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Enron Mail |
Alan, there is a good article on power trading in Japan. Please pass it on
as appropriate. Mark ----- Forwarded by Mark E Haedicke/HOU/ECT on 06/15/2000 04:54 PM ----- Tara McAuliff <TMCAULIFF@isda.org< 06/15/2000 10:16 AM To: Aubrey Rothrock <arothrock@pattonboggs.com<, "Carol Nichols for Joe Bauman (b of a)" <carol.j.nichols@bankofamerica.com<, "Carolyn Huntley (Allen & Overy)" <Carolyn.Huntley@allenovery.com<, Cecilia Steffensen <CSTEFFENSEN@isda.org<, Charles Smithson <charlessmithson@mindspring.com<, "Chi Wing Yuen (AIG)" <chi-wing.yuen@aig.com<, "Claudia Martell for Goodrich (Deutsche Bank)" <claudia.martell@db.com<, Corrinne Greasley <CGREASLEY@isda.org<, "Damian Kissane (Deutsche Bank)" <damian.kissane@db.com<, Daniel Cunningham <dcunning@cravath.com<, "David Mengle (JP Morgan)" <mengle_david@jpmorgan.com<, Dennis Oakley <dennis.oakley@chase.com<, Don Moorehead <dmoorehead@pattonboggs.com<, Douglas Bongartz-Renaud <douglas.bongartz-renaud@nl.abnamro.com<, Ernest Patrikis <ernest.patrikis@aig.com<, "George Francois (CIBC)" <francois@us.cibc.com<, "H.Ronald Weissman" <h.ronald.weissman@arthurandersen.com<, Henning Bruttel <Henning.Bruttel@dresdner-bank.com<, "Hiroyuki Keisho (Sanwa)" <Hiroyuki_Keisho@sanwabank.co.jp<, ISDA LONDON OFFICE <ISDALONDON@isda.org<, Jeff Golden <goldenj@allenovery.com<, Jerry del Missier <jerry.delmissier@barclayscapital.com<, Jonathan Moulds <jonm@crt.com<, Jose Manuel Hernandez-Beneyto <jhb1@bancosantander.es<, "Joseph Evangelisti (JP Morgan)" <evangelisti_joe@jpmorgan.com<, Josh Cohn <jcohn@cravath.com<, "Kazuhiko Koshikawa (Sanwa)" <kazuhiko_koshikawa@sanwabank.co.jp<, Keith Bailey <kbailey2@exchange.ml.com<, "Liz O'Sullivan" <LOSULLIVAN@isda.org<, "Marjorie Cresta (Cravath)" <mcresta@cravath.com<, Marjorie Marker <marjorie.b.marker@arthurandersen.com<, Mark Brickell <brickell_mark@jpmorgan.com<, Mark Haedicke <Mark.E.Haedicke@enron.com<, Mark Harding <mark.harding@wdr.com<, "Mark Wallace (Warburg)" <mark.wallace@wdr.com<, Mary Cunningham <MCUNNINGHAM@isda.org<, Maurits Schouten <maurits.schouten@csfb.com<, Michael Iver <milphil@gateway.net<, Paul Wilkinson <paul.zz_wilkinson@wdr.com<, Quentin Hills <quentin.hills@citicorp.com<, Richard Grove <RGROVE@isda.org<, Robert Mackay <robert.mackay@nera.com<, Robert Mark <markb@cibc.ca<, Robert Pickel <RPICKEL@isda.org<, Roseanne Stanzione <RSTANZIONE@ISDA.ORG<, Rosemary Ryan <RRYAN@isda.org<, Ruth Ainslie <RAinslie@isda.org<, "Samantha Penney (Allen & Overy)" <Samantha.Penney@AllenOvery.com<, Sebastien Cahen <sebastien.cahen@socgen.com<, "Shawn Dorsch (Derivatives Net)" <shawn@blackbird.net<, Shigeki Kawano <SKawano@isda.org<, Shigeru Asai <Shigeru_Asai@sanwabank.co.jp<, "Shunji Yagi (Sanwa)" <DPD@aurora.dti.ne.jp<, Stacy Carey <SCAREY@ISDA.ORG<, "Steve Bernardete (MSDW)" <isdaarticles@msdw.com<, Steve Kennedy <kennco@mindspring.com<, Steve Targett <steve_targett@nag.national.com.au<, "Sue Edwards (WDR)" <sue.edwards@wdr.com<, Teruo Tanaka <teruo.tanaka@ibjbank.co.jp<, Thomas Montag <tom.montag@gs.com<, Thomas Werlen <twerlen@cravath.com<, Tsuyoshi Hase <fwhx9396@mb.infoweb.ne.jp<, Wendy Chang <w.chang@msdw.com<, Yasuko Horibe <YHORIBE@isda.org<, "Yasumasa Nishi (IBJ)" <yasumasa.nishi@ibjbank.co.jp<, Yoshitaka Akamatsu <yoshitaka_akamatsu@btm.co.jp< cc: Subject: ISDA Press Report, 6/15/00 ISDA PRESS REPORT, THURSDAY, JUNE 15, 2000 * US Regulators Find Flaws In Commodities Overhaul Bill - Capital Markets Report, 6/14/00 * Japan Online Power Trading May Spark More Deregulation - Dow Jones Energy Service, 6/15/00 * Philippines Relaxes Banks' Requirement To Raise Capital - The Wall Street Journal Europe, 6/14/00 * Danger Signs - The Economist, 6/10/00 Capital Markets Report, 6/14/00 US Regulators Find Flaws in Commodities Overhaul Bill By Dawn Kopecki WASHINGTON -(Dow Jones)- U.S. financial regulators at a hearing Wednesday faulted legislation aiming at rewriting the nation's commodities laws for going too far in some areas at streamlining the laws overseeing derivatives products and futures markets. Some officials criticized the bill, introduced by Rep. Thomas Ewing, R-Ill., chairman of the House Agriculture Subcommittee on Risk Management, for diminishing the jurisdiction of the Securities and Exchange Commission over certain derivatives products. The legislation, as well as a companion bill introduced by Senate Agriculture Chairman Richard Lugar, R-Ind., would streamline the laws overseeing derivatives products and futures markets as well as deregulate some aspects of that industry. Lawmakers have been struggling all year to revamp those markets. The Commodity Exchange Act - which expires Sept. 30 - determines which agency, the SEC or the Commodity Futures Trading Commission, has jurisdiction over what derivatives products. A tugging war between the two agencies over how to redraw those lines has slowed progress on the legislation. Annette Nazareth, director of the SEC's division of market