ISDA Press Report - March 21, 2001


Ministers urged to back Lamfalussy report - Financial Times
Liberalisation of financial services tops summit agenda - Financial Times
Crisis-hit Argentina continued to dominate credit derivatives... - Reuters
CREDIT DERIVATIVES MAY SUBJECT INVESTORS TO UNEXPECTED RISKS - Moody's
How traders in capacity can make rapid new connections - Financial Times
Watchful eye on energy traders - Financial Times


Ministers urged to back Lamfalussy report
Financial Times - March 21, 2001
By Peter Norman

The European Banking Federation, representing 3,000 mainly private-sector
banks in the European Union, yesterday urged an immediate end to the
institutional wrangling holding up agreement on the Lamfalussy report on
faster financial market legislation in the EU, Peter Norman reports from
Brussels.

Ambassadors from EU member states meet today in Brussels to try to resolve
the three-way squabble between the council of ministers, the Commission and
the European parliament over the powers each institution should cede to
enable the EU securities committee, proposed by Baron Alexandre Lamfalussy,
to enact legislation. EU finance ministers will discuss it tomorrow evening
in Stockholm before the EU summit on Friday and Saturday.

Writing to each finance minister, Maurizio Sella, the federation's chairman,
said any delay would damage development of European financial markets


Liberalisation of financial services tops summit agenda
Financial Times - March 21, 2001
By Brian Groom

Liberalisation of financial services will be Britain's priority for this
week's Stockholm summit, the government said yesterday as it rejected claims
economic reform in the European Union was going too slowly.

Tony Blair, prime minister, suffered a setback, however, when Lionel Jospin,
his French counterpart, said he would resist early deadlines for full
liberalisation of gas and electricity.

A dispute with the French would overshadow the summit of EU leaders on
Friday and Saturday, which comes as Mr. Blair prepares to call the general
election, expected on May 3. Britain wants full liberalisation of energy
markets by 2003.

Alastair Campbell, Mr. Blair's spokesman, rejected claims by the European
Round Table of Industrialists that there had been little action since last
year's Lisbon summit on issues such as liberalisation of energy, postal
services, financial markets, air traffic control and creation of a
union-wide patent.

"Those who say the impetus is not for economic reform and that there hasn't
been progress have got it wrong," he said. "We think Europe has got the
message on economic and social liberalisation. Stockholm is about
accelerating the change."

He said 2.5m jobs had been created in the EU last year. Denmark and the
Netherlands had joined Sweden in overtaking the US for the percentage of
homes with internet access: the EU average had doubled to 28 per cent
compared with 47 per cent in the US, with Britain on 41 per cent.

EU investment in information and communications technology had outstripped
the US as a proportion of gross domestic product for the first time last
year.

Mr. Campbell said faster liberalisation of financial services would help
investors, the finance industry and consumers.

Britain wants the Lamfalussy group's report on financial reform implemented
by the year-end, but it is caught up in a dispute over jurisdiction between
member states, the European Commission and European Parliament.

Mr. Blair and Wim Kok, the Dutch prime minister, published a joint paper
calling for action to close the gap with the US on biotechnology. Other
British objectives include a business-led taskforce to address skills gaps
and moves to improve mutual recognition of professional qualifications,
lighten regulation on small business, cut air traffic control delays and cut
car prices.

* The government was accused yesterday of trying to "rig" a Brussels
competition inquiry by organising a write-in campaign by MPs.

Opposition Conservative MPs were angry after discovering the Department of
Trade and Industry had supplied a "core script" that MPs and others could
use to lobby the European Commission to approve a Pounds 60m (Dollars 86m)
regional venture capital proposed by Gordon Brown, chancellor.

The Commission is likely to approve the scheme, but Mr. Brown has accused
officials of dragging their feet.


Crisis-hit Argentina continued to dominate credit derivatives trading on
Tuesday....
Reuters - March 20, 2001

LONDON, March 20 (Reuters) - Crisis-hit Argentina continued to dominate
credit derivatives trading on Tuesday, almost knocking the Federal Reserve's
decision on U.S interest rates due later in the day off its perch as chief
talking point.

The price of five year default swaps for Argentina widened out to
1,000/1,200 from 950/1,050 at the start of the week, traders said. The move
was even more dramatic at the shorter-end of the curve, with one-year credit
protection on Argentine debt being quoted at 1,200/1,300 from 950.

