The Euromarket. Origins

Transcription

1 The Euromarket Origins At the end of World War II there was only one major freely convertible currency the dollar. In 1949 the U.S. held about 70% of the world s monetary gold, and for every dollar of American short-term obligations, payable directly or indirectly in gold, the Treasury held $3.20 in actual gold. As the agreement formed at the Bretton Woods conference put it, the dollar was as good as gold. The unquestionable strength of the dollar formed the basis of the postwar monetary system. The eurocurrency market originated in the efforts to rebuild Europe after World War II. The international financial system designed at the Bretton Woods conference was supervised by the International Monetary Fund and promoted the U.S. dollar as the premier currency for international trade. Since the U.S. economy had escaped the war relatively unscathed, there was tremendous demand for dollars by the European countries in order to finance imports from the U.S. In response, the Marshall Plan was initiated and injected large amounts of dollars into Europe from 1948 to As European industry was rebuilt, and as demand for goods in the U.S. continually outstripped supply, the U.S. balance of payments swung from a surplus to deficit, and the dollar shortage in Europe became a dollar glut. However, European central banks and commercial banks still eagerly collected dollars in order to build reserves and finance international trade. In 1958, following the plan established at Bretton Woods, all European currencies once again became fully convertible into dollars. Private corporations and wealthy individuals, in addition to commercial and central banks, now sought to convert some of their foreign currency holdings into dollars. This resulted in rapidly increasing international trade and capital movements. American capital safely migrated to foreign countries offering higher interest rates and investment profits than in the U.S. Multinational corporations expanded by leaps and bounds, economic and financial integration progressed, and international interdependence grew. Foreign dollar holdings had typically been left on deposit with domestic branches of major U.S. banks. However, certain events occurred which made these foreign depositors nervous about leaving their balances in the United States. In 1948, as the cold war began, the U.S. blocked Czechoslovakian gold holdings in New York. In 1956, during the Suez crisis, the Treasury blocked English, French, and Arabian bank deposits in the United States. And as the cold war escalated in the 1950s, Soviet banks transferred their U.S. dollar holdings to British and French banks in Western Europe to protect against possible seizure. Copyright 2009 Hal B. Heaton. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the express, written permission of Hal B. Heaton.

2 As foreign nonbank owners of dollars began depositing their holdings with non-u.s. international banks or the foreign branches of major U.S. banks, Eurodollars were created and the Euromarket was born. These offshore banks matched these Eurodollar deposits liabilities with either short-term Eurodollar loans or their own deposits in U.S. domestic banks. Thus, although many of these dollars never actually left the U.S. banking system, the Eurodollar depositors were once removed from the U.S. regulators. In fact, so called Eurobanks were not considered to be banks in the traditional sense for the very reason that they were not subject to any regulatory restrictions or requirements and were sometimes referred to as nonbanks. Other events coincided to further develop the Eurodollar market. In 1957 the British government implemented capital and foreign exchange controls which prevented banks from financing trade for non-residents with pounds sterling. U.K. banks solved the problem by using their new dollar inflows to provide financing for international customers. British authorities did not interfere, because they recognized the advantages of developing London as the center of the new Eurodollar market. At the same time, the Federal Reserve imposed interest rate ceilings on time deposits in U.S. domestic banks, which encouraged outflows of dollars to Europe seeking better yields. Market Characteristics Since the Eurodollar market had no regulations such as reserve requirements, deposit insurance, or maximum interest rates, and was exempt from national taxes, Eurobanks operated more cheaply and efficiently, and had a lower cost of funds. Since investors perceived greater risk in financial institutions outside the United States, Eurodollar deposits paid a higher rate of interest than domestic deposits. Domestic banks encouraged their foreign branches to accept Eurodollar deposits in order to compete with other international banks for business from international customers and to broaden funding sources beyond U.S. domestic depositors. When interest rates rose above U.S. regulatory ceilings on domestic deposit rates in the early 1980 s, and investors turned to nonbank short-term securities for higher yields, the banks were able to fund themselves by borrowing from their offshore branches which accepted Eurodollar deposits at market rates. The majority of offshore banking originally centered in London. (New York, Tokyo, Paris, Switzerland, Hong Kong, Singapore, and the Caribbean became, alongside traditional London, the world s main offshore and Eurobanking centers). The rate which these London banks were willing to pay to their best dollar depositors (usually other banks) was called the London Interbank Bid Rate (LIBID). These banks would lend dollars to their best customers (again, usually other banks) at the London Interbank Offer Rate (LIBOR). The difference between these two rates was traditionally 1/8% (12.5 basis points bps). The average of the two rates was called LIMEAN. LIBID deposits could be made ranging from overnight to several years, although one-, three-, and six-month deposits were most popular. Offshore banks used these deposits to fund short- 2

