ISDA PRESS REPORT - MAY 16, 2001

* IRS Should Implement Broad Risk Standard In Hedging Regulations,
Witnesses to Urge - BNA
* EMB-BIS data show OTC derivatives activity slowed in H2 - Reuters
* Federal Home Loan Bank of New York meets full FAS133 compliance with
Principia Partners solution - M2 Presswire
* Cost Of Single-Stk Futures A Drawback, Says Ex-CFTC Head - Dow Jones
* CME, CBOE create joint venture on single-stock futures - M2
Presswire
* FASB offers options respite - Risk
* The FSA's hardliner - Risk
* Building society use of credit derivatives approved - IFR
* Default swap collapse opens arbitrage window - IFR
* Lightrade expands pooling points network - IFR
* ISDA Finalizes Credit Derivatives Restructuring Document - Dow Jones

IRS Should Implement Broad Risk Standard In Hedging Regulations, Witnesses
to Urge
BNA - May 16, 2001
By Alison Bennett

Proposed rules (REG-107047-00) on hedging transactions do not go far enough
in implementing a new risk management standard enacted by Congress, several
witnesses are expected to tell the Internal Revenue Service May 16.

Issued in January, the rules are intended to reflect changes under the
Ticket to Work and Work Incentives Improvement Act of 1999 (Pub. L. No.
106-170) for businesses entering hedging transactions (12 DTR G-10, L-25,
1/18/01).

That law changed the standard for qualifying hedging transactions from one
focusing on risk reduction transactions to one centered around risk
management transactions.

Several witnesses are expected to tell IRS officials at a hearing that the
proposed rules fall short of what Congress intended in implementing the new,
broader standard.

Broad Standard Favored

Andrea Kramer, McDermott, Will & Emery, Chicago, is expected to testify that
while the government did try to incorporate the new risk management standard
into the rules, its efforts did not go far enough.

"While the proposed regulations generally define a hedging transaction in
terms of the required risk management standard, many of the operative
provisions revert back to the risk reduction standard of the current
regulations," Kramer said in written comments to IRS.

Kramer said she objected to statements in the rules that "a transaction that
is not entered into to reduce a taxpayer's risk does not manage risk," and
others that she said "would, if adopted as final regulations, effectively
negate the statutory changes Congress thought it was making."

The McDermott, Will & Emery practitioner is expected to contend the final
regulations must be conformed throughout to replace the concept of risk
reduction with that of risk management. In addition, she will urge IRS to
provide examples of modern risk management activities that would constitute
qualifying hedging transactions.

Commodities Rule Requested

Earl Goldhammer, representing America's Energy Partner, is expected to make
similar points at the hearing.

In an outline submitted to IRS, Goldhammer said the final rules should allow
hedging treatment for certain commodities derivatives transactions entered
into in the normal course of business by commodities dealers.

According to the outline, qualifying transactions should:

* relate to a derivative valued in reference to a commodity also
handled by the dealer;
* fall within pre-approved controls on speculation set out in formally
adopted risk management policies; and
* not be identified by the commodities dealer as having been entered
into in its dealer capacity.

This proposal "recognizes the existence of appropriate and inevitable
differences between each dealer in commodities as to its risk tolerances and
risk management techniques," he said.

Weather, Energy Derivatives

Salomon Smith Barney Tax Director Mark Perwien, representing the
International Swaps and Derivatives Association Inc., New York, also is
likely to criticize the references to risk reduction found under the
proposed rules.

To properly implement congressional intent, Perwien said in an outline of
his testimony, the proposed rules should "extend hedging transaction status
to all transactions undertaken in the ordinary course of business that alter
the taxpayer's exposure to one or more of the risks inherent in the
taxpayer's core economic activities."

Perwien also is expected to urge IRS to provide hedge transaction status to
weather and energy supply derivatives. Likewise, he said in the outline,
"the service should permit hedges of dividend streams, overall
profitability, and other business risks that do not relate directly to
interest rate or price changes or currency fluctuations."

Insurance Concerns

Mark Canter, representing the American Council of Life Insurers, Washington,
D.C., will bring specific industry concerns to the hearing.

Canter is likely to assert that life insurer's utilization of gap hedging
transactions should be allowed hedging treatment because they are entered
into in the normal course of business to manage risk with respect to
interest rate changes.

Without a change to the proposed rules, "gap hedges of life insurers may be
inappropriately denied hedging treatment ... solely because of an unworkable
test in the preamble that requires them to be more closely associated with
liabilities than assets," Canter said in an outline of his oral comments.

The fifth and final witness, Linda Carlisle of White & Case LLP, Washington,
D.C., is expected to ask IRS to extend hedging treatment to risk management
transactions for services income derived from converting one commodity into
another.