Credit default swaps, the most active part of the credit derivatives market,
are insurance-like tools that enable investors to juggle exposure to the
risk of an issuer defaulting on a debt or loan.

The resignation of economy minister Ricardo Lopez Murphy after just two
weeks in office has heightened a political crisis in Argentina that
threatens to spill over into other emerging markets. This follows Lopez
Murphy's efforts to lift the economy out of recession with a searing
austerity programme aimed at raising investor confidence.

Domingo Cavallo, the architect of Argentina's embattled ten year-old fixed
exchange rate regime, was named his successor.

With Cavallo yet to set out his policy programme to cut $3 billion off the
Argentine fiscal deficit and tackle the country's crisis, it remained to be
seen how the U.S. market would open.

"For Argentina, the liquidity has just dried up on the default swaps. What
offers are out there are distressed," a New York based trader at a U.S. bank
said.

Events in Argentina hit the rest of the emerging markets asset class. "Latin
America generally is better bid and offers are few and far between," a
broker said.

Among the other sovereigns affected was South Africa. "The five year default
swap is at 185/235 and the three year is at 125/175, and that's more than
10% worse than last week," he added.

BACK IN EUROPE

Trading conditions elsewhere were described as relatively thin, but if
traders were keeping their powder dry ahead of the U.S. FOMC meeting, they
weren't saying.

In Europe, the story remained one of default swap prices on corporate debt
edging inwards and edging outwards on telecoms debt.

"The general trend for European corporates for the past week has been one of
prices trading lower, with bids being hit and offers being lifted," a broker
said. "We're talking small, mind," he added, "maybe 2-3 basis points tighter
below a price of 50 and around 5 bps at 50-plus."

Five year default swaps on BASF traded at 21/28 on Tuesday from 23/29 on
Monday. The German chemical group posted better than expected fourth quarter
earnings last week and is forecasting double-digit growth this year and
next.

Not so the embattled telecoms sector. On Tuesday morning five-year default
swaps on the debt of British Telecom widened five basis points from Monday
to a bid/offer spread of 162/169, before settling back to 160/165.

In comparison, the spread between BT's February 2006 euro-denominated bond
has a mid-rate yield spread of 125bps over 3-month Libor, while the December
2005 dollar bond was 145bps over Libor.

Five-year default swaps on the debt of France Telecom were cited by the
dealer at 158/165, unchanged since Monday, and 155/165 on Deutsche Telekom,
also unchanged.


CREDIT DERIVATIVES MAY SUBJECT INVESTORS TO UNEXPECTED RISKS
Moody's - March 20, 2001

New York, March 20, 2001 -- In a new special report outlining potential
risks in credit default swaps, Moody's Investors Service says that if credit
events are defined too broadly, a credit default swap may pass along the
risk of loss following mere credit deterioration instead of the risk of loss
following an actual default.

"Investors often assume the risk of a synthetic investment, by way of a
credit derivative, is equivalent to the risk of a cash investment in the
same credit. However, if not structured carefully, the synthetic investment
can be riskier than the cash investment," says Jeffrey Tolk, a Moody's
analyst and author of the report, "Understanding the Risks of Credit Default
Swaps."

Among Moody's key sources of concern are the prevailing standard definitions
for "credit events." Under a credit default swap, losses to investors are
determined synthetically, based on credit events occurring in a reference
credit. Thus, investors' risk is driven largely by the definition of credit
events in the swap.

The broader the definition, the broader the risk, according to Moody's.


SOME STANDARD DEFINITIONS ARE BROAD

Moody's report includes a detailed look at the International Swaps and
Derivatives Association's (ISDA) widely referenced "credit event"
definitions.

"In some critical areas, ISDA's current definitions are broader than the
market's understanding of "default," and could, in some cases, increase the
risk of loss by triggering payouts for events that are not actually
defaults," says Tolk.

"An obligation that has been restructured to defer principal payments may
not technically be a default if the lender has been properly compensated.
But ISDA would nonetheless define this as a credit event," he says.

Conversely, under ISDA's definition of "obligation acceleration," a credit
default swap investor might suffer a loss although an investor in the
underlying cash position would suffer no loss.

OTHER SOURCES OF RISK: VALUATION DISCREPANCY, MORAL HAZARD


In addition to "credit events," Tolk cites the risks that arise from the
difficulty of valuing defaulted credits to determine the extent of loss to
investors under a cash-settled credit default swap.

