International Finance & Treasury - Eurogiro Int Finance and Treasury...Weekly Report for...

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Finance & Treasury International Weekly Report for International Finance Executives July 15, 2003 Vol. 29, No. 17 IN THIS ISSUE See Eurogiro, Page 3 The Eurogiro cross-border payment cooperation has shown strong growth over the past few years, with the number of transac- tions reaching nearly 20 million in 2002 compared to about 6 mil- lion in 1997. Growth is due to low transaction pricing, a strong product range covering both credit and cash payments and a coop- eration facilitating low processing costs (high STP). Eurogiro is uniquely structured. It has shown convincing past successes and is confidently looking forward to new challenges and opportunities following introduction of the new EU regulation re- garding cross-border payments. A new alliance with the U.S. Federal Reserve system, providing a transatlantic payments gateway, is among its exciting new initiatives. Eurogiro’s Last Ten Years Eurogiro was established in 1992 as both cooperation between postal banks and a cross-border payment system comparable to Swift. The background to this cooperation was partly that the postal banks Eurogiro Comes of Age Eurogiro provides new opportunities via its transatlantic gate- way in cooperation with the U.S. Federal Reserve system. Henrik Parl, Eurogiro Network A/S Article after article has been written, read—and eventually consigned to the recycling bin—about the recent crisis that cap- italism seems to have inflicted on itself. In this article I will try not to add to that account, but simply to ask the questions: What lessons can finance executives learn from what has happened in the recent past? In what ways do they need to modify their strategies and policies in the aftermath? Although this is not the place for another survey of the crisis, it is worth pointing out that as long ago as 1998, with the Long Term Capital Management (LTCM) collapse, there were clear signs that the financial system could wreck the widespread boom. How- ever, the high-tech spending bubble continued until the “dot.com” bubble burst in early 2000; there followed terrorism, a corporate governance crisis (Enron, etc.) and major shocks to the system from geopolitical risks. Throughout the U.S., the economy had to take virtually all of the strain; there was no help from Japan or Europe. It had become abun- The CFO’s New Clothes Like the imaginary robes of Andersen’s deluded emperor, re- cent events reveal the inadequacy of modern financial theory. Alan W. Clements, C.B.E. See Clothes, Page 12 Treasury Operations A cross-border payments system based on the postal savings bank system uses technology to ensure its continued success. page 1 Treasury Strategies When a cutting-edge financial theory like add- ing shareholder value turns on its champions, havoc may ensue. page 1 Banking Financial institutions acquire asset-management firms in a wave of competitive diversification. page 2 Currencies A pause in the dollar’s recovery seems likely as it treads water against the yen and euro. page 2 “World Value of the Dollar” foreign exchange supplement. page 5 Indicative options market volatilities for world currencies against the dollar and euro. page 10 International Financing Withholding tax reform enhances public bond fi- nancing for Italian issuers and foreign investors. page 10 Accounting The imminent shift to international accounting standards affects employee benefit programs. page 15 Capital Markets Factors affecting unification of Europe’s capital markets, with comparisons to practices elsewhere. page 16 International Taxation There is more to tightening the supply chain than simply making operational adjustments. page 20 Snapshots A new EU tax package; Argentine authorities act against hot money flows. page 24

Transcript of International Finance & Treasury - Eurogiro Int Finance and Treasury...Weekly Report for...

Finance & TreasuryI n t e r n a t i o n a l

We e k l y R e p o r t f o r I n t e r n a t i o n a l F i n a n c e E x e c u t i v e sJuly 15, 2003

Vol. 29, No. 17

IN THIS ISSUE

See Eurogiro, Page 3

The Eurogiro cross-border payment cooperation has shownstrong growth over the past few years, with the number of transac-tions reaching nearly 20 million in 2002 compared to about 6 mil-lion in 1997. Growth is due to low transaction pricing, a strongproduct range covering both credit and cash payments and a coop-eration facilitating low processing costs (high STP).

Eurogiro is uniquely structured. It has shown convincing pastsuccesses and is confidently looking forward to new challenges andopportunities following introduction of the new EU regulation re-garding cross-border payments. A new alliance with the U.S. FederalReserve system, providing a transatlantic payments gateway, isamong its exciting new initiatives.

Eurogiro’s Last Ten YearsEurogiro was established in 1992 as both cooperation between

postal banks and a cross-border payment system comparable to Swift.The background to this cooperation was partly that the postal banks

Eurogiro Comes of AgeEurogiro provides new opportunities via its transatlantic gate-way in cooperation with the U.S. Federal Reserve system.

Henrik Parl, Eurogiro Network A/S

Article after article has been written, read—and eventuallyconsigned to the recycling bin—about the recent crisis that cap-italism seems to have inflicted on itself. In this article I will trynot to add to that account, but simply to ask the questions: Whatlessons can finance executives learn from what has happenedin the recent past? In what ways do they need to modify theirstrategies and policies in the aftermath?

Although this is not the place for another survey of the crisis,it is worth pointing out that as long ago as 1998, with the LongTerm Capital Management (LTCM) collapse, there were clear signsthat the financial system could wreck the widespread boom. How-ever, the high-tech spending bubble continued until the “dot.com”bubble burst in early 2000; there followed terrorism, a corporategovernance crisis (Enron, etc.) and major shocks to the system fromgeopolitical risks.

Throughout the U.S., the economy had to take virtually all of thestrain; there was no help from Japan or Europe. It had become abun-

The CFO’s New ClothesLike the imaginary robes of Andersen’s deluded emperor, re-cent events reveal the inadequacy of modern financial theory.

Alan W. Clements, C.B.E.

See Clothes, Page 12

Treasury Operations

A cross-border payments system based on thepostal savings bank system uses technology toensure its continued success.

page 1

Treasury Strategies

When a cutting-edge financial theory like add-ing shareholder value turns on its champions,havoc may ensue.

page 1

Banking

Financial institutions acquire asset-managementfirms in a wave of competitive diversification.

page 2

Currencies

A pause in the dollar’s recovery seems likely asit treads water against the yen and euro.

page 2

“World Value of the Dollar” foreign exchangesupplement.

page 5

Indicative options market volatilities for worldcurrencies against the dollar and euro.

page 10

International Financing

Withholding tax reform enhances public bond fi-nancing for Italian issuers and foreign investors.

page 10

Accounting

The imminent shift to international accountingstandards affects employee benefit programs.

page 15

Capital Markets

Factors affecting unification of Europe’s capitalmarkets, with comparisons to practices elsewhere.

page 16

International Taxation

There is more to tightening the supply chain thansimply making operational adjustments.

page 20

Snapshots

A new EU tax package; Argentine authorities actagainst hot money flows.

page 24

2 © WorldTrade Executive, Inc. 2003 July 15, 2003

International

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Vol. 29, No. 17July 15, 2003

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(ISSN 1070-9215)

Robert J. BaldoniErnst & Young, LLP

Fred CohenPricewaterhouseCoopers, LLP

Michael DarbyAnderson School, UCLA

Advisory BoardWalter H. DiamondThe Offshore Institute

Geoff HenneyBank Relationship Consultancy

Andrew HodgeBanque Brussels Lambert

Marie HolleinRuesch International

Al JirkovskyBank of America

Lionel LavigneErnst & Young Conseil, S.A.