3 term Eurodollar loans, matching the maturity of the loans with the deposits. By lending at LIBOR plus a spread and funding the loans with deposits at LIBID for the same period, offshore banks locked in a profit. Offshore banks that didn t have sufficient loan demand for these dollars would redeposit them with another offshore bank or a domestic U.S. bank. The interbank Eurodollar market grew rapidly as banks pyramided deposits among themselves. Soon offshore banks began to extend the maturities of these loans beyond the maturities of the deposits in order to provide their customers governments, state-owned entities, international corporations and other banks with medium term financing (five to seven years). Rates on these loans were reset periodically instead of being fixed. Typically the offshore bank specified at the inception of the loan an interest rate formula consisting of a benchmark, such as six-month LIBOR, plus a fixed spread added to the benchmark rate. With six-month LIBOR, for example, the benchmark would be reset every six months. One- and three-month LIBOR were also common benchmarks. Interest was paid at the end of the period to which the benchmark applied. During the early years of Eurodollar lending, the spreads over LIBOR ranged from 100 bps for the highest quality borrowers to 250 bps for the less creditworthy borrowers. Competition among offshore banks eventually reduced these spreads. Banks charged front-end management fees of 50 to 100 bps of the total loan amount. Borrowers could establish a maximum loan amount (the facility ) and then borrow ( drawdown ) the amount needed during each period. Borrowings could be partially or wholly repaid at the end of any benchmark period and subsequently redrawn, up to the facility amount, at any time within the remaining life of the facility. This structure was called a revolving credit. In addition to front-end management fees, annual commitment fees of 25 to 50 bps were paid on the undrawn portion of the facility. In some cases the borrower could specify, at the beginning of the benchmark period, a different benchmark rate for that particular period. This allowed the borrower to choose shorter-term benchmarks when yield curves became steeper. Market Developments Eurodollar lending increased substantially in the 1960s because of U.S. legislation aimed at reducing capital outflows abroad and curbing the balance of payments deficit. These capital controls included the Interest Equalization Tax (IET) in 1963, which applied to U.S. investors who purchased foreign securities issued in the U.S. (known as Yankees ). Since investors demanded higher yields to compensate for the tax, the cost of these borrowings increased. Later, the tax was also applied to loans made by domestic banks to foreign borrowers. The Voluntary Credit Control in 1965, and the Mandatory Credit Control in 1968, limited direct investment overseas by U.S. corporations. In 1969 the Federal Reserve imposed reserve requirements on domestic banks borrowing funds from foreign branches. Because these measures made it either expensive or difficult for international borrowers to use the U.S. financial markets, the Eurodollar market became the popular alternative. Eurodollar rates rose and more funds flowed into the market. U.S. banks increased their foreign presence to participate in this growing market and offset domestic weakness. 3

