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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Henry Volquardsen who wrote (46)	9/7/1998 11:44:00 AM
From: C.K. Houston	Respond to of 2794

SOMETHING TO THINK ABOUT DOWN THE ROAD: "... disappointing news from vendors has moved banks to consider implementing financial transactions designed to reduce exposures - and particularly cash flows - from the December 1999 through March 2000 period. Examples are contingency plans that envision completing year-end portfolio trades by December 15th 1999; amending loans or entering derivatives with customers and counterparties to move cash flows out of the December to March period; and contingency planning for malfunctions in the wire transfer, settlement, credit card, ATM, and other critical systems." Testimony Concerning the Progress of Financial Firms in Managing Year 2000 July 6 '98 By Tanya Styblo Beder - Principal, Capital Market Risk Advisors, Inc. Message 5685081 Well worth reading all testimony. FYI: Asia, Latin America, Africa and middle East are 18-24 months behind U.S. with Y2K remediation. Most European countries (except possibly U.K. and Netherlands are 12 months behind U.S. (been working on Euro instead of Y2K) FED said that they will bar transactions with foreign banks which are not Y2K compliant. Will make it pretty tough to do business. Major telecoms said they will not do business with foreign telecoms if they are not Y2K compliant. Will make it pretty tough to communicate. Expect failures to start occurring next year, because of fiscal years ending in 2000. Cheryl

To: Henry Volquardsen who wrote (46)	9/7/1998 12:19:00 PM
From: Worswick	Respond to of 2794

Don't know if you saw this...appeared this am. (C)The Financial Times For Private Use Only LTCB: derivative deals at risk By Gillian Tett in Tokyo Investors holding derivatives contracts with Japanese financial institutions such as the troubled Long Term Credit Bank of Japan (LTCB) may not be fully protected under Japanese law if an institution collapses. The concern has arisen because Japanese law does not yet guarantee that the "netting" of counterparty derivative contracts will be respected if a bank or broker collapses. Netting is the process by which the different losses and profits between creditors are offset against each other and paid off in one lump sum. Japanese officials say the loophole will be plugged by legislation introduced as part of Big Bang financial deregulation designed to bring the country into line with global standards. But this legislation will not come into effect until December. The legal uncertainty is causing unease among some international investors because of mounting concern about the health of some Japanese financial institutions. The Financial Supervisory Agency (FSA), Japan's banking watchdog, says the gross notional volume of derivatives contracts held by Japanese banks totals Y2,090,000bn (œ9,000bn) - although the actual "netted" position of actual losses or profits would be far smaller. Most of these contracts are covered under an agreement forged by the International Swaps and Derivatives Association. Bankers believe that in the event of a collapse the Japanese courts would uphold any netting agreement. However, this is not stipulated under local law and there has been no precedent to date, they say. Yoshinobu Yamada, analyst at Merrill Lynch said: "The lack of a legal framework would make dealing with the derivatives problem complicated [in the case of a collapse]. This uncertainty undermines confidence." Christopher Well, a lawyer with White and Case, the US law firm, added: "There will be a collective sigh of relief in December when the lingering doubts are eliminated. But there are questions now about whether a trustee could reverse a netting agreement now." The issue of derivatives has become particularly controversial because parliament is debating LTCB's future. LTCB is in merger talks with Sumitomo Trust and the government is expected to inject at least Y500bn of public money to ensure the merger is consummated. The political opposition says public money should not be used to save LTCB but the ruling Liberal Democratic party insists that a collapse of LTCB would create a systemic risk because of its derivatives exposure. The degree of LTCB's derivatives risk is disputed. LTCB says it has reduced its exposure from Y51,500bn to Y40,000bn between March and July, and adds that most contracts are "plain, vanilla" contracts, such as swaps in the yen market. Some government officials conclude therefore that unwinding the contracts would be a relatively simple matter. However, the FSA has indicated that LTCB's exposure is nearer Y80,000bn and some bankers fear the exposure may contain complex structures which would be difficult to unwind. "It could lead to a very negative reaction in the markets," says one Bank of Japan official. Most western bankers believe the government will rescue LTCB but many have been re-examining their derivatives contracts with Japanese institutions. One lawyer with a US investment bank yesterday said: "We assume that the government would protect us in the last resort, since we are all in the same boat. But until December there will be an uncertainty, however small." Hmmmm. As usual they admit one thing, change it and then ....?