Testifying on behalf of the Interstate Natural Gas Association, Carlisle
also will urge the agency to clarify that weather derivatives may hedge
price risks.


EMB-BIS data show OTC derivatives activity slowed in H2.
Reuters - May 15, 2001

BASEL, Switzerland, May 15 (Reuters) - Growth in the huge market for
over-the-counter derivatives slowed in the second half of 2000, with volume
of outstanding contracts rising just one percent from the end of June 2000,
the Bank for International Settlements (BIS) said on Tuesday.

Growth in the first half had been nearly seven percent.

The BIS bases its estimates on the "notional" amount of outstanding OTC
contracts, which totaled $95.2 trillion at the end of December.

Notional value reflects the size of the underlying transactions on which the
derivatives instruments are based.

The interest rate derivatives segment, the single largest in terms of OTC
traded instruments, had a notional value of $64.7 trillion at end-2000, 68
percent of the total market.

Swaps are the single largest category in the interest rate category,
amounting to $48.8 trillion at the end of December.

"In the specific case of the interest rate swap market, the deceleration in
growth was in sharp contrast to the very rapid pace of business seen since
the end of 1998," the BIS said.

Euro-denominated contracts accounted for $21.3 trillion or nearly one-third
of the total volume of interest rate derivatives outstanding at the end of
2000.

A seven percent drop in euro-denominated interest rate contracts was a major
factor behind slower growth in the second half, the BIS said.

The BIS cited financial sector consolidation, reduced issuance of some types
of domestic securities - including German Pfandbriefe, which are often
hedged with swaps - and "belated efforts by banks to clean up their pre-euro
legacy currency portfolios" as likely factors behind the drop.

Counterparties most affected by this were inter-dealer brokers, the BIS
added.

Meanwhile volume in dollar-denominated interest rate swaps remained buoyant.
That market, second behind euro-denominated swaps, accounted for $13.0
trillion in notional value at the end of 2000, up around 10 percent from
end-June.

GROWTH IN OTC STARTS TO LOOK LIKE EXCHANGE-TRADED BUSINESS

The BIS data show the pace of growth in the OTC market, which once
outstripped that seen for exchange-traded instruments, slowed after rapid
expansion in the past decade.

OTC derivatives volume based on notional value rose by 7.9 percent for all
of 2000, compared with growth in exchange-traded contracts of 5.9 percent.

The BIS gave no indication whether it thought the OTC market would pick up
again in the first half of 2001.

Its statistics also omit data on the fast-growing market for credit
derivatives .

While growth in notional value slowed in the second half, so-called gross
market values, which reflect the cost of replacing a derivatives contract,
rose by 24 percent in the same period to $3.2 trillion from $2.6 trillion at
end-June 2000.

"Estimated gross market values experienced the most pronounced increase
since the BIS began collecting data on the OTC market...," the BIS said.

The BIS, which serves as a bank to and forum for the world's central banks,
began collecting the data in 1998.

It gave no reasons for the discrepancy for the relatively rapid growth in
OTC gross market value.

The largest absolute increase here was seen in foreign exchange contracts,
which rose by $271 billion in the final six months of 2000. The BIS gave no
reason for the large increase in the gross market value relative to notional
amounts, which rose to $15.7 trillion for currency instruments, also up one
percent.

Currency activity picked up in the latter part of 2000, however, while a
drop in short-term interest rates relative to long rates could have raised
the value of interest rate swaps.


Federal Home Loan Bank of New York meets full FAS133 compliance with
Principia Partners solution
M2 Presswire - May 15, 2001

Jersey City, New Jersey -- Principia Partners LLC, a leading provider of
full front-to-back office systems for global capital markets, today
announced that the Federal Home Loan Bank of New York (FHLB New York) has
successfully implemented FAS 133 for the first quarter of 2001, using the
Principia Analytic System (PAS).

The Principia system enables FHLB New York to produce internal and external
derivatives reporting in compliance with the new accounting standards. PAS
is used to analyze potential transactions, value derivatives and related
cash items, summarize the accounting entries and assess the effectiveness of
the hedging relationships. The derivatives standards were established by the
Financial Accounting Standards Board (FASB) and effective as of the first
quarter of 2001. PAS also allows the bank's treasury and risk managers to
identify and hedge potential risk.

