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600 Fifth Avenue        One New Change           1 Robinson Road      The Chuo Building, 1st Floor
Rockefeller Center      London EC4M 9QQ          #18-00 AIA Tower     2-17 Kagurazaka-Shinjuku-Ku
New York, NY 10020      Tel: (44) 207 330-3550   Singapore 048542     Tokyo 162-0825 Japan
Tel: (1) 212 332-1200   Fax: (44) 207 330-3555   Tel: (65) 538-3879   Tel: (813) 5227-3282
Fax: (1) 212 332-1212                            Fax: (65) 538-6942   Fax: (813) 5227-3283

                                       Website: www.isda.org
                                       E-Mail: isda@isda.org

                        TABLE OF CONTENTS
Letter From The Executive Director            ii

Member Relations                              1

Regional Committees                           3

Documentation                                10

Netting and Collateral Opinions              13

Risk Management                              14

Regulatory Issues                            19

Euro                                         22

Collateral                                   25

Accounting                                   25

Equity Derivatives                           26

Energy and Developing Products               27

Operations                                   27

Trading Practice                             29

Market Survey                                30

Tax                                          30

Conferences                                  32
International Swaps and Derivatives Association, Inc.
600 Fifth Avenue, 27th Floor
Rockefeller Center
New York, NY 10020-2302
United States of America
Telephone: (212) 332-1200
Facsimile: (212) 332-1212
email: isda@isda.org
website: www.isda.org

                                                                      March 2001

                                          Letter from the Executive Director

        Dear ISDA Member:

        For many, the year 2000 represented a period of transition – some of which went smoothly,
        such as those issues related to Y2K, and some of which went not so smoothly, like the U.S.
        Presidential election and the dot-com shakeout. As you know, after three and a half years,
        Rick Grove resigned as executive director and CEO and I assumed his position in January of
        this year. I am pleased to report that the recent ISDA leadership transition was seamless. I
        would like to take this opportunity to update you on some of the significant developments
        that shaped ISDA in 2000 under Rick’s leadership.

        Our continuing growth in membership is testament to our commitment to providing real
        value to our global constituency. 82 organizations joined the Association in 2000. With new
        members joining in the first quarter, ISDA’s membership now totals over 500 firms located
        in over 40 countries on six continents. Our global presence has expanded as well, with the
        openings of new full-service offices in Tokyo and Singapore to support our committees and
        member organizations in Japan and the Asia-Pacific region.

        In the area of public policy, we are pleased to report a major victory in the passage of key
        legislation: the U.S. Commodity Futures Modernization Act has finally become law, ending
        more than a decade of debate concerning the status of swaps transactions under the U.S.
        Commodity Exchange Act. We have won our fight for the enactment of legal certainty
        legislation, which ensures that over-the-counter derivatives transactions will continue to be
        enforceable in accordance with their terms.

        Public policy issues in Europe remain on the forefront of ISDA’s agenda. We continue to use
        multiple channels to work towards a more integrated single market in the EU, including the
        formation of roundtables, the issuance of comment papers, and the monitoring of key
        legislation at the European Community level and in member states.

        We have continued our well-established leadership role in the area of documentation with the
        publication of the 2000 ISDA Definitions, the successor to our widely used 1991 ISDA
        Definitions. Like its predecessor, the 2000 Definitions will serve as the standard for interest
rate and currency swap transactions documented under the 1992 ISDA Master Agreement.
Other publications this year included the 2000 Supplement to the 1993 ISDA Commodity
Derivatives Definitions, and, in conjunction with the Emerging Markets Traders Association
and the Foreign Exchange Committee, a revised version of Annex A to the 1998 FX and
Currency Option Definitions, which was published on our web site.

We opened the EMU Protocol (Greece) for signature in October, and 140 dealers and end-
user entities signed on before the December 15 deadline. The adherents included all three of
ISDA’s Greek dealer members: EFG Eurobank, National Bank of Greece, and Alpha Bank.
Our web site played a critical role in the EMU Protocol process; it contains the full text of the
protocol, background information and a complete list of adhering firms.

Underscoring our emphasis on e-commerce issues, we unveiled our new web site,
www.isdadocs.org, an online source for the full library of ISDA documentation. With its
easy-to-use shopping cart features, the site is the most efficient way to obtain both electronic
versions and hard copies of ISDA documents. Interactive versions of the library, which
permit navigation within and between documents, will be available shortly to members only.

Significant progress is being made on our Strategic Documentation Review, ISDA’s ongoing
effort to ensure that our documentation deals most effectively with marketplace issues facing
our members. The working groups (Master Agreement Structure, Force Majeure,
Termination, Valuation and Close-Out and Collateral Issues) and the Documentation
Committee have met and proposed amendments to the ISDA Master Agreement, which have
been circulated among members for review.

Credit derivatives provide a constant source of discussion in the marketplace. Likewise, they
provide a steady stream of issues for market practitioners and documentation specialists
involved in ISDA’s processes. These practitioners and specialists are currently considering
modifications to the 1999 ISDA Credit Derivatives Definitions to address the issue of
restructuring and detail regarding the settlement process. The increasing focus on the nature
of the product has led to a discussion to form a Credit Derivatives Committee to provide a
forum for market practitioners.

To ensure the enforceability of ISDA documentation, we now have a total of 35 legal
opinions on the enforceability of the netting provision of the ISDA Master Agreements,
including a new netting opinion for the Bahamas. Legal opinions on ISDA’s credit support
documents have now been obtained in 18 jurisdictions, and opinions commissioned in
Malaysia and South Korea were distributed last spring. We are continuing our efforts to
obtain collateral opinions from new jurisdictions, including Austria, Australia, Bermuda,
Denmark, Finland, Ireland, Netherlands Antilles, Norway, South Africa and Sweden.

In the area of risk management, our focus has been, and will continue to be, on responding
effectively to the Basel Committee’s initiative to reform the current capital accord. We
developed and published, with the active participation of some 100 individuals from 40
member firms based in 13 countries, a 60-page paper with detailed comments.

Following the release of our paper, working groups advanced the Association’s efforts in two
key areas of concern. Our OpRisk Working Group submitted the Operational Risk

Regulatory Approach (ORRA) Discussion Paper, previously referred to as the OpRisk
Supervisory Framework Project, to the Basel Committee and the European Commission.
Our dialogue with regulators on the treatment of OpRisk within the new Basel Accord will
continue now that the second consultative paper on the new Accord has been issued.

In addition to ISDA’s customary strong focus on public policy, documentation and risk
management issues, we also significantly enhanced our work in other key areas of the
derivatives business in 2000. In the collateral area, we released our Collateral Survey 2000, a
follow up to the less extensive survey presented in the ISDA 1999 Collateral Review. The
results of this year’s survey demonstrate how collateralization has emerged as a key tool that
is increasingly being used to mitigate credit risk in the privately negotiated derivatives

An exposure draft of the 2000 ISDA Credit Support Provisions was published on our web site
in response to recommendations in the 1999 ISDA Collateral Review. The new provisions
will consolidate and upgrade credit support documentation. Collateral practitioners met
offsite in Brussels, and later in London, to discuss the draft and amendments to ISDA’s
existing credit support documentation, and four focus groups are currently reviewing related
issues. A final draft of what are now called the 2001 ISDA Margin Provisions will be
available following this review.

The European Union Commission has issued a draft directive promising a thorough
rationalization of collateral law within the 15 member states of the EU by 2005. National
authorities in the EU are reviewing the proposal, which is notable for its clear support of
principles espoused by ISDA and other market practitioners. Our report, Collateral
Arrangements in the European Financial Markets, contains recommendations to reform the
existing legal structures in EU member states that impede the effective use of collateral. In
light of the vital importance of this issue to the EU financial markets, we hosted a seminar in
Brussels to discuss and ensure understanding of the legal obstacles hindering the use of
collateral in the EU. Over 100 delegates, representing member firms, the European
Commission and national authorities from most EU member states, attended the seminar.

In response to member interest, we conducted and published the first industry-sponsored
survey providing detailed quantitative information on the processing of privately negotiated
derivatives.    The ISDA 2000 Operations Benchmarking Survey: Over-the-Counter
Derivatives Operations Issues revealed two major themes: the need for greater automation in
processing and the need for standardization of terms. Our Operations Committee intends to
repeat the survey annually, and we expect that the 2001 survey will provide us with a set of
realistic recommendations for the industry to reduce operational delays and mitigate costs and

In the trading practice area, 2000 saw the inclusion of ISDA’s U.S. dollar par swap rates in
the Federal Reserve Board’s H-15 Daily Update of benchmark interest rates. The publication
of the U.S. dollar ISDAFIX rates by the Fed is a significant step in increasing their
acceptance in the market and serves as further indication of the swap curve’s benchmark

The Equity Derivatives Committee is pressing on with a project to explore some of the
reasons behind confirmation backlogs related to event language in all forms of equity
derivative transactions. The Energy and Developing Products Committee (formerly the
Commodity Derivatives Committee) has met in both London and Houston to discuss
documentation and market practice issues.

As mentioned earlier in this letter, during 2000 ISDA opened our third full-service office in
Tokyo to better support our members there. Consequently, we established and strengthened a
number of key committees; we also established Shadow Committees for non-Japanese
speaking professionals of ISDA member firms in Tokyo to act as a liaison with local
committees for meetings conducted in Japanese when and if necessary.

ISDA’s fourth full-service office was opened in Singapore during the latter half of 2000 in
order to better serve our members and better represent our industry’s interests in the Asia-
Pacific region. During the year, we maintained an active dialogue with public policy makers
in a number of jurisdictions: Hong Kong, Taiwan, China, Singapore and Malaysia, to name
several. We also actively participated in or monitored key issues affecting our mission and
our members in the region, such as the GITIC situation. Finally, we are revamping our
committees in the area to address issues that arise within key functions of the business and to
encourage members’ participation in these efforts.

In 2000, we also revitalized our Latin American Committee. With enhanced staff and
member input, we began to work actively with regulators, members and other industry
participants in order to study and resolve issues related to derivatives and risk management in
the region.

