ISDA PRESS REPORT - OCTOBER 25, 2001

ACCOUNTING
	*	FASB Adds Performance Reporting Project, Defers Intangible
Assets Disclosure Decision - BNA

CREDIT DERIVATIVES
	*	Railtrack, Swissair First Test of Europe's Default Swap
Market - Bloomberg

REGULATORY
	*	Canada Publishes Final Regulations To Implement Financial
Services Framework - BNA

RISK MANAGEMENT
	*	The Case for Catastrophe Bonds

TRADING PRACTICE
	*	End Of Cantor Treasurys Quotes On Telerate Causes Bother -
Dow Jones

FASB Adds Performance Reporting Project, Defers Intangible Assets Disclosure
Decision 
BNA - October 25, 2001

NORWALK, Conn.--The Financial Accounting Standards Board Oct. 24 formally
added a project on performance reporting to its rulemaking agenda, but it
deferred a decision on whether to start a separate standard-setting effort
on disclosures about intangible assets.  The topic of intangibles was the
subject of extended debate among FASB's seven members as they weighed its
importance in allocating staff resources to such a project or to two other
issues vying for the attention of rulemakers. 

FASB heard arguments from one board member, John Wulff, suggesting that an
effort to simplify and codify standards and other guidance that form
statements of generally accepted principles, together with writing standards
on revenue recognition and defining liability, may be more suitable
candidates for rulemaking.  Major U.S. corporations, through at least one
trade group, the Institute of Management Accountants, counseled the course
described by Wulff, a former leader of Financial Executive International's
Committee on Corporate Reporting. That committee opposes FASB's taking on
the performance reporting and intangibles projects as outlined in a
prospectus issued about two months ago. 

FASB settled on a compromise plan offered by board Chairman Edmund Jenkins.
In the compromise, the panel's staff will carry out further preparatory work
on intangible assets. At the same time, FASB's staff will study the three
potential projects--revenue recognition and liability definition,
simplification and codification of accounting rules, and disclosures about
intangibles--with an eye toward deciding an appropriate use of staff
accountants' time.  The additional work on intangibles is to focus on
summarizing existing research on such non-concrete assets as in-process
research and development, patents, and customer lists, with particular focus
on questions about what information on intangibles is useful to investors,
security analysts, and other users of financial statements. FASB would not
carry out polling or surveys, the board emphasized.  The board tentatively
set a deadline of Dec. 24 for completion of the two-pronged work by its
staff. That timetable would suggest FASB plans to make a more definitive
decision on adding a second, or even a third, standard-setting project in
early 2002.  

'Minimum Approach' in Performance Reporting Effort
FASB's new rulemaking on performance reporting represents an effort to
improve and make more useful information displayed on all the basic
financial statements, both interim and annual. In such a "display and
presentation" project, the board would not address recognition and
measurement questions, according to a staff summary.  FASB's staff
recommended that the board "stick close" to what is known as the minimum
approach in the performance reporting project, said Ronald Bossio, a senior
staff project manager. Pursuing that approach was the avenue favored by most
of the board's constituents who expressed support for starting the
standard-setting effort. 

The minimum approach is described by FASB's staff as one that would have the
board "explore whether certain line items, subtotals, and totals should be
defined in standards and required to be displayed in financial statements,
including interim statements.  "Line items and amounts that would be
considered include those related to metrics commonly used by investors and
creditors in assessing financial performance," the staff continued in a
summary distributed at the board's Oct. 24 meeting. 

Favored less by constituents and not advocated so far by any board member in
preliminary discussions is a broader approach. Under that, FASB would
describe how key financial metrics--usually ratios or some other
indicator--should be calculated if they are presented in financial
statements. However, the methods of figuring such metrics would not be
required to be shown in the financial statements, according to the staff's
summary of the broader path. 