Patrick Morgan, controller, FHLB New York, states: "Our goal was to comply
with the FAS 133 regulations. In order to do this we had to find a vendor
that clearly understood our business and could integrate its solution with
our existing accounting infrastructure. The PAS product is well designed and
has met all our requirements. Our focus has always been to employ a
sophisticated, quick-to-implement and easy-to-use system. We truly believe
that we have chosen the best system and a vendor that can meet our present
and future needs." Theresa Adams, one of Principia's founding partners,
states: "Very early on we realized the importance of this major regulation
and released our FAS133 compliant version of PAS in the first quarter of
1999. We have created a system that seamlessly brings together both
accounting and pricing capabilities for assets, liabilities and derivative
instruments. We are delighted to provide such a successful and prestigious
organization as FHLB New York with full FAS133 compliance." FHLB New York
uses the PAS sub-ledger facility to mark derivatives and cash items to
market, link specific assets and liabilities with specific hedge
instruments, document hedge relationships and demonstrate the effectiveness
of hedging policies.

Adams concludes: " Derivatives end-users, such as corporations, insurance
companies and government entities need a thorough, well thought-out approach
to compliance that can be fully customized to reflect each client's unique
and changing FAS 133 interpretation. In addition to being ranked fully
compliant by FAS133.com and International Treasurer, we were also awarded
the highest ranking for system functionality. During the development process
we collated valuable advice from our end-user community about their needs
and concerns. This helped us design and implement what we believe is a
complete solution. Our aim is to continue providing a highly flexible
accounting function that gives our clients the ability to comply with the
new standard." END About Federal Home Loan Bank of New York The Federal Home
Loan Bank of New York is a AAA rated, congressionally chartered, wholesale
bank. It is part of the Federal Home Loan Bank System, a national wholesale
banking network of 12 regional, stockholder-owned banks. The Federal Home
Loan Bank of New York serves 300 community lenders in New Jersey, New York,
Puerto Rico and the U.S. Virgin Islands. The mission of the Home Loan Bank
is to advance housing opportunity and local community-based member-lenders
to serve their markets.

About Principia Partners

Founded by a group of finance and technology professionals, Principia
Partners offers a fully integrated front to back office solution for
management of financial assets, liabilities and derivatives . The Principia
Analytic System covers fixed-income (including ABS/MBS), FX and equity index
products. The sub-ledger facilitates full compliance with both FAS 133 and
IAS 39 accounting regulations. Principia's target market is composed of
end-users, dealers, fund managers and other entities that require
sophisticated processing capability without the desire or resources to
develop internal systems. For more information about Principia, see
www.principiapartners.com.

Principia Partners is headquartered at the Harborside Financial Center,
Jersey City, New Jersey, USA.


Cost Of Single-Stk Futures A Drawback, Says Ex-CFTC Head
Dow Jones Commodities Service - May 15, 2001
By Nicholas Elliott

NEW YORK -(Dow Jones)- Single-stock futures have drawbacks that may limit
their use, according to Philip McBride-Johnson, head of exchange-traded
derivatives at law firm Skadden, Arps, Slate, Meagher & Flom and a former
chairman of the Commodity Futures Trading Commission.

McBride-Johnson was speaking at the Third Annual Derivatives Expo Tuesday.

He pointed out that because single-stock futures, which were legalized under
the Commodity Futures Modernization Act passed last December, will be
regulated by both the CFTC and the Securities and Exchange Commission, the
costs of regulation will be higher than for other futures, or for options on
stocks.

For current users of options on stocks, McBride-Johnson noted that futures
on stocks entail a higher cost in margin payments, plus a standard fee paid
by options users to the SEC.

McBride-Johnson added that of the international exchanges that list futures
on stocks and options on stocks, the volume of options traded is 50 times
larger than on the futures.

He pointed out that the new law prohibits options on single-stock futures
for at least three years, another limit on the appeal of such futures.

McBride-Johnson stressed that he wasn't predicting failure for single-stock
futures, but outlining a possible limitation on their uptake.

On Monday, the Chicago Board Options Exchange and the Chicago Mercantile
Exchange announced a joint venture to list single-stock futures, which will
trade electronically.


CME, CBOE create joint venture on single-stock futures
M2 Presswire - May 15, 2001

CHICAGO -- The world's largest options exchange and the largest futures
exchange in the U.S. are teaming up to introduce a highly anticipated new
product single-stock futures contracts. The Chicago Board Options Exchange
(CBOE) and Chicago Mercantile Exchange Inc. (CME) today signed a letter of
intent to create a joint venture to introduce single-stock futures,
following approval by the boards of directors of both exchanges.

The Chicago Board of Trade (CBOT) has also agreed to participate in the
joint venture with a limited stake.

Legislation signed into law in December will allow the introduction of
single-stock futures by U.S. financial exchanges later this year, after an
18-year prohibition on the products.