To: Henry Volquardsen who wrote (46)	9/8/1998 2:57:00 AM
From: Peter Singleton	Read Replies (3) \| Respond to of 2794

Henry, Clark, Some corroborating data re: concerns about the Japanese pension system, from AFR in Australia, coincidentally just posted by Joe Flood on LongWaves ... fyi, note the $ are Australian $, so the shortfall in USD is $450B, not $750B, but that's still a fair piece of change ... afr.com.au Japan Inc contemplates $750bn pensions black hole By Tony Boyd, Tokyo A little-known financial black hole in the balance sheet of Japan Inc is now estimated to have grown to 60 trillion yen ($750 billion), almost rivalling in magnitude the bad loan problem of the nation's banks. The black hole, which takes the form of unfunded defined benefit pensions promised by corporate Japan, poses a risk to investors and will likely be the trigger that strips Japan of its triple-A sovereign credit rating within the next month. Although the unfunded liabilities are private, ratings agency Moody's Investors Service believes the problem is so huge that it may be treated as a contingent claim on the Japanese Government. Japan's most respected pension industry analyst, Mr Shinji Watanabe of Nikko Research, has told The Australian Financial Review that the size of the problem is now 60 trillion. Japan's Ministry of Health and Welfare says it is only 1.2 trillion but that is based on a series of unrealistic assumptions including 5.5 per cent investment returns and 5 per cent economic growth. "Unfunded pension liabilities are Japan's second bad loan problem," Mr Watanabe said. The Government's estimates of the size of the problem have been shown to be wildly optimistic by the disclosure of Japanese companies with American Depositary Receipts which are forced to adopt US accounting standard FAS 87. Under the US Financial Accounting Standards Board's FAS 87 standard, companies must reveal in their accounts the actuarial present value of pension obligations, the accumulated benefit obligation, the projected benefit obligation and the fair market value of plan assets at balance date. A study by Nikko Research Centre this year of the Japanese companies with ADR programs shows that all 23 companies have inadequate assets to cover their projected benefit obligations. The shortfall of assets over liabilities was 3.9 trillion at March 31 and for some companies the level of unfunded liabilities was equal to more than their net worth. For example, Mitsubishi Electric, which is ranked as one of the top 100 companies in the world by revenue, has unfunded liabilities of 676 billion. That is more than its net worth. As a percentage of shareholders' equity, the shortfall in pension reserves averaged 23.8 per cent for the 23 companies. According to Nomura Research Institute, that represents a major risk factor for management and investors alike. Japanese companies will not be obliged to reveal their retirement income liabilities until fiscal year 2000. Mr Watanabe said the shortfall in assets to cover pension liabilities was growing as more and more companies cut the assumed annual rates of return on their pension assets to more realistic levels. Mr Masao Tamura, a certified pension actuary with Nomura Research Institute, said that while it was prudent to cut the expected rate of return, this pushed up the projected benefit obligations. He said that each 1 per cent cut in the expected rate of return increased the projected benefit obligation by about 20 per cent, which in turn pushed up the shortfall on plan assets. As well as cutting their assumed rates of investment return on pension benefits, Japanese companies are cutting the total level of pension benefits paid. This year Sumitomo Chemical, Hitachi, Nissan Motor, Nippon Steel and Kawasaki Steel all cut their pension benefits. Mr Tamura, who is one of only 300 actuaries in Japan compared with 2,100 in Australia, warned that the safety net for pension fund beneficiaries was "totally inadequate" and that there was no law which would protect the interests of beneficiaries. Disappearing pension benefits will only serve to exacerbate the precautionary savings motive driving sluggish consumption in Japan, according to Ms Kathy Matsui, equity strategist at Goldman Sachs (Japan). Ms Matsui said the exact size of the unfunded pension liabilities of corporate Japan would not be known until 2000 when Japanese accounting standards would be brought into line with the US standards. "Obviously the smokestack industry companies will be the most vulnerable because the average age of employees is much higher and they will have a much higher liability," she said. "So far we have only seen the tip of the iceberg." Japan's corporate pension fund market consists primarily of two types of corporate pension plans: employee pension funds and tax qualified pension plans. EPFs number about 1,800 and cover 12 million workers while TQPP number about 92,000 and cover 11 million workers. Both of these plans are defined benefit schemes that qualify for certain tax exemptions covering their earnings and their payouts. Private pension plans are expected to grow in importance and popularity because of the crisis in the public pension system caused by the rapidly aging population.