Gary Schieneman, a veteran security analyst who joined FASB in July, said he
supports taking on the project on performance reporting. He added, however,
"I think it will be difficult to stick closely to the minimum approach."
Michael Crooch, a colleague on the board, said he, too, supports the
rulemaking effort, but voiced a concern that the effort "may be a project
that has no bounds. This is one we have to watch with regard to scope."  The
International Accounting Standards Board has begun its own standard-setting
on performance reporting. That task is being carried out jointly with the
United Kingdom's Accounting Standards Board in an effort, in part, toward
helping ensure convergence of financial reporting rules around the world.
FASB plans to monitor the IASB-ASB joint project. 

Defining Simplification
Wulff, a former high-ranking financial executive at Union Carbide who joined
FASB with Schieneman, first raised the issue of perhaps taking on other
projects--revenue recognition and simplification--when he was asked to voice
a view on embarking on the performance reporting project.  what
"simplification" is came to a head in FASB's debate when Wulff, weighing the
intangible assets project, questioned moving ahead on that effort before
understanding how many staff resources would be used in writing standards on
disclosures about intangibles. 

Some in the community of financial statement preparers--generally U.S.
corporations and their trade groups--oppose FASB's taking on the performance
reporting and intangibles projects. Instead, they suggest the accounting
board should begin rulemaking on liability and revenue recognition and what
the Institute of Management Accountants (IMA) labels "FASB
Codification/Simplification."  FASB board members and IASB's liaison to the
U.S. board, James Leisenring, said they know what codification means. The
name signifies a collection of FASB's authoritative literature and GAAP in
general that should be collected in "one comprehensive format," as IMA's
Financial Reporting Committee wrote in a Sept. 19 letter to the accounting
board. 

However, several board members and Leisenring, FASB's former vice chairman,
regarded arguments for simplification warily, as shown by their comments
Oct. 24.  "I know what codification is," said Leisenring. "I don't know what
simplification is." He and FASB members Neel Foster and Katherine Schipper
suggested they know what simplification could mean, but did not elaborate,
instead making veiled references to moves such as requiring full fair
value-based recognition of financial instruments in the income statement,
widely opposed by banks and corporations.

Simplification a Complicated Effort
"I also know that isn't what they want," Leisenring said of advocates of a
simplification project. He suggested that, if such a project is anything
like IASB's current effort to improve existing international accounting
standards, simplification would prove not so simple--and would consume
hundreds of hours of staff time "if it's a serious endeavor."  Foster
labeled arguments that FASB should begin a simplification effort "an attempt
to tie this organization up for the next 20 years." 

Schipper, who alone objected to Jenkins's compromise on the intangibles
project, said the board should begin the rulemaking on disclosures about
intangibles "immediately" and proceed "full speed ahead." 
Schipper cited the lack of comparability in current reporting on purchased
intangible assets, which are accounted for under FASB's new rules on
business combinations, and on intangibles that are internally generated. The
latter and their values often are not reflected at all in financial
statements, although they are said to be key drivers in the so-called "new
economy." 

In-process research and development, which figured prominently in mergers
and acquisitions in the high technology sector, "needs a very strong look,"
she added.  Schipper, a former accounting professor at the University of
Chicago and Duke University, said of accounting for intangibles: "This issue
has been studied up and down, left and right, ... from floor to ceiling.
"You may think [the academic] research is stupid and misguided. I don't,"
she said in urging a quick start on standard-setting.

Other Action by FASB
In other action at its Oct. 24 meeting, the board tentatively decided to: 

	*	reactivate its dormant project on costs associated with
activities stemming from disposal of a factory or other hard asset used in a
discontinued business operation and reconsider all of the guidance in Issue
No. 94-3 of FASB's Emerging Issues Task Force, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity,"
including one-time employee termination benefits and other restructuring
costs; 

	*	issue draft rules in mid-November to rescind FASB Statement
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and to make
miscellaneous technical corrections, including non-substantive changes to
FASB Statement No. 13, Accounting for Leases, and amendments related to FASB
Statements No. 141, Business Combinations, and No. 142, Goodwill and Other
Intangible Assets; and 

	*	consider at an upcoming meeting plans to revive--and most
likely head in a different rulemaking direction than previously pursued--the
board's 20-year-old project on consolidations policy, or defining when an
affiliate of a company should be deemed a subsidiary and have its activities
included in the financial statements of the parent.