Attendance at ISDA conferences this past year has been impressive. Our 2000 Annual
General Meeting in Amsterdam attracted over 700 delegates, setting a new record. In
recognition of technological advances in the industry, we included e-commerce forums in our
AGM agenda, as well as in our annual Member Updates in London, New York, Singapore
and Tokyo. Participation at the updates was high in each location, indicating a significant
level of interest in this topic. We will continue to highlight e-commerce issues in upcoming

ISDA’s Board of Directors continued to provide strong strategic direction to the Association
throughout the year. At the AGM in Amsterdam, Keith Bailey was elected Chairman,
succeeding Mark Harding. ISDA delegates also reelected eight Directors and added four new
Directors. ISDA welcomed to the Board: Damian Kissane of Deutsche Bank; Kazuhiko
Koshikawa of The Sanwa Bank Limited; Robert Mark of the Canadian Imperial Bank of
Commerce; and Stephen Targett of National Australia Bank. During the year, Tim
Fredrickson of UBS Warburg joined the Board, replacing Mark Harding. ISDA wishes to
thank, Mark together with Sebastian Cahen, Suneel Bakhshi, and Ravit Mandell for their
service to the Association as Board members during the past year.

ISDA’s staff capabilities were significantly strengthened with the opening of ISDA’s Asia-
Pacific and Tokyo offices. In spring 2000, Shigeki Kawano joined ISDA from the Bank of
Tokyo-Mitsubishi to head the Association’s new Tokyo office. Angela Papesch, previously

with ISDA’s European office, relocated to Singapore to head the Association’s new Asia-
Pacific office, which opened in October.

The departure of Nick Collier led to the appointment of Emmanuelle Sebton, Head of Risk
Management and Richard Metcalfe, whose responsibilities include both policy and risk
management, as co-heads of the European office. ISDA also wishes much success in their
new endeavors to several members of the senior staff, Susan Hinko, David LaFleur and
Milton Bellis, who left during the year.

On behalf of our Board of Directors and our staff, I wish to thank you for your membership
in ISDA. The support of our members – and their participation in the range of activities in
which ISDA is involved – continues to be the defining strength of the Association. We look
forward to continuing to serve the derivatives and risk management community by
maintaining and enhancing your close involvement in our efforts.


Robert G. Pickel
Executive Director and Chief Executive Officer



                                      Keith A. Bailey
                                     Managing Director
                            Merrill Lynch Capital Services, Inc.

Thomas Montag, Vice-Chairman                         Dennis Oakley, Treasurer
Managing Director-Partner                            Managing Director
Goldman Sachs (Japan) Ltd.                           The Chase Manhattan Bank

Douglas Bongartz-Renaud, Secretary                   Richard Grove
Adjunct Directeur                                    Executive Director & Chief Executive
ABN Amro Bank N.V.                                   Officer


Henning Bruttel                                      Kazuhiko Koshikawa
Senior Manager                                       Senior Vice President
Head of Foreign Exchange/Commodities                 The Sanwa Bank Limited
Dresdner Bank AG

Sebastien Cahen                                      Ravit E. Mandell
Global Interest – Rates Derivatives Director         Managing Director Derivatives Trading
Societe Generale                                     Salomon Smith Barney

Jerry del Missier                                    Dr. Robert Mark
Managing Director                                    Senior Executive Vice President
Barclays Capital                                     Canadian Imperial Bank of Commerce

Tim Fredrickson                                      Jonathan Moulds
Global Head of Fixed Income Derivatives &            Head of Global Rates
   Government Bonds                                  Bank of America
UBS Warburg

Diane Genova                                         Ernest Patrikis
Managing Director & Deputy General Counsel           Senior Vice President & General Counsel
J.P. Morgan & Co. Incorporated                       American International Group, Inc

Mark Haedicke                                        Maurits Schouten
Managing Director & General Counsel                  Managing Director & Head of Global
Enron Capital & Trade Resources Corp.                Equity Derivatives Trading
                                                     Credit Suisse First Boston International

Jose Manuel Hernandez-Beneyto                    Luciano Steve
Director General Adjunto                         Head of Fixed Income
Banco Santander                                  Banca Commerciale Italiana

George James                                     Teruo Tanaka
Head of Global Fixed Income Derivatives          Senior Manager, International Treasury
Morgan Stanley Dean Witter                       The Industrial Bank of Japan, Limited

J. Damian Kissane                                Stephen Targett
Chief Operating Officer                          General Manager
Deutsche Bank AG                                 Global Markets Division
                                                 National Australia Bank

                         MEMBER RELATIONS

Throughout 2000, ISDA continued in its efforts to update members on key industry
issues in areas such as documentation, regulation, accounting, emerging markets, e-
commerce, risk management and Euro implementation. Increased use of electronic
communications, the ISDA internet website and the bimonthly ISDA newsletter
enabled the Association to keep its membership informed and involved in an efficient
manner throughout the year. During the year, ISDA directors and staff provided
presentations at seminars and member update meetings covering a range of topics in
over 35 countries. With the opening of new offices in Tokyo and Southeast Asia in
2000, the level of service offered by the Association will only improve in the years to

The Association’s member benefits, level of activity and the importance of issues that
ISDA addressed in 2000 continued to fuel a significant increase in membership. 82
new members joined the Association last year, including the first from China and
Turkey. ISDA’s membership in 2000 totaled over 500 financial institutions,
government entities, corporations and professional service providers from 39
countries. The new members reflect in part the growth of swaps and other derivatives
activity in energy, insurance and emerging markets.

During 2000, ISDA members participated in the following committees: Accounting,
Collateral, Documentation, Energy and Developing Products, Equity Derivatives,
Euro, Operations, Regulatory, Risk Management, Tax, and Trading Practice, as well
as regional committees in Japan, Asia Pacific, Canada, Eastern Europe, Latin
America and South Africa.

In 2000, ISDA welcomed the following institutions as new members:

                              PRIMARY MEMBERS

Accord Energy Limited                          F. van Lanschot Bankiers N.V.
Arab Banking Corporation (B.S.C.)              Moscow Narodny Bank Limited
Banca d'Intermediazione Mobiliare              Nikko Salomon Smith Barney Limited
   IMI S.p.A.                                  Osterreichische Volksbanken-
Bank of China                                      Aktiengesellschaft
Banque Degroof SA                              Overseas Union Bank Limited
BG Bank A/S                                    PNC Bank, N.A.
Daiwa Securities SB Capital Markets            Turkiye Garanti Bankasi A.S.
   Co. Ltd.                                    United Overseas Bank Limited
EFG Eurobank S.A.

                          ASSOCIATE MEMBERS

Allen & Gledhill                          International Financial System Ltd.
Arcordia LLC                              Karatzas & Partners
Bingham Dana LLP                          Kiodex, Inc.
Caminus Corporation                       Mannheimer Swartling Advokatbyra
Cantor Fitzgerald International              AB
CapClear Limited                          MoneyLine
Creditex, Inc.                            Mori Sogo Law Offices
CreditTrade                               Nagashima Ohno & Tsunematsu
Cygnifi Derivatives Services LLC          Niederer Kraft & Frey
Derivatives Documentation Limited         O'Melveny & Myers LLP
DLA                                       Pekin & Pekin
eDerivative.Com, Inc.                     Peltonen, Ruokonen & Itainen Oy
e-Mid S.p.A.                              Raft International
European Transaction Bank ag              Reech Capital PLC
Fixed Income Money Market and             Sentry Financial System LLC
   Derivatives Assoc. of India            S.J. Berwin & Co.
Framesoft AG                              Treasury Connect
GlobeOp Financial Services                TriOptima
GNI Limited                               Troutman Sanders, LLP
Icor Brokerage Inc.                       Tullett & Tokyo Liberty Inc.
iFOX International Inc.                   Weiss-Tessbach Rechtsanwalte OEG

                          SUBSCRIBER MEMBERS

Ace Capital Re International Ltd.         Ontario Power Generation Inc.
Ambac Financial Group, Inc.               Pacific Forest Resources, Inc.
Bayview Financial Trading Group,          Petrus Securities, L.P.
   L.P.                                   Prudential Banking Plc
Britannia Building Society                Queensland Treasury Corporation
Business Development Bank of              Societe Nationale des Chemins de fer
   Canada                                    Belges (SNCB)
Caisse de depot et Placement du           Standard Life Investments Limited.
   Quebec                                 Susquehanna Financial Products
Export Credits Guarantee Department       TransCanada Pipelines Limited
HBK Investments L.P.                      Trout Trading Management Company
Inter-American Development Bank              Ltd. (TTMC)
International Finance Corporation         Union Bancaire Privee
Keyport Life Insurance Company            Western Australian Treasury
Mitsui Marine and Fire Insurance             Corporation
   Company Limited                        Yasuda Fire & Marine Insurance Co.,
National Bank of Hungary                     Ltd.

                          REGIONAL COMMITTEES

                                ASIA-PACIFIC REGION

ISDA opened a full-service office in Singapore to support its members in the Asia-Pacific
region including Australia and India in late October 2000. Angela Papesch, previously of
ISDA’s European Office, has relocated to head the Asia-Pacific office. The Association
marked the occasion by hosting a day-long Member Update and a reception for members,
policymakers and other industry participants in Singapore. The following day ISDA
conducted a seminar on the Fundamentals of ISDA Documentation.

ISDA's decision to open an office in South East Asia reflects the strong recovery of the Asian
markets from the financial crisis of recent years and the continuing dramatic growth in the
derivatives markets throughout the region.         The Asia-Pacific Office supports the
Association's Local Steering Committees as well as Legal & Regulatory Committees and also
aims to enhance local transparency concerning other ISDA activities primarily taking shape
in Europe and the US.