"Today's announcement highlights the innovation and entrepreneurial spirit
among Chicago's exchanges," said CBOE Chairman and Chief Executive Officer
William Brodsky. "This exciting new initiative combines the best of
securities and futures trading. Our willingness to work together on this
venture will ensure that Chicago remains the worlds center in derivatives
trading and risk management."

"The creation of this joint venture recognizes the tremendous synergies of
CME and CBOE, making us a formidable competitor in the global marketplace
for single-stock futures," said CME Chairman Scott Gordon. "Our
complementary customer bases of retail and institutional investors will
benefit from the efforts of all three Chicago exchanges to establish deep
pools of liquidity in these products."

"I am enthused that Chicago's exchanges have worked so well together to
understand and address our customers needs and our members concerns," said
CBOE Vice Chairman Mark Duffy. "We have designed a product that, I believe,
will appeal to our customers, and a business structure that will provide
great benefit to our members."

"Our largest customers have emphasized the importance of collaboration
between the CBOE and CME to combine the capabilities, distribution and
connectivity of the futures and securities worlds," said CME President and
Chief Executive Officer Jim McNulty. "This alliance should also provide the
highest level of capital efficiency for our customers who trade in both
futures and options."

"The CBOT is pleased to work with the leadership of CBOE and CME in this
initiative to bring this exciting new product to our markets," said Nicholas
Neubauer Chairman of the Chicago Board of Trade. "The involvement of our
members and the access to our customers will make important contributions to
the success of this venture."

The joint venture will be a for-profit company, will have its own management
and board, and will be separately organized as a regulated exchange.

Single-stock futures will be traded electronically, and orders may be
entered through both the new CBOEdirect electronic platform and CMEs GLOBEX2
electronic trading system.

CME and CBOE officials said they are engaged in negotiations with the
Options Clearing Corporation (OCC), which clears all CBOE transactions, to
clear the new products. McNulty said the negotiations contemplate CME
becoming a special clearing member of OCC to provide access for CME clearing
members who are not members of the OCC.

The exchanges anticipate contracting with Designated Primary Market-Makers
(DPMs) in these products and expect that the board appointed to govern the
joint venture will determine the eligibility criteria, selection process,
rights, privileges and duration of such arrangements.

Single-stock futures are expected to bring new efficiencies to securities
trading, securities lending and corporate hedging activities. CME and CBOE
officials said they also expect to develop rules that would accommodate
block trading and exchange-for-physicals (EFPs).

The Chicago Board Options Exchange created and launched the first listed
options on stocks in 1973 and the first index options in 1982. Today, CBOE
lists options on more than 1,500 stocks and on over 40 indexes, such as the
S&P 500, the Dow Jones Industrial Average, the Russell 2000, the Nasdaq-100,
and the S&P 100. It remains the worlds largest and most successful options
marketplace.

Chicago Mercantile Exchange Inc. launched the first successful stock index
futures contracts on the S&P 500 in 1982. Today, CME trades futures and
futures options on indexes including the S&P 500, Nasdaq-100, S&P MidCap
400, Russell 2000, FORTUNE e-50' , S&P/BARRA Growth and Value Indexes, and
Nikkei 225, as well as its electronically traded E-mini S&P 500 and E-mini
Nasdaq-100 contracts the fastest growing products in the exchanges history.
CME also trades interest rate, foreign currency and agricultural commodity
products. On November 13, 2000, CME demutualized and became a for-profit,
shareholder-owned corporation.

CBOE is regulated by the Securities and Exchange Commission (SEC). CME is
regulated by the Commodity Futures Trading Commission (CFTC). Additional
information about the CBOE and CME can be found at their respective Web
sites: www.cboe.com and www.cme.com.
Except for the reported historical information, matters discussed in this
release are forward-looking statements that are subject to risks and
uncertainties. The factors that could cause actual results to differ
materially are discussed in CMEs filings with the SEC. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this release. CME undertakes no obligation to
publicly release any revision to these forward-looking statements to reflect
events or circumstances after the date of this release.

&P, S&P 500, S&P/BARRA Growth, S&P/BARRA Value, S&P MidCap 400, Nasdaq-100,
Russell 2000 and other trade names, service marks, trademarks and registered
trademarks that are not proprietary to Chicago Mercantile Exchange Inc. or
Chicago Board Options Exchange are the property of their respective owners,
and are used herein under license. The FORTUNE e-50 Index (the "Index") is a
trademark of FORTUNE, a division of Time Inc., which is licensed for use by
the Chicago Mercantile Exchange Inc. in connection with futures and options
on futures (the "Products"). The Products have not been passed on by FORTUNE
for suitability for a particular use. The Products are not sponsored,
endorsed, sold or promoted by FORTUNE.