"Calculated losses may vary based on liquidity, market conditions, and the
identity of the parties supplying bids. In analyzing a credit default swap,
Moody's looks carefully at the methods and procedures for calculating loss
given default," he says.

The report also says that investors should be aware of moral hazard - the
inherent conflict of interest that exists because the sponsoring financial
institution determines the timing of a loss event as well as how much loss
is imposed on investors.

"The sponsor's incentive is to construe 'credit events' as expansively as
possible and to calculate losses as generously as possible," says Tolk.
"Moody's considers these factors carefully when rating securities supported
by credit default swaps."

Tolk believes that these risks can be addressed by tightening the credit
event and loss calculation provisions, increasing transparency, and
providing more objective mechanisms for verifying loss determinations.

The capital markets have an enormous capacity for absorbing credit risk, and
this capacity has only been partially tapped by the credit derivatives
market. In Moody's opinion, for capital markets investors to participate
fully in the growing credit derivatives market, the risks inherent in credit
default swaps should be more precisely defined, more transparently managed,
and more readily quantifiable.


How traders in capacity can make rapid new connections
Financial Times - March 21, 2001
By Alan Stewart

Online trading exchanges have been set up in many sectors of commerce, and
telecommunications is no exception. But while some exchanges focus on
physical goods, such as car components or hospital supplies, the telecoms
version is dealing with something more intangible - bandwidth.

A number of online exchanges have been set up to trade in bandwidth,
matching buyers and sellers via bid and offer prices, and taking a
percentage of the price paid. According to research by Arthur Andersen, the
telecoms market will be transformed by bandwidth trading.

The bandwidth being traded may take the form of physical circuits linking
two cities, or the data packets and voice calls sent over them. A recent
Europe-wide survey by Andersen revealed a market in flux, but one which
believed in the inevitability of bandwidth commoditisation.

"Online bandwidth trading exchanges have arrived in response to a need,
because of a bandwidth glut," says Simon Forge, principal telecommunications
analyst at UK consultancy OSI. "For some of the latest networks going in,
people are claiming petabits per second - that's a billion megabits per
second."

Exchanges have been set up by Arbinet (based in New York), Band-X (London),
and RateXchange (San Francisco) - see accompanying stories. Other exchanges
already running or being set up include GlobalTeleExchange (GTE in
Washington), Asia Capacity Exchange (ACE in Hong Kong), International
Telecommunications Clearing Corporation (ITCC in Dubai), and eSwitch
(Sydney).

Buyers and sellers of bandwidth are linked up through interconnecting
facilities at the switching hubs of the exchanges. RateXchange has nine of
these in the US, plus three in Europe, while ITCC intends to have hubs in
London, Hong Kong, Los Angeles, New York, and Miami.

The exchanges stress that these connections mean that bandwidth trades will
be able to be carried out in seconds. At present, it can take up to three
months to arrange a trade, with most of those arranged not actually taking
place at all. According to investment bank CIBC World Markets, Dollars 16bn
in revenues (20 per cent of the wholesale bandwidth market) may be traded by
2004.

Andersen says the bandwidth market has suffered from a lack of liquidity and
price transparency, combined with a paucity of offers and bids on the
exchanges. The company believes, however, that the presence of big energy
companies, such as Enron and Williams, in bandwidth trading is stimulating
the appetite of customers for greater product innovation and pricing.

Bandwidth is expected to follow a shorter timeline to liquidity than any
other current traded commodity. Although the detail of the emerging market
has still to be defined, Andersen expects 'city-pairs', that is, two named
cities connected by fiber optic cable, to form the basic product.

Jon Merriman, president and chief executive of RateXchange, foresees four
market segments becoming involved in bandwidth trading within the next year.


"The first are the energy merchants, the second the telecommunications
companies as a business line, the third the financial houses, and the fourth
the pure commodity players," he says.

"A fifth market segment - and this is longer term - will be large
corporates, who'll want to trade and optimise their use of bandwidth," says
Mr. Merriman. "It'll become a treasury function at some point for large
companies. That's at least a year down the road, but there is interest right
now from some large corporates."

Andersen points out that energy businesses, such as Enron, Williams, Aquila,
El Paso, TXU, and Dynegy have made significant investments in backbone,
customer and skills development in the last few years. Those companies'
presence has had a considerable influence on the growing bandwidth market.