Johann MüllerDeBrauw Blackstone Westbroek

Daniel M. PerkinsPricewaterhouseCoopers, LLP

Hans PohlschroederColgate–Palmolive

Anthony ReganPutnam Investments, Inc.

George SanbornBorden, Inc.

Philip SantoriellaPfizer

Sandra ShaberThe WEFA Group

Françoise Soares-KempBank of New York

Jeffrey WallaceGreenwich Treasury Advisors

See Strategies, Page 4

See Frontiers, Page 4

Banking/Exchange Strategies

In recent weeks, several major banks andsecurities companies have purchased asset man-agement companies. Additional transactions aresurely in the works.

Financial firms that normally manage theirown capital, through extending loans or tradingsecurities, are always on the lookout for lines ofbusiness that generate a steady stream of income.This is especially true when profit margins shrinkin their core businesses, as is the case now.

Banks can’t make much of a spread on loanswhen interest rates are low. Bond-trading firmsmade good money as interest rates fell, but that ral-

New Frontiers for Asset ManagementFinancial institutions are engaged in a grab for asset management companies asa new leg on the cash flow stool.

Scott E. Pardee

ly is over. Stock prices have rebounded, but brokershaven’t seen a revival of commission income. In-vestment banking revenues from mergers, acquisi-tions, IPOs and venture capital deals are still small.

Thus, financial firms are seeking to gain fee in-come by managing other people’s money (OPM). Itis cheaper and quicker to buy an asset managementcompany than to build one from scratch.

The business model is to accumulate fundsunder management and charge a fee, however as-sessed, for managing them. The first job is to at-tract investors, by establishing a promising invest-

Financial firms areseeking to gain feeincome by manag-ing other people’s

money. It is cheaperand quicker to buyan asset manage-

ment company thanto build one from

scratch.

Conditions are remaining favorable forfurther correction to the euro-dollar overval-uation, but the current consolidation of themove into the $1.12 to $1.14 range could beextended. This would occur as senior tradersand institutional portfolio managers takeleave for summer holidays.

Nevertheless, we believe the market haslocked onto $1.10 as a fair-value target for thepair, so the danger of a reversal on grounds

Exchange StrategiesExtrapolating from the greenback’s laggard performance against the yen, lookfor a short-term consolidation against the euro.

Brendan Murphy, FXotica.com, Inc.

other than a major exogenous shock, i.e., ter-rorism, seems minimal.

All the same, thin markets are volatile mar-kets, so readers are advised to maintain widestops at the top and bottom of the range withrelatively tight trailing stops in the oppositedirection on any sudden breakaway to the euroupside (probably short-lived) or downside(more sustainable). On a somewhat longer-

We believe themarket has locked

onto $1.10 as a fair-value target for the

(euro-dollar) pair, sothe danger of a

reversal on groundsother than a majorexogenous shock

seems minimal.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 3

saw great opportunities for cost efficiencies byworking closely together. Cooperation wouldpermit them to secure low processing costs anddevelop value added products. An additionalincentive was the fact that, at that time, a num-ber of postal banks were not eligible to partic-ipate in the S.W.I.F.T. payments system.

Cooperation was based on a simple prin-ciple: how can members add value by work-ing together, rather than individually?

The cooperation now comprises 41 mem-bers in 39 countries, of which 15 Western Eu-ropean members are shareholders. The mainreason for the “closed club” structure is that alimited number of members expedites highquality processing of payments and query han-dling, as well as rapid decision making.

Eurogiro is predominantly European-based, but is in the process of expanding glo-bally. New members have recently been add-ed in China, Canada, Brazil and the Baltic coun-tries. Taken as a whole, Eurogiro representssome 200,000 banks and post offices in Great-er Europe and more than 200 million accountholders. It therefore ranks as one of the largestfinancial cooperations in the world.

Eurogiro focuses on Low Value Payments(LVP). A unique feature is the coverage of bothaccount-based and cash-based transfers. Thismeans that any person in Europe can bereached either via the post office or a bank ac-count, through a domestic clearing link.

Thus, Eurogiro also can be seen as an au-tomated clearing house (ACH) solution for theEuropean market. Through its strategic allianc-es with Deutsche Bank (dollar payments) andWestern Union (urgent cash payments),Eurogiro covers nearly 200 countries.

It is worth noting that cash payments con-stitute an important part of the total transac-tion volume, despite past predictions about the“death” of such transactions.

Eurogiro ProductsWithin its specialization involving LVP,

Eurogiro provides the following products: (i)credit transfers between members; (ii) credittransfers to third-party banks; (iii) money or-ders (cash); (iv) Western Union urgent cashpayments; and (v) pension payments.

The transactions are transmitted in bulk,in some cases with more than 200,000 pay-ments in one transmission, but the system is

simultaneously used for on-line payments. TheS.W.I.F.T. format is used to facilitate links tothe member’s host systems.

New EU Regulation forCross-Border Payments

The new EU regulation for charges forcross-border payments stipulates that cross-border payments in euro within the EU mustbe priced the same as domestic euro payments.

The regulation is rooted in the goal of theEU to secure an efficient, smooth internal mar-ket for financial transfers. Without the regulation,it would have been difficult for EU authorities toexplain to consumers why it should cost more totransfer money from Frankfurt to Amsterdamthan from Frankfurt to Hamburg, especially withthe introduction of the single currency.

The new regulation creates significant chal-lenges for financial institutions in the EU. Dif-ferent account structures, language differenc-es, different domestic payment systems andvarious domestic reporting requirements areseveral of the reasons why cross-border pay-ments tend to be more expensive to produce.

It is likely to be many years, even decades,before all these areas of additional costs are re-moved, even though initiatives are being made.

Many financial institutions see the new reg-ulation as a challenge. However, both finan-cial institutions and the EU share a commonhope that the regulation can lead to increasedgrowth within EU in general, and higher cross-border payment activity in particular.