FORTUNE makes no warranty and bears no liability with respect to such
Products. FORTUNE makes no warranty as to the accuracy and/or completeness
of the Index or the data included therein or the results to be obtained by
any person from the use of the Index or the data included.


FASB offers options respite
Risk Magazine - May 5, 2001
By Dwight Cass

The options market got a partial reprieve last month from an onerous
provision in the US Financial Accounting Standards Board's (FASB) new
derivatives accounting standard. FAS 133 requires companies to report option
premium volatility due to time value changes (theta) in their earnings.
End-users say this causes earnings volatility that many of them cannot
tolerate and which, they argue, makes no sense to report if they plan to
hold the hedge to maturity.

End-users are currently scaling back their use of complex options and
swaptions in favour of simpler hedging tools that qualify for FAS 133's
hedge accounting - which allows end-users to avoid reporting the effective
portion of a hedge's fair value fluctuations in earnings. Indeed, 21% of
end-users in a recent survey of about 1,300 US corporations and asset
mangers by Greenwich Associates, a Greenwich, Connecticut-based research
firm, said FAS 133 would cause them to reduce their use of interest rate
options, with 14% saying it would force a "significant reduction".

A handful of high-profile US derivatives end-users, led by home mortgage
securitisation giant Fannie Mae, lobbied unsuccessfully for a change in the
option provision last year. The group proposed that the time-value component
of an option's premium be amortised into earnings over its life.

Rejection
The FASB rejected this approach during its comment period for FAS 133 and
again last autumn, when the group pressed once more for an amendment (Risk
October 2000, page 14). After the years of controversy leading up to FAS
133's passage, the board is loath to reopen the standard for amendments.
Rather, the FASB's derivatives implementation group (DIG), a task force of
accountants and derivatives industry members that churns out advice on how
to implement FAS 133, has devised a guideline that skirts the need for an
amendment. "We are not amortising time value, as was proposed last year in
one of the amendments," says Timothy Lucas, director of research and
technical activities at FASB and chairman of the DIG. "There will definitely
be no amendment," he says.

The implementation guideline is no panacea. Essentially the DIG has proposed
that all changes in an options fair value be recorded under other
comprehensive income (OCI), a part of a company's equity account, until the
date that the hedged transaction affects earnings. Then the fair value of
the hedge should offset the fair value of the exposure. But the option must
match the underlying exactly - it must pass all FAS 133's effectiveness test
requirements. It must match the timing of the underlying cashflow and there
must be no basis risk.

FASB put the proposal out for a five-week comment period on April 16. Fannie
Mae and other end-users say they are scrutinising it and expect to submit
comments this month.


The FSA's hardliner
Risk - May 5, 2001
By Matthew Crabbe

Is there a schism between the New York Federal Reserve Bank and the UK's
Financial Services Authority (FSA)?

A speech delivered by William McDonough, president of the New York Fed and
chairman of the Basel Committee on Banking Supervision, to the annual
meeting of the International Swaps and Derivatives Association in Washington
last month, seemed to offer the prospect of a cut in the w charge - a 15%
capital floor on credit derivative positions - or even its full removal.

The Basel Committee may have confused legal risk with op risk in its
conception of the charge, McDonough said.  It seemed for a while as if the
derivatives business might have persuaded the Basel Committee to make an
historic U-turn on a charge that ISDA says will damage the credit
derivatives business.

If the w charge is anyone's idea, it is Oliver Page's. Page joined the Bank
of England in 1968 from Cambridge, and worked his way through the statistics
division, the forex division, the international division and then markets
supervision.

He moved with other supervisors to the new FSA in 1998, where he became
director of financial supervision for complex international groups - the
largest UK banks. Last month, that responsibility was expanded to include
major insurance companies and the division was renamed the major financial
groups division.

In recent speeches, FSA chairman Howard Davies has been hammering home the
message that insurance companies should be subject to the same prudential
standards of the Basel Accord as banks.

Page is also chairman of the Basel Committee's capital group, and one of
that group's sub-groups covers credit risk mitigation. This is the source of
the detail of the w charge (the w stands for "weight" - it was Page's idea
to label it so).

David Clementi, deputy governor of the Bank of England, has also been making
hawkish noises about the hidden dangers of the credit derivatives business.

Page says too much has been read into McDonough's speech. "This is a
consultative paper we are talking about," he says. "The operational risk
charge is a concept that still has to be fleshed out. Even the internal
ratings-based approach to credit calculations still has to be fleshed out.
And banks are only just waking up to the message that by October these
proposals will be decided."

But while everything is open to discussion, Page insists: "The w charge is
not a mistake. We [the Basel Committee] decided last year that if we could
locate capital charges closer to the risks then those charges would be more
accurate."