4 For these reasons the Eurodollar market became globally prominent in the 1960s, growing from $12 billion in 1964 to $221 billion in Not only did the number of Eurodollar loans grow, the average size of these loans went from under $50 million to almost $100 million. To distribute the risks associated with larger loans, offshore banks formed underwriting groups called syndicates. Syndication allowed more banks to participate in international lending and lessened the exposure of any one bank to a particular borrower. As with securities underwriting, a lead bank managed the syndicate by farming out pieces of the deal to the other syndicate banks that chose to participate. Major suppliers of funds were central banks and other financial institutions in Europe. The major borrowers were U.S. commercial banks and multinational corporations involved in financing overseas direct investment. Developing countries also became significant borrowers as they funded domestic economic development. In addition to syndicated loans, other instruments, such as bonds and floating rate notes (both will be discussed later) were also used to move capital from suppliers to borrowers. During the 1970s the Eurodollar market continued its tremendous growth due to petrodollar recycling. Following the oil crisis of 1974, OPEC enjoyed a burgeoning cash surplus that reached $320 billion by The Eurodollar market grew to $1,155 billion in the same period. OPEC members would make huge deposits in large international banks, which then made loans to oil importers throughout the world and to developing countries needing to finance payment deficits. Developing countries also sought loans for trade financing. The early 1980s saw several changes in the Eurodollar markets. In 1981 infighting in the OPEC cartel led oil prices to plummet from $33 to $12 per barrel. The huge OPEC surplus slowly disappeared at the same time that countries such as Mexico, Brazil and Poland who had been snapping up Eurodollar loans were staggering under their heavy debt service burden. Financial crises in these developing countries led to a worldwide credit crunch as banks were reluctant to make loans to all but the strongest credits. The Eurodollar market recovered in 1984 and from grew strongly once again due to falling interest rates, increased interbank trading and the demand for syndicated loans to finance a binge of mergers and acquisitions in developed countries. During the 1980s Japan became the largest supplier of funds to the world s financial markets due to a growing balance of payments surplus. U.S. corporations also supplied funds due to high interest rates in Europe, the appreciation of the U.S. dollar and a strong domestic economy. Germany, Taiwan, Luxembourg and the Netherlands also became significant suppliers of funds as the decade progressed. A new currency, the ECU (consisting of a weighted basket of major European currencies) became a popular choice for bond issuers during the 1980s. In the 1990s, sovereigns increased their participation in the Euromarkets as suppliers. Nondollar issues became more frequent and the average issue size became much larger. Where $200 million issues had once been considered large, multi-billion dollar issues were not uncommon in the 1990s. The Euromarkets had become a significant and critical source of funds for large international corporations and financial institutions. The new currency resulting from the 4

5 European monetary union, the Euro, essentially replaced the ECU. The Euro competed with the dollar after its introduction in January 1999 as the currency of choice for Eurofinancing. Eurobonds In addition to the Eurodollar deposit and loan markets, the Eurodollar bond market grew during the 1960s. This growth suffered severe contractions in the 1970s as interest rate volatility and dollar devaluations caused turmoil in the market for new issues. But the various financial crises around the world from 1981 to 1983 made banks re-emphasize capital market issues to meet their customers needs as they became more selective in using their balance sheets to provide credit. This caused rapid growth once again in the Eurobond market, as growth in the traditional Eurodollar deposit and loan markets slowed. Eurodollar bonds were syndicated by groups of international banks and sold in small denominations ($1,000 or $5,000) mostly to individual retail investors in Europe. These bonds typically paid an annual fixed coupon free from withholding tax by the issuers government. Since they were sold in bearer form (identified by a number, not by the investors name) they were useful in escaping local tax authorities. This feature was attractive to wealthy European investors, such as Belgian Dentists, who liked to earn high U.S. interest rates and avoid paying income taxes. During the 1970s and 1980s income in the highest marginal tax bracket in many European countries was taxed at rates as high as 98%. The Belgian Dentist market declined during the 1990s as the highest marginal tax rates dropped and as tax authorities more vigilantly pursued evaders. Eurodollar bonds were not registered with the SEC, so U.S. investors could not purchase them until a 90-day lock-up period had expired. These bonds were listed on the London or Luxembourg exchanges, and listing requirements and regulations were minimized. Borrowers could quickly tap the markets when conditions were favorable, particularly with bought deal issues. In a bought deal, the issuer and underwriter agreed to the final issue terms which the underwriter guaranteed before the announcement of the deal and formation of the syndicate. The bought deal differed from common practice with U.S. domestic issues, where the underwriter waited until the formal offering (often weeks after the announcement) to assess market conditions and price the issue. As with domestic bonds, the lead bank of the underwriting syndicate (the group of banks that purchased and then resold the issue to investors) was paid a front-end management fee for its work in arranging the deal, and all members of the syndicate received a front-end underwriting fee. The syndicate members purchased the bonds at par minus a selling concession. Fees for a typical 10-year fixed rate Eurodollar bond averaged 200 bps which generally consisted of 25 bps for the lead underwriter, 25 bps for the remaining underwriters, and 150 bps of selling concession. Some of the selling concession was passed on to portfolios managers, who then sold the bonds at par into their clients accounts, garnering extra commission for themselves. For obvious reasons, these client accounts were referred to as cramdown accounts. Bond dealers faced pressure from investors and regulators to eliminate this practice and had largely 5