The Single European Payment Area (SEPA)

41 Members in 39 Countries

EuropeP.S.K./BAWAG (Austria)*Postcheque (Belgium)*Swiss Post (Switzerland)*CSOB Czech Postal Bank (Czech Republic)Deutsche Postbank (Germany)*Danske Bank (Denmark)*AS Sampo Bank (Estonia)BBVA (Spain)Correos e Telégrafos (Spain)Sampo Bank plc (Finland)*La Poste (France)*Alliance & Leicester Com’l. Bank (Great Britain)*Hellenic Post (Greece)Croatia Post (Croatia/Hrvatska)Magyar Posta (Hungary)An Post (Ireland)*Postgiró (Iceland)*Poste Italiane (Italy)*P&T Luxembourg (Luxembourg)*Latvia Post (Latvia)ING/Postbank (Netherlands)*ING/Postbank (Norway)

ING/Bank Slaski (Poland)CTT Correios do Portugal (Portugal)*Banc Post, S.A. (Romania)Posta Romana (Romania)Postgiro Bank/Nordea (Sweden)*Postna Banka Slovenije (Slovenia)Postova Banka (Slovak Republic)Turkish Post (Turkey)Postal Savings Bank (Serbia/Montenegro)

Outside EuropeEmpresa Brasileira ECT (Brazil)National Bank of Canada (Canada)China Post (People’s Republic of China)Cape Verde Post (Cape Verde Is.)Israel Postal Authority (Israel)Japan Post, Postal Savings (Japan)Barid al Maghreb (Morocco)La Poste (Senegal)La Poste Tunisienne (Tunis)Deutsche Bank (U.S.)

* Shareholder Bank

Treasury OperationsEurogiro, from Page 1

See Eurogiro, Page 8

Taken as a whole,Eurogiro repre-sents some 200,000banks and postoffices in GreaterEurope and morethan 200 millionaccount holders.

Transactions aretransmitted in bulk,in some cases withmore than 200,000payments in onetransmission, butthe system issimultaneouslyused for on-linepayments.

4 © WorldTrade Executive, Inc. 2003 July 15, 2003

Strategies, from Page 2

Frontiers, from Page 2

See Strategies, Page 6

Banking/Exchange Strategies

ment approach and achieving a solid track record.Most investors, individuals and institutions,

will leave funds with asset managers indefinitely,reinvesting returns. The asset manager’s own capi-tal may not be large—investments in people andtechnology, mainly—but the purchase price isgeared to total amounts of OPM under manage-ment, and revenues generated from those amounts.

However, caveat emptor. This is not an easybusiness.

Often, the music stops. As long as total assetsincrease revenues increase. The SEC and otherregulators have sought to stop asset managersfrom engaging in Ponzi schemes, such as egre-giously using current investors’ funds to acquirefunds from new investors. However, that hasn’tstopped asset management firms from clutteringnewspapers, airwaves, e-mail addresses, andeven airports with their ads, all paid for by cur-rent investors in this world of no-load funds.

The industry has suffered several cycles of re-demptions, mainly in bear markets. Asset manage-ment companies have blown themselves up, usual-ly because of investment irregularities. Even in well-managed companies, star portfolio managers makemistakes or leave for another job.

Ralph Wanger of Acorn Funds notes that fundmanagers have collectively sold a put on the stockmarket. Investors can redeem at today’s closingnet asset value, but fund managers may not beable to raise that much cash by then. Don’t counton a steadily rising stream of “fee” income.

Track records are poor forecasters. Even withthe same management team, a company, or one ormore of its portfolio managers, may founder as con-ditions change. That is, prices may respond to newinfluences in specific markets, or the market for spe-cific investment products may change.

In the recent shakeout, index funds lost theirluster; you would have been better off in cash.Meanwhile, gold funds are back in fashion.

The performance bar is steadily rising. To besure, very few fund managers have ever beatenthe S&P over the years, but more managers arequick to adopt the strategies that do. The betterperforming fund managers demand higher pay.

Finally, independent asset managers tend tohave better track records than those in subsidiariesof larger firms. The team you acquire, paying thembig bucks for their sweat equity, may relax, take afew weekends off, and spend time resisting yourefforts to bring them into your corporate culture.

You might do better buying into their fundsthan buying their company. ❑❑❑❑❑

Scott E. Pardee is Alan R. Holmes Professor of Mon-etary Economics at Middlebury College, Vermont. Hehas taught finance at MIT Sloan School of Manage-ment and the University of Chicago Graduate Schoolof Business. Mr. Pardee has served as Chairman ofYamaichi International (America) Inc. and as SeniorVice President at the Federal Reserve Bank of NewYork, where he was Manager for Foreign Operations ofthe Open Market Committee.

The asset manager’sown capital may not

be large...but thepurchase price is

geared to totalamounts under

management, andrevenues generated

from those amounts.

term view, the dollar could push through $1.10and trek towards parity. But at sub-$1.10 lev-els the dollar would subject to selling correlat-ed with setbacks in equities.

Our main concern at this point is that, whilethe dollar has made good progress against theeuro, it has not been able to secure a footholdover ¥120 and in fact has been pressured to thedownside in dollar-yen despite more or lessconstant Bank of Japan intervention.

Much of this is technical; a rise in Japanesebond yields has provided an incentive for re-patriation for domestics, while on the broaderfront the correction in Canadian and Aussie hasprompted unwinding of carry trades.

Many of these concerns may have run theircourse but, if the dollar is going to press onacross the board, there needs to be progress indollar-yen back towards and preferablythrough the ¥120 level. This may be too muchto ask over the short term given the weight of

capital flows that can be generated domesti-cally on the yield factor even if the carrytrade—go short yen, buy Canadian andAussie—subsides.

With respect to the dollar-bloc high-yield-ers, Canadian is looking more attractive at cur-rent levels around CAD1.3750 to $1.38, thoughAussie could be vulnerable to further declinesat $0.66.

Troubled Europe is Dollar-PositiveThough we could be in for a more substan-

tial dollar consolidation, the big picture re-mains positive for the greenback from a fun-damental standpoint.

The surprisingly strong advance in U.S.stocks, while also subject to consolidation, hasprovided some validation for the view that U.S.economic growth is on a stronger path as wemove into the second half. Meanwhile, Europeis floundering and dissension between the Eu-ropean Central Bank and the political estab-lishment over interest rates and the level of the

The surprisinglystrong advance inU.S. stocks, while

also subject toconsolidation, has

provided somevalidation for the

view that U.S.economic growth ison a stronger path.

