ISDA PRESS REPORT - NOVEMBER 7, 2001


CREDIT DERIVATIVES
	*	Credit Derivatives - FOW

DOCUMENTATION
	*	ISDA publishes amendments to master agreements - IFR

EMERGING MARKETS
	*	Emerging market issuers press ahead  - Financial Times

RISK MANAGEMENT
	*	Dumping "W" - FOW
	*	Basel Committee, IOSCO, IAIS Publish Cross-Sector Reports -
Dow Jones


Credit Derivatives
FOW - November 7, 2001
By Jane Douglas-Jones

In the weeks following the terrorist attacks in the US, credit derivative
traders reported record levels of activity. "In the immediate aftermath of
the events of 11 September trade ticket size went down," says one broker. "A
lot of people were prepared to make markets in $5m or euros where previously
the average ticket size was $10-15m. The nominal size of the trade went down
as a result of the level of uncertainty and volatility in the markets."

Traders report that credit default swap trade volume soared to three times
the normal level. "If nominal ticket value went down by half and trade
volume went up three-fold, overall volumes were up by 5 00/0 in terms of the
actual business being written," explains the broker.  After the initial
shock of the devastating attacks, the market recovered its poise and
analysts and traders soon realised the credits that would be most affected.

"Clearly, airline stocks took a pummelling," says one trader. "Prior to the
event, British Airways was trading around 100 basis points for five year
default swaps. After the attacks, BA widened dramatically to 350/SOObp.
Spreads on this credit did come in from this level, but they have since gone
back out again and are currently trading around 380/450bp. Meanwhile, we saw
a credit event on Swiss Air, and German airline Lufthansa also went out,
with all the European airlines following suit."

Insurance sector
As was expected, the credit derivatives market also saw heightened activity
in the insurance and reinsurance sector. "There has been a lot of activity
around companies such as Zurich Re," says the trader. "Zurich spreads moved
out from around	20/40bp to 50/100bp. The credit did trade towards the
offered side once or twice. Zurich spreads have stayed in this range despite
the fact that the company has downsized its profits and upsized its
predicted loss (effectively doubling the amount of provision) as a result of
the terrorist attacks."

Similarly, names such as AXA, Agon, and Aliance have all been actively
quoted in the aftermath of 11 September and spreads have widened
considerably on these names. For example, as FOW went to press Aliance
spreads went out to 7Obp before tracking back in to 35/55bp. In addition,
sectors that have not been considered directly affected by the attacks, such
as the auto sector, also moved out as a result of the potential slowdown in
the US.

"We have seen principle investors in the credit derivatives market trading
either with a view or going by what the spot markets are doing," says one
dealer. "We have also seen quite a few investors gaining synthetic exposure
to bonds by selling default swaps.  Recent weeks have proved a significant
test of the liquidity in the default swaps market. In some areas, the bond
market was extremely thin and it was difficult to trade. However, with
default swaps there was always a price in no more than five minutes. The
market was both traded and tradable."

Europe
The European credit derivatives market has also had to contend with the
demise of the UK's train operator, Railtrack. "Railtrack is going to be a
credit event on bankruptcy rather than restructuring," says one structurer.
"There was a thought initially that it would go via restructuring and that
would have been an interesting test of the modified ISDA restructuring
supplement. This is still very much an issue in the market. While the US has
adopted the new version, by far the majority of business being done in
Europe and Asia uses the original ISDA 1999 definition of restructuring. The
new restructuring Z supplement has simply not been accepted and I do not
think it ever will be accepted. I expect that we will soon move back along
the lines of the original ISDA wording with perhaps one or two tweaks. 

Overall, traders say that the market has survived the seismic shock of the
events of 11 September extremely well. "There was no mad panic," says one
broker. "The credit derivatives market made a fair and measured response in
the face of tragedy." 


ISDA publishes amendments to master agreements
IFR - November 3, 2001

As part of its effort to improve counter-party risk management practices,
the International Swaps and Derivatives Association last week released nine
amendments that can be added as attachments to ISDA master agreements. Many
of the changes included in the document were inspired by the market
turbulence in 1998, ISDA said. Ultimately, the amendments will form the
basis of an initial draft of a new master agreement.