Speaking at an FSA-organised conference in London the following week,
McDonough failed to repeat the suggestion that the w charge could be about
to go. "I still think people are reading too much into what they think was
said in Washington about the w charge. There are some material risks there
and this is the solution that people on the Committee signed up for."

Page says the w charge is not just a knee-jerk response to last September's
loan restructuring by Conseco, the US insurer - a restructuring that
triggered default clauses under ISDA's standard documentation for credit
derivatives.

Even if it were specifically a charge for the legal risk involved in writing
credit protection, that doesn't mean it should not be charged separately,
but wrapped up in Basel's sweeping charge for operational risks, says Page.
And anyway, this is not a pure legal risk charge. "ISDA tried to get the
documentation for credit derivatives right twice, and now they are changing
it again. That's not about legal risk; it's about the risk that credit
derivatives do not pay out when people expect them to. It's about the
instability of the documentation."

As for the op risk charge, Page rejects the idea that banks should be able
to take out insurance instead. "Just because it's been laid off, the risk is
not zero," he says. "What is the evidence that insurance companies can lay
off the risk somewhere else?"

So, there may be differences in opinion among the Basel Committee's members
- but a deal was done. And if there are going to be any changes to the
proposals for a new Accord, they must be decided quickly, because the
proposals are going to be set in six months time.

This is a sensitive stage in the global regulatory process, the FSA
believes. The Basel Committee's January 1, 2004 deadline for the
implementation of the new Accord was seen as a concession to European banks
and their supervisors by the Fed. The FSA has told the EU it must move fast
if it wants its Capital Adequacy Directive, which parallels Basel's New
Accord, to be ready at the same time.

The FSA is not just worried that there will be an uneven regulatory playing
field for banks, with US banks being forced by the supervisors into their
own capital-efficient super-league while flabby European banks fall behind.

It also wants to stamp its authority as the all-embracing single regulator
for UK financial markets, responsible for consumer protection and the safety
of the financial system. The "nod and a wink" style of market supervision
that the Bank of England perfected over the years has gone, replaced by the
kind of bold statement favoured by US government agencies such as the
Securities and Exchange Commission.


Building society use of credit derivatives approved
IFR - May 12, 2001

The UK Treasury last week proposed legislation that would allow building
societies to use credit derivatives for risk management purposes UK building
societies are already active users of interest rate and currency derivatives
and wilt be able to hedge against borrower default if the legislation is
passed. The UK parliament has Just broken up ahead of the June 7 general
election, but a change in the law to extend the use of credit derivatives
could still K enacted later this year.

The most active debt issuers and hedgers among building societies have
converted from mutual status in recent years. With Halifax and Alliance &
Leicester among those following Abbey National in turning themselves into
listed banks. There are still 67 building societies in the UK, with total
assets of more than olb160bn, however, and credit derivatives dealers in
London can be exported to start pitching credit protection products to the
societies in advance of any actual change in the law

Nationwide is the biggest remaining building society in asset terms followed
by Britannia and Yorkshire.

Even assuming that legislation allowing credit derivatives use is passed,
building societies will not be able to use default swaps to take speculative
positions. The Building Societies Act of 1986 restricts derivatives use to
risk management purposes and sets out a list of risk factors where
derivatives use is permissible.


Default swap collapse opens arbitrage window
IFR - May 12, 2001
By Jon Macaskill

At least E5bn, and possibly as much as E15bn, equivalent of credit-linked
note issuance has been seen in the last month. The resulting offsetting of
short credit default swap positions has caused a sharp widening in the
negative basis between default swaps and the asset swap value of the
underlying debt in the secondary bond market.

Dealers with access to corporate bonds have been able to buy default swaps
at levels as much as 20bp under the asset swap value of the debt, and to
create synthetic packages for their clients where in effect the only risk is
to the counterparty on the swap. Credit derivatives dealers who chanced to
be flat have been turning huge profits by proprietary dealing - and from
sales of these packages to their favoured insurance company customers.

Deutsche Bank, Merrill Lynch, Bear Stearns and Citigroup have been among the
most aggressive sellers of default swaps in recent weeks, according to
dealers at rival houses, and their crossing of bid/offer spreads has driven
the negative default swap basis to bonds ever wider.

A E2.25bn credit-linked note issued by Deutsche Bank is typical of the deals
that have been fuelling this movement. The deal, Deutsche Bank Repon
2001-2014, offered exposure to 150 separate corporate credits, 51% from the
US and 49% from Europe.  Because Deutsche Bank had the deal rated, the terms
of the issue spread across trading desks in London and New York, and rival
dealers pulled hack their bids on default swaps in the relevant corporates.