Also in 2000, ISDA hosted conferences on the 1992 ISDA Master Agreement in Bombay,
Kuala Lumpur and Bangkok and with the presence of its new offices ISDA aims to increase
the number of conferences, seminars and member meetings provided in the Asia-Pacific

Over recent years, ISDA has established a dialogue with a variety of regulatory bodies in the
Asia Pacific region. In particular, the Monetary Authority of Singapore ("MAS") and the
Hong Kong Monetary Authority ("HKMA") have been very supportive of ISDA establishing
offices in the region.

In September 2000, the MAS issued its final credit derivatives guidance, which incorporated
a number of comments ISDA submitted in late 1999. In October 2000, the HKMA released
amended draft rules regarding capital treatment of credit derivatives. ISDA provided
comments the following month.

Early in 2000, ISDA made submissions to The Securities and Futures Commission ("SFC")
in Taiwan regarding derivative disclosure obligations on Qualified Foreign Institutional
Investors ("QFIIs"). In December of 2000, the SFC responded by announcing that the
previously announced disclosure obligations and related protocols no longer applied and that
market participants were now only required to disclose derivative transactions on an
exceptional basis.

In late 1999, the liquidation committee of Guangdong International Trust and Investment
Corporation ("GITIC") rejected a number of swaps claims on the ground, inter alia, that a
transaction-specific approval from the State Administration of Foreign Exchange ("SAFE")
should have been obtained by GITIC. SAFE also stated that the PRC financial institution
should hold an appropriate license issued by SAFE or the People's Bank of China ("PBoC")
with an approved scope of business for "conducting foreign exchange transactions for its own
behalf or on behalf of its clients". As a result, market participants were seeking clarification
on the regulatory requirements when entering into OTC derivative transactions with PRC

In August of 2000, ISDA wrote a letter to the SAFE, requesting its assistance in clarifying
whether a derivative transaction with a PRC counterparty would require a transaction-specific
approval from SAFE. ISDA was happy to receive a positive response from the Director
General of SAFE in late November confirming that PRC commercial banks and non-bank
financial institutions conducting derivative transactions for hedging purposes would not be
required to obtain a transaction specific approval from SAFE.

ISDA subsequently met with PBoC and SAFE in Beijing to further develop the dialogue
between PRC regulators and the OTC Derivatives industry and it is expected that the
dialogue will continue in 2001. Copies of ISDA's original submission and of the letter from
SAFE (together with the English translation) are available to members of ISDA.

                                JAPAN COMMITTEES

On April 13th, ISDA formally opened its new office in Tokyo in support of its Japanese
committees and member organizations, which include the country’s leading banks as well as
other financial institutions. The office also serves non-Japanese members with operations in
Japan. The Association’s decision to open an office in Tokyo reflects the increased level of
activity and the significant issues that have emerged in the Japanese market.

The Tokyo office is headed by Shigeki Kawano, who joined ISDA from the Bank of Tokyo-
Mitsubishi (BTM) and assigned to oversee policy matters for Japan. Yasuko Horibe,
previously of ISDA’s New York Office, has relocated to Tokyo to serve as the office’s
assistant director. Ms. Horibe’s responsibilities include overseeing member relations in
Japan, as well as ISDA’s Asia-Pacific conferences.

Trading Practices and Documentation Committee

The ISDA Documentation Committee was active in Japan during 2000. In July, member
meetings were held to discuss electronic delivery of ISDA publications and to select topics
for the committee. The majority of the attendees proposed discussion on issues relating to
new products such as Credit Derivatives, Equity Derivatives and Energy & Weather
Derivatives. In order to reflect the members’ proposal, three new product sub-committees
were established under the newly renamed Trading Practices and Documentation Committee.
This committee is intended to activate discussion and to resolve current issues related to the
products with active participation of traders and sales professionals supported by technical
help of documentation specialists. The general documentation committee will continue to
exist. The Committee also started to produce the Japanese translation of the 1999 ISDA
Credit Derivatives Definitions and continued to work on the project to publish a Japanese-
language User’s Guide to the 1998 FX and Currency Option Definitions.

Collateral Committee

During 2000, ISDA’s Collateral Committee was also active. In May, the members of ISDA’s
Japan Collateral Committee submitted the comments for Article II (by Operations Working
Group) and Article V (by Legal Working Group) on the “Exposure Draft”. In July, the
member meeting was held to further discuss the current status of 2000 ISDA Credit Support
Provisions and accounting issues on collateral under new fair value accounting guidelines in
Japan. In September, ISDA Board director, Teruo Tanaka of IBJ, attended Collateral
Implementation Working Group Meeting in Brussels for further discussion on the subject.

Operations Committee

Activities of the ISDA Tokyo Operations Committee in 2000 included discussion of the IT
role and E-commerce focusing on OTC derivatives markets and Straight Through Processing
(STP). The Operations Committee also discussed on-line automatic confirmation matching.

Regulatory Committee

ISDA’s Tokyo Regulatory Committee held several meetings on topics including New
Accounting Rules, the Financial Service Act in Japan and the Basel Committee Capital
Accord Reform process. In October, the Legislative sub-committee of ISDA’s Tokyo
Regulatory Committee submitted comments on proposed regulations under the Law on Sales
of Financial Products when the Japanese Financial Services Agency requested public

Shadow Committee

In June, the ISDA Japan Shadow Committee was established to provide a forum for
discussion of key areas in the Japanese derivatives market for the non-Japanese speaking
professionals of ISDA member firms in Tokyo. The committee set up three sub-committees
for Collateral, Credit Derivatives and General Documentation.

ISDA held several meetings with Japanese regulators during the year to discuss issues of
mutual interest. In April, when ISDA opened its Tokyo office, the ISDA Board of Directors
met with the BoJ and the FSA. In October, a follow-up visit was made to the BoJ and the
FSA by the same ISDA representatives along with other European-based ISDA Directors and
staff members, where discussions focused on Japanese Financial Systems in Big Bang, the
reform of Basel capital accord and ISDA’s global and Japanese activities. Emmanuelle
Sebton, Head of Risk Management separately met with the BoJ and the FSA for further
discussion on New Capital Adequacy Rules.

                      CANADIAN MEMBERS’ COMMITTEE

In the Blue Range Resource case ISDA, Enron, and others argued that long-term natural gas
supply contracts are “forward commodity contracts” thus eligible financial contracts and are
entitled to termination and netting protection under the Companies Creditors Arrangement
Act (“CCAA”) even though they anticipated physical delivery of an underlying commodity.
The Alberta Court of Appeal affirmed the Appellant’s and ISDA’s arguments by overturning
a lower court ruling that “forward commodity contracts” were restricted to “financial”
commodity contracts as distinct from “physical” commodity contracts. The Court of Appeal
rejected this reasoning on the basis that it was contrary to the CCAA and Parliament’s intent
of protecting the risk management structure within the derivatives market.

The Court restricted the definition of “forward commodity contracts” to contracts involving
fungible commodities that trade in a liquid and volatile market. The Court considered that
derivative instruments of all varieties fall within the list of eligible financial contracts and that
physically settled forward commodity contracts are an important part of the derivatives
market. Further, the Court reasoned that commodity forwards are risk management tools that
serve a financial purpose unrelated to settlement.

In other activity, ISDA responded to efforts of the Ontario Securities Commission (OSC) on
proposed National Instrument 81-102 and its application to swaps entered into by mutual
funds. ISDA’s July response reflected the view of its Canadian membership that this effort
would present compliance difficulties for mutual funds thereby impeding efforts to enter into
swap transactions.

On September 8, 2000, the OSC proposed rule 91-504, intended to bring OTC derivatives
transactions under the purview of Ontario's Securities Act. The rule failed to be approved by
the Minister of Finance. The Minister returned the rule to the OSC on November 2, 2000 for
further consideration questioning the need for the rule given the balance between the
objectives of the rule and the costs and restrictions that would be placed on market
participants. The Minister also questioned whether the OSC’s objectives could be achieved
by identifying specific classes or transactions and related parties that would be regulated
rather than imposing the provisions of the Securities Act to all OTC derivatives transactions
with exemptions from the application. Many of the concerns raised by the Minister reflected
the same concerns expressed by ISDA and the Canadian Bankers Association.

                       EASTERN EUROPEAN COMMITTEE

ISDA’s Eastern European Committee has continued to work with local market participants
and local authorities, particularly in Central and Eastern Europe, to promote legal certainty,
particularly in the areas of close-out netting, local documentation, and appropriate regulation.

In March, the Association entered into a framework contract with the European Bank for
Reconstruction and Development (EBRD), which engaged the Association (together with
Allen & Overy, its European legal counsel) as consultants in drafting close-out netting
legislation in up to five Central and Eastern European countries. With the support of the
EBRD, it is hoped that real progress can be made in the region.
Czech Republic

During 1999, the Financial Markets Association (FMA), which includes the Czech National
Bank, developed draft close-out netting legislation, and ISDA reviewed the drafts through
Allen & Overy. Consequently, in 2000, the Securities Act was amended to recognize the
right of securities dealers to perform close-out netting under the terms of a netting agreement
(the amendment includes definitions of "close-out netting" and "netting agreement"). It is
now hoped that this amendment will form the basis of an anticipated amendment to the
Bankruptcy and Composition Act. The amended Securities Act also includes a revised
definition of "derivative", which more correctly reflects the legal characteristics of an over-
the-counter derivative.

During the year, the FMA, assisted by Allen & Overy, also continued to pursue its goal of
developing standardized local derivatives documentation, along the lines of the
documentation produced by the Hungarian Forex Association (in consultation with ISDA) in
1999. The documentation is intended to be compatible with ISDA's existing market standard
documentation, taking the form of local supplements to the ISDA Master Agreement and
ISDA definitions, and to be capable of use for cross-border trading. ISDA supports these
efforts and hopes that other markets will find this approach to be a useful model.


In conjunction with its work with the EBRD, the Association has chaired a series of three
meetings in Budapest. In March, the Association met with representatives of the Hungarian
National Bank and market representatives, including the Hungarian Forex Association, to
discuss the merits of introducing close-out netting legislation. In May, the Association
returned to Hungary, accompanied by the EBRD, to meet with representatives of the National
Bank as well as representatives of the Ministry of Finance. At these initial meetings, strong
interest for developing close-out netting legislation was expressed by all parties.

Building on the momentum of these early meetings, the Association and the EBRD returned
in June to meet with a broader group of representatives of the Ministry of Finance, the
National Bank, the Financial Services Authority and the Ministry of Justice. Draft close-out
netting legislation was provided by the Association and by year-end comments had been
received from key participants, although the draft legislation had not yet been proposed in


In March, ISDA met with representatives of the Polish National Bank and the Polish Finance
Ministry, as well as market representatives, to discuss the merits of introducing close-out
netting legislation.

Towards the end of 2000, the Polish National Bank put forward proposals to amend the
Polish Banking Law to recognize close-out netting. ISDA understands that the proposed
amendment, because it is an amendment to the Polish Banking Law, will only recognize the
enforceability of close-out netting for the benefit of Polish banks. However, ISDA welcomes

this development and hopes that the authorities in Poland will work to enact a broader
recognition of close-out netting.

Earlier in the year, legislation was adopted that appears to require contracts with Polish
counterparties to be signed in Polish in addition to any other language version that may be
signed. The adoption of the Polish Language Act became one of the dominant issues at
meetings of the Task Force in the second half of the year. ISDA, at the request and on behalf
of the members, obtained translations of the ISDA Master Agreement, the 2000 ISDA
Definitions and the 1998 FX and Currency Option Definitions (together with the revised
Annex A). These documents do not constitute official ISDA publications, and interested
members were asked to finance the translation efforts. The documents are available from the
Association's European Office.

Following the adoption of the Act, ISDA monitored developments in Poland, and sought to
express support for legislative change in conjunction with other industry associations. The
Association understands that a draft amendment to the Act was withdrawn from the Polish
Parliament late in the year, but efforts to amend the Act are continuing.


In May, ISDA, accompanied by the EBRD, met with representatives of the Slovak National
Bank and Finance Ministry to discuss the merits of introducing close-out netting legislation.
Both the National Bank and the Finance Ministry expressed positive interest.

Turkey, Greece and Israel

ISDA has used the expertise and commitment of the Eastern European Committee to pursue
initiatives in Turkey, Greece and Israel. In May, for the first time in a formal capacity, the
Association visited Turkey, Greece and Israel. ISDA met with the Bank of Greece, the
Hellenic Bank Association, the Bank of Israel and members of ISDA in the region, and all
concerned expressed interest in improving the legal infrastructure required for more
developed OTC derivatives markets.

In December, the Committee discussed the enforceability of close-out netting in Turkey and
Greece, assisted by local lawyers. On the basis of these discussions, ISDA is considering
commissioning a netting opinion for Turkey. At this stage, Greece may be a jurisdiction
where it is more appropriate for the Association to promote the enactment of close-out netting

                                   LATIN AMERICA

ISDA’s Latin American Committee was reactivated in November 2000 to focus on issues
important to the development of the over-the-counter derivatives markets throughout the
region, with initial emphasis on Mexico, Brazil, Argentina and Chile. At that time, the Latin
American Committee and three subcommittees covering Mexico, Brazil and Argentina/Chile
were formed. The main goal of the initiative is to work with local participants and local
authorities promote legal certainty and to facilitate development of derivatives business, local
documentation, financial innovation, and improvement of risk management practices.
Membership development within the region continues to be a major focus of the Latin
American initiative. ISDA staff and members of the Board of Directors visited with
representatives of the Central Bank and other governmental entities in November and
planning additional meeting in Mexico, Argentina and Brazil for early 2001.


ISDA’s Mexican subcommittee has been closely monitoring the impact of the May 13, 2000
Mexican Law on Commercial Reorganizations, which ensures enforceability of close-out
netting provisions of a master agreement, such as the ISDA Master Agreement, and provides
a broad definition of financial derivative transactions. To that end, ISDA commissioned a
netting opinion from Mexican counsel, and work with Mexican Bankers Association on
development of local documentation is also under consideration. The Mexican subcommittee
has planned a two-day conference on Derivatives and Risk Management in Mexico in
Mexico City in spring 2001 with the Central Bank of Mexico, Nacional Financiera, the
Mexican Bankers Association and MexDer.


ISDA’s Brazilian Subcommittee action plan has identified projects such as the proposed
amendment to Medida Provisoria, which currently applies solely to multilateral derivatives
activities, and the development of the Brazilian Bankruptcy bill, each of which will affect the
growth of the local OTC derivatives markets, and work on credit derivatives initiatives and
local documentation led by local institutions.


The action plan for ISDA’s Argentine/Chilean Subcommittee contemplates close monitoring
of the Close-Out and Netting Bill to amend the Argentine Bankruptcy Code, which was
approved by the Senate on November 22, 2000, and identification of opportunities together
with the Argentina Derivatives Association in connection with ongoing local documentation
projects. The bill, when passed, will ensure the enforceability of the termination and close-out
netting provisions of a master agreement, such as the ISDA Master Agreement, governing
derivatives and repurchase contracts, as well as the enforceability of collateral arrangements.


2000 ISDA Definitions

At the end of June, the Association published the 2000 ISDA Definitions. The Definitions
consolidate and update the 1991 ISDA Definitions, one of the most widely-used documents
in the ISDA library of publications, the 1998 Supplement to the 1991 ISDA Definitions and
certain parts of the 1998 ISDA Euro Definitions. The Definitions, which have been designed
primarily for use in documenting interest rate and currency derivatives, have already been
broadly accepted and are in general use by market participants.

Some of the key themes of the Definitions include:

   •   New, flexible structure consisting of the core Definitions booklet and the
       Annex (containing provisions that are most likely to need updating over
       time) facilitates future updates.

   •   Focus on interest rate and currency derivatives (the Association has
       published various product-specific sets of definitions in recent years).

   •   The Euro replaces the "national currency units" (see the NCU Supplement,
       available at www.isda.org).

   •   The Definitions include several new currencies and floating rates and
       modified floating rate definitions.

   •   The swaption, optional/mandatory early termination and cash settlement
       provisions have been revised.

   •   New concept of "Fallback Exercise".

The concept of Fallback Exercise, which is presumed to apply to a swaption where the
underlying swap is a simple fixed-for-floating interest rate swap unless specifically
disapplied, is one of the most significant changes to be introduced in the new document.
Under Fallback Exercise, such a swaption is deemed to be exercised at its expiry so long as it
is in-the-money by at least 10 basis points. The purpose for the introduction of this concept is
to prevent a significant loss of value in the swaption through inadvertence on the part of the
buyer of the swaption. While similar in operation, Fallback Exercise is distinct from
Automatic Exercise. The new Definitions still provide mechanics for Automatic Exercise,
which potentially may be applied to any type of swaption, but the applicability of Automatic
Exercise, together with any threshold for exercise, must be separately negotiated by the

By the end of the year, the Association had held sessions in London, Paris, Frankfurt,
Sydney, Singapore and Tokyo to facilitate understanding of this important new document.
Strategic Documentation Review

The Termination, Valuation and Close-out Working Group drafted eight annexes to a
proposed protocol in order to effect changes to the 1992 ISDA Master Agreement. Three
significant changes are contemplated. First, a party’s failure to make any payment or
delivery will constitute an Event of Default if such payment or delivery failure is not
remedied on or before the first Local Business Day after a notice of payment failure is given
or delivery is not be accomplished in accordance with customary market practice. The
current ISDA Master Agreement provides for a three-day grace period after a notice of failure
is given or a delivery failure occurs.

Second, a new term called Replacement Value is introduced, which if the parties agree,
would replace the current Master Agreement’s reference to Reference Market-makers,
Market Quotation and Loss. Third, the definition of Specified Transaction is expanded to
cover other types of financial market transactions such as repurchase agreements and
securities lending.

The Force Majeure and Impossibility Working Group drafted a protocol to address the
occurrence of force majeure and impossibility events that impact a party’s ability to perform
its obligations under the ISDA Master Agreements. Force Majeure Events are defined and
circumstances of Illegality are addressed. The group also discussed the practice employed by
certain institutions of ring-fencing the obligations of a branch, so that a counterparty’s rights
are limited to the assets of the relevant branch office.

The Master Agreement Structural Issues Working Group reviewed and commented on the
Cross-Product Master Agreement, published by the Bond Market Association, and various
other forms of bridges to allow the ISDA Master Agreement to be treated as a master-master.
The group also advocated the notion of a single agreement to cover a wide range of
transactions and developed a Cross-Product Bridging Agreement, which would allow the
close-out amounts under various industry master agreements to be taken into account in
Section 6 of the ISDA Master Agreement as Unpaid Amounts.

Strategic Documentation Review Opinions

ISDA requested counsel in 35 jurisdictions to provide advice on the impact of a number of
proposed changes to the ISDA Master Agreement arising out of the Strategic Documentation
Review. These include: (i) amendments to Sections 5 and 6 of the Master Agreement; (ii)
the inclusion of a Force Majeure Annex in the Master Agreement; (iii) the characterization of
the ISDA Master Agreement as an underlying agreement under the Cross Product Master
Agreement published by the U.S. Bond Market Association; (iv) the development of ISDA’s
Cross Product Bridging Annex; and (v) the expansion of the types of transactions covered by
the opinion to include buy-sell back transactions, credit spreads, repurchase transactions,
securities lending transactions and physical commodity transactions. Small working groups
are currently reviewing the opinions, which will ultimately be published on ISDA’s website
in April, together with final versions of the Annexes mentioned above.

Collateral Documentation Initiatives

An Exposure Draft of the 2000 ISDA Credit Support Provisions (the “Provisions”) was
distributed at the 2000 AGM. During the summer, comments on the Provisions were
received from a wide range of ISDA members. Each institution that submitted comments on
the Provisions received a response letter and the Provisions were redrafted in light of member
input. Meetings of the Collateral Working Group, a small group of practitioners and attorneys
from a variety of institutions, were held in September and December to discuss the revised
draft. Draft Amendments to the New York and English Law Credit Support Annexes, as well
as drafts of a reconciliation paper, a standard settlement cycle paper and a case study were
also reviewed.

As a result of the work of the Collateral Working Group, a new draft of the Provisions was
distributed to the Collateral Committee on January 22, 2001. The Collateral Committee met
in London on February 6, 2001 and in New York on February 16, 2001 to discuss the new
draft of the newly named 2001 ISDA Margin Provisions and the draft Amendments to the
New York Law and English Law Credit Support Annexes. A total of 225 people attended the
meetings. It is anticipated that the new collateral documentation will be finalized by early
April and a panel presentation on the documentation will be made at the ISDA Annual
General Meeting.

Credit Derivatives

A credit derivatives working group held several meetings in late 2000 to consider a possible
new definition of Restructuring in the 1999 Credit Derivatives Definitions. It is anticipated
that a new definition will be published in April. In addition, another credit derivatives
working group is considering modifications to the definition of Successor in light of the
demerger of National Power in England. ISDA is considering providing a formal statement
on the situation.

Work has also continued on the User’s Guide to the 1999 ISDA Credit Derivatives
Definitions. It is expected that the User’s Guide will be completed in 2001.


ISDA announced in November 2000 that its complete library of documents was available in
electronic form. With the launch of its newly structured website in October 2000, interested
individuals can order ISDA documents either on the existing website (www.isda.org) or on
the documents site (www.isdadocs.org).

The electronic availability of the ISDA library of documents continues ISDA’s electronic
documentation initiatives. Following on the success of the electronically-facilitated EMU
Protocol in 1999, ISDA has increasingly utilized electronic means to serve the derivatives

ISDA members as well as non-ISDA members can access either ISDA website and order
electronic documents, although members received discounted rates. In addition, ISDA is

now offering the 1992 ISDA Master Agreement both the local currency – single jurisdiction
and multi-currency – cross border versions free of charge.

ISDA documents will continue to be offered in print form and documents can be ordered in
the same way as the electronic documents. Interactive versions of the library, which allow
users to navigate within and between documents (through inter-sectional and inter-document
hyperlinks), will be available to members soon.


Mitigation of risk through the use of netting and collateralization continued to be a central
consideration for the Association throughout 2000. Both the Strategic Documentation
Review and the efforts of the ISDA Collateral Committee focused considerable efforts on
these areas during the year. A further manifestation of this focus was the expansion of the
Association’s efforts to collect opinions on the enforceability of the ISDA credit support
documents and the close-out netting provisions contained in the ISDA Master Agreement.

Netting Opinions
At the end of 2000, netting opinion updates were obtained from counsel in 35 jurisdictions.
The entire library of netting opinions, which are requested on an annual basis, is now
available to members on the Association’s website. Primary ISDA contacts and legal opinion
contacts at each member institution have a password and identification code to permit access
to the opinions.

Collateral Opinions
The Association received collateral opinions from counsel in Malaysia and South Korea in
2000 and these opinions, as well as the collateral opinions from 15 other jurisdictions, are
now available on the Association’s website for members. The Association anticipates
requesting updated collateral opinions from counsel in those 17 jurisdictions in 2001.

                             RISK MANAGEMENT

In 2000, ISDA continued to put emphasis on regulatory capital issues, by entering into an
active dialogue with the Basel Committee and the EU Commission Services on the basis of
its original response on the new capital adequacy framework. Aside from the Basel Accord
reform, ISDA also contributed to the development of regulatory policy in the field of credit
derivatives, and expanded its program of risk management seminars and conferences.

Reform of the Basel Accord

ISDA finalised its response to the Basel Committee Consultation Paper on the new capital
adequacy framework for banks in February 2000. ISDA concluded that the regulators should
promote the following principles:

       1. Clarity: the assumptions underlying the new framework should be made
       explicit where this is possible. For instance, the horizon set for holding
       capital (equivalent to the holding period retained in the trading book rules),
       as well as the loss percentile assumed, should be clearly defined. This is a
       pre-requisite for establishing a consistent, incentive-compatible framework,
       particularly since relying on portfolio risk models in the longer-term future is
       envisaged. ISDA suggests retaining 99th percentile loss over a one year
       horizon as a basis for setting capital requirements. This would ensure that
       capital charges constitute a maximum insolvency standard that is non-
       constraining for well-managed banks.

       2. Economic consistency: regulatory capital charges should be aligned
       more closely with banks’ economic capital, and certainly be directionally
       consistent with it. They should for this purpose be sensitive to the same risk
       drivers that govern economic capital variations. The current Accord fails this
       test. ISDA has identified a range of key factors, and derived capital
       requirements based on these factors. For instance, credit risk charges are
       dependent on the tenor of the exposure, the default probability of the issuer,
       the loss given default on the facility, and diversification. Similarly, where
       analyzing contingent credit risk, ISDA has sought to link default correlation
       with essential parameters, such as the country of incorporation and industry
       of the obligors. Economic consistency is a pre-requisite for the proportionate
       recognition of risk mitigation (credit derivatives, operational risk insurance).
       Finally, ISDA strongly advocates the recognition of banks’ potential future
       exposure measures by the regulators in the calculation of counterparty risk

       3. Simplicity: regulators should also seek to avoid excessive complexity in
       developing new capital rules. These need to remain sufficiently simple,
       although robust, in order not to burden banks with disproportionately high

       implementation costs. To this end, ISDA suggests a framework for credit
       risk, where the same matrix of capital requirements applies whether or not
       the bank has been allowed to use its internal ratings for regulatory purposes.
       Similarly, the incorporation of credit risk mitigation in the framework is not
       differentiated according to whether the capital charges are internal ratings or
       external ratings-based.

       4. Incentives for good risk management: finally, it is essential that
       regulators consider carefully whether minimum capital requirements are
       appropriate protection against the forms of risk under consideration. ISDA
       does not believe that charging against operational risk is sensible, since this
       risk is mostly endogenous and should therefore normally be addressed by
       adopting proper systems and controls. Establishing minimum capital charges
       against operational risk would lead to arbitrage, and runs the risk of
       discouraging the development of adequate controls, in particular if the
       charges applied bear little relation to the underlying risk. ISDA would
       suggest developing an assessment methodology for banks’ operational risk
       as part of Pillar II of the review, to ensure at least that regulatory
       intervention, if warranted, is proportionate to the level of risk incurred and
       quality of the controls in place. Similarly, it is proposed to address interest
       rate risk in the banking book as part of Pillar II. From a broader standpoint,
       ISDA welcomes the Committee’s emphasis on increased and improved
       supervision. We also support Pillar III of the review, in as much as
       disclosure can effectively foster market discipline.

This response was presented bilaterally to most G-10 regulators, as well as to the main Basel
Committee working groups (for credit risk, the Models Task Force and the Capital Group, for
operational risk, the Risk Management Group). It was also sent to the EU Commission
services along with a letter reviewing the more EU specific issues (treatment of small banks,
treatment of investment firms, scope of consolidation).

At the request of the Models Task Force, ISDA refined its Basel response in a number of

       •       ISDA ran a survey of market estimates of Loss given default (LGD)/
           Exposure at default. The main conclusion was that it would be difficult, if
           not impossible to produce market averages for these estimates, and that it
           was essential that banks be allowed to use their own estimates as part of
           the New Capital Accord, subject to regulatory approval.

       •       One further conclusion that we drew from the LGD-EAD survey was
           that the market would benefit from the setting-up of a central LGD
           database, which firms could use to benchmark their recovery practice, as
           an input into their risk models, as well as into their regulatory calculations.
           ISDA initiated a joint project with the Risk Management Association, the
           British Bankers’ Association and the European Banking Federation. A
           template for a LGD database was drawn up by a Pilot Group of European
           banks, using the US RMA LGD database framework as a starting point.
           This has proved a very popular project, with a number of European banks
           ready to sign up.

       •       ISDA further ran a definition of default survey and sought to
           determine whether a standard definition could be developed for regulatory
           purposes, at least for corporate exposures. Interestingly, the definition
           recommended in this survey has been retained by the Basel Committee as
           part of its second Basel Consultation Paper.

       •       We joined forces with the European Banking Federation to produce an
           in-depth survey of banks’ retail risk management practices. Once again,
           most of our findings have found their way into the latest Basel proposals.

       •       In order to provide the Basel Committee with an external benchmark
           for the calibration of the regulatory credit risk function, ISDA also re-
           estimated its index matrix (see ISDA’s response to the Basel Committee
           available on our website at www.isda.org) at a higher loss percentile.

       •       Finally, ISDA launched a counterparty risk study in September 2000,
           to be completed in early 2001. It was quite apparent from the original
           Basel proposals that the treatment of counterparty risk had been
           overlooked, and needed a complete re-think before the Basel proposals
           could be finalised. The ISDA working group on counterparty risk has
           studied the regulatory capital treatment of counterparty risk in the trading
           and the banking book. The working group strongly favoured the
           acceptance for suitably qualified banks of internal models to assess credit
           equivalent exposure for OTC derivatives. However, ISDA also recognised
           the requirement for a non-modelling method to assess credit equivalent
           exposure and has undertaken a quantitative survey with its members that
           forms the basis for the proposition of an alternative method.

ISDA met with the BIS Capital Group to discuss the treatment of collateral under the new
Basel framework. We supplied the Group with enhanced examples of how collateralised
transactions would be treated under the proposals included in our response to the
Committee’s Consultation Paper.

On operational risk, apart from the contribution to the overall response to the Basel proposals,
the Working Group completed another major document (on qualitative factors) and
maintained an intensive dialogue with the Risk Management Group sub-committee of the
Basel Committee. Working closely with a large group of operational risk management
specialists from member firms, ISDA used the ‘Operational Risk Regulatory Approach’
Discussion Paper to develop a structured approach to the incorporation of qualitative factors
into the assessment of the effectiveness of operational risk within financial institutions. This
looked at issues of governance, risk management, and the interaction between the two. Its
publication was widely welcomed and contributed to the regulatory debate on threshold
factors as used in an evolutionary approach to capital for operational risk.

An important part of the ORWG’s agenda in 2000 was the series of meetings it had with the
Risk Management Group, during which it discussed a wide range of issues in relation to an
operational risk capital charge, including definition, calibration and the inclusion of
qualitative factors. ISDA had initially opposed a capital charge, on grounds of lack of risk-
sensitivity. Given the difficulties of pursuing any alternative, ISDA switched its focus to
minimising the risk-insensitivity of the capital structure. Levels of participation in the ORWG
grew steadily over the year, reflecting more interest in scrutinising regulatory proposals.

ISDA remains strongly committed to attaining a more risk sensitive approach to the setting-
up of banks’ capital requirements, and will respond to the Basel Committee’s Second
Consultation Paper, issued in January 2001. We will also explore the usefulness of setting-up
further databases, as well as of sponsoring academic work on credit and operational risk

Credit Derivatives:

In 2000, ISDA continued to monitor and provide feedback to regulators on policy regarding
the regulatory treatment of credit derivatives.

In February 2000, ISDA responded to guidance published by the Central Bank of Ireland
(CBI). The association was very concerned about the criteria for trading book eligibility laid
out in the proposed guidelines and urged the Central Bank of Ireland to re-consider its
proposed treatment of first-to-default basket products. We were pleased with the final CBI
draft issued August 2000.

The Hong Kong Monetary Authority issued amended draft rules regarding the capital
treatment of credit derivatives in October 2000 and ISDA submitted its comments. The
association particularly welcomed the fact that credit derivatives had become eligible for
trading book treatment and that maturity mismatches and multiple name products in the
banking book had been specifically addressed.

Risk Management Seminar Program:

ISDA continued its seminars in New York and London on risk management. The European
seminars were organised in collaboration with the Global Association of Risk Professionals
(GARP) beginning in September. These seminars provide useful updates on industry best
practice and research in the field of risk management. A mix of institutions is represented,
including practicioners, consultants, and academics. Separate from the seminars listed below,
ISDA also organized two risk management conferences on the Basel Accord Reform in mid

                        North American Program
Date           Title                            Speaker
March 29       Integrating Market and Credit    Elizabeth Ruml
               Risk – Why is It So Hard
April 12       Internal Ratings                 William Treacy, Federal
                                                Reserve System
May 10         Insurance Risk                   David Tyson, Travelers
                                                Insurance Company
June 15        Modelling of Default Risk        Corrine Neale, Financial
September 29   A Regulatory Capital Perspective Bob Mark, Canadian
               on the Integration of Market and Imperial Bank of
               Credit Risk                      Commerce;
                                                Michel Crouhy,
                                                Canadian Imperial Bank
                                                of Commerce
November 14    Extreme Value Theory: A useful Marcelo Cruz, UBS
               framework for modelling extreme Warburg
               Operational Risk Events
                           European Program
February 21    Operational risk                 Richard Metcalfe, ISDA
                                                & David Glittelson,
March 10       Credit and Market Risk           Ludger Overbeck,
               Modelling                        Deutsche Bank
July 7         Liquidity – The Risk             Con Keating
September 20   Extreme Value Theory: A useful Marcelo Cruz, UBS
               framework for modelling extreme Warburg
               Operational Risk events
October 30     A New Approach to EDF            Corinne Neale, Financial
               Validation                       Systems
November 14    Issues for Consideration in a    Bob Scanlon, Credit
               Credit Model World               Suisse First Boston
December 15    The Basel Review                 Daniele Nouy, Bank for
                                                International Settlement
December 15    Risk, Regulatory Capital and     Tim Shepheard-Walwyn
               Capital Management

                             REGULATORY ISSUES


Forum of European Securities Supervisors

Following an earlier submission to the Forum of European Securities Supervisors (FESCO)
on the categorisation of investors for the purpose of applying conduct of business rules, ISDA
presented industry views to the Commission on the absolute need for:
        • Inter-professional business to be subject to a lighter regime than retail
        • All regulation of inter-professional business to be country of origin based.

The current situation where Member States apply different definitions of professional
investor and apply different conduct of business rules imposes significant costs and acts as a
barrier to cross-border business. Regardless of the contents of the Communication however, it
is likely that the definition of investor debate will only be fully settled when the Investment
Services Directive is reviewed.

Investment Services Directive Review

The European Commission produced a green paper on the review of the ISD in September
2000. This was followed by a formal Communication to the European Parliament and
Council on “Upgrading the ISD”. Industry comments are requested before March 31st 2001.

The Commission has identified four key priorities:
       • Securing an effective passport for investment firms;
       • Developing appropriate regulations for new forms of service provision,
          ATSs in particular;
       • Allowing effective competition between exchanges and trading platforms
       • Catering for the growing cross-border dimension of clearing and
          settlement via the introduction of appropriate supervision.

ISDA is playing an active part in the consultation on this key initiative, with specific input on
(i) passage to country of origin control for all wholesale business; (ii) harmonisation of
conduct of business rules for retail investors; and (iii) elaboration of a suitably calibrated
approach to the regulation of ATSs.

“Lamfalussy” Report

The Committee of Wise Men (otherwise known as the Lamfalussy group) released its interim
report on the regulation of European Securities Markets on 9 November 2000. ISDA
participated in the survey launched by the Committee in order to prepare this document.

The report proposes a re-organisation of the regulation of securities markets in Europe, with a
view to eliminating barriers to business, and ensuring greater convergence in day-to-day
implementation of the corpus of directives regulating these markets.

The proposed approach consists is focusing directives on principles rather than detailed rules.
A new EU securities committee, made up of the European Commission and national
regulators, would have powers to make and update the technical rules implementing these
principles. This Committee would be supported by an advisory committee of national
regulators, who would further co-operate on national implementation.

ISDA produced a response to the Wise Men report, centering on the following issues:

   •   It is absolutely essential for the proposed framework to work satisfactorily, the
       EU securities committee consult with the industry at an early stage as part of
       the rule-making process. Lack of transparency was one the reasons why
       FESCO’s initiatives were not always well received, and for some, unhelpful.

   •   We strongly support the need, stressed in the Committee’s report, for
       strengthened enforcement for Community rules through more vigorous action
       by the Commission and enhanced co-operation between the member states
       and their regulators.

   •   It is essential that EU member states move quickly towards a single definition
       of professional investors, and distinguish, in their conduct of business rules,
       between these and non-professional investors. ISDA already submitted
       various papers to the Commission and FESCO on this matter.

Market Abuse

Market abuse legislation became a significant issue in Europe in 2000. In the UK, it formed a
major part of the Financial Services & Markets Bill, the approach influencing the thinking of
EU legislators. ISDA raised issues in both arenas, particularly regarding the scope of the
proposed legislation, in terms of: the activities covered; its territorial (and especially extra-
territorial) reach; and the instruments potentially affected, the latter point being of most direct
concern to derivatives markets. A draft EU Directive was still in preparation as the year
ended, with a fundamental issue being lack of consultation with the market on its drafting.

Alternative Trading Systems

FESCO has studied the features of Alternative Trading Systems (ATS) and published in
September 2000 a comprehensive report identifying and assessing the benefits and risks
associated with the emergence of ATS and analyzing the current regulatory treatment of such
systems within Europe and elsewhere. The report proposes both a short term and a long term
option for a harmonized regulatory treatment of such systems in Europe. ISDA will prepare
comments on the FESCO paper in 2001.

Reform of the Commodity Exchange Act

ISDA is pleased to report that on Friday, December 15, 2000, the 106th Congress, in its final
vote of the session, favorably ended a decade of debate concerning the status of swap
transactions under the Commodity Exchange Act by passing H.R. 5660, the Commodity
Futures Modernization Act (CFMA) of 2000. ISDA provided extensive public testimony and
support in various committees of the United States House of Representatives and the United
States Senate for legal certainty legislation.

ISDA acclaimed passage of this landmark legislation introduced by Congressman Tom
Ewing and Senator Richard Lugar, which assures that swaps transactions will continue to be
enforceable in accordance with their terms. H.R. 5660 was signed into law on December 21,
2000 and includes virtually all of the recommendations made by the President’s Working
Group in the November 1999 report on Over-the-Counter Derivatives Markets. Specifically,
the legislation excludes from Commodity Futures Trading Commission’s (CFTC) jurisdiction
swap transactions traded among eligible contract participants that are individually negotiated
and not traded on a trading facility. The legislation removes Commodity Exchange Act
(CEA) jurisdiction over transactions in excluded commodities if they are traded electronically
as long as the transactions are conducted on a bilateral basis between eligible contract
participants. Impediments to clearing of OTC derivatives are removed and an appropriate
regulatory framework is established for clearing systems.

The legislation also limits the application of the CEA for exempt commodities including
energy and metals products. Bank products as defined under the Gramm-Leach-Bliley
Financial Modernization Act will be excluded from the CEA and certain swap transactions
will be excluded from regulation as securities under federal securities laws. Additionally, the
legislation provides regulatory relief for the U.S. futures markets by converting the CFTC
from a front-line regulator to a supervisory agency and also permits trading of previously
banned futures contracts on single securities.

CFTC Efforts to Modernize the Commodity Exchange Act

Prior to passage of the CFMA, the CFTC worked diligently under the leadership of Chairman
William Rainer to take administrative action to provide legal certainty to the OTC derivatives
markets and regulatory relief to the U.S. futures exchanges. Chairman Rainer and the CFTC
are to be commended for leading a thoughtful and insightful regulatory initiative. ISDA met
with CFTC Commissioners and staff on numerous occasions and provided written comment
on the proposal. Final rules implementing the CFTC’s New Regulatory Framework were
proposed on November 21, 2000 but were subsequently withdrawn after passage of the

Bankruptcy Reform

ISDA continued its efforts to support netting provisions of bankruptcy reform legislation that
promotes greater certainty for the netting of financial contracts. Bankruptcy legislation passed
in the final days of the 106th Congress. However, President Clinton vetoed the legislation
over consumer protection concerns. ISDA worked with the Bond Market Association in
supporting an unsuccessful attempt to separately pass the netting provisions (H.R. 1161, the
Financial Contracts Netting Improvement Act) included in the larger bankruptcy reform


Greece's Adoption of the Euro

Employing some of the same expertise that worked to ensure that the initial changeover to the
euro on January 1, 1999 would be a smooth one in the derivatives and other financial
markets, the Euro Committee worked to ensure a smooth changeover of the Greek Drachma
to the euro on January 1, 2001.

EMU Protocol (Greece)

On October 10, the Association opened the EMU Protocol (Greece) for signature. The
Protocol was modelled closely on the successful original EMU Protocol published in May
1998 in advance of the first wave of eleven European Union member states that adopted the
euro on January 1, 1999. As in 1998, the Protocol facilitated efficient multilateral
modification of contracts based on master agreements published by the Association, and
enabled adherents to clarify a range of issues arising in OTC derivative transactions as a
result of the adoption of the euro in Greece, through selection of optional annexes covering
continuity of contract, price sources, payment netting, EMU-related definitions, bond options
and equity derivatives.

On October 13, the Association held a meeting in Athens to address a wide audience in
Greece and give locally represented institutions an insight into lessons learned during the
initial changeover to the euro. Representatives from all the major banks in Greece, as well as
the Bank of Greece and the Hellenic Bank Association (HBA), attended the meeting.
When the December 15 deadline for adherence passed, 140 dealer and end-user entities had
signed on to the Protocol, and most elected to adopt all six optional annexes. The adherents
included the Association's (at that time) three Greek dealer members. As in 1998, the
Association's website (www.isda.org) was a critical part of the Protocol process. Among
other things, the final list of adhering parties can be found in the section dedicated to the

Changes to Greek Drachma Price Sources

Following the publication of a press release by the HBA in September, the Association
worked with the HBA and screen service providers to ensure a smooth changeover from
Greek Drachma rate sources to euro rate sources. As a result of these efforts, the Association
was able to prepare an overview of the implications of Greece's adoption of the euro for
various Greek Drachma price sources, including ATHIBOR, ATHIBID and ATHIMID. The
overview, which constitutes the "Price Sources Update" as referred to in the EMU Protocol
(Greece), can be found in the section of the Association's website dedicated to the Protocol.

Legacy Transactions

In July, the Association conducted a survey of interested members that was intended to
ascertain how market participants prefer to remedy situations where valuation and settlement
of legacy transactions (which are valued and settled according to pre-1999 business day
provisions) fall to be carried out on days that may be good business days in the legacy
currency center, but are days on which TARGET is closed.

In preparation for the initial introduction of the euro on January 1, 1999, the consensus
among market participants was that legacy transactions should continue to be subject to the
market conventions agreed upon at the outset of the trade ("settle as dealt"). This approach
was reflected in the Association's EMU Protocols.

Since the introduction of the euro, the European Central Bank (ECB) has increased the
number of weekdays in each year on which the TARGET system will be closed. In 1999,
only January 1 and December 25 were TARGET holidays. In 2000, TARGET was also
closed on Good Friday, Easter Monday, Labor Day (May 1) and December 26, and the ECB
has announced that this will reflect the TARGET calendar for 2002 onwards as well (see
below). As there are now more days that may be good business days in the legacy currency
center, but on which TARGET may be closed, this creates some difficulty in applying the
settle as dealt approach. These difficulties were encountered during the Easter period of

The results of the survey suggested that the majority of respondents preferred:

  •    where valuation falls to be carried out on days that may be good business days
       in the legacy currency center, but are days on which TARGET is closed, to
       use the EURIBOR rate for the immediately preceding day that is a good
       TARGET day;

  •    where settlement falls to be carried out on days that may be good business
       days in the legacy currency center, but are days on which TARGET is closed,
       to postpone payment until the next day that is both a national business day in
       the relevant place and a good TARGET day, and, for those transactions (the
       majority) where calculation periods or interest accrual periods run from
       payment date to payment date, to extend the relevant calculation period to the
       extent of that postponement.

The results of the survey were not unanimous, and after the survey was conducted,
discussions continued in the Euro and Operations Committees on these issues and also on
issues surrounding the redenomination and reconventioning of legacy transactions.
Discussions remain ongoing, and further efforts will include consideration of how to assist
market participants who wish to address and resolve these issues in their documentation.

      ECB long-term calendar for TARGET closing days (from 2002 until further notice):

         •   Saturdays and Sundays
         •   New Year's Day
         •   Good Friday
         •   Easter Monday
         •   Labor Day (May 1)
         •   Christmas Day
         •   December 26

      NB: In 2001, TARGET will also be closed on December 31


The Collateral Committee continues to be active on market practice, documentation, risk
management and regulatory fronts. Documentation initiatives are covered elsewhere in this
publication and include a comprehensive discussion of the scope and substance of the work
of the collateral group in 2000. In addition, the lobbying activities of the Risk Management
working groups on capital rules, which are of great relevance to collateral markets, is set
forth in the Risk Management section. Major events for the Collateral Committee included
the March 2000 publication of a ground-breaking survey on collateral practice, released at the
Amsterdam AGM and the crucial work on law reform in the European Union.

The survey – which was intended to be repeated in some form in the future – grew out of
earlier publications such as the ‘1999 Collateral Review’. It tracks many aspects of the
collateral market, most notably the numbers of agreements being used (12,000 as at end-
1999) and how this is growing (by over a third every year). An advisory committee of
member firms helped ISDA produce the survey, which was widely reported on and confirmed
earlier estimates that some $200 billion of collateral was posted at end-98. The key driver in
this growth was shown to be improved credit risk management. For technical reasons, growth
in collateralization was expected to be particularly strong in Europe in the coming years.

Growth of collateralization in Europe would be boosted by effective law reform and an ISDA
group continued to work on this topic throughout 2000. Building on earlier research, the
Collateral Law Reform Group published ‘Collateral Arrangements in EU Financial Markets’,
also at the March 2000 AGM. This was designed to influence the drafting of an EU Directive,
as was a successful seminar for national and EU authorities in Brussels in November 2000.
This pulled together speakers from the European Commission, the European Central Bank,
banks and investment banks, law firms and a range of trade associations. In 2000, ISDA also
began to work with individual EU Member States on collateral law reform.


In 2000, ISDA filed a letter to the Financial Accounting Standards Board (FASB) urging
changes to FAS 133, its derivatives and hedge accounting standard. ISDA’s letter urged
alterations to six areas of the standard: hedging the risk-free rate; hedging using purchased
options; providing hedge accounting for foreign currency assets and liabilities; extending the
exception for normal purchase and sales; and central treasury netting. The FASB
subsequently rejected changes to purchased option provisions, conceded some on normal
purchases and sales, extending the exception to contracts that implicitly or explicitly permit
net settlement, declined to amend FAS 133 to facilitate partial term hedging and agreed to
consider changing the restrictions on hedge accounting for foreign currency.

The Committee also wrote a response to the IASC’s IAS39 concerning fair value accounting
and formed an Implementation Guidance Committee to deliberate issues arising from use of
the standard, which became effective January 1, 2001.

The Committee opted not to lobby FASB on its application of EITF issue 96-13, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s
Own Stock’.

The Accounting Committee began work on a response to the FASB’s Exposure Draft,
‘Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both’. If
implemented, the Draft would have major implications for the way in which member firms
account for convertible transactions in particular, necessitating a bifurcation approach. This
will form a significant part of the focus of the Accounting Committee in the coming year,
along with a response to a proposal by the Joint Working Group of Standards Setters on fair
value accounting for all financial instruments, a proposal issued last year which significantly
does not provide for hedge accounting.

                            EQUITY DERIVATIVES

The Equity Derivatives Committee started the year looking at the issue of impact from
changes to the composition of stock indices, and ended it by initiating a group looking at the
provisions used for corporate actions and other eventualities. In between, it addressed a major
North American accounting initiative.

Following the identification of changes to certain stock indices as potentially material, the
Committee considered language developed to smooth the effects of such changes. It
concluded that, wherever possible, the decision as to whether a change was material should
be left to individual parties.

Later, in the US, the FASB floated significant changes to the treatment of options written by
companies on their own stock, which might reduce the potential for this class of business.
This issue remained open as the year 2000 ended.

Also going into the New Year, the Provisions Task Force, newly formed from interested
Committee members, was working to reduce any potential for confirmation backlogs arising
from technical differences of policy between firms vis-a-vis the provisions appropriate for
contingencies such as corporate actions. The Committee had identified this as an issue early
in its life, its view confirmed by the ISDA 2000 Operations Benchmarking Survey. The
Committee also expressed its determination to work closely with exchanges as regards their
policies on corporate actions.


In early 2000, the Association agreed to form an Energy Derivatives Committee, with active
presences in both Europe and North America, to work on market practice and policy issues in
the rapidly growing energy markets. The Committee superceded the Commodity Derivatives
Committee. In recognition of the variety of new derivatives products developing (including
weather, bandwidth and telecommunications) and the increasing number of new ISDA
members involved in these developing markets, the Committee was named the Energy and
Developing Products Committee.

The main objective of the European Energy and Developing Products Committee is to
standardize the existing documentation currently used. Due to the territorial nature of energy
trading and the diversity of settlement arrangements in Europe, most of the trading
agreements used in the electricity and gas markets contain terms, which are tailored for
specific regional markets. The European Energy and Developing Products Committee met
on September 11 to consider a draft report on current documentation arrangements for OTC
power and gas trading in Europe.

A meeting of the Association’s North American Energy and Developing Products Committee
was held in Houston on October 10. The meeting included an in-depth comparison of the
various masters used in North America for energy products and an analysis of the current
documentation arrangements and use of the ISDA Master Agreement in light of product-
specific issues. Follow-up work is ongoing. Recognizing the rapid evolution of energy
derivatives and other developing products, the Committee gave consideration to updating the
1993 Commodity Derivatives Definitions. The Committee also discussed emerging products
in the energy and related markets and the impact of proposed U.S. legislation (enacted in
December 2000) and regulations on energy derivatives. The Committee began preparations
for an upcoming ISDA Energy and Developing Products Conference to be held in Houston
on March 6, 2001. The Committee agreed that the focus of the Conference should be on
documentation, regulation and market practice issues.


During the first week of January 2000 ISDA’s Operations Committee launched the ISDA
2000 Operations Benchmarking Survey, the initial Survey of its kind in the industry. The
Survey was undertaken in response to member requests for industry-wide quantitative
benchmarks addressing operations issues such as processing volumes, automation challenges
and personnel and technology costs. This project was also driven by the need to provide
operations managers sufficient data to be able to measure performance on a consistent basis
with their peers. The ISDA Operations Committee considered inclusion of transaction
numbers, confirmation and settlement backlogs, processing and procedure times, as well as

other potential operational risk indicators and agreed that Survey Results would be tiered
among large, medium and smaller size institutions.

The Survey was based on the data of 41 responding member firms representing ISDA’s
global membership and included firms in the Americas, Europe and the Asia-Pacific region.
An Operations Advisory Committee was formed to oversee evaluation of the survey data and
conclusions. In addition, Lombard Risk Consultants was retained as independent consultant
to validate the data and prepare the final report with the advice and supervision of the
Operations Advisory Committee.

The ISDA 2000 Operations Benchmarking Survey: Over-the-Counter Derivatives Operations
Issues was published in print form in late October and is available on ISDA’s web site,
www.isda.org. The initial Survey results, which present primarily data on interest rate and
other mature products, highlighted the need for greater standardization of terminology and for
increased automation in processing efficiencies. Each survey respondent received further
feedback in the form of a comparison of its individual responses to each question with the
results of its entire tier respondent group.

The Operations Advisory Committee has proposed that the Operations Benchmarking Survey
be an annual survey and that ISDA 2001 Operations Benchmarking Survey focus more
directly on costs and benefits of automation and standardization and broaden the product
focus. Wider member participation will be actively sought in order to achieve a broad
representation by size, region and type of member firm. The 2001 Operations Benchmarking
Survey questions have been standardized in format and more closely correlated. The ISDA
2001 Operations Benchmarking Survey: Over-the-Counter Derivatives Operations Issues
should be published midsummer 2001.

In 2000, the ISDA Operations Committee focused extensively on the cash settlement of
swaptions and mutual puts, working with Documentation Committee members on
amendments appropriate for the ISDA 2000 Definitions. Three outstanding issues were day-
count for Euribor trades, ISDAFIX as fallback pricing and whether European straddles
constitute single trades. Consultation with the heads of the Trading Practice Committee
confirmed differing views not only among operations professionals but also between front
and back offices. Views of the ISDA Board of Directors have been solicited in an attempt to
settle outstanding differences causing confirmations backlogs among member firms. The
Committee also analyzed issues around the settlement of legacy transactions and auto-

During 2000, the ISDA Operations Committee instituted monthly London and New York
video teleconference meetings. The Operations Advisory Committee frequently met on an ad
hoc basis and began active planning of the ISDA 2001 Operations Benchmarking Survey. In
addition, in May, a Roundtable for Senior Derivatives Operations Executives Roundtable
began meeting at least quarterly to provide a forum for strategic discussions on operations
and to provide policy direction to the ISDA Operations Committee.

                                TRADING PRACTICE

ISDA’s Market Practice Committee was renamed the Trading Practice Committee last year.
Its new title is intended to better reflect its role as a business practitioner group that acts in an
advisory capacity on questions and issues raised through other committees, such as ISDA’s
Operations and Documentation Committees.

The committee was instrumental last year in resolving, for example, one such discussion on
the holiday convention for cash settlement of euro-denominated swaptions. The Trading
Practice Committee and subsequently the ISDA Board voted to add London holidays to
TARGET holidays for the purposes of settling these transactions.

The Trading Practice Committee also launched a sub-committee, the Trading Practice
Advisory Group, to hear localized cases of member disputes or disagreements, and to advise
on a ‘best practice’ course of action. Cases referred to this group of seven advisors will be
offered advice on a non-binding basis, which will be made available to other ISDA members
for guidance without reference to specific entities.

The Committee also began significant discussions on a common approach to the
disappearance of certain US Treasury benchmark maturities. Building on this work going
forward, the committee will attempt to formulate acceptable procedure for establishing
reference rates for swaps where underlying benchmark Treasuries are being withdrawn from

Highlighting the increasing acceptance of ISDA’s par rate screen service, ISDAFIX,
produced in association with Garban Intercapital and Reuters, the Federal Reserve Board
began to include the ISDAFIX US dollar figures in its H-15 Daily Update of benchmark
interest rates. The ISDAFIX par swap rates are crucial to a number of firms which use the
fixing rates as a basis for swaption settlements, and to a growing number of systems, such as
Garban Intercapital’s planned Swapcross and LIFFE’s Swapnote, that will rely on ISDAFIX
as an integral part of their service.

                                 MARKET SURVEY

For the year 2000, ISDA’s semi-annual headline Market Survey figures showed that growth
in global OTC interest rate derivatives use was close to 5% both overall and at the top ten
firms. By contrast, the mid-year the survey revealed that growth within the top ten firms was
at a rate of 10%, while overall global OTC derivatives use grew by 3%. Notional amounts at
mid-year 2000 totaled $60.366 trillion, while at the end of the year, this figure stood at
$63.009 trillion.

ISDA’s survey covers global notional use of interest rate swaps and options as well as
currency options within primary member firms. At its November 2000 meeting, ISDA’s
Board determined that for forthcoming surveys it would include credit derivative volumes,
and potentially equity derivative volumes in future surveys, in addition to interest rate


In July 2000, ISDA sent letters to the Chairmen of the U.S. House and Senate Finance
Committees regarding section 475 of the Internal Revenue Code of 1986, to permit securities
dealers to value bilateral derivatives contracts in the same manner they value such contracts
for financial reporting purposes. Section 475 requires that securities (including derivatives
contracts) held by a dealer in its capacity as a dealer be valued on the so-called “mark-to-
market” accounting method. Any gain or loss taken into account by reason of the mark-to-
market rule generally is treated as ordinary income or loss.

The principal issue arising under section 475 with respect to bilateral derivatives contracts is
whether dealers should be permitted to comply with the mark to market requirement by
valuing those contracts in the same manner as they are valued for financial statement
purposes. ISDA believes that book-tax conformity for the valuation of bilateral derivatives
contracts represents the best method of implementing Congress’ express intent that section
475 be administered in a way that avoids unnecessary compliance burdens for taxpayers. In a
section 475 U.S. Tax Court case involving Bank One, ISDA participated with other industry
groups in filing on October 13 a “Friend of the Court” brief providing market information on
industry recognition methodologies for valuing bilateral derivatives contracts for reporting
purposes. The case is ongoing.

Other issues that the U.S. Tax Committee followed in 2000 included straddles, tax shelters
and new disclosure requirements.

In December 2000, ISDA circulated a Memorandum on the Internal Revenue Service
regulations for withholding and information reporting for swap payments, which apply to
payments made after December 31, 2000, regardless of the date on which the parties entered
into the swaps. In response to member requests on the necessary documentation required to
comply with these regulations, the Memorandum to the Tax, Documentation and Operations
Committees contained a suggested representation included in a March 22, 1999 Cravath,
Swaine & Moore to ISDA.

The European Tax Committee noted that the European Union has shelved plans to introduce
a withholding tax on interest income and is now exploring an alternative based on
information exchanged between member states.


                   2000 ISDA CONFERENCES

New York:       Understanding the 1992 ISDA Master Agreements
                Tuesday, January 20


London:         Understanding the 1992 ISDA Master Agreements
                Friday, February 4

Mumbai:         Introduction to ISDA Documentation
                Monday, February 7

New York:       The Capital Accord Reform
                Tuesday, February 8

Kuala Lumpur:   Introduction to ISDA Documentation
                Wednesday, February 9

Bangkok:        Introduction to ISDA Documentation
                Friday, February 11

London:         The Capital Accord Reform
                Tuesday, February 15

London:         Developments in FX and Emerging Market Products
                Wednesday, February 16

New York:       Developments in FX and Emerging Market Products
                Monday, February 28


New York:       Documenting and Confirming Credit Derivatives
                Tuesday, March 30

New York:       Advanced Topics in Confirmations
                Wednesday, March 31


Tokyo:      Collateral Management, Practices and Documentation
            Tuesday, April 13


London:     Documenting and Confirming Credit Derivative Transactions
            Wednesday, May 10

London:     Understanding Collateral Arrangements
            and The ISDA Credit Support Documents
            Thursday, May 11

New York:   Understanding Collateral Arrangements
            and The ISDA Credit Support Documents
            Tuesday, May 16


New York:   Operations Training Course
            June 19-20

New York:   Understanding The 1992 ISDA Master Agreements
            Thursday, June 22


Toronto:    ISDA Documentation: A Canadian Perspective
            Tuesday, July 13




London:     Understanding the 1992 ISDA Master Agreements
            Monday, September 11

London:     ISDA Member Update and Forum on E-Commerce
            Tuesday, September 12

New York:   ISDA Member Update and Forum on E-Commerce
            Wednesday, September 20


New York:    Documenting and Confirming Credit Derivative Transactions
             Thursday, October 12

New York:    Understanding Collateral Arrangements
             and The ISDA Credit Support Documents
             Friday, October 13

Sydney:      ISDA/AFMA Derivatives Conference
             Thursday, October 19

Singapore:   ISDA Member Update and Forum on E-Commerce
             Monday, October 23

Singapore:   Fundamentals of ISDA Documentation
             Tuesday, October 24

Bangkok:     Collateral Management Practices and Documentation
             Tuesday, October 24

Tokyo:             ISDA Update
             Thursday, October 26


London:      Documenting and Confirming Credit Derivatives Transactions
             Tuesday, November 14

London:      Understanding Collateral Arrangements and
             The ISDA Credit Support Documents
             Wednesday, November 15


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