6 moved toward price transparency in the 21 st century. Unlike domestic U.S. bonds, designed to be sold at par, Eurodollar bonds were considered successful if they sold at any price above par less the selling concession. It was not uncommon, therefore, to see new Eurodollar bonds trading in the gray market before issuance at a discount. In the gray market, dealers, market makers, and investors effectively traded the bonds by pre-organizing trades of the bonds before they were even issued, based on their own expected allocation of the issue. In addition to avoiding the credit restrictions mentioned earlier, dollar borrowers flocked to the Eurobond market because the all-in borrowing costs 1 were often lower than could be obtained in the domestic U.S. market. Top quality borrowers could even sometimes obtain financing at rates below comparable U.S. Treasuries. Well-known but lower-rated borrowers, particularly those who sold consumer products in Europe, also often found Eurobond issues to be less costly than domestic bonds. Individual investors often made credit assessments based on qualitative factors such as name recognition. Institutional Eurodollar investors represented a new market, eager to diversify their portfolios with U.S. corporate debt. A complication arose for U.S corporations issuing Eurobonds during the 1970s: the U.S. treasury imposed a 30% withholding tax on the coupon paid to non-resident investors. To circumvent this problem, U.S. corporations established offshore finance subsidiaries to issue the Eurobonds and lend the proceeds back to the parent corporation. The Netherlands Antilles islands became the popular location for these offshore subsidiaries because the Netherlands Antilles did not impose withholding requirements on either the coupon payments to investors or on the debt repayment interest from parent to subsidiary. In 1984 the Treasury s withholding requirement was eliminated and the offshore financing subsidiaries became unnecessary. However, many U.S. corporations continued to use these subsidiaries because they still had bonds outstanding, and because it was a useful way to isolate international financing activity. U.S. multinational corporations were the most prolific Eurobond issuers. Other significant issuers were supranational organizations such as the World Bank and IMF, and governments, municipalities and state-owned agencies from countries with small domestic capital markets such as Canada, Sweden and Denmark. Japanese banks and corporations were significant issuers because Japanese Eurodollar bonds circumvented regulations restricting Japanese insurance companies investment in foreign securities. Junk bonds became more prolific in the 1990s as sub-investment-grade corporations and the governments of emerging market countries increasingly tapped the Eurobond markets, though these issues were on average smaller. Floating Rate Notes (FRNs) In 1970 the concept of tradeable bonds was merged with the floating rate feature of syndicated 1 The all-in cost is the IRR of the bond, with cash flows consisting of the issue proceeds less the front-end fees, the annual coupon payments, and the final principal payment. 6

7 loans to form a new product called Floating Rate Notes (FRNs). The birth of FRNs arose from financial market instability in the late 60s and early 70s due to high interest rates and inverted yield curves. Interest rate instability made issuing fixed rate bonds very difficult. As with syndicated loans, the rates on FRNs were also determined using a fixed spread above a benchmark rate. Top quality issuers (AAA, AA) paid 8 to 25 bp above LIBOR, while weaker investment-grade (A, BBB) credits paid spreads anywhere from 35 to 135 bps over LIBOR. For non investment-grade borrowers, spreads were as high as 300 bps. Front-end fees averaged 50 bps of the total issue, and maturities were generally longer than syndicated loans from 7 to 15 years. Bankers accepted lower fees and concessions for FRNs than fixed rate Eurobonds because the average issue size of FRNs had become much larger than fixed rate Eurobonds. Also, banks faced less price risk on FRNs during the initial placement period and the involvement of institutional investors resulted in larger trade sizes. By 1975 large international banks became the major FRN issuers as they sought committed, medium-term, floating-rate funding. Strong growth in the FRN market continued through the late 1970s and into throughout the 1980s as investor demand grew, as banks sought high quality liquid assets to supplement loan portfolios, as competition among underwriters reduced spreads, and as FRNs became a vehicle for banks to raise inexpensive capital that met regulatory requirements. In the 1970s most FRN borrowers were low investment grade, seeking floating rate financing, or non investment grade, having no alternative. In the 1980s the stigma associated with companies who used FRN financing wore off and borrowers of all qualities used this market. In the 1990s most FRN borrowers paid junk-level spreads, as investment grade borrowers chose other instruments. Sovereign and government agencies also began using FRNs to finance balance of payment deficits following the oil price shocks of the 1970s. High quality non-financial corporations avoided the FRN market since they could afford the fixed rate Euromarkets and disliked the uncertainties associated with FRNs. They used the U.S. domestic commercial paper market for short and medium term floating rate financing because commercial paper rates, including a backstop fee (similar to the fee paid on the undrawn portion of a credit line), had been historically less than LIBOR. Individual investors preferred fixed rate Eurobonds over Eurodollar FRNs for several reasons. They viewed Eurobonds as long-term investments, which were often held to maturity and then redeemed at par rather than actively traded, which meant strong credit was more important than high liquidity. FRNs were unattractive because they were subordinated, the issuers were often lower quality credits, and there were often unusual redemption features. Individual investors usually preferred to know the exact amount of their future cash flows. FRN coupons were more difficult to calculate. FRN coupons were also paid semi-annually or even quarterly, as opposed to annually for Eurobonds, so investors had to go through the trouble more often of reinvesting the coupons. Finally, while Eurobonds were issued in denominations of $1,000 or $5,000 to appeal to individual investors, FRNs were issued in values of $100,000 and $500,000 to minimize transaction costs for large institutions. 7