regulation, faulted Ewing's legislation for creating a new kind of deregulated futures trading facility, but then giving the CFTC exclusive jurisdiction over the securities traded on those new facilities. "The (SEC) does not believe that there is a justification for eliminating the traditional role of other regulators, including the SEC, in regulating markets and intermediaries that trade such government securities and other products," Nazareth said in written testimony. She noted that it's especially important that the SEC retain its authority "when these products would be traded on facilities subject to even fewer investor protections than exist today on futures exchanges." Treasury assistant secretary Lewis Sachs also found that section of the bill flawed, saying that his agency was concerned that Ewing's bill makes regulatory oversight of clearinghouses optional, not mandatory. He was similarly concerned about giving the CFTC exclusive jurisdiction over all transactions conducted within a clearinghouse. "The exclusive jurisdiction of the CFTC may preclude securities regulators from maintaining oversight of organizations that clear securities-related products," Sachs said in his written testimony. He added that regulation of clearinghouses should be mandatory and that the SEC should oversee clearinghouse transactions for products currently under its jurisdiction. Nazareth also suggested that Ewing clarify a section of the bill so that it clearly gives the SEC direct access to audit trails, coordinated market surveillance and inspection authority to pursue insider trading and other fraudulent practices regarding the trading of single-stock futures. "The SEC should not be required to seek the permission of any other entity to protect investors," she said. Both Sachs and Nazareth found it "troublesome" that Ewing's bill has a lower threshold than other proposals for determining what constitutes a "sophisticated investor." That's important because the legislation allows sophisticated investors to conduct a wide variety of transactions with the least amount of scrutiny from federal regulators. "We do not believe that adequate consideration has been given to whether $10 million in total assets is a sufficient indication of sophistication," she said. "Moreover, the bill grants the CFTC broad discretion to declare anyone an eligible contract participant." Lugar's bill, as well as a report released last year by the nation's top financial regulators, defines a sophisticated investors as having at least $25 million in assets. Sachs also had serious reservations about the way Ewing's bill relieves regulatory burdens for futures markets, saying that there may be some unintended consequences for "legislating" relief. "Once such provisions are written into law, the regulators will have no ability to review and amend them should subsequent market developments warrant change or should other problems arise," Sachs said. In addition, Sachs was troubled by some changes to the rules overseeing government securities that, he said, could "undermine the laws that Congress put in place in recent years that were designed to uphold and strengthen the integrity of the government securities market." Patrick Parkinson, associate director of the division of research and statistics for the Board of Governors of the Federal Reserve, also criticized a section of the bill that he said would "leave uncertainty about whether some electronic trading systems for financial contracts between professional counterparties were subject to the (Commodities Exchange Act)." C. Robert Paul, general counsel for the CFTC, had concerns of his own about the legislation. He highlighted problems with the way the bill handles metal and energy commodities as they relate to electronic trading systems. For his part, Ewing warned regulators that Congress may run out of time to pass the legislation this year if the agencies can't agree on key aspects of the bill. "I hesitate to say, let's pass those parts we agree on. It's pretty easy to pat yourself on the back and just do the easy work," Ewing said. Several lawmakers criticized the SEC and CFTC for holding up progress for the sake of politics. The two agencies have deep differences of opinion over how to regulate single-stock futures. Ewing's bill gives the CFTC almost exclusive authority over single-stock futures. The SEC wants to share jurisdiction over the new product. "I really don't necessarily see this as a turf battle," Nazareth said following her testimony. "There are significant challenges in crafting a framework that protects investors in the way they have come to expect in the securities market." Dow Jones Energy Service, 6/15/00 Japan Online Power Trading May Spark More Deregulation By Mika Watanabe TOKYO -(Dow Jones)- Partial deregulation of Japan's power industry in March hasn't exactly charged up the country's power sector, as industrial and commercial users have yet to take advantage of their newly-won freedom to pick suppliers. However, the launch of online electricity trading in Japan later this year will likely lure more independent power suppliers into the market, spurring trading activity and possibly prompting the government to take further deregulation steps ahead of a scheduled review in March 2003, analysts say. Among the early birds hoping to provide the catalyst for this process in the form of a trading system are Japanese trading house Itochu Corp. (J.CIT or 8001) and the U.S.' Automated Power Exchange (X.AUP), which plan to launch a Web-based electric power exchange in November. U.S.