ISDA PRESS REPORT - MARCH 9, 2001

* BoE Clementi Wants More Transparency In Derivatives Mkts - Dow Jones
International News
* Swaps may move warns BIS - Financial Products
* Greenspan Encourages Banks Not to Exercise Too Much Caution - BNA
* ISDA seeks derivatives product documentation standard - Risk News
* OTC strength hampers new exchange issues - Risk News

BoE Clementi Wants More Transparency In Derivatives Mkts
Dow Jones International News
By Gonzalo Vina

LONDON -(Dow Jones)- Bank of England Deputy Governor David Clementi said
Friday that booming derivatives markets need to be more transparent to avoid
risks to the stability of financial markets.

According to prepared remarks for a speech to be delivered at a central
banking conference at the Bank of Italy in Rome, Clementi said the
documentation recording transactions in derivatives markets also needs to be
improved to avert wider shocks in financial markets.

"In the banking system, capital and liquidity management are crucial to the
management of these risks and have to be adapted to new circumstances,"
Clementi said.

"But the attention of central banks and regulators can't end there. Recent
developments in the credit transfer markets and the concerns identified
regarding risk management and documentation for credit derivatives
illustrate this," he added.

Clementi said one of the benefits of the rapid expansion of credit
derivative markets, worth around $600 billion a year, is that banks need no
longer remain exposed to their large customers.

But these same customers can now take on further exposure to other forms of
credit through these new instruments without increasing their borrowing.
This, he argues, makes it more difficult for creditors, shareholders and
regulators to assess risk.

Clementi warned that the documentation relating to many of these
transactions is often misunderstood or is taken to have different meanings
by different parties. He is also worried about how courts in different
countries would treat these contracts.


Swaps may move warns BIS
Financial Products - March 8, 2001
By Andrea Reierson

Consolidation in the global banking sector could make it harder to keep
swaps the preserve of the OTC marketplace and may push them onto a
centralised exchange, the Bank for International Settlements (BIS) said in
its quarterly review.

"Credit-conscious customers are losing their ability to diversify
counterparty credit risk, particularly in their derivatives transactions,"
the BIS said in its report for the fourth quarter of last year.
This increasing concentration of swap books may spark strong pressure for
swaps listed on an organised exchange where counterparty risk is taken by
the exchange's clearing house, BIS said.

Later this month, Liffe is to roll out futures contracts based on euro swaps
which will allow traders to hedge two-, five- and ten-year swap contracts in
the same way bond traders use futures to hedge positions.

BIS also noted the market shift in fixed income benchmarks from government
bonds to shorter-term instruments, particularly in the US. This comes amid
the trend of declining government debt issuance and debt buybacks while
financing grows among parastatal and private sector financing.

This would likely see derivatives exchanges introducing contracts based on
underlying assets such as corporate bonds and asset-backed securities.

In a study accompanying the quarterly review, the BIS found that private
instruments eclipsed government paper as a benchmark in the dollar money
market over the last two decades. And the bond market's shift away from
government securities may have continued even without the declining stock of
US government debt issuance.

Trading in interest rate swaps has risen relative to futures and options
trading in Treasury notes and bonds with transactions in coupon-bearing US
Treasuries peaking in 1998 while those in private instruments continue to
rise, the BIS said.

Global exchange-traded derivatives activity rose 6% in the fourth quarter of
last year to $91.5 trillion, buoyed by rising volumes of equity derivatives
trade while an increase in money-market transactions offset a decline in
government bond related trade, BIS said in its quarterly review.

For 2000 as a whole, the value of exchange-traded products rose 10% from the
previous year to $383 tr.  The value of Interest rate product transactions
also grew 10% to $339 tr.

Weakening stock markets and increased volatility boosted equity-related
trade, prompting increased hedging by investors, BIS said.

Expectations of easier monetary policy in the US led to buoyant activity in
short term interest rate products with the dollar value of US money market
contracts up 20%.

The continued expansion of the interest rate swaps market also underpinned
demand for money market products, typically the most common hedging vehicle
for swaps and swaptions.

By the end of June last year, the total notional amount outstanding of all
OTC derivatives stood at $94tr up 15% from the same period in 1999.

The notional outstanding amount of OTC single-currency interest rate
derivatives was $64tr, while OTC equity-linked derivatives posted a gain of
13% to $1.7 tr.


Greenspan Encourages Banks Not to Exercise Too Much Caution
BNA - March 9, 2001

Even as he acknowledged that lax credit standards can jeopardize banks'
solvency and have contributed to deteriorating bank earnings, Federal
Reserve Chairman Alan Greenspan March 7 cautioned bankers not to be overly
careful about making loans.

''Lenders and their supervisors should be mindful that in their zeal to make
up for past excesses they do not overcompensate and inhibit or cut off the
flow of credit to borrowers with credible prospects,'' Greenspan told a
convention of the Independent Community Bankers of America in Las Vegas.

Greenspan said community bank lending has had little to do with recent
contractions in loan quality. "Today's problems generally relate to
syndicated credits, especially those to leveraged borrowers," he said. "As
problems materialized, earnings fell significantly for some of the larger
banks, which in turn caused aggregate commercial bank industry earnings to
fall slightly during 2000, thus bringing to an end the industry's string of
ten consecutive years of higher earnings.