8 Offshore banks were the main investors in FRNs. Since banks were also the major issuers, the FRN market basically consisted of swapped obligations. Banks invested in FRNs as long-term assets instead of syndicated loans. Prime bank and government FRNs improved overall asset quality and liquidity. Institutional investors such as supranationals, central banks, pension funds, insurance companies and mutual funds purchased FRNs for cash management purposes. Insurance and pension funds preferred fixed income securities in order to better plan cash flows and actuarially calculate premiums and contributions. Sophisticated institutions would purchase non-callable FRNs and use interest rate swaps to create artificial fixed rate securities while arbitraging FRNs and fixed rate bonds. Innovations in the Euromarkets In addition to the FRNs and fixed rate bonds, the Eurodollar market offered a variety of issue features, such as zero coupon bonds, convertible bonds, equity warrants. Zeros were particularly popular because reinvestment risk was minimized, and investors in some countries, such as Japan, were not taxed on the original issue discount until maturity. By the late 1990s this tax benefit had become extinct throughout the world. U.S. corporates who issued zeros could, until 1982, deduct annual interest expense based on a straight-line amortization of the original issue discount. The discount is now geometrically amortized. Some additional features specific to Eurobonds had developed, and they eventually appeared in domestic markets as well. Debt warrants were issued, which allowed the holder to purchase additional bonds (termed back bonds ) with a pre-established coupon and maturity. The proceeds from the sale of warrants effectively reduced the all-in cost of the bond issue. Retractable/extendable bonds gave the investor the option to either put the bonds back to the issuer at an earlier date than the stipulated maturity or to extend the maturity of the bonds. Partly-paid issues required investors to pay only a portion of the total price at issuance and then pay the remainder within a specified period. This structure allowed investors to make a leveraged play on interest rates, and enabled non-dollar investors to speculate on exchange rates before the final payment. Issuers found the partly-paid structure attractive if they could borrow the unpaid amount in the short-term debt markets at lower costs than the costs on the bond and, because of the balance due to be collected, be assured of long-term funds with which to repay the short-term borrowings. Other structures gave the borrowers valuable flexibility. With tap bonds, borrowers announced the size of the basic debt and also an additional underwritten tap amount. The borrower received the basic amount at closing and could decide sometime before the first coupon if it wished to increase the size of the issue up to the additional tap amount. Another technique, known as delayed rate setting or delayed closing, gave borrowers the option of locking-in a spread over a benchmark U.S. Treasury security at issuance, but waiting several months usually anytime before the first coupon payment to select the absolute Treasury rate. Several innovative structures lowered borrowing costs by appealing to special investor groups or 8