In previous incarnations of FASB, an accounting model based on control of an
entity did not garner enough support to advance to a final accounting
standard and was criticized strongly by FEI and others. The control-based
model departed from the traditional majority equity ownership model, which
several FASB members suggest is not followed in current practice despite its
standing as accounting gospel.


Railtrack, Swissair First Test of Europe's Default Swap Market
Bloomberg - October 2001
By Tom Kohn

Europe's $250 billion market for credit default swaps, a form of insurance
against companies missing their debt payments, is getting its first test as
Railtrack Plc and Swissair Group wrestle with insolvency. 

Credit default swaps let banks and other investors juggle the risk that a
bond or loan won't be paid back. The buyer of such protection pays an annual
premium, and the seller pays if there's a so-called credit event, such as a
company going bankrupt. 

``Railtrack is the bigger of the two tests to the overall market,'' said
Dale Lattanzio, head of structured credit trading at Merrill Lynch & Co.
``While the government said the bonds will be OK, under the terms of the
contract it triggered a credit event, and the credit derivatives market is
treating it'' as such. 

Britain's government seized control of Railtrack on Sunday to stop the owner
of the U.K.'s rail network going bankrupt. It would have debts of 700
million pounds ($1 billion) by December and 1.7 billion pounds by March,
government lawyer David Richards told the High Court. Railtrack owes
bondholders more than $2.2 billion. 

Swissair is seeking bankruptcy protection after running out of money Oct. 1.
Europe's seventh-biggest airline owes bondholders $2.6 billion. The
company's market value is currently $48 million, after its shares fell 97
percent this year. 

Settling Claims 

Default swaps traded for both companies, and were triggered by the
announcements. 

``We're going through the process of settling claims,'' said Lattanzio.
``There's a broad agreement in the London-based credit derivatives market,
and it's been fairly orderly with no market disruptions.'' 

Sellers of credit protection aren't likely to refuse to pay out on their
contracts, traders said. Still, because the companies' near-bankruptcies
sparked swap payments it will test the legal contracts on which the banks
rely. 

Credit derivative agreements depend on legal documents developed by the
International Swaps and Derivatives Association, which represents about 540
securities firms. Banks use ISDA contracts for credit default swaps to
ensure their agreements won't collapse if unexpected events occur. 

ISDA defines a credit event as ``bankruptcy, failure to pay, obligation
default, obligation acceleration, repudiation or moratorium, and
restructuring.'' 

``The likelihood is that the documentation should stand up,'' said Ruth
Ainslie, senior policy director at ISDA in New York. She said that depends
if banks used ISDA agreements and ``whether or not they have been radically
changed.'' ISDA has received legal opinions on Swiss and U.K. jurisdiction,
because ISDA contracts cover a ``very broad range'' of agreements, she said.


`Consternation' 

The U.K. government plans to transfer Railtrack's bonds into a new company,
rated at least ``BBB'' by Standard & Poor's and ``Baa2'' by Moody's.
Bondholders would get interest and be repaid when the debt matures at
``broadly'' the same terms, Transport Secretary Stephen Byers said this
week. 

``Initially there was consternation when Railtrack was put into
receivership,'' said Ned Swan, a partner and derivatives specialist at law
firm Simmons & Simmons. Still, ``it's a major company with major assets. It
was a surprise, but these things will be worked out.'' 

The Bank of England estimates the credit derivatives market has a face value
of about $1 trillion, with credit default swaps accounting for about half
the market. London trading accounts for ``just under'' half the market. Up
to 2,000 swaps on companies are traded, with 500 to 1,000 trading
``actively.'' the bank said in a June report. 

The central bank cited British Bankers' Association and U.S. government
figures as well as its own estimates. The U.S. Office for the Comptroller of
the Currency reported U.S. commercial banks had credit derivatives with a
face value of $351 billion at the end of the second quarter. 