Afghanistan Afghani 42.785Albania Lek 120.80Algeria Dinar 76.80Andorra Euro* 1.131Angola Kwanza 79.2341Antigua E. Car. $ 2.66Argentina Peso 2.755Armenia Dram 554.882Aruba Guilder 1.781Australia Dollar 1.5139Austria Euro* 1.131Azerbaijan Manat 4879.48Azores Euro* 1.131Bahamas Dollar 1.00Bahrain Dinar 0.377Bangladesh Taka 58.35Barbados Dollar 1.9801Belarus Ruble 2060.65Belgium Euro* 1.131Belize Dollar 1.98Benin CFA Franc 580.288Bermuda Dollar 1.00Bhutan Ngultrum 46.1075Bolivia Boliviano 7.671Bosnia Herzegovina Konv. Marka 1.7191Botswana Pula 4.9888Bouvet Island Krone 7.339Brazil Real 2.9023Brunei Dollar 1.7545Bulgaria Lev 1.7212Burkina Faso CFA Franc 580.288Burundi Franc 1050.00Cameroun CFA Franc 580.288Canada Dollar 1.3759Cape Verde Islands Escudo 108.405Cayman Islands Dollar 0.8282Cent. Af. Republic CFA Franc 580.288Chad CFA Franc 580.288Channel Islands Pound* 1.633Chile Peso 704.175China Renminbi 8.2772Christmas Islands Aus. Dollar 1.5139Cocos Islands Aus. Dollar 1.5139Colombia Peso 2855.20Comoros Rep. Franc 432.427Congo Republic CFA Franc 580.288Congo Dem. Rep. Franc 421.00Costa Rica Colon 398.732Côte d’Ivoire CFA Franc 580.288Croatia Kuna 6.6321Cuba Peso 1.00Cyprus Pound* 1.924Czech Repub. Koruna 28.0914Denmark Krone 6.5748Djibouti Franc 174.125Dominica E. Car. $ 2.66Domi. Rep. Peso 31.94Dronning Maud. Krone 7.339East Timor US$ 1.00Ecuador US$ 1.00Egypt Pound 6.05El Salvador Colon 8.752Eq’tl. Guinea CFA Franc 580.288Eritrea Nafka 9.65Estonia Kroon 13.834Ethiopia Birr 8.2585European EMU Euro* 1.131Faeroe Islands Krone 6.5748Falkland Islands Pound* 1.633Fiji Dollar 1.8772Finland Euro* 1.131Fr. Pacific Islands Franc 102.254France Euro* 1.131French Guiana Euro* 1.131Gabon CFA Franc 580.288Gambia Dalasi 24.50

Georgia Lari 2.1241Germany Euro* 1.131Ghana Cedi 8600.00Gibraltar Pound* 1.633Greece Euro* 1.131Greenland Krone 6.5748Grenada E. Car. $ 2.66Guadeloupe Euro* 1.131Guam US$ 1.00Guatemala Quetzal 7.8506Guinea Republic Franc 1985.00Guinea Bissau CFA Franc 580.288Guyana Dollar 178.10Haiti Gourde 40.0488Heard/McDonald Islands Aus. Dollar 1.5139Honduras Lempira 17.2732Hong Kong Dollar 7.7993Hungary Forint 231.625Iceland Krona 77.03India Rupee 46.1075Indonesia Rupiah 8215.00Iran Rial 7962.00Iraq Dinar N/AIreland Euro* 1.131Israel New Shekel 4.3655Italy Euro* 1.131Jamaica Dollar 58.0483Japan Yen 117.80Johnston Island US$ 1.00Jordan Dinar 0.708Kazakhstan Tenge 146.73Kenya Shilling 74.40Kiribati Aus. Dollar 1.5139Korea, North Won 2.20Korea, South Won 1178.50Kuwait Dinar 0.3004Kyrgyzstan Som 40.7656Laos Kip 7562.00Latvia Lat 0.569Lebanon Pound 1513.50Lesotho Maloti 7.5947Liberia Dollar 1.00Libya Dinar 1.2059Liechtenstein Franc 1.3715Lithuania Litas 3.054Luxembourg Euro* 1.131Macao Pataca 7.9921Macedonia Dinar 53.2929Madagascar Franc 5890.40Madeira Euro* 1.131Malawi Kwacha 89.60Malaysia Ringgit 3.80Maldive Is. Rufiyan 12.6862Mali Republic CFA Franc 580.288Malta Lira* 2.656Martinique Euro* 1.131Mauretania Ouguiya 265.75Mauritius Rupee 29.20Mexico New Peso 10.4305Moldova Lei 13.93Monaco Euro* 1.131Mongolia Tugrik 1120.37Montserrat E. Car. $ 2.66Morocco Dirham 9.5745Mozambique Metical 23332.50Myanmar Kyat 6.1702Namibia Dollar 7.5947Nauru Is. Aus. Dollar 1.5139Nepal Rupee 73.5504Neth. Antilles Guilder 1.7711Netherlands Euro* 1.131New Zealand Dollar 1.6846Nicaragua Cordoba 14.9449Nieue NZ Dollar 1.6846Niger Rep. CFA Franc 580.288Nigeria Naira 129.75

Norfolk Islands Aus. Dollar 1.5139Norway Krone 7.339Oman Sultanate Rial 0.385Pakistan Rupee 57.73Panama Balboa 1.00Papua N.G. Kina 3.4965Paraguay Guarani 6065.00Peru Nuevo Sol 3.4728Philippines Peso 53.44Pitcairn Island NZ Dollar 1.6846Poland Zloty 3.93Portugal Euro* 1.131Puerto Rico US$ 1.00Qatar Riyal 3.6401Rep. Yemen Rial 177.001Ile de la Reunion Euro* 1.131Romania Leu 32837.00Russia Ruble 30.4221Rwanda Franc 521.43Samoa (American) US$ 1.00San Marino Euro* 1.131SaoTome/Principe Dobra 8656.50Saudi Arabia Riyal 3.7502Senegal CFA Franc 580.288Serbia/Montenegro New Dinar 57.6065Seychelles Rupee 5.1541Sierra Leone Leone 2278.55Singapore Dollar 1.7552Slovakia Koruna 36.8155Slovenia Tolar 207.725Solomon Is . Solomon$ 7.3432Somali Rep. Shilling 2606.90South Africa Rand 7.5947Spain Euro* 1.131Special Drawing Right* 1.3984Sri Lanka Rupee 97.13St. Helena Pound* 1.633St. Kitts E. Cat.$ 2.66St. Lucia E. Car. $ 2.66St. Pierre/Miq’lon Euro* 1.131St. Vincent E. Car. $ 2.66State of Cambodia Riel 3815.82Sudan Dinar 257.41Suriname Guilder 2502.40Swaziland Lilangeni 7.5947Sweden Krone 8.0903Switzerland Franc 1.3715Syria Pound 41.79Taiwan Dollar 34.37Tajikistan Somoni 3.081Tanzania Shilling 1045.00Thailand Baht 41.613Togo Rep. CFA Franc 580.288Tokelau NZ Dollar 1.6846Tonga Island Pa’anga 2.1197Trinidad/Tobago Dollar 6.11Tunisia Dinar 1.2878Turkey Lira 1397500.00Turkmenistan Manat 5148.00Turks & Caicos US$ 1.00Tuvalu Aus. Dollar 1.5139Uganda Shilling 1990.00Ukraine Hryvnia 5.3373United Kingdom Pound* 1.633Uruguay Peso 26.815U.A.E. Dirhan 3.673Uzbekhistan Sum 969.20Vanuatu Vatu 120.25Vatican City Euro* 1.131Venezuela Bolivar 1598.00Vietnam Dong 15503.50Virgin Islands BR US$ 1.00Virgin Islands US US$ 1.00West. Samoa Tala 3.0193Zambia Kwacha 4810.00Zimbabwe Dollar 824.00