Steve Elliott, chief executive of Enron Broadband Services (EBS) Europe,
says the communications market needs to become much more open and robust,
and that this will change the supply and demand dynamics. "It's already
moving that way," says Mr. Elliott, who stresses that EBS does not see
itself in competition with bandwidth exchanges.

"Exchanges exist in all the markets we participate in, and they're an
overlay to the actual market itself," he says. "We're not an exchange, nor
are we an 'independent player' at the exchange level, nor a bulletin board
type of facilitator. We're a market maker, a principal in all transactions
that we do, with contractual terms and physical delivery obligations."

EBS is creating pooling points to provide physical interconnectivity between
bandwidth trading principals. Although EBS's plans for doing business in
Europe are still at a fairly early stage, the company has set up a pooling
point in London, to provide bandwidth trading between the US and Europe.
Further European pooling points are in Amsterdam, Brussels, Dusseldorf,
Frankfurt, and Paris.

Enron Online

Bandwidth-related commodities have recently been added to the Enron Online
web-enabled e-commerce platform, where the company posts its prices and
carries out commodity trading.

"Enron Online is the largest e-commerce web platform in the world for buying
and selling commodities," says Mr. Elliott. "We've transacted a notional
value of over Dollars 380bn since its inception around a year ago."

"The energy companies are all copying Enron, which is a very progressive,
rather fabulous company," says Marcus de Ferranti, co- founder of the
Band-X. He points out that Enron is leveraging its own network into its
trading, and thereby becoming a kind of telecommunications company in its
own right.

Mr. de Ferranti suggests the other energy companies are desperately trying
to get into the broadband revolution, having seen Enron's share price double
on the announcement of broadband.

"They're coming along in a frenzy, trying to copy it and leverage their own
infrastructures by sticking fiber along the top of their gas pipes, and
sticking cables along their electricity highways," he says.

But how do the telecommunications companies view bandwidth trading
exchanges? Do they see them as speeding up the commoditisation of bandwidth,
leading to a deterioration of prices?

"At the most senior level, the telecoms companies are attracted by what
we're providing," says Anthony Craig, chairman and chief executive of
Arbinet.

"As you come down, some see it as a threat, or even say that we're a
catalysing force for commoditisation. I find that on the verge of ludicrous,
because bandwidth is commoditising anyway," says Mr. Craig. "Anything that
commoditises needs a more efficient process to manage the product. We're
responding to commoditisation."

As for the future, the online bandwidth exchanges may face some of the
pressures which have caused problems for other B2B (business-to-business)
marketplaces.

US analyst International Data Corporation (IDC) foresees a challenge for
bandwidth trading companies in collecting fees, and believes exchanges may
suffer payment defaults.

IDC warns also that profit margins could dwindle as bandwidth costs fall,
taking margins with them.

"I suspect that bandwidth exchanges will have a relatively limited window of
opportunity, during which time they will make good money," says Ian Beeby,
UK managing director of US consultancy Wireless Facilities.

Mr. Forge at OSI agrees that some of the exchanges will go out of business.
However, he argues: "Long-term, this is something that's here to stay."


Watchful eye on energy traders
Financial Times - March 21, 2001
By Anthony Cox

After the sharp falls in their shares since last summer, telcos worldwide
might despair at the threat from US energy traders, such as Enron, to
revolutionise how capacity on carriers networks is bought and sold - further
depressing the prices operators can charge for bandwidth, their staple
product.

In two to three years, real-time trades on bandwidth, for immediate
delivery, will be possible. These will replace, at least to some extent, the
drawn out negotiations between operators when selling space on their
networks to one another.

But if new trading models will exert downward pressure on bandwidth prices
by increasing transparency and ironing out market inefficiencies, an
environment where bandwidth is traded through purpose-built exchanges has
its benefits to operators.

"In the short term, it will provide a more liquid channel for selling spare
capacity," says Stuart McIntosh, vice president of the Boston-based
consultancy Adventis. Longer term, it may have an impact on how operators
manage the roll out of their networks, he says.

Leasing capacity in the short term will become increasingly attractive, and
operators will opt more and more to buy or rent capacity from their rivals,
instead of building their own infrastructure.

Bandwidth trading may also increase volumes for operators by creating new
sales avenues: "Exchanges open up new segments in the market, many of which
you wouldn't do business with if it was down to personal relationships,"
says Cecilia Herslow, carrier manager at Telia UK.

Further, operators could benefit from lower sales costs, as the expense of
setting up long-term capacity deals between operators is replaced with lower
per trade costs at the exchanges, says Martin Smillie, vice president for
marketing wholesale at KPNQwest.