9 by exploiting market inefficiencies. So-called mismatched FRNs recalculated the coupon rate more frequently than the interest was actually paid. For example, coupons might be reset monthly based on a spread over six month LIBOR, but the coupon would be paid at the end of six months. Banks could lock in a spread between the coupon and their one month funding cost. This structure is especially popular in times of steeply upward sloping yield curves. Issuer set coupons let borrowers choose the least costly benchmark period at the beginning of the coupon period. The partly paid FRN structure was similar to the structure in the fixed rate market. Some issues allowed the borrower to call the remaining payment, or parts thereof, at any time over the life of the issue, rather than specifying a certain date when the balance was due. This arrangement provided an inexpensive backstop arrangement for the borrower. FRNs with caps ( ceilings or maximum allowable coupon rates) required the borrower to pay a slightly higher spread than normal above LIBOR. The borrower usually sold the cap to a third party and agreed to pay the difference between the calculated coupon and the cap level to the cap purchaser. The proceeds from the cap sale more than offset the extra spread on the FRN issue. Eurodollar fixed rate bonds and FRNs effectively disintermediated 2 major international banks from some of their traditional loan customers by giving these borrowers direct access to investors with Eurodollars. Furthermore, the introduction of Note Issuance Facilities (NIFs) in 1978 transformed revolving credits into short-term tradeable Eurodollar notes, which could be sold to investors rather than held by the banks. Banks supported the development of these markets by both underwriting and purchasing Eurodollar securities in order to offer their customers international financing without having to book loans on their balance sheets. The mid-1980 s also saw the development of the Eurosecurity market with the introduction of Note Issuance Facilities (NIFs) by commercial banks and Revolving Underwriting Facilities (RUFs) by investment banks. These facilities allowed more highly-rated issuers to sell a variety of short term debt instruments directly to the capital markets on an as-needed basis. Though spreads on NIFs at first were slightly larger than spreads on FRNs, the NIFs had useful features. With an NIF the borrower could continually issue the short-term notes over the life of the facility at a rate which would not exceed a specified maximum spread over the benchmark. Rolling over the notes sometimes produced lower cost medium-term funding than through FRNs. The borrower could also easily adjust the size of outstanding debt, similar to a revolving credit facility. With the repeal of the withholding tax in 1984, more U.S. domestic issuers began using the Eurodollar market, resulting in converging all-in costs of issuing Eurodollar bonds vs. domestic bonds as the 1980s progressed. In the 1990s Eurocommerical paper began to compete with domestic commercial paper markets for short-term financing. Also, the note market became 2 Disintermediation refers to the transformation from bank-centered to capital market-centered financial activity. In bank financing, a commercial bank collects deposits from capital suppliers and makes loans to capital borrowers. In the capital markets, commercial banks are disintermediated (eliminated as the middle man). Borrowers issue debt securities instead of entering into loans, and suppliers provide the capital by purchasing these securities. Investment banks facilitate capital market transactions, but in the future, electronic networks and greater use of in-house financial expertise could disintermediate them to some degree. 9

10 more sophisticated, with the introduction of instruments such as PERPS and MOFFs. PERPS were perpetual bonds, meaning the borrower paid interest forever and never repaid principal. MOFFs were multi-option financing facilities which give the issue tremendously flexibility in choosing term, currency, fixed vs. floating rate, benchmark, redemption options and equity options. The 1990s also saw tremendous growth in the use of financial derivatives in the Euromarkets, particularly the use of instruments such as swaps, futures and options to gain favorable interest rates. The introduction of the Euro in January 1999 did not provide the stable currency hoped for early on. Within a year it had fallen in value from its $1.19 dollar price at introduction to less than $.85 two years later. However, the issuance volume in the Euromarkets had grown to almost $1 trillion annually with both developed and emerging country corporations and governments viewing the Euromarket as a now stable source of funds. The Euromarket in the Early 21 st Century The Euromarket continued explosive growth in the early 21 st century. The new European currency, the Euro appreciated dramatically against the U.S. and debt issuances in Euroeuros often exceeded that of Eurodollars. The use of derivative instruments for risk management purposes and to allow issuers to exploit untapped markets grew rapidly as well. The Eurocommerical paper market had come to dominate the old NIF, RUF, and MOFF programs. The Euro medium term note (EuroMTN) market also became a major source of funds for corporations and financial institutions. Although MTNs were originally 3 to 7 years in maturity, the market proved popular and the range of maturities expanded to 270 days to over 30 years. With an MTN program, an issuer would effectively have a variety of notes with different maturities, currencies, floating and fixed rates, and other features ready to issue. However, the notes would sit on the shelf until the money was needed. Reverse inquiry allowed investors looking for a note with specific features to call the issuing underwriter and request a specific note. 10

11 Exhibit 1 CURRENCY BREAKDOWN OF REPORTING BANKS' CROSS BORDER POSITIONS (in billions of US dollars) Assets Liabilities All Currencies 33, , , ,731.5 US dollar 12, , , ,298.2 European currencies 12, , , ,692.5 Yen 1, , , ,178.1 Pound sterling 2, , , ,971.7 Swiss franc Other 1, , , ,849.7 Exhibit 2 INTERNATIONAL DEBT SECURITIES BY COUNTRY OF RESIDENCE (in billions of US dollars) NET ISSUES ALL COUNTRIES 2, ,430.8 DEVELOPED COUNTRIES 2, ,416.2 France Germany Netherlands Spain United Kingdom United States OFFSHORE CENTRES DEVELOPING COUNTRIES ASIA & PACIFIC