Pacific Exchange Rate Services Exchange Rates for the Dollar as of July 11thThe table below gives the rates of exchange for the U.S. dollar against various currencies as of Friday, July 11th, 2003. All currencies are quoted in foreign currency units per

U.S. dollar except in certain specified areas. All rates quoted are indicative. They are not intended to be used as a basis for particular transactions. Pacific Exchange Rate Services(http://pacific.commerce.ubc.ca) does not assume responsibility for errors.

Dollar exchange rates from Pacific Exchange Rate Services are distributed to “International Finance & Treasury” subscribers by e-mail weekly. In order to receive this service,please provide the publisher with your e-mail address.

Value ofCountry Currency U.S. Dollar

Value ofCountry Currency U.S. Dollar

Value ofCountry Currency U.S. Dollar

(n/a) Not Available. * U.S. Dollar per national currency unit.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 5

6 © WorldTrade Executive, Inc. 2003 July 15, 2003

Strategies, from Page 4

Exchange Strategies

currency is becoming more open by the day, amajor euro negative.

Support for the dollar from U.S. fundamen-tals and market technical factors could waver,depending on the tenor of the latest releasesand equities price action. It would be unrealis-tic to expect a huge improvement in indicatorsbut we sense that the economy is gaining trac-tion so that it should be reasonable to look forcontinuity in a generally positive direction.

Employment data might not be the bestmeasure of progress in the weeks and monthsto come – the unemployment rate could riseas formerly discouraged workers re-enter themarket, though state claims should decline.

More important for the short- to medium-term are business sentiment and investment.With stocks rising, Keynes’s “animal spirits” arealso rallying, and this may encourage corporateexecutives to initiate ventures that have been onhold these many months of uncertainty.

Such activity won’t turn up in the hard in-dicators for while, so investors will be lookingfor significant improvement in the ConferenceBoard and University of Michigan surveys,pending a confirmatory expansion of commer-cial and industrial lending activity. Meantime,equities will need to carry the burden.

With the Dow Jones Industrial Average wellover the psychologically important 9,000 level,and the S&P 500 cracking 1,000, traders and port-folio managers are concerned that the marketmay be getting ahead of itself. On the other hand,very large amounts of capital are still sidelinedin short-term Treasuries and the money marketand while one portion of the market is frettingabout equity valuation, another segment of play-ers is worried about being left behind.

Limited Dollar Consolidation LikelyWe would not be surprised to see a healthy,

and maybe even hefty, consolidation here—perhaps testing support at the 9,000 level onthe Dow. In our opinion, this would be a goodthing, because many of those on the sidelineswho missed the initial run-up would be likelyto seize the chance to get involved at better lev-els, broadening participation especially amongequity fund managers.

This could embolden those currency mar-ket players who either remain unreconstruct-ed euro bulls or believe that the rebound inthe dollar needs to be confirmed through a

retracement towards the May-June highsaround $1.1930.

We don’t believe such a correction or con-solidation would go that far—European fun-damentals and the political backdrop weighagainst a big euro bounce.

Purely on technical factors, Market News In-ternational tells us that the euro has been tryingto “base out” over important Fibonacci levels at$1.1245 and $1.1215, which, if successful, couldhelp it to retrace towards $1.1345. That level issignificant as a reference point in the down-chan-nel from $1.1935 and also as the 23.6 percent Fi-bonacci retracement of the earlier euro rise from$1.1260 to $1.1610. Euro-dollar may well havebased, so $1.1345 is key resistance.

Our best guess is that we’ll see such a moveto $1.1345 and perhaps over $1.15. At last sightthe euro was pushing up against the $1.13 lev-el and the dollar was looking somewhat slug-gish despite strong advances in equities.

Therefore, it seems that the market wantsto test the dollar’s resilience here and will prob-ably pursue this theme over the next week orso. But unless there is a sharp setback in equi-ties, i.e., a sell-off well under the DJIA 9,000level, we’re dollar-constructive.

Reposition in Canadian; Caution on AussieThe Canadian dollar has given back a good

amount of ground and looks like a buy in thearea of CAD1.3850.

Given the loonie’s excellent performancein recent months it was reasonable for the speccommunity to take some money off the tableon the back of the dollar revanche against theeuro. Portfolio players naturally directed fundsinto the U.S. market with equities surging, andthen the corporate community naturally pulledback to see what would develop.

From the speculative group, we would ex-pect to see some re-establishment of positions,from the portfolio group there could be diver-sification into the Canadian market as U.S.stocks consolidate, and for corporate players,fundamentals should support a move by theCanadian dollar back towards its recent highs.

We’re somewhat more cautious on the Aus-tralian dollar for a number of reasons. At $0.66it hasn’t cheapened enough to encourage orwarrant bottom-fishing along the lines we ex-pect to see in Canadian. Somewhat disappoint-ing employment data have sharpened expec-

Support for thedollar from U.S.

fundamentals andmarket technical

factors couldwaver, depending

on the tenor of thelatest releases and

equities priceaction.

Given the loonie’sexcellent perfor-mance in recent

months, it wasreasonable for the

spec community totake some money

off the table on theback of the dollarrevanche against

the euro.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 7

Exchange Strategies

tations that the Reserve Bank of Australia willtrim short-term rates at its next monthly meet-ing—it has left the benchmark rate at 4.75 per-cent for 13 months through July 2.

A central bank easing wouldn’t narrow theAussie’s yield advantage significantly, but suchexpectations take the edge off A$ demand.

Analysts at RBC Sydney note that fromits recent five-year high at $0.6848, Aussiesold off to a low of $0.6487 then rallied toclose the week of July 11 at $0.6570. That wasencouraging, given that the long-term 61.8percent Fibonacci level stands at $0.6490 and,according to the RBC research note, “remainskey support in the near term.”

Given the Aussie’s many positives, we see agood chance that the $0.6490 level will hold, how-ever readers should be cautious as to re-estab-lishing or bolstering positions at current levelsaround $0.66.This is because it seems likely thatthere will be further tests of that support, andthe A$ could be offered intraday under $0.450.