Using one amendment, a failure to pay becomes a default one local delivery
day after notice of such failure is given to the relevant party. "Many
market participants found three local business days after notice to be too
long a period during times of market stress in 1998" ISDA noted in a
commentary on the amendments. A local delivery day is a day on which
settlement systems are generally open for business.

Under a second amendment, market participants can use a replacement value
method of valuing transactions after early termination of a master
agreement. The replacement method combines elements of the market quotation
and loss methods into one valuation provision, 1SDA said, noting that the
quotation or loss methods are still valid. Because the inability to
communicate notices via email or fax proved unduly restrictive in 1998, an
amendment was added allowing market participants to use these channels to
give notices.

An amendment stating that the occurrence of termination events should be
treated in a manner similar to an event of default also featured on ISDA's
new list of amendments that may be tacked on to master agreements.
According to ISDA, this option was added because a number of members hold
the view that most termination events are credit-related.

ISDA initiated a review of its master agreements' provisions in 1999. The
process took into account recommendations by the counter-party risk
management policy group's 1999 report "Improving Counter-Party Risk
Management".


Emerging market issuers press ahead 
Financial Times - November 7, 2001
By Arkady Ostrovsky

Emerging market borrowers are pressing ahead with planned international bond
issues, despite a deepening debt crisis in Argentina. 

Fitch, the credit rating agency, yesterday said Argentina's planned debt
swap would amount to a default. Fitch cut Argentina's credit rating from CC
to C, indicating an imminent default, and left it on rating watch negative. 

"Although the proposed debt exchange has been described as voluntary, public
statements by Argentine officials imply that in the absence of such an
exchange, public debt held by domestic investors is unlikely to be
serviced," Fitch said. 

Fitch also said the terms of the new instruments would be inferior to those
of existing debt, including lower coupons and longer maturities. 

However, despite all this, emerging markets remained surprisingly calm with
no visible signs of contagion developing. Emerging markets bond spreads had
hardly moved since last Friday's announcement and the yield spread of some
countries, including Brazil, had even tightened. This is because there is
little leverage in the system, compared with the 1998 Russian crisis, and
because most market participants were prepared for an Argentine default. 

Several emerging market issuers said they were pressing ahead with bonds
despite Argentina's troubles. 

Bulgaria is likely to launch its debut euro-denominated international bond
next week. Its finance minister said yesterday the country would not launch
the bond if it had to pay a coupon above 8.5 per cent. 

But bankers close to the deal were confident Bulgaria could borrow at
between 7 and 8 per cent, or between 380 and 420 basis points over the
eurozone benchmark, depending on the maturity. Bulgaria is considering a
three-year or five-year issue of up to Euros 255m. 

Emerging market analysts said Bulgaria's economy was in good shape, despite
eurozone economic slowdown and falling export revenues. The country, rated
B2 by Moody's and B+ by Standard & Poor's, has attracted healthy levels of
foreign direct investment by selling its banks to foreign banks, has pegged
its currency to the euro and has met several Maastricht criteria. 

"Bulgaria is the final country to offer extra value as an EU convergence
play. It is unrecognisable as the state engulfed by crisis five years ago,"
said Charles Robertson, emerging markets analyst at ING Barings. 

Latvia, which is on a roadshow in London today, is also pushing ahead with a
bond issue. Sibneft, Russia's oil company, said it would also go ahead with
a three-year Dollars 250m bond issue this month, although other oil
companies have chosen to postpone their issues until next year. If
successful, Sibneft could become the first Russian corporate to issue
international bonds since the 1998 crisis. 

Moody's yesterday assigned Sibneft a rating of B1, a notch above Russia's
sovereign credit rating. 


Dumping "W"
FOW - November 2001
By Jane Douglas-Jones

Basel Committee for Banking Supervision has been busy in recent weeks. The
Committee has issued guidance to banks on customer due diligence processes,
reviewed its Internal Ratings Based Approach (EBB) to specialised lending
exposures, and published crucial papers on operational risk and market
discipline. In addition, the credit derivatives market breathed a sign of
relief at the Committee's decision to dump 'w'.
In the first of a series of updates on the proposed new Basel Capital
Accord, the Basel Committee's Capital Group has decided to incorporate the
'w' factor (a residual risk charge for credit derivatives) into pillar two
of the Accord's framework, which deals with the supervisory review process.