Other banks were selling similar unrated (and therefore private) credit
linked notes at the same times, which led to a scramble to offset swap
positions.  Faced with a shortage of bonds in the secondary market, and repo
rates at 0% for some corporate issues forced to hit whatever bid was
available in the default swap market, pushing the negative basis for many
investment grade five-year default swaps from an 8bp-16bp negative basis to
a 12bp - 20bp basis last week.

This produced wild diversity between default swaps for corporates that had
seen their debt used for credit-linked notes, and similar companies that had
not. Lufthansa five-year default swaps were offered at 29bp late last week,
while British Airways offers in the same maturity were no lower than 50bp,
for example.

Many default swaps were also very low on an absolute basis. Single A rated
French pharmaceuticals company Aventis was quoted at 16bp/20bp for a
five-year default swap at the close of dealing on Friday, for example. Other
corporate default swaps were also at extremely tight levels, with
Rolls-Royce offered as low as 27bp in the five-year, Volkswagen at 26bp, BMW
offered at least as low as 26bp and Unilever at 21bp.

Run for the door

The movement was not limited to European credits. Offsetting of default
swaps led to the sale of negative basis packages in US names including
Sears, Bank of America and Philip Morris, with Bank of America trading at
levels below 40bp in the five-year, or less than half its trade point when
fears about US bank credit quality were at their height earlier this year.

General market sentiment that the worst of the current downturn in credit
quality has passed has amplified the effect of the default swap selling.
Investors are happy to hold corporate bonds, which has left dealers
struggling to buy paper to cover their positions as tentative to selling
default swaps.

"Everyone tried to run for the door at the same time," said one head dealer,
describing trading in recent weeks.  He predicted that the wide negative
basis between swaps and bonds will be a trading feature for some time.
Dealers worry that the banks which are selling default swaps most
aggressively are more synthetic credit linked notes. As long as they can
maintain a margin between the notes and the level at which they can offset
their exposure, they will keep hitting swap bids.

This collision of default swap offset needs, a bond shortage and improved
credit sentiment is working in favour of corporate treasurers. WorldCom
managed to sell the biggest deal yet from a US corporate last week, and saw
spread talk on what proved to be an US$11.83bn equivalent deal tighten ahead
of pricing.

An issue of this size would normally prompt a sharp widening in default
swaps on the relevant corporate, but WorldCom saw its five-year mid quotes
fall from 150bp two weeks ago to below l4Obp last week.

The decline in default swap quotes, and widening basis to asset swap levels
for bonds, has been restricted to Europe and the US so far. If sentiment
about the credit quality of Asian corporates improves there could be note
issuance and spread movement. The dealers who have been struggling to cover
their positions in the supposedly liquid US and European bond and swap
markets may be reluctant to try the same approach in Asia, however.

With the prospect of more issuance of credit-linked notes on US and European
corporates, and maintenance of the wide negative swap to bond basis, dealers
who are allowed to run proprietary positions - and their insurance company
clients - should reap further windfall arbitrage profits. The traders forced
to offset deals issued by their structured note departments face further
weeks of anxious hedging, however.


Lightrade expands pooling points network
IFR - May 12, 2001

The time it takes to deliver bandwidth between New York and Los Angeles will
soon get a little shorter. Lightrade, the neutral pooling point operator, is
expanding its network of pooling points, (the high capacity switches that
deliver bandwidth between buyers) from New York to Los Angeles.

The pooling centre is under construction at present, but plans are under way
to complete the connection by the end of June, according to Doug Minster,
vice-president of corporate development at Lightrade.

Lightrade, formed in November 1999, began establishing pooling points or
carrier hotels in most major US metropolitan cities to shorten the time it
takes to deliver bandwidth and provide the quality of service measurements
needed to efficiently connect all parties. Beginning with Seattle, Lightrade
operates its pooling points in cities including Philadelphia, Washington,
Atlanta, Miami, Chicago, Dallas and San Jose.

The pooling point operator is focusing on deploying seven or eight more
pooling point centres throughout the US with San Francisco-Denver and
Houston-Boston in progress. The company is also investigating opportunities
in Europe.

Energy companies are excited about the prospect of more pooling point
expansion, as that is one of the catalysts they believe will accelerate
bandwidth trading and derivatives use. "A carrier could bring in a large
pipe and split off and give smaller pipes to multiple, different entities,"
Minster said.

As much as 75% of the trading that is occurring now in the bandwidth market
is via Lightrade pooling points, according to an energy trader. The
Lightrade active switch equipment that can be controlled from a personal
computer is favoured by energy traders over alternative passive cross
connect panels that may be cheaper, noted another energy trader.