RBC remains bullish on the dollar-blochigh-yielders, calling for Canadian andAussie to finish the year at CAD1.33 and$0.70, which seem like perfectly reasonabletargets, perhaps even a touch conservative,though CAD1.30 is likely to offer powerfulresistance and Aussie could find it tough toget a solid foothold over $0.70, inviting a cor-rection after that level is touched or topped.

Mexican Peso SupportedThe Mexican peso looks a touch overvalued

at its recent levels around MXN10.40. On the oth-

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er hand, an encouraging U.S. economic outlookand general bullishness concerning equitiesshould insulate the Mexican currency against asevere sell-off, though it could easily cheapen by10 to 20 centavos from here.

Politics is a concern to a limited extent, giv-en the setback sustained by President VicenteFox’s National Action Party (PAN) in congres-sional mid-term elections. The opposition Insti-tutional Revolutionary Party (PRI) consolidat-ed its advantage in the Chamber of Deputies. Thishas the effect of further hobbling Fox in his ef-forts to push through reforms in the energy sec-tor, the labor market and in the fiscal structure.

Nevertheless, the political lineup has notdramatically changed even if Fox’s position haseroded, and the currency, well in hand at theBank of Mexico and Hacienda, is more likelyto track equity market developments thanFox’s political fortunes.

Some even contend the election outcomewill favor reform, as the PRI, though lackingan outright majority, will be positioning itselffor the next presidential election in three years.If this is the case, it will need to show that itcan get things done. Bottom line for the peso:pare back exposures, but accumulate on movesthrough MXN10.50/60. ❑❑❑❑❑

Foreign exchange analysis and provided recommen-dations by Brendan Murphy, founder and chief ex-ecutive of FXotica.com, Inc., The Global CurrencyChannel. Market News International, New York,and Thomson Financial-IFR, Boston, have alsoprovided information and data for this report.

The Mexican pesolooks a touchovervalued at itsrecent levels aroundMXN10.40. Anencouraging U.S.economic outlookand general bullish-ness concerningequities shouldinsulate the Mexicancurrency against asevere sell-off,though it couldeasily cheapen by10 to 20 centavosfrom here.

8 © WorldTrade Executive, Inc. 2003 July 15, 2003

is the industry’s answer. The hope is to createa genuine European payment area by 2010.Eurogiro both follows and is an integrated partof this initiative. It is well positioned andstrongly committed to capture this growthpotential and to further enhance the networkto the benefit of existing and new members.

A key example is the recent cooperationwith the U.S. Federal Reserve system.

Fed/Eurogiro Transatlantic GatewayA limited introduction of the service will

be implemented late in 2003, involving a lim-ited number of U.S. banks and five Eurogiromembers (Austria, Germany, The Netherlands,Switzerland and the United Kingdom).

This limited transatlantic service could in-clude up to 10 participating U.S. banks. Like-ly banks are those with international paymentsrequirements, limited or no international cor-respondent relationships, and a customer basein industries conducting transatlantic business.

The vision for the transatlantic service isthat all European bank accounts can be reachedfrom any U.S. bank that is part of the ACH sys-tem. Also, any account connected to the U.S.ACH system can be reached from Europe.

A simple converter (implemented by Euro-giro) between the U.S. format and the interna-tional S.W.I.F.T. format ensures that these trans-atlantic payments can be exchanged at very lowcosts, i.e., at fees (excluding foreign exchange) of$1 to $3 per transaction. This is very attractivecompared to the present fees in the market.

The product is mainly targeted at LVP trans-actions initiated by corporations and institutions.For these, cost efficiency and total straight-through processing (STP) are key success factors.However, potentially all retail and corporate pay-ments could be sent via the gateway.

Of particular importance in ensuring lowcosts of the transatlantic gateway is the use ofexisting infrastructures. In the U.S., the domes-tic ACH system can be used to send/receiveinternational payments, while the Europeancounterparts use the existing Eurogiro systemand the domestic clearing system to transmittransatlantic gateway transactions.

Product FeaturesFeatures of the Fed/Eurogiro gateway in-

clude: (i) three-day (OUR) credit transfer; (ii)low costs with 100 percent STP; (iii) access toall accounts in-country, secured by the Fed in

the U.S. and Eurogiro members in their homecountries; (iv) handling as domestic dollar pay-ments in the U.S. system; and (v) full transpar-ency and certainty of payment.

The cooperation agreement was signedin mid-March by the Federal Reserve andEurogiro Network A/S, and subsequently byall five European pilot project participants(Bawag/PSK, Deutsche Postbank, Postbank/ING, PostFinance/Swiss Post and Alliance& Leicester Commercial Bank plc). Develop-ment will be based on a central database tosupport message type conversion and the de-velopment will be carried out in parallel withother product development, which will usethe same database.

Design, development and testing will becarried out between April and October of thisyear. The pilot project will begin on Novem-ber 1st, with expanded service expected to beavailable by the second half of next year.

The goal is to expand the transatlantic gate-way to other European countries as soon as ex-perience has been gathered from the limited pro-duction, and the concept could potentially alsobe expanded to other countries outside Europe.

Two U.S. banks will be the first to send andreceive ACH credit payments from the fiveEuropean countries in which Eurogiro Mem-bers will act as gateway operators. Eurogirowill serve as the intermediary gateway net-work linking U.S. participants to the Europe-an gateway operators, and the MinneapolisFederal Reserve Bank fills the role of U.S. gate-way operator. This limited production trans-atlantic service can include up to 10 participat-ing U.S. banks.

Like Canadian ACH payments, paymentsoriginated to or received from Europe will com-ply with CBR and PBR formats. For the Feder-al Reserve system, the transatlantic gateway isan extension of ACH service to Canada andother Fed ACH initiatives being developedwith Mexico, Panama and the United Kingdom.

The strategic alliance between Eurogiro andthe Fed for the transatlantic gateway is fully inline with the gateway strategy of Eurogiro,which envisions increased connectivity formembers and partners, secured at low cost.

Future Strategy of EurogiroThe past success has been based on two

roles for Eurogiro:

Treasury OperationsEurogiro, from Page 3

Introduction of the(Eurogiro/FederalReserve) service

will be implement-ed late in 2003,

involving a limitednumber of U.S.banks and five

Eurogiro members.

Eurogiro will serveas the gateway

network linking U.S.participants to

European gatewayoperators, and the

Minneapolis FederalReserve Bank fills

the role of U.S.gateway operator.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 9

• as a system for cost efficient transmis-sion of low value payments; and

• as a cooperation facilitating newproducts, standards, conversion ofpaper based solutions, formation ofalliances, etc.

Its role as a payments system is currentlyunder threat from global competition, organi-zational changes among the members, EU reg-ulation, etc. The EU regulation and subsequentdevelopment of SEPA/EPC should lead to de-velopment of a very cost efficient pan-Europe-an solution.