This move was welcomed by the banking industry and the International Swaps &
Derivatives Association (ISDA), neither of which has been backward in
expressing disapproval of 'w'. The news that the charge is to be assimilated
elsewhere in the Accord came as no surprise given the uproar since w's birth
in the January 2001 Basel consultative paper. As FOW reported (see May
issue, It's the end of
as we know it, page 21), the charge was derided, at ISDA's AGM, by the very
regulators one would expect to defend it and the future of the 'w' factor
has looked bleak since then.

However, some market participants were worried that the Committee would
stand by the charge both because of the immaturity of the credit derivatives
market and also because of the worry that credit risk management instruments
could be used for regulatory arbitrage. "Any sign of traders using a
derivative to 'get around' a capital charge or regulation has been, in the
past, punished by conservative and complex rules," says one source. "Recent
evidence of this can be found in the securitisation market."

The demise of 'w' has not meant the end of regulator concern about credit
derivatives. The Capital Group states: "One of the Basel Committee's
objectives in considering the treatment of credit derivatives in the trading
book is to minimise the possibility of regulatory arbitrage... the Capital
Group is planning to specify a rule that is already implemented by many
supervisors. This rule provides that when a bank conducts an internal hedge
of a banking book exposure using a credit derivative in its own trading
book, in order to receive any regulatory capital benefit it must transfer
the credit risk to an outside third party (ie an eligible credit protection
provider)."

Meanwhile, the Accord's add-on matrix for potential future exposure
calculations does not explicitly cover credit derivatives and rules differ
across countries. 'The Capital Group is working ~to provide proposals that
will harmonise this treatment.

Op risk
The Risk Management Group
(RMG) of the Basel Committee
has also been hard at work. The Group has made a number of significant
changes to the January proposals including:
	*	Refinement of the definition of operational risk
	*	Proposed reduction in the overall level of the operational
risk capital charge from 200/0 to 120/0
	*	Introduction of a new regulatory capital approach that is
based on banks' internal risk estimates (the "Advanced Measurement
Approaches" [AMA])
	*	Consideration of the role of insurance as a risk mitigant in
the regulatory capital calculations.

The Group now defines op risk as "the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external events".
 
Due diligence
In the aftermath of the terrorist attacks on the US in September, the Basel
Committee has issued guidance and minimum standards to banks on customer due
diligence processes. "Systemic customer due diligence is an essential
element of banks' risk management,' says William McDonough, chairman of the
Basel Committee. "It is critical 'to safeguarding confidence and the
integrity of the banking system. The importance of a rigorous approach has
been underscored by the recent terrorist attacks in the US." 


Basel Committee, IOSCO, IAIS Publish Cross-Sector Reports
Dow Jones Newswires - November 7, 2001

LONDON -- Two cross-sector reports aimed at supervisors in the banking,
securities and insurance industries were published Wednesday by the Basel
Committee on Banking Supervision, the technical committee of the
International Organization of Securities Commissions, and the International
Association of Insurance Supervisors.

The reports deal with cross-sectoral comparisons of risk management
practices and regulatory capital, and with core principles of the respective
sectors the organizations deal with.

The reports were published by the Joint Forum, established in 1996 to
examine supervisory issues related to financial conglomerates.

**End of ISDA Press Report for November 7, 2001**

THE ISDA PRESS REPORT IS PREPARED FOR THE LIMITED USE OF ISDA STAFF, ISDA'S
BOARD OF DIRECTORS AND SPECIFIED CONSULTANTS TO ISDA ONLY.  THIS PRESS
REPORT IS NOT FOR DISTRIBUTION (EITHER WITHIN OR WITHOUT AN ORGANIZATION),
AND ISDA IS NOT RESPONSIBLE FOR ANY USE TO WHICH THESE MATERIALS MAY BE PUT.






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