"Nevertheless, though the effects of these excesses are likely to continue
for much of this year in the form of moderately deteriorating asset quality
and earnings at some of the larger banks, these problems, one hopes, will
prove modest both by historical standards and relative to the resources of
these institutions."

Greenspan said bank regulators are paying close attention to smaller
commercial banks' increased real estate lending. "Though underwriting
practices appear to be much healthier today than they were in the 1980s and
standards have tightened somewhat recently, supervisors are paying
particular attention to community banks with concentrations that make them
materially vulnerable to a downturn in this market," he said.

Nevertheless, Greenspan was also somewhat critical of banks' lending
judgment. ''It is interesting to note that the length of the current
expansion, coupled with the absence of problem commercial loans until
recently, has led to some depreciation in both bankers' and supervisors'
skill in handling weakened or troubled credits,'' he said, referring to the
problem lending of the late 1980s and early 1990s.

To community bankers concerned that it has become increasingly difficult to
attract the deposits necessary to maintain a healthy lending portfolio,
Greenspan offered the other side of the coin: "It is also important to
recognize that the reduction in portfolio liquidity is more a product of
good business--high loan demand--than of the relatively slow growth in core
deposits."

Greenspan's comments further confirm earlier indications that he does not
support proposals to raise deposit insurance coverage provided by the
Federal Deposit Insurance Corporation above the current $100,000 per account
provided now. Recently, FDIC adopted the position that deposit insurance
coverage levels should be raised. Several bills pending in Congress would
raise coverage levels to $200,000 per account.

Banks O.K. With Basel

Lastly, Greenspan said most banks have submitted comments to the Fed in
support of the new Basel Accord, which recommends new capital standards for
banks. Responses to a request for comment related to the new Basel Accord
and an alternative proposal by the Fed that could simplify capital standards
for U.S. banks show that most banks prefer the Basel Accord, he said.

"The responses to date indicate that community banks in general do not
believe that the current accord is burdensome, mainly because the costs of
adapting systems and reporting for such an approach have already been
incurred," Greenspan said. "Indeed, some commentators indicated that a
change to an even simpler system would in itself be more burdensome than
sticking with the current regime."

The Fed, the Office of the Comptroller of the Currency, the Office of Thrift
Supervision, and FDIC issued an advance notice of proposed rulemaking on the
matter in October. Comment letters have indicated cautious support for
simpler methods of calculating capital adequacy, but not if "simplicity"
means meeting tougher capital criteria.

Many banks have also reported to the Fed that they are not in favor of a
stand-alone leverage ratio with much less complexity and reporting if it
means that bank supervisors would set the a minimum ratio higher than is
required by the current leverage standard, Greenspan said. "Many of the
responses indicated that was not a favorable trade-off, even though most
community banks have exceptionally strong leverage ratios," he said. "I
should emphasize that we are still analyzing your many excellent comments to
determine what kind of response we should give."


ISDA seeks derivatives product documentation standard
Risk News - March 8, 2001
By John Ferry

Members attending the International Swaps and Derivatives Association (ISDA)
conference in Houston this week reached general agreement that there is a
need to standardise derivatives 'master agreements' - legally binding
counterparty contracts.
"There was much discussion about reconciling the variety of product
documents for risk management purposes," said Ruth Ainslie, senior policy
director at ISDA, the global trade association that represents
over-the-counter (OTC) derivatives market participants.

The possibility of creating a single 'master master' agreement that covers
both physical and financial products was actively discussed, with advocates
citing such contracts would improve efficiency by simplifying the
negotiation process for market operators.

Doubts were expressed by some participants, however, regarding the
feasibility of developing a 'master master' contract, especially concerning
administration, legal and negotiation difficulties with cross-affiliate
master agreements.


OTC strength hampers new exchange issues
Risk News - March 6, 2001
By Christopher Jeffery

The continuing dominance of the over-the-counter (OTC) derivatives
marketplace has meant the plethora of new exchange-traded products
introduced in the past few years have had only limited success.

While a number of contracts like 10-year Treasury notes have seen
significant trading volumes, evidence collated by the Bank for International
Settlements (BIS) suggests that growth has been at the expense of other
exchange-traded contracts, and not due to an erosion of OTC activity.

"Few of the contracts introduced by established marketplaces in recent years
have met with an enthusiastic response, and the gains enjoyed by some
contracts have largely reflected a reallocation of business away from
traditional benchmarks," said BIS economist Serge Jeanneau in the
international body's Quarterly Review.

Jeanneau added that this trend was most acute in the US, where net
repayments of government debt combined with a shift of issuance to
intermediate maturities have affected the liquidity of the Treasury bond
contract and led to a near displacement by the 10-year Treasury note.

Europe, however, has also witnessed displacement activity.

"A reallocation of activity also took place in Europe in the late 1990s,
with Eurex capturing business in the long-term segment of the euro yield
curve and Liffe achieving dominance in the short-term area," said Janneau in
the report.

Janneau believes the falling number of non-government issues in the near
future will lead to exchanges introducing contracts based on corporate and
asset-backed securities. Examples of likely future behaviour include the US
Bond Market Association's move last September to develop proposals for a
corporate bond futures contract, and CBOT's efforts to introduce
mortgage-backed contracts.

Janneau added that he also expects exchanges to look at introducing
instruments based on broader fixed-income indexes and not just government or
corporate securities in the next few years. Many investment banks already
offer such services.


**End of ISDA Press Report for March 9, 2001.**

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Scott Marra
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ISDA
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