the
problem first came to light on Thursday after questions were raised about a
research report by Deutsche Bank's emerging markets analysts.


California Clash Over Power-Grid Control
The Wall Street Journal - May 4, 2001
By Rebecca Smith

As California politicians wade deeper into the energy crisis, the state's
electric-grid operator appears headed toward a showdown with federal energy
regulators over whether its board is independent enough.  The California
Independent System Operator Friday bowed to pressure from the Federal Energy
Regulatory Commission and submitted its qualifications to continue as a
federally sanctioned grid operator. But the tardy filing is almost certain
to be challenged by federal regulators and market participants because the
ISO's governance structure has strayed from a "bedrock requirement" that it
be "independent of control by any market participant."

The market participant casting the long shadow is the state of California.
Since January, when the state of California began buying huge sums of
electricity on behalf of its nearly broke utilities, the ISO has been under
pressure to give state officials preferential treatment and unique access to
market-sensitive information. Its chief operations officer, paid $245,000 a
year according to the most recent IRS filing, is on indefinite loan to the
governor's office where he is working as an energy adviser.

This politicization of the ISO is significant because the organization's
purpose is to run a market for power needed to keep the electric system in
balance and to give buyers and sellers impartial access to the power lines
on which they depend to move electricity. Unlike other commodities,
electricity can't be stored. Transactions, therefore, depend completely on
instantaneous access to the electric superhighway of high-voltage lines. The
FERC worries that a loss of political independence by the ISO will further
degrade the state's already dysfunctional energy market.

The FERC hasn't formally accused the ISO of acting improperly, but it is
clear that a wall between the state and the ISO that once was solid has
become permeable. Last month, the ISO notified the FERC that the state of
California had asserted "it must have access to the ISO control room floor"
and "nonpublic information" as a "necessary condition" of continuing to buy
power, even though such preferential access violates ISO rules. But without
the state to back power purchases -- it has spent nearly $8 billion on
electricity since January -- the ISO's market would collapse and blackouts
and chaos likely would ensue.

The governance issue, which may appear esoteric, actually cuts to the heart
of the power crisis in California. State officials feel they have ceded too
much control to the FERC, which they accuse of shirking its duty to protect
consumers. As a consequence, the state has forced its way into the inner
workings of the formerly arcane ISO, a public-benefit corporation formed
three years ago amid California's push to deregulate its electricity market.

In January, the state legislature authorized the governor to eject a
FERC-approved board of directors and hand pick his own five-member ISO
board. The state attorney general ordered old board members to resign or
face personal fines of $5,000. Currently, one ISO board member is a former
member of the governor's staff, while another, on the governor's behalf,
negotiated the proposed purchase of utility transmission assets by the
state, all the while serving as chairman of the supposedly independent
board.

The ISO's chairman says changes in the board structure have made the ISO
more answerable to the citizenry and "efficient." Michael Kahn, who is a San
Francisco attorney, added that the governance structure had to change to
reflect the fact that "we're in a state of emergency."

In its filing Friday, the ISO took the position that the tighter
relationship between the ISO's board and the state doesn't violate the
FERC's requirement that ISO boards be free of control by market
participants. Even though the state has been "required to provide financial
support," the ISO asserts, this "participation does not make ... the State a
market participant." Many market watchers scoff at that contention.

"Inevitably, this will lead to a showdown," said N. Beth Emery, former
general counsel of the ISO and now an energy attorney for Ballard, Spahr,
Andrews & Ingersoll in Washington, D.C. "Clearly, the ISO is in violation of
the independence requirement."

But the FERC doesn't have many tools for enforcing its vision of autonomy.
That may explain why it has failed to intervene. It can order the ISO to
make board changes, for instance. But if it refuses, there may not be much
the FERC can do except threaten to rescind the ISO's operating tariffs.
That, of course, is the opposite of what the FERC wants to do, which is
encourage creation of multistate grid organizations free of any political
favoritism.

But California's angry isolationism appears to be growing. Gov. Gray Davis
said the ISO's filing ensured the state will "maintain control of our own
energy destiny and not be subject to the whims of federal regulators or the
interests of other states."

To date, the FERC has been steadfast in its resolve to make regional grid
operators independent organizations, free of control of utilities and power
marketers. It has rejected other grid-operator proposals because it felt
utilities that owned the power lines were attempting to retain too much
control. But Order 2000, the landmark decision issued in December 1999 that
promoted the creation of independent grid runners throughout the nation,
never contemplated a state government assuming such a huge role in a market
as has occurred in California.