Mike Pardun, vice-president, marketing and development, at Colo.com, a
neutral co-location provider that offers facilities and power to carriers
and service providers including Lightrade, agreed that telecoms traders have
a particular need for multiple pooling point operators. "The Holy Grail of
bandwidth trading only becomes a reality when true multi-carrier bandwidth
on demand is enabled by seamlessly traversing multiple pooling points," said
Pardun.

As a neutral operator, Lightrade does not own any fibre, just the switches
that facilitate the faster buying and selling of bandwidth. It does not get
involved in any actual trading, but charges a port fee to connect to its
equipment and a delivery fee. Though Enron, El Paso and Williams
Communications all operate pooling points of their own, Lightrade is not in
direct competition with them. There is a natural disinclination for other
energy companies to want to do business with them since they are not a
neutral body. Some companies like Enron also use Lightrade pooling points.

Other carriers, however, do not have a compelling incentive to interconnect
with Lightrade, as they often prefer to avoid the pooling point middleman
and swap bandwidth among themselves. Some opposition to Lightrade also stems
from Lightrade's favouring of the trading community over the carriers, notes
Cob's Pardun.

He adds that Lightrade and bandwidth traders in general have not yet
convinced the carriers that matter that there is revenue to be had that tips
the balance away from the perceived threat of the commoditisation of
bandwidth.

Companies that have attempted to have neutral bandwidth trading platforms as
well as operate neutral pooling points have had conflicts arise.
RateXchange, the online trading exchange for bandwidth and futures products,
shut down its 12 neutral pooling points that were deployed globally for that
very reason.

The trading platform is often viewed as competing with online brokers and
conflicts existed in cultivating their business through the neutral pooling
point, according to Nick Coil, senior vice-president of trading operations
at RateXchange.

"It was not as much with the energy trading groups, but it was still an
issue," he adds. RateXchange has three pooling points in Europe that were
shut down last year and still have to be uninstalled.

Competition could conic from "virtual pooling points", that perform a
similar role as the neutral pooling points, but use software instead of
deploying a large unit. Companies such as Telseon are already breaking
ground with the use of high-speed gigabit ethernet services.

Pooling Points Corporation is also entering this market with the use of a
Teletrade Intelligent Platform that uses real-time analysis, but it is not
expected to be ready until later this year.


ISDA Finalizes Credit Derivatives Restructuring Document
Dow Jones - May 11, 2001
By Joe Niedzielski

NEW YORK -(Dow Jones)- The International Swaps and Derivatives Association
said Friday that it has finalized and published the restructuring supplement
to its 1999 ISDA Credit Derivatives Definitions.

The supplement, which was previewed in early April at the trade group's
annual meeting in Washington D.C., includes changes to what kind of
underlying financial instruments can be delivered in the event of a
credit-restructuring event.


"The Supplement represents the consensus of a diverse range of constituents
in the credit derivatives markets, including portfolio managers, credit
protection sellers and dealers," Robert Pickel, ISDA's executive director
and CEO, said Friday in a press release.

Credit default swaps are over-the-counter derivatives contracts that let
investors transfer the default risk on loans or bonds by selling it to a
third party for a premium that is derived from the notional amount of the
contract.

The language of these contracts generally allows protection buyers to
collect on their default swaps if a debt instrument such as a loan is
restructured and the underlying instrument's coupon is reduced, or its
maturity is lengthened. Buyers can also usually collect if there is some
other type of credit event that would make the loan economically impaired.

But the restructuring of loans last year made to Conseco Inc. (CNC) created
some stir in the market. Market participants who had bought default swap
protection on the Conseco credit were able to deliver cheap cash bonds to
dealers and receive par in exchange. Some of the maturities on longer-dated
bonds that were delivered far outweighed the maturity of the loans.

Some dealers then decided to remove the restructuring language from the
contracts on newly written business. Those dealers and others noted that the
Conseco example amounted to a "cheapest to deliver" opportunity that wasn't
the initial intent of how these contracts should be settled.

The primary change that ISDA and its credit derivatives market practice
committee announced in April limits the maturity of physical securities that
can be delivered if a restructuring event is declared.

Under the new supplement, credit protection buyers would be limited to
delivering physical securities with a maturity of less than 30 months
following the restructuring date, or to the extended maturity of the
restructured loan.

Since the supplement was previewed in April, ISDA's credit derivatives
market practice committee have worked to finalize several details in the
proposal, ISDA said.

These include the definition of an eligible transferee for certain
deliverable obligations under a credit derivative transaction.

ISDA said the full test of the restructuring supplement is available on its
web site, http://www.isda.org.

**End of ISDA Press Report for May 16, 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.