U.K. securities watchdog the Financial Services Authority monitors the banks
trading credit default swaps, though doesn't regulate credit derivatives. 

``We don't regulate it as a product,'' said Karin Loudon, an FSA
spokeswoman. ``It's up to the banks to manage their own legal risk.'' 

UBS AG sued Deutsche Bank AG for $10 million at Britain's high court in
March for failing to pay on a default swap when Armstrong World Industries
Inc., the U.S.'s biggest vinyl-flooring maker, defaulted on its debt. 

The dispute centered on Armstrong's name, because the contract referred to
its parent company, Armstrong Holdings Inc., according to the court filing.
The two banks settled the suit March 15. An FSA spokesman said at the time
that regulators don't typically intervene in such cases because banks
usually resolve disputes among themselves. 


Canada Publishes Final Regulations To Implement Financial Services Framework

BNA - October 25, 2001

OTTAWA--The Canadian government has implemented new framework legislation
for the financial services sector, including domestic and foreign banks,
trust companies, insurance companies, credit unions and other financial
institutions, Secretary of State (International Financial Institutions)
James Peterson said Oct. 24. 

Implementation of Bill C-8, An Act to establish the Financial Consumer
Agency of Canada and to amend certain Acts in relation to financial
institutions, coincides with the publication of a finalized package of
regulations necessary to give effect to the legislation's provisions,
Peterson said in a statement. 

"The measures contained in Bill C-8 will help to ensure that the Canadian
financial services sector continues to be among the safest and most
accessible in the world," he said. "The legislation will promote efficiency
and growth in the sector, foster international competitiveness and domestic
competition, empower and protect consumers of financial services, and
improve the regulatory environment." 

The legislation also creates the Financial Consumer Agency of Canada, which
begins operations Oct. 24 and will enforce compliance with the legislation's
consumer provisions and educate consumers on how the legislation benefits
them, he said. The new agency has been in the public spotlight recently as a
necessary element of the federal government's efforts to track down and
freeze assets in Canada of international terrorist organizations. 

The Department of Finance published the finalized package of 75 regulations
in the Oct. 24, 2001 issue of the Canada Gazette, Part II. The regulations
are particularly important because a key element of the new financial
framework is the use of regulations to provide a more flexible regulatory
environment for the financial sector, said a regulatory impact analysis
statement published with the finalized regulations. 

"This allows the government to make modest policy adjustments to the
framework in response to significant changes taking place in the global
environment in which financial institutions operate. Many regulations are
being proposed or modified in order to achieve this policy objective of
creating a more flexible regulatory regime," the impact analysis statement
said. 

The current proposals are the first of several packages of regulations that
will be brought forward to implement the policy intent of the new Act, and
will include regulations essential to operation of the legislation, it said.


Of the 75 regulations, 37 relate to the new framework's restructuring of the
permitted investment regime, while 18 are related to the new holding company
regime for financial institutions, six relate to creation of the new
Financial Consumer Agency of Canada, six relate to changes to the foreign
bank regime and the remaining eight are aimed at various other policy
objectives, it said. 

Key areas of the regulations relate to the activities of banks include: 


	*	definition of "aggregate financial exposure" for banks
engaging in certain transactions with related parties that are not federally
regulated financial institutions; 

	*	limits on the commercial lending activities of financial
institutions other than banks; 

	*	requirements for financial institutions to inform customers
with a complaint about a product or service on how to contact the Financial
Consumer Agency of Canada; 

	*	exemption of certain classes of entities from the status of
being an entity associated with a foreign bank and exemption of certain
classes of entities from the definition of foreign bank; 

	*	definition of the term "equity" when used in dealing with
ownership rules for banks and demutualized insurance companies; 

	*	rules on the investment powers of entities in which a
financial institution holds more than 10 percent of the voting shares or 25
percent of the equity, but not control; 

	*	definition of "financial leasing"; 

	*	prescription of a range of information-processing activities
permitted for banks and authorized foreign banks, including payroll
processing, clearing and management of deposit accounts; 

	*	prescribed limits for the amounts of real property and
equity investments permitted for financial institutions; 

	*	rules governing the ability of an entity to identify itself
as a member of a group in describing its corporate relationship with a
foreign bank; 

	*	prohibitions that apply to a foreign bank's real property
activities outside of its authorized foreign bank branch; 

	*	rules governing the content of a prospectus; 

	*	expansion of the scope of commercial companies in which
financial institutions are permitted to invest, subject to a number of
constraints and caps; and 

	*	provisions permitting regulated securities entities to hold
shares of a parent bank holding company to a limit of one percent of the
bank holding company's regulatory capital.

End Of Cantor Treasurys Quotes On Telerate Causes Bother
Dow Jones - October 25, 2001
TOKYO -- Some Japanese institutional investors were a little peeved Thursday
when information provider Telerate stopped offering Treasurys' pricing from
major inter-dealer broker Cantor Fitzgerald Securities, but the change
hasn't hampered trading of U.S. government debt, said Tokyo traders.

Telerate, owned by Moneyline, stopped posting Cantor Fitzgerald real-time
U.S. Treasury bond pricing on its screens globally from 5:00 p.m. EDT
Wednesday. The information and data provider said it would replace the
service with price quotes from rival inter-dealer broker BrokerTec Global
LLC. But as of 0700 GMT (3:00 a.m. EDT Thursday) the display remained blank.
The reason for the change wasn't immediately clear.
"Investors have called in to say it's inconvenient that they can't check the
Cantor page (on Telerate) and have asked about prices," said a foreign
securities house trader in Tokyo. "They are now logging onto the Cantor's
website or having to set up a Cantor page on a Bloomberg terminal."

Apart from a bit of hassle suffered by some investors, however, impact on
trading was limited.
Even with comprehensive on-screen price data investors will typically phone
up several brokerages to get bond price quotes before deciding to trade,
said a trader at a large Japanese insurance company. Losing access to price
indications wouldn't change that practice, he added.

Brokerage and bank Treasurys dealers, and their colleagues in the swaps
market, were unaffected as apparently none of them rely solely on the
Telerate service for U.S. debt security pricing information, traders said.
Telerate continues to provide limited non real-time U.S. government bond
pricing data from Cantor Fitzgerald and other brokers on a separate display.


The Case for Catastrophe Bonds
The New York Times - October 25, 2001
By Hal R. Varian

The insurance industry faces claims of at least $40 billion tied to the
World Trade Center attacks, and it remains exposed to significant risk from
future incidents. Retail insurance companies are considering exclusions for
terrorist damage, leaving property owners unable to buy the coverage they
need.

The problem lies in the reinsurance industry, the wholesale market where
insurers lay off large risks to pools of investors willing to absorb them.
Warren E. Buffett's reinsurance company, General Re, has done well in the
last few years offering property reinsurance because there have not been
major hurricanes or earthquakes. But its luck ran out last month: General Re
has said it is liable for over $2 billion of the total industry losses in
the Sept. 11 attacks.

Earthquakes and hurricanes, unpleasant as they are, present manageable
risks: insurers know roughly how often they occur in various places, what
their likely magnitudes are and how much property damage might be expected.

Terrorist risk is much harder to quantify, leading to the current paralysis
in the reinsurance market. The insurance industry has been lobbying in
Washington to make the federal government the insurer of last resort against
terrorism, which means that taxpayers will end up bearing the financial risk
of future attacks.

Britain adopted a government-backed reinsurance market several years ago
and, so far, it has worked reasonably well. But there is another way to
supplement traditional reinsurance markets that has been attracting
increasing attention: catastrophe bonds. These bonds, generally sold to
large institutions, have typically been tied to natural disasters, like
earthquakes or hurricanes, but they could, in principle, be used to provide
financial backing for terrorism insurance.

Here is how they work. A financial intermediary, like a reinsurance company
or an investment bank, issues a bond tied to a particular insurable event,
like a Los Angeles earthquake. If there is no earthquake, investors are paid
a generous interest rate. But if the earthquake occurs and the claims exceed
an amount specified in the bond, investors sacrifice their principal and
interest.

How generous does the interest rate have to be? That is left up to the
market. If the bond sales offer cheaper reinsurance coverage than do
traditional private placements used in the reinsurance market, these bonds,
known as cat bonds, are a preferred method of finance.

Cat bonds are a form of "contingent security," a concept first formulated by
Kenneth J. Arrow of Stanford University, winner of the 1972 Nobel in
economic science. 

Back in 1952, Professor Arrow came up with the idea of a security that would
pay a fixed amount of money depending on whether or not some event occurred.
He showed that portfolios of such contingent securities could be used to
allocate virtually any kind of risk in an efficient manner.

The analysis by Professor Arrow was long thought to be of only theoretical
interest. But it turned out that all sorts of options and other derivatives
could be best understood using contingent securities. Now Wall Street rocket
scientists draw on this 50-year-old work when creating exotic new
derivatives.

There are a number of special cases of contingent securities. Consider a
security tied to my house burning down. This would certainly affect my net
worth, but would have negligible impact on the owners of the other 70
million housing units in the United States.

This kind of personal risk can easily be shared among many people, each
paying only a small amount if the event occurs, and homeowners insurance is
to ease this kind of risk sharing.

This works fine for small independent risks, but there are other sorts of
events that impose large costs on many people at the same time, like
earthquakes or hurricanes. Insurance companies are able to deal with such
events using reinsurance markets, where the risk is transferred to large
investors.

There are other financial institutions that also allow for risk transfer for
this sort of widespread risk. The orange juice futures market in Chicago is
essentially a market in a contingent security tied to whether it freezes in
Orlando, Fla.

A futures market allows market participants who bear a significant risk
(like farmers worried that their crop might be destroyed) to transfer some
of that risk to others, who are, of course, paid to absorb it. The futures
market allows shifting of risk rather than a simple sharing of risk.

Risk sharing and risk shifting are familiar terms, but there is another
phenomenon worth noting, something I like to call "risk shafting." This is
when some risk - often a particularly large risk - is transferred to a third
party who is forced to bear it involuntarily.

In many cases, these third parties are taxpayers, who are not even aware of
their potential liability.

Hence the debate that is going on in Washington now: should the insurance
industry be able to transfer the risk from future terrorist attacks to
taxpayers? Or would it be better to use existing reinsurance markets or new
financial instruments like catastrophe bonds to shift the risk to those
willing and able to bear it if appropriately compensated?

Cat bonds have some attractive features. They can spread risks widely and
can be subdivided indefinitely, allowing each investor to bear only a small
part of the risk. The money backing up the insurance is paid in advance, so
there is no default risk to the insured.

As the market for cat bonds matures, secondary markets may develop,
particularly if the bonds become standardized and bundled into portfolios.
If so, the market price of cat bonds will reflect the market perceptions of
the likelihood of the event associated with the bond, just as price changes
on the orange juice futures market reflect the likelihood of a freeze in
Florida.

The market for cat bonds is still immature, and is only a fraction of the
size of traditional reinsurance. But cat bonds and other sorts of contingent
securities may well end up being part of the long-run solution to the
problems of the reinsurance industry.

**End of ISDA Press Report for October 25, 2001**

THE ISDA PRESS REPORT IS PREPARED FOR THE LIMITED USE OF ISDA STAFF, ISDA'S
BOARD OF DIRECTORS AND SPECIFIED CONSULTANTS TO ISDA ONLY.  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 and Media Relations
International Swaps and Derivatives Association 
600 Fifth Avenue 
Rockefeller Center - 27th floor 
New York, NY 10020 
Phone: (212) 332-2578 
Fax: (212) 332-1212 
Email: smarra@isda.org