12 Exhibit 3 INTERNATIONAL MONEY MARKET INSTRUMENTS (in billions of US dollars) by type sector and currency AMOUNTS OUTSTANDING NET ISSUES TOTAL ISSUES $1,136.8 $1,131.5 $198.9 $81.3 COMMERCIAL PAPER US dollar Euro Yen Pound sterling Swiss franc Canadian dollar Other currencies Financial institutions Governments International organizations Corporate issuers OTHER INSTRUMENTS US dollar Euro Yen Pound sterling Swiss franc Canadian dollar Other currencies Financial institutions Governments International organizations Corporate issuers MEMORANDUM ITEM: DOMESTIC MONEY MARKET INSTRUMENTS TOTAL ISSUES 11, , ,462.0 Commercial paper 2, , Treasury bills 3, , ,293.0 Other instruments 5, ,

13 Exhibit 4 INTERNATIONAL BONDS AND NOTES (In billions of US dollars) By type sector and currency AMOUNTS OUTSTANDING NET ISSUES TOTAL ISSUES $21,577.9 $22,734.3 $2,784.2 $2,349.4 FLOATING RATE 7, , , ,205.8 US dollar 2, , Euro 4, , Yen Pound sterling Swiss franc Canadian dollar Other currencies Financial institutions 6, , , ,216.6 Governments International organizations Corporate issuers STRAIGHT FIXED RATE 14, , , ,139.5 US dollar 5, , Euro 6, , Yen Pound sterling 1, Swiss franc Canadian dollar Other currencies Financial institutions 9, , , Governments 1, , International organizations Corporate issuers 1, , EQUITY-RELATED US dollar Euro Yen Pound sterling Swiss franc Canadian dollar Other currencies Financial institutions Governments International organisations Corporate issuers Convertibles Warrants MEMORANDUM ITEM: DOMESTIC BONDS AND NOTES TOTAL ISSUES 44, , , ,281.5 Medium-term notes Bonds 43, , , ,

14 Exhibit 5 14

15 Exhibit 6 DOMESTIC DEBT SECURITIES (in billions of US dollars) by sector and country of issuer AMOUNTS OUTSTANDING FINANCIAL INSTITUTIONS CORPORATE ISSUERS France , Germany Italy , Japan , United Kingdom United States 13, , , , CHANGES IN STOCKS FINANCIAL INSTITUTIONS CORPORATE ISSUERS France Germany Italy Japan United Kingdom United States

16 Exhibit 7 AMOUNTS OUTSTANDING OF OVER-THE-COUNTER (OTC) DERIVATIVES (In billions of US dollars) Notional amounts outstanding Gross market values (total) TOTAL CONTRACTS $595,341.0 $591,963.0 $15,813.0 $33,889.0 Foreign exchange contracts 56, , , ,917.0 Outright forwards and forex swaps 29, , ,732.0 Currency swaps 14, , ,588.0 Options 12, , Interest rate contracts 393, , , ,420.0 Forward rate agreements 26, , Interest rate swaps 309, , , ,573.0 Options 56, , ,694.0 Equity-linked contracts 8, , , ,113.0 Forwards and swaps 2, , Options 6, , Commodity contracts 8, , , Gold Other commodities 7, , , Forwards and swaps 5, ,471.0 Options 2, ,561.0 Other 71, , , ,831.0 Memorandum item: GROSS CREDIT EXPOSURE $3,256.0 $5,004.0 Exhibit 8 AMOUNTS OUTSTANDING OF OTC FOREIGN EXCHANGE DERIVATIVES BY CURRENCY (In billions of US dollars) Outstanding Net Issuance ALL CURRENCIES $40,271.0 $56,238.0 $49,753.0 $1,266.0 $1,807.0 $3,917.0 Australian dollar 1, , , Canadian dollar 1, , , Danish krone Euro 16, , , ,567.0 Hong Kong dollar Japanese yen 9, , , New Zealand dollar Norwegian krone Pound sterling 6, , , Swedish krona 1, , , Swiss franc 2, , , Thai baht US dollar 33, , , , , ,133.0 Other 7, , , total long and short positions 16

17 Exhibit 9 17

18 Exhibit 9 (continued) 18

19 Exhibit 10 Exhibit 11 19

20 Exhibit 12 20