Will Eurogiro be able to compete with trans-action prices in EBA that are fractions of a cent?Can the cooperation cope with takeovers ofmembers that transform postal organizationsinto bank entities? Finally, will there be roomfor Eurogiro in a global market that demandseconomies of scale and global coverage?

While optimism regarding these questionsprobably needs to be guarded, we stronglybelieve that, prospectively, there may be evena stronger position for Eurogiro as a globalplayer in the future.

To service their customers, financial insti-tutions will primarily have demands for a wideproduct range and geographical coverage, butalso for cost efficiency and simplicity. Theseaims are clearly conflicting. It is difficult to ser-vice the customers with a full range of prod-ucts while maintaining simplicity and low cost.

Among Eurogiro members, there is in-creasing focus on the high cost of implement-ing. As a result, the following questions arebeing asked:

• Could members use the same technol-ogy to link different networks?

• Can members offer more productsconsolidated on one platform?

• Will it be possible for Eurogiro mem-bers to provide global coverage bymeans of gateways?

The new strategy of Eurogiro tries to exactlyfulfill these needs. The goal is to develop theEurogiro system and cooperation as a way to linkdifferent products, geographical areas, networksand alliance partners and to function as a linkbetween the postal and the bank worlds.

This is illustrated in the accompanying fig-ure, in which Eurogiro acts as a gateway betweendifferent participants in the payment market.

Benefits for members are:• substantial cost savings, especially in

relation to host connections, mainte-nance of systems and ongoing IT costs;

• easy access to a wide range of productsby means of a single infrastructure;

• Eurogiro acts as an intermediary tosecure good terms for all members;

• global access without the need to buildcostly bilateral relationships; and

• a low cost set-up that can easilyadapt to changes with the environ-ment or needs.

The alliance with Western Union, inwhich Eurogiro is a gateway for the urgentcash payments product, for IT and geograph-ically, and the new alliance with Federal Re-serve are good examples of our strategy. Weare in discussion with numerous parties toimplement further gateways and are confi-dent that we can build a very strong valueproposition for our members.

It will be a value proposition that not onlyfocuses on effectiveness as a payment network,but also increasingly emphasizes on Eurogiro’sability to link up with leading institutions with-in the payment sector. ❑❑❑❑❑

Henrik Parl is Managing Director of EurogiroNetwork A/S, Taastrup, Denmark. He may bereached by phone at +45 4371 2772 or directly bye-mail at [email protected]. U.S. banks thatwant further information about participation in thegateway project may contact Ms. ElizabethMcQuerry of the Atlanta Federal Reserve [email protected].

Treasury Operations

The EU regulationand subsequentdevelopment ofSEPA/EPC shouldlead to develop-ment of a very costefficient pan-European solution.

BANK

EUROPE

FED

SEPA

S.W.I.F.T.

UPU/WesternUnion

POST

OUTSIDEEUROPE

Gateway Role of Eurogiro

Financial institu-tions will primarilyhave demands for awide product rangeand geographicalcoverage, but alsofor cost efficiencyand simplicity.These aims areclearly conflicting.

10 © WorldTrade Executive, Inc. 2003 July 15, 2003

The Italian fiscal system has been sub-ject to several changes especially during thepast 15 years. Fiscal requirements and op-erational processes were often completelyamended with significant impacts on finan-cial investments in Italy.

More recently, relevant improvements tothe system have particularly involved non-Italian investors.

BackgroundAt the end of the 1980s, foreign investors’

tax refunds on both Italian bonds proceedsand dividends were based only on the pro-visions of double taxation agreements stip-ulated by Italy. This implied that not all coun-

tries and, so, not all investors were eligiblefor a refund of all or in part of the Italianwithholding tax on bond interest.

Until 1992, withholding tax refunds re-quired several years for payment. During1993, an automated process was introducedfor tax refund on bond interests, reducing thetime needed to obtain the reimbursement to45 days after coupon cashing.

Foreign Investors and Italian BondsWithholding tax reform has created an attractive financing environment for Ital-ian issuers and new asset opportunities for foreign investors.

Stefano Scalera, Ministry of Economy and Finance and Stefano Ceccacci, Banca IMI

During 1996, the so-called “gross couponreform” regarding Italian bonds took place.Legislative Decree No. 239 (Decree), datedApril 1st, 1996, effective first for coupons fall-ing due in 1997, modified the Italian with-holding tax regime on interest proceeds re-ceived by non-residents for:

• domestic bonds issued by the Ital-ian government (e.g., BOT, CTZ,CCT, BTP) and similar instruments(e.g., BOC); and

• bonds issued by Italian banks,companies listed in Italy andformer public entities transformedinto joint-stock companies (e.g.,ENEL), with an original maturityof at least 18 months.

Non-resident qualified investors havebeen exempted from the 12.50 percent Ital-ian withholding tax and no reimbursementwas ever more needed. In other words, since1997, coupons have been paid gross to qual-ified non-resident investors.

The principles of that reform are still inplace and coupons are still paid gross, eventhough the above-mentioned Decree hasbeen amended several times. The amend-ments were made in order to improve the ef-fects of the reform on the financial system.

In particular, at the end of the 2001 fiscal

At the end of the 2001 fiscal year, a new fiscalregulation strengthened benefits for non-resident

investors by widening the exemption regime.

International Financing

Year % Chg. Implied Volatility for At–the–Money Options7/11/03 Ago $ /€Value 1 Week 1 Month 2 Month 3 Month 6 Month 1 Year 1 Mo. R/R 1 Mo. Act’l.

