ISDA PRESS REPORT - NOVEMBER 26, 2001

ASIA
	*	Korean Regulation Change Will Allow Onshore Equity -
Derivatives Week

CREDIT DERIVATIVES
	*	Condensed default swap confirmation launched - IFR
	*	Banks move to boost credit derivatives liquidity - Risk News
	*	Fitch Plans Credit Hiring Spree - Derivatives Week

REGULATORY
	*	Cross-Border Security Transactions Costing More Than
Domestic Ones, EC Says - BNA
	*	Enter the FSA - Financial Times
	*	FSA to open securitised derivatives to retail sector - Risk
News

TAX
	*	Dealers hope for clarity on swap books - IFR

Korean Regulation Change Will Allow Onshore Equity 
Derivatives Week - November 26, 2001

The Financial Supervisory Service in Korea will permit local securities
houses to trade over-the-counter equity derivatives next July; a move that
players said will bolster the market. "[The regulations] will strengthen the
competitiveness of the securities companies and offer investors a greater
range of choices in the financial market," said Lee Young Gi, associate in
the securities supervision department of the FSS in Seoul. 

"More participants will lead to greater liquidity," said Charles Chiang,
equity derivatives trader at Nomura International in Hong Kong. He continued
that offshore flow products such as index options and equity swaps for the
Korean market totaled about USD100 million this year. Chiang added that with
the new regulations enacted, the Korean OTC market is set to grow, likely
expanding by over 50% in the first year and substantially higher after that.
"We've been waiting for this for a long time," noted one equity derivatives
regional head at a global firm in Hong Kong. "This is good news," he
continued, "this will in effect open up the onshore market for international
players." Currently, international firms trade primarily in the offshore
market. 

Condensed default swap confirmation launched
IFR - November 24, 2001

IP Morgan Chase and Morgan Stanley last week introduced a credit default
swap master agreement to the European market, which reduces documentation to
a one-page confirmation form.

The master agreement is based on the 1999 International Swaps and
Derivatives Association credit derivatives definitions, but 22 of the 30
clauses that are typically subject to agreement are standardised under the
shorter master agreement, leaving only eight clauses to be agreed for each
trade.

The two banks said that use of the new master agreement would allow quicker
trade confirmation, reduce operational risk and should eventually improve
market liquidity. They did their first trade using the new master agreement
last Tuesday and had closed a total of six deals using the new form by
Friday. The two banks' London offices typically trade credit derivatives
with one another five to 10 times a week.

The new agreement had not been adopted by any other dealers by the end of
last week, and traders expressed some surprise that the two US banks had
launched the document on their own, without consultation under the aegis of
trade group ISDA. "That would have taken quite a long time, and at the end
of the day these are bilateral contracts," said Guy America, European head
of credit derivatives trading at JP Morgan Chase.

Both banks intend to use the agreement in their default swap trades with
other dealers and expect it eventually to prove popular throughout the
market.  "I don't see any reason going forward why it would not be rolled
out to end users of the product," said Annabel Littlewood, European head of
credit derivatives trading at Morgan Stanley.

She added that JP Morgan Chase and Morgan Stanley have agreed to use the new
master document in trades between their New York dealing desks, with
amendments to be made for local market practice.
US dealers typically use the modified definition of restructuring as a
credit event, and two weeks ago they dropped the use of the obligation
acceleration clause as a standard feature of default swaps.

Banks move to boost credit derivatives liquidity 
Risk News - November 23, 2001 
By John Ferry

JP Morgan Chase and Morgan Stanley have agreed to standardise most of the
items on their European credit swap master agreements, in a move designed to
increase liquidity in the credit derivatives market.

By cutting the widely used International Swaps and Derivatives Association
(ISDA) documentation down from several pages to just one, the banks aim to
minimise the time taken to execute and confirm a trade while reducing
documentation risk. "Frequent credit swap traders will be able to increase
the volume of confirmed trades, thereby increasing market liquidity and
growth of the credit derivatives business," said the banks in a joint
statement. 

Standard ISDA master agreements for credit swaps have 30 negotiable items.
JP Morgan and Morgan Stanley's shortened version leaves only eight items
open to discussion. The banks said the one-page confirmation form contains
only the "key commercial terms", including the name of the underlying
company, the notional involved and the price and duration of the trade. The
banks claim this will eliminate the risk of a party missing a modified term
or adding terms that were not previously agreed. 

Guy America, head of European credit derivatives trading at JP Morgan Chase
in London, said the development of the credit derivatives market will
receive a boost as a result of the agreement. "The new agreement now looks
very similar to an interest rate swap contract," he said. 

Annabel Littlewood, head of European credit derivatives trading at Morgan
Stanley in London, said it took around a year to finalise the agreement.
"It's been quite a struggle getting to the point where dealers agree on the
major terms in the contracts."

Fitch Plans Credit Hiring Spree
Derivatives Week - November 26, 2001

Fitch plans to hire six or seven collateralized debt obligation
professionals for its London-based CDO rating team because of the increase
in the number of deals coming to the market. Mitchell Lench, senior director
in London, said it has about 15 CDOs in the pipeline this month in
comparison to five or six this time last year, approximately one-third of
these are synthetic or balance sheet transactions.

Lench expects the new recruits to start in the first half of next year and
to come from structuring houses, investment firms or competitors. The hires
will include a lawyer familiar with the International Swaps and Derivatives
Association's documentation. There are currently 10 professionals in the CDO
team in London. Lench said it is becoming easier for rating agencies to hire
top personnel because the wage differential between the agencies and the
sellside firms has decreased. He added recruits also join rating agencies
for job security and to get a bird's eye view of the market.

Cross-Border Security Transactions Costing More Than Domestic Ones, EC Says 
BNA - November 26, 2001

Despite an increase in the demand for securities by foreign investors
because of the euro, there is a highly fragmented system in the European
Union when it comes to cross-border clearing and settlement, concluded a new
report published Nov. 23 on behalf of the European Commission. 

Moreover, the cost of clearing and settling a foreign security transaction
can be 10 times as much as a domestic sale.  "There is no European financial
market right now and one has to wake up to this reality," said Alberto
Giovannini, the chairman of a group that wrote the report.

Legislative Proposal Planned

As a result of the report, the EU executive body said it will begin a
legislative process in 2002 to reverse the inefficiencies in the EU system.
At the same time, the commission urged financial markets to find
market-based solutions within the framework of the EU competition law. 

"The additional cost and risk associated with a fragmented clearing and
settlement infrastructure represents a significant limitation on the scope
for cross-border securities trading in the EU," said EU Economics
Commissioner Pedro Solbes. "By extension it also represents an important
limitation on exploiting the economic benefits of the internal market and
the euro."

Three Main Problems Cited

The three main problems highlighted in the report are as follows: 

	*	national differences in technical requirements and market
practice; 
	*	national differences in tax procedures; 
	*	issues relating to legal certainty.

While the report says financial markets could do much when it comes to
convergence and ensuring inter-operability as regards technical requirements
and market practices across national systems, it is up to governments and
the European Commission to deal with matters related to taxation and legal
certainty.

Enter the FSA 
Financial Times - November 26, 2001

Midnight on Friday will be a historic moment for Britain's financial
services industry. At that hour its new system of regulation under the
Financial Services Authority will come fully into effect, more than four
years after it was first proposed by the Labour government. How the FSA
handles its new powers, such as personal fines for wrongdoing by directors,
will have a profound impact on the City of London and its place as a global
financial centre. It will be closely watched by countries considering a
similar move.

The legislation that created the FSA - rightly amended to curb its powers to
punish - is broadly sensible. The authority replaces 10 self-governing
industry bodies that have not always regulated consistently or with
sufficient bite. The aim is to make regulation more efficient and more alert
to the scandals that have regularly plagued the City.

The legislation leaves wide discretion to the authority. But Sir Howard
Davies, its chairman, has promised a new and sensible risk-based approach:
resources will be focused on preventing problems where failure is most
likely rather than on routine visits to well run companies. Better
businesses should enjoy a lighter regulatory touch.

That is fine in principle but the City awaits the new policeman with
apprehension. There are three main worries. First, that it will prove
heavy-handed. There are widespread complaints that while senior FSA staff
are excellent, more junior ones still suffer from a box-ticking mentality.
Compliance costs, it is said, have been rising - a particular worry for
small companies. Second, there is concern that the authority may stretch
itself too thinly. A recent report on Equit-able Life criticised the FSA's
role, including its poor internal co- ordination.

Third, there is a fear the FSA will adopt an excessively aggressive approach
in its pursuit of wrong-doing, particularly for the newly created offence of
"market abuse", and might go for some early high-profile scalps. The
authority denies this, as well it might. A reputation for inquisitions would
serve it ill.

Some of the City's concerns stem from natural tensions between regulator and
regulated. But the FSA, which can sometimes appear overly sensitive to
criticism, needs to be alert to these anxieties if it is to start on the
right note.

The main test will be to produce a flexible, low-cost regime that is firm
yet fair, while encouraging innovation and London's growth as a global
centre. This will be a difficult balance - but the FSA's short life so far
offers hope that it will get it broadly right.

FSA to open securitised derivatives to retail sector 
Risk News - November 21, 2001
  
The UK's financial watchdog, Financial Services Authority (FSA), plans to
allow retail investors to invest directly in securitised derivatives for the
first time by initiating a flexible listing regime.

The proposals, which will be relevant to issuers of listed securities and
derivatives, have been released in a consultation paper, 'Proposed Listing
and Conduct of Business Rules for Securitised Derivatives', after
discussions with market participants and international regulators. 

The idea to list retail covered warrants was first raised by the FSA in
January this year. The new proposals offer a wider and more flexible regime
that includes other types of derivatives. The paper details the
determination of who can issue securitised derivatives and the information
about these products that must be disclosed. 

The FSA's proposals focus on establishing the suitability of retail
investors to purchase securitised derivatives and the qualification of IFAs
(independent financial advisers) and brokers to advise on derivatives. The
listing of securitised derivatives will also include a risk warning with
full disclosure of the risks associated with these products, alongside
details of the product, how it works and how the investor's return is
calculated. Issuers of securitised derivatives will also need to be
regulated by the FSA and permitted to conduct business in derivatives. 

Ken Rushton, director of listings at the FSA, said: "Market participants
believe there will be a demand for these products, which are very popular in
some European countries. The FSA believes there is the potential for the
market in the UK for these products to be substantial if UK investors show a
similar appetite for these products as they have for other products such as
spread betting and options."
 
Dealers hope for clarity on swap books
IFR - November 24, 2001

Some clarification is expected this week on how the US courts may rule on
the Internal Revenue Service's challenge to dealers' methods for valuing
income from swaps. Closing arguments in Bank One Corporation v Commissioner
are set to begin on Wednesday.

Although no decision is expected before March or April next year, the nature
of the questions asked by the judge during the closing arguments may be
telling, industry executives believe.

The IRS's case is that the method for valuing First Chicago's swaps
portfolio between 1991 and 1993 included inappropriate downward adjustments
for credit risk and administrative costs. This, the IRS alleges; led the
dealer to underestimate the value of its income from derivatives, and
thereby reduced its taxable income base.  Bank One acquired First Chicago
more than three years ago.

Bank One claims that the method used was common practice at the time. In a
brief filed this summer the bank also said that its numbers were more
accurate with the adjustments than without. It is proposing to use an
adjusted mid-market approach to valuing income from swaps.

To the annoyance of some in the derivatives industry, the IRS's 600-page
brief submitted in September did not tell dealers what recipe they should
use for valuing income from swaps. "They only put forward a brief saying
that the way Bank One did it was wrong," one firm's lawyer said. "[The
government's position] can't be applied somewhere else. And it doesn't tell
an IRS agent how to audit [another dealer]."

The IRS was not under any obligation to come up with a better method, though
this would have been helpful, the lawyer said.  The problem with an
across-the board use of a mid-market approach of the type used by Bank One
is that banks using this approach rarely mark up their valuations because of
their own credit risk, said Darrell Duffie, a professor of finance at
Stanford University's business school who is one of two court-appointed
experts for the case.

One partial way to address this would be to disallow mark-downs from
mid-market value when a counterparty has the same or higher credit quality,
said Duffie. Under a slightly more refined guideline, banks would mark down
swaps based on the credit quality of its counterparty relative to its own
quality.

"For example, if an A rated bank issuing debt at 20bp over Libor signs a
swap with an A- counterparty issuing at 50bp over Libor, then the swap could
be marked down based on a mean (relative) loss rate of 50-20=30bp per year,
per dollar of expected exposure," said Duffie.

"This is not text-book perfect, but would capture the majority of the effect
of relative quality. [Also] it would not require new software, just a shift
in model inputs for mean loss rates."

**End of ISDA Press Report for November 26, 2001**

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