He notes, however, that the operator will incur costs to set up and maintain
trading capability, whether on its own behalf or via third- party trading
houses.

Some 94 per cent of carriers expecting a liquid, traded bandwidth market to
emerge within three years, according to research by Arthur Andersen. A
market for derivatives, which could eventually dwarf the primary market,
will follow close on the heels of a market for physical bandwidth.

Two types of bandwidth exchanges are emerging: those that trade bandwidth
capacity on specific routes - say London to New York, so-called routed
capacity; and those that trade data and voice minutes, usually via internet
exchanges, such as Arbinet and Band-X.

According to Ciara Ryan, a senior manager in Arthur Andersen's bandwidth
trading team, the routed capacity market will be the most significant in
terms of revenues for operators, due to increased pressure to find new
channels to market the capacity they own on these routes.

"Owners of capacity are eager to sell their bandwidth as quickly as
possible, without destroying margins completely," he says, noting that
bandwidth prices are falling by up to 70 per cent annually on transatlantic
and European routes.

Several routes, or city pairs, will provide a yardstick for the prices for
capacity between other cities. Capacity on these other routes will trade at
a discount or a premium to those that have become the benchmarks, says Mr.
Ryan.

Some loss of margins may be an acceptable trade-off for more efficient
markets and possible higher volumes of traffic for operators, particularly
since bandwidth prices are expected to come down in any case, due to
capacity oversupply. Turn to next page

From facing page

But bandwidth exchanges' impact on pricing could be more significant: "The
whole pricing structure is potentially at risk," says Nigel Pitcher,
director of marketing at UK-based carrier Fibernet.

If spare capacity is sold on an anonymous basis to an exchange, the
operator's existing 'list price' customers could pick up the same capacity
at an exchange at a knock-down price, while unknowingly remaining with the
provider they had originally, he says.

This could cause bandwidth prices to fall dramatically.

Downward pressure on the price of capacity would be increased if large users
were to curtail existing relationships with their operators altogether,
buying direct from the bandwidth exchanges.

This threat is dismissed by telecoms industry players, however: "There is no
reason why large telecom users could not lease bandwidth today under most
regulatory regimes," says Ian Beeby, managing director of WFI, a wireless
telecommunications consultancy.

Mr. Beeby notes that most large corporations have spent the last years
trying to outsource their telecom networks and that they are unlikely to
change direction now.

The extent to which operators either embrace the new status quo or reject it
may define their success in an environment where long-term bandwidth
contracts are being replaced by more immediate trading models: "Carriers
will either take on a very pro-active approach or a more defensive
strategy," says Ms Herslow at Telia.

If a player does not move fast enough a "penalty of ignorance" may result in
some operators losing the first mover advantage, suggest analysts. This, in
turn, may result in a loss of competitiveness relative to other players,
fuelling consolidation among global carriers, says Christian Jepsen, the
founder of Pangea, a pan-European carrier with a focus on Scandinavia.

"Ultimately, there may be three to four global carriers and only a handful
of regional ones left," he says.

In anticipation of significant changes in the market, Pangea is already
establishing a separate sales team to focus exclusively on capacity sales
via bandwidth exchanges.

In an increasingly complex market, telecommunications operators have no
choice but to explore new ways to exchange telecom capacity. The sheer
number of telecoms players now means that bilateral agreements between
carriers will become increasingly obsolete.

Internationally there are some 2,000 carriers. If they all were all to lease
some capacity from one another, nearly 2.5m interconnects, contracts and
settlements would be required across the industry. Avoiding a proliferation
of contracts alone is likely to change the way operators deal with one
another on bandwidth deals.

Although it is too early to see the full implications of bandwidth trading
on today's telecoms market, operators are keeping the developments under
very close review.

"Bandwidth trading may prove to be a interesting idea which simply did not
make it - but it would be rash to conclude that today," says Mr. McIntosh at
Adventis. He also warns that the US energy players could leverage their
experience of establishing trading in the energy market to carve a
significant niche in the telecoms sector.

This is borne out by recent developments: energy operators Williams and
Enron are understood to have joined forces recently with AT&T, Sprint,
Global Crossing and Dow Jones to provide the first index for routed
bandwidth capacity. "If I were in a telecoms company, I would be watching
the energy traders very closely," says Mr. McIntosh.

**End of ISDA Press Report for March 21, 2001.**

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