-based Enron Corp. (ENE) has also launched its global EnronOnline Internet trading platform for a variety of commodities and financial products and is approaching companies here with the eventual target of trading electricity. "Even though the market will be limited initially, if the trading mechanism were there, a substantial number of large-lot buyers who seek lower prices would participate, while potential sellers who hold excess generation capacity would also join in, to make money from their idle assets," said Naoto Hashimoto, a senior utility analyst at Nomura Securities. As of March, Japan's 8,000-odd high-volume industrial and commercial users - which together represent 27% of total Japanese power demand - are now free to choose their suppliers. "The potential is enormous," agreed Hideki Yokoyama, general manager of Itochu's power project group. "Though the performance (of our online exchange) won't necessarily be stellar at first, its early launch should pave a smooth way to grab some 65% of the Japanese electricity market, which is slated to open in the next stage of deregulation within three years." Yokoyama also noted a chicken-and-egg effect: while trading activity would likely lead to faster deregulation, specific liberalization measures would lead to more activity. Online electricity trading might take hold in Japan sooner than expected if requirements discouraging potential entrants are eased in response to growing complaints from various industries, he said. Even after partial deregulation, independent power producers who want to sell retail electricity are still fettered by several inflexible requirements. For example, companies must sign a one-year or longer transmission grid leasing contract and a costly back-up supply contract with existing utilities. Yokoyama predicts that the Ministry of International Trade and Industry might relax such requirements before the 2003 review. "Potential entrants' calls for online trading could set a wave of e-commerce in motion, and that would put added pressure on the regulators," he said. Utilities' Participation Key To Boosting Liquidity Experts concede that online electricity trading liquidity is likely to be thin in the initial stage, but they say volume will snowball as domestic utility giants enter the market. APX and Itochu plan to form a joint venture in July for their online exchange, tentatively called JPX, and expect Japanese utilities as well as other energy concerns to invest in the Y1.5-billion venture. "We will keep the door open for any regional power monopolies," said Yokoyama, adding that some utilities are now studying the trading mechanism with keen interest. "It's just a matter of time before some farsighted existing utilities use the new mechanism to hedge against potential risks such as losing customers and falling prices, and this will consequently increase market liquidity," predicted Nomura's Hashimoto. Outside the power concerns, the likely participation of other domestic heavyweights, including Osaka Gas Co. (J.OSG or 9532) and Nippon Telegraph & Telephone Corp. (NTT or 9432) should also provide a tremendous boost to the electricity market, said Masanori Maruo, a Tokyo-based utility analyst at Deutsche Securities Ltd. NTT, Osaka Gas and Tokyo Gas Co. (J.TYG or 9531) already unveiled in March their plan to team up in entering Japan's retail electricity business. "Gas utilities and NTT hold massive excess power generation capacity, while NTT is the country's largest electricity user which alone represents 0.5% of entire domestic consumption," said Maruo. "The combination will be able to play a significant role in electricity trading by taking a two-way position to offset risks," he said. In addition, some domestic and foreign financial firms, including Industrial Bank of Japan Ltd. (J.IBJ or 8302) and Morgan Stanley Dean Witter & Co. (MWD), are set to offer various electricity-linked derivatives, designed to manage risks from fluctuations in demand and prices. Such products could spur further market participation of existing utilities as well as potential sellers. Analysts say the biggest long-term risks are those faced by utilities which lag behind in doing business the new way. While market participation won't bring them much financial gain, such power companies have the most compelling need to hedge against price fluctuations, as they surrender their price-setting monopolies to market forces. "It may seem that power utilities have little to gain from participating in online trading, but in fact, they have much to lose if they stay away from the trading mechanism," as they fall behind in hedging risks, said Hashimoto. "Eventually, they'd end up playing a loser's game." The Wall Street Journal Europe, 6/14/00 Philippines Relaxes Banks' Requirement To Raise Capital MANILA -- The Philippine Central Bank has decided to withdraw a requirement for banks to raise their minimum capital for 2000, a move expected to ease investors' concerns over the stability of the country's banking industry, analysts said. The decision to eliminate the third and final round of a capital increase for banks effectively extends to Dec. 31, 2000, the deadline for compliance with last year's minimum capital requirement of 4.95 billion pesos (122.2 million euros) for universal banks and 2.4 billion pesos for commercial banks. Originally, universal banks were required to raise their minimum capital to 5.3 billion pesos by the end of 2000, while commercial banks were required to raise their minimum capital to 2.8 billion pesos. In the Philippines, universal banks are commercial banks with expanded licenses that allow them to venture into noncommercial banking operations such as investment banking and fund management. The central bank's decision to relax its capital rule will prevent a loss of confidence in banks that would otherwise have had a difficult time meeting the new requirement, said Angping & Associates Securities Inc. The move will also prevent panic among depositors that could lead to heavy withdrawals at banks or the banks' closure, Angping added. The central bank's capital requirement for banks may be adjusted next year in line with the new risk-based capital framework contained in the recently passed General Banking Act. The framework allows the central bank to impose new capital requirements based on the activities banks are involved in and the capital risks tied to them. Higher capitalization may be imposed, for instance, on banks engaged in high-risk transactions such as derivatives trading, central bank Gov. Rafael Buenaventura said. The central bank implemented a three-stage increase of the minimum capital of banks in 1998 in a bid to strengthen the banking system to prevent a fallout from the Asian financial crisis. Ironically, however, the higher capital requirements indirectly led to the closure of one commercial bank and heavy withdrawals at two other banks earlier this year. Last month, Urban Bank closed after experiencing a liquidity crunch after several days of withdrawals by depositors. The withdrawals were triggered by rumors that the bank's previous downgrade to a thrift bank from a commercial bank was because of cash flow problems. The bank was downgraded because it couldn't meet the original 2.4 billion peso capital requirement deadline for commercial banks as of the end of 1999. The Economist, 6/10/00 Danger Signs An unusual thing happened this week in America. The prices of corporate bonds rose. Of late they have proved a dreadful investment-worse by far than government bonds. How much farther their prices will rise depends largely on what happens in the market in which they are priced: the swaps market. That market is in turmoil. Swaps are the glue that binds together the world's financial system. First developed in the early 1980s, they now dwarf other financial instruments. At the end of last year there were some $46 trillion of swaps outstanding, compared with $5.4 trillion in, for example, international bond markets. Broadly, swaps come in two forms: interest-rate swaps and currency swaps. Simply put, both allow parties to exchange cash-flows. In a currency swap, the two exchange currencies and re-exchange them at maturity at the same rate. In the meantime they exchange interest payments. In a typical interest-rate swap, one side exchanges a floating-rate obligation (generally based on Libor, the rate at which the best banks lend to each other) for a fixed one. This simplicity has made swaps, and interest-rate swaps in particular, a very useful tool. They allow banks, for example, to match their assets and liabilities much more closely. If they have lots of short-term floating-rate liabilities (such as savings accounts) but long-term fixed-rate assets (such as loans) they can "swap" long-term assets into short-term ones. Likewise, companies can use swaps to convert fixed-rate debt (which investors might prefer) into floating-rate debt, or vice versa. The level of the fixed rate in the swap reflects, among other things, the willingness of the market to accept corporate debt rather than government debt, which means that the swap rate is calculated at a spread over government bonds. Euro swap-spreads have risen in recent weeks, but dollar swap-spreads have widened dramatically. Ten-year spreads peaked at the end of May at 140 basis points (hundredths of a percentage point)-a higher spread than ever before (see chart on next page). They have since narrowed, but are still wider than at the height of the financial crisis that followed Russia's default. At times in recent weeks, the swaps market has shut down completely; nobody was willing to receive a fixed rate. What on earth is going on? There are, broadly, two sets of explanations, one relatively benign, the other emphatically not. The benign view is that the rise in swap spreads is explicable by rising interest rates, greater default risk, and the relative sizes of government-and corporate-bond markets. Governments are issuing fewer bonds. On optimistic assumptions, America's government could buy back all its debt by 2010. American companies, in contrast, are borrowing hugely. That makes government bonds more valuable, compared with corporate debt. It reflects what Stephen Compton, head of bonds at Schroder Salomon Smith Barney in Europe, calls "the privatisation of the bond markets". Rising interest rates, too, are partly to blame for widening swap spreads. When the market thinks that interest rates will rise, there is more of an incentive to pay, rather than receive, a fixed rate. That incentive is greater at times when, as now, long-term rates are lower than short-term ones (an "inverted yield curve"). This means that anybody receiving a fixed (long-term) rate and paying a floating one loses money. Then there is the increase in corporate debt Credit Suisse First Boston (CSFB) expects American companies to issue as many bonds this year as they did last, when they sold record amounts. Importantly for swap spreads, one reason that firms are borrowing so much is to buy back their shares. So American companies are becoming ever more highly geared, and hence less creditworthy. Share buy-backs are running at double last year's level and, reckons David Goldman, a strategist at CSFB, will remain in vogue as long as debt is relatively cheap, and firms' managers think that more leverage is good for shareholder value. If this were not enough, swap-market folk also point accusing fingers at Gary Gensler, under-secretary at the American Treasury. In March, he said that federally sponsored agencies, such as Fannie Mae and Freddie Mac, which everybody assumed were guaranteed by the government, were not. The yield on their debt rose sharply. Since they are the biggest actors in the swaps market, so did swap spreads. Swap knot Taken together, these factors might seem enough to explain what has happened. But James Bianco, who runs an eponymous research firm, thinks they are not. Swap spreads, he points out, have been widening for the past three and a half years-before any of these other factors cropped up. And they do not explain why swap spreads have risen so fast this year. Mr. Bianco argues that two things dominate the pricing of interest-rate swaps: interest rates and credit concerns. For most of the 1990S swap rates went up and down with interest rates. That relationship has now largely broken down, suggests Mr. Bianco, because markets have become more concerned over risks to the financial system, as a result of the crises of recent years. If Mr. Bianco is right, this has important ramifications: it suggests there are growing worries about the riskiness of the swaps market, based on fears about the health of financial firms-by far the biggest participants. Pshaw, say critics: there is no credit risk in the swaps market. Forget about those telephone-number figures: no principal amount is exchanged in a swap, so what matters is not the "notional" amount at risk but the cost of replacing the swaps-a far lower number. Moreover, big banks post collateral if they are on the losing side of a swap, thus eliminating even any residual risk. Really? "Swaps are perceived as riskless. That must be wrong," says a treasurer at a big bank. Unlike futures exchanges, the swaps market looks only at current exposures, not potential ones (futures exchanges demand a dollop of cash up front to cover the second). And the market has grown so much that these potential risks are becoming huge. So it is at least plausible that people are starting to fret about the banking system. But why might this be a problem in America, of all places? Because it is taking ever more risk to generate the returns demanded by share-holders. Bank lending is growing by 10% at an annual rate, and property lending by 13.5%, its highest rate since 1989. If anything, these rates are accelerating because, after nine years of growth and few defaults, banks' backward-looking risk models tell them that lending is a fine business. And not just in America. In Europe, too, banks are taking more risk to generate higher returns. At best, the swap market is merely reflecting this increase in risk. At worst, it might be signaling that the world's financial system is in danger of becoming unglued. End of ISDA Press Report, Thursday, June 15, 2000. 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.
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