If anything, that role is likely to increase. Not only is the state of
California the biggest power buyer in the nation now, but it has formed a
power authority that intends to build and operate generating plants. In
addition, Mr. Davis is promoting a plan to buy the transmission systems of
the state's investor-owned utilities. As such, a new vertically integrated
utility is forming that could be larger than any the nation has seen since
the "power trusts" of the 1930s were broken apart by Congress.

It is rife with conflicts of interest. The ISO's drift has created a fissure
in the solid support it enjoyed from the state's big utilities that
transferred control of their transmission systems to the ISO in 1998. PG&E
Corp.'s Pacific Gas & Electric Co. unit, which is in bankruptcy proceedings,
declined to join the ISO filing, which was supported by Edison
International's Southern California Edison unit and Sempra Energy's San
Diego Gas & Electric Co. unit. PG&E said in a separate grid-plan filing that
it would prefer the ISO join a multistate grid organization. It expressed
reservations about the independence of the current board.

Opposition to the state's influence is becoming more vocal. The Electric
Power Supply Association, a trade group representing power producers, warned
FERC last month that the ISO has become "a partisan advocate for the State
of California" and sought FERC intervention to defend the rights of all
market interests.


Newer options
Business Standard - June 4, 2001
By Gaurav Dua

In addition to the numerous advantages of derivatives in terms of risk
management, price discovery and instruments for providing the required
leverage to the investor, options are also very effectively used as a tool
to develop and structure innovative products. Investment bankers use various
form of options including call, put, exotic, binary and so on, to structure
products for retail investors. Such products have gained immense popularity
in developed markets like the US and Europe.

In fact, structured products offered by investment banks like Salomon Smith
Barney (SSB), Goldman Sachs and others, are also actively traded at the
Chicago Board Options Exchange (CBOE). These relatively new investment
vehicles are similar to call or put options as they have an expiration date,
and are cash settled like index options. The capital markets division at
CBOE assesses the concept behind the instrument and provides regulatory
guidance before the product is offered in the market.

One of the very successful and popular examples of structured products is
capital protected notes where the return on investment is linked to the
performance of certain indices, basket of stocks or a single stock in a
given time frame. Here, the investment bank or intermediaries will calculate
the present value of risk-free interest that can be earned

* on the capital and use it to buy

* call options. The best part of the instrument is that there is no
risk

* of capital loss. And the risk of the investor is only limited to the

* interest that could have been earned on the capital.

This apart, exotic options like knock-in or knock-out options, where the
expiry of the option is based on certain conditions, are utilised to provide
flexibility and additional features to the investors. For instance,
structured products such as Target Trust Warrants offered by SSB guarantees
an assured return of six per cent with no risk to the capital and investor
can opt for redemption before the expiry date. But there is a cap on the
maximum amount of return that can be earned on the deposit.

A typical example of index based structured product is Equity based notes by
SSB where the returns to the investor is based on the

* appreciation in Dow Jones

* Industrial Average in a given time frame. This product is actively
traded on CBOE.

In the Indian context, structured products could very well fill in the gap
between the high risk high return equity investments and low risk low return
fixed deposits by banks. The drop of 150 basis in the interest rate on
popular investment avenues such as public provident fund, national saving
certificate and others, has already compelled the small investors to look at
others investment alternatives for higher returns. In such a scenario,
structured products are expected to do well in India.

Structured products could turn out to be a boon for numerous software
professionals who were unable to cash-in on their employee stock option
(ESOP) in the bull-run due to the lock-in period. "Investments bankers could
target such professionals with customised structured products using put
options", says Sanjiv Mehta, chief executive officer derivative segment,
Bombay Stock Exchange. Normally, customised structured products are used for
high networth clients.


**End of ISDA Press Report for June 4, 2001**

THE ISDA PRESS REPORT IS PREPARED FOR THE LIMITED USE OF ISDA STAFF, ISDA'S
BOARD OF DIRECTORS AND SPECIFIED CONSULTANTS TO ISDA.  THIS PRESS REPORT IS
NOT FOR DISTRIBUTION (EITHER WITHIN OR WITHOUT AN ORGANIZATION), AND ISDA IS
NOT RESPONSIBLE FOR ANY USE TO WHICH THESE MATERIALS MAY BE PUT.



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