EUR/USD 1.1305 0.9951 –11.98% 8.8/ 9.8 9.2/ 9.5 9.3/ 9.6 9.4/ 9.7 9.5/ 9.8 9.6/ 9.9 0.1/0.4 EU C 9.7USD/JPY 117.66 116.23 1.21% 7.5/ 8.5 8.2/ 8.5 8.4/ 8.7 8.4/ 8.7 8.5/ 8.8 8.5/ 8.8 0.6/0.9 JY C 6.7GBP/USD 1.6316 1.5559 – 4.64% 8.0/ 9.0 8.3/ 8.6 8.2/ 8.5 8.2/ 8.5 8.0/ 8.3 8.0/ 8.3 0.0/0.2 GB P 8.5USD/CAD 1.3760 1.5324 –11.37% 10.2/11.2 9.3/ 9.6 8.9/ 9.2 8.6/ 8.9 7.9/ 8.2 7.7/ 8.0 At Par 11.4AUD/USD 0.6607 0.5618 –14.97% 10.5/11.5 10.2/10.6 10.2/10.5 10.0/10.3 9.9/10.2 9.9/10.2 0.3/0.6 AU P 12.6USD/CHF 1.3715 1.4764 – 7.65% 9.8/10.8 10.0/10.3 10.1/10.4 10.1/10.4 10.1/10.4 10.1/10.4 –0.1/0.3 SF C 11.7USD/MXN 10.4110 9.7200 6.64% 10.2/11.4 10.3/11.3 10.4/11.2 10.4/11.3 10.4/11.2 10.5/11.1 1.0/2.0 MX P 10.9USD/BRL 2.8940 2.7950 3.42% 15.3/16.8 15.4/16.7 16.1/17.2 16.5/17.5 17.6/18.6 18.6/19.5 0.7/4.2 BR P 12.1USD/SGD 1.7543 1.7471 0.41% 5.0/ 6.1 4.6/ 5.1 4.6/ 5.1 4.7/ 5.2 4.8/ 5.2 4.8/ 5.3 0.1/0.4 SG P 5.6USD/ZAR 7.5700 9.9550 –31.51% 21.2/24.8 21.4/23.6 20.2/22.8 19.9/22.2 19.1/21.0 18.5/20.0 1.4/3.6 ZA P 15.0EUR/JPY 133.01 115.66 13.04% 10.0/11.0 9.6/10.0 9.3/ 9.7 9.2/ 9.5 9.0/’ 9.3 9.0/ 9.3 0.6/0.8 EU P 10.7EUR/GBP 0.6929 0.6396 7.69% 9.0/10.0 8.5/ 8.8 8.1/ 8.4 7.9/ 8.2 7.4/ 7.7 7.3/ 7.6 0.0/0.3 EU C 7.7

Foreign Exchange Market Options DataProvided by Bank of America

International Finance & Treasury © WorldTrade Executive, Inc. 2003 11

year, a new fiscal regulation, Law Decree no.350/2001 (2001 Decree), effective January 1st,2002, strengthened benefits for non-residentinvestors by widening the exemption regimeto include some foreign investors previous-ly excluded.

Current SystemAt present, a significant number of for-

eign investors (those that are resident incountries both with and without a doubletaxation treaty with Italy) can achieve a to-tal exemption at the source on Italian bondinterest1 through submission of a “Self-Dec-laration” statement.

This self-declaration states that the ap-plicant is a non-Italian resident and, at thesame time, is resident of a country that pro-vides for exchange of information with Italy(so-called “white listed countries”) and is notincluded in the Italian “black list” (i.e., thelist of tax havens and other countries withprivileged tax regimes).

Self-declaration has no expiry date, savefor changes in the beneficiary’s data.

Moreover, according to current Italian taxlaw, all national central banks are fully ex-empt from these requirements, regardless ofthe country in which they reside.

In order to obtain the exemption from theItalian withholding tax, eligible foreign in-vestors must also deposit the bonds, direct-ly or indirectly, with:

• a bank or a financial broker residentin Italy;

• a permanent organization of a bankor a non-resident financial brokerwhich has direct electronic links withthe Finance Ministry; or,

• a body or a non-resident companymaintaining accounts with central-ized clearance systems and whichhas direct electronic links with theFinance Ministry.

Central Banks and international bodiesand organizations established in accordancewith international agreements ratified in It-aly need not either submit any declarationor deposit their bonds by one of the above-

mentioned intermediary.

Effects of the ReformThe impact of this reform program on

investors’ demand for Italian fixed-incomesecurities has been huge.

The objective of the law has been fullyreached, i.e., to reduce the cost of debt forItalian issuers (there is evidence that this re-form helped Italy to reduce its governmentbond spread in respect to Germany’s govern-ment bonds) and to enlarge the base of in-vestors in Italian bonds.

As a matter of fact, institutional investors,which, at the beginning, were not even allowedto receive gross coupons from certain Italianbonds, have started to buy Italian governmen-tal securities, also discovering the high gradeof liquidity and efficiency of the secondarymarket for these instruments.

Still the reform is not well known by in-vestors. We hope with this article to have

driven the readers’ attention to it. More in-formation regarding it is available on theWeb Site maintained by the Italian Treasury(www.tesoro.it/publicdebt).

The sole purpose of this article is to de-scribe the principles of the Italian govern-ment securities tax regime. The views ex-pressed in the article are those of the authorsand do not necessarily represent the corre-sponding views of the institutions for whichthey work. ❑❑❑❑❑

Stefano Scalera is Director, Head of Domestic Fi-nancing at the Italian government’s Ministry ofFinance & Economy, Rome. Stefano Ceccacciis Head of Tax Research and Advisory Servicesfor Banca IMI, Rome.

(1) Generally, interest proceeds on Italian bonds aresubject to a final 12.50 percent withholding tax, di-rectly calculated and paid by an Italian depositoryinstitution, acting as a fiscal agent.

A significant number of foreign investors can achievetotal exemption at the source on Italian bond interest

through submission of a “Self-Declaration.”

In the Next Issue of F&T

A treasury practice partner in a Big Four firmreviews the effects of recent market develop-ments on strategies for hedging the euro.

Also,an international banker provides in-sights into managing global liquidity with the lat-est and most effective techniques.

International Financing

12 © WorldTrade Executive, Inc. 2003 July 15, 2003

dantly clear that, while our markets alwaysoverreact—climbing too high only to fall toolow—this time the situation was, if anything,worsened because of a strong belief in the su-periority of U.S. capitalism.

Investors became convinced that growth inproductivity was real, and would last, and thatas many put it, a new “paradigm” hademerged. Reinforcing this belief was a widelyheld view that investment had become scien-tific, that risk could be measured, that intrin-sic values could be calculated, and that pro-vided portfolios were properly constructed,returns similar to those enjoyed in the 1990scould be virtually guaranteed.

The result was not only the extremelyhigh values making up the stock marketboom of the late 1990s, but also over invest-ment, resulting in overcapacity and a mas-sive increase in borrowing.

All the talk now, following a three-yearmarket collapse, is of recovery just around thecorner, provided a near-slide into deflation canbe avoided by central bank intervention. How-ever, while the blame for what has happenedis directed at those who made the markets, atgreedy corporate management, at ineffectiveauditors and at sleepy regulators, it is worth-while asking whether basic financial theoryand practice had something to do with the ul-timate fiasco.

In brief, is there a need to rethink much ofcorporate finance?

A recurrent—indeed, the dominant—theme in articles and books on corporate fi-nance in the 1980s and 1990s was that of “share-holder value.” Creation of shareholder valuecame to be seen as the prime duty of manage-ment. This was to be accomplished largely, ofcourse, by adopting techniques that would re-sult in an increasing share price.

Shareholder value concepts became, formany, a summation or encapsulation of cor-porate finance, because:

• they emphasized the need to use cashflows, not profits or earnings;

• they claimed to be able to calