News Release	Louise Marshall 212.901.6000 Katrina Keller 646.637.9281
July 31st, 2003

The International Swaps and Derivatives Association and The Bond Market Association Comment on the Third Consultative Paper (CP3) on the New Basel Capital Accord

London, New York – In a letter submitted today to the Basel Committee on Banking Supervision, the International Swaps and Derivatives Association and The Bond Market Association commented on the Third Consultative Paper (CP3) on the Basel Capital Accord issued by the Committee. The Associations’ comments focus on four core issues in the proposed Accord: capital treatment of credit derivatives, counterparty risk, maturity, and Pillar 2 of the Accord (supervisory review).

“We appreciate the steps taken in CP3 to address previously stated concerns, and applaud many of the proposed changes,” said Emmanuelle Sebton, head of risk management and co-head of the European office at the International Swaps and Derivatives Association. “However, we also feel there are areas in the new proposal that could be improved upon to better serve the goals of the Accord.”

Regarding the capital treatment of credit derivatives, the Associations applaud the proposed change to the treatment of restructuring risk arising from the use of certain credit default swaps (CDS), finding the new approach to be better aligned with risks borne by protection buyers. The Associations also welcome the Committee’s recognition of the protection CDS offer by proposing that a discount apply when a bank calculates its risk based capital requirements for such transactions. The Associations recommend that the guidelines for CDS add-ons, factors that increase the calculated level of potential future exposure, be reconsidered, as they are too conservative and inconsistent with firms’ internal assessment of counterparty exposure.

In terms of repo counterparty risk, the Associations reiterate their objection to the level of multipliers which would result if a firm’s backtesting of its “Value-at-Risk,” or “VaR,” models generated more than a certain number of exceptions. The Associations believe the level of multipliers is punitive and could potentially provide a disincentive for firms to utilize VaR models when calculating counterparty risk, because the multipliers may lead to overstated capital requirements. The Associations also suggest that the review of counterparty risk treatment of derivatives be coupled with a parallel review of the treatment of repo and securities lending transactions to ensure uniform capital treatment of these transactions, and that OTC derivatives, repo and securities lending transactions be afforded consistent capital treatment.

The Associations feel that the treatment of maturity under the Internal Ratings Based (IRB) approach warrants further consideration under the new Accord, and would like to see the Basel Accord more accurately reflect banks’ practice. Suggestions include removing the maturity adjustment and adjusting the probability of default for transactions with a maturity of less than one year.

The consistency and quality of the new Accord depends on supervisory review, and the Associations support the overall purpose of Pillar 2, the area of CP3 dealing with supervision. However, the Associations believe that duplicative reviews for firms active in more than one jurisdiction should be avoided, and instead advocate the designation of lead supervisors that would have supervisory responsibility for a global consolidated group. Additionally, the Associations strongly support the proposal that supervisors disclose national standards, but would find it helpful to see additional disclosure of the number of firms that have achieved each of the proposed regulatory approaches to capitalizing credit, market and operational risk, and the average capital required under the supervisory review process in each jurisdiction.

“Our goal is to ensure the revised Basel Accord appropriately tailors risk-based capital requirements to the actual amount of risk exhibited in derivatives and repo-style transactions,” said Omer Oztan, vice president and assistant general counsel at The Bond Market Association. “We appreciate the continued willingness of the Committee to discuss our concerns, and hope that the Committee will address these concerns in the final version of the Accord.”

The International Swaps and Derivatives Association, with offices in New York, London, Tokyo, Singapore and a liaison office in Brussels, is the global trade association representing leading participants in the privately negotiated derivatives industry. The Bond Market Association, with offices in New York, Washington, D.C. and Europe (London), represents securities firms and banks that underwrite, trade and sell debt securities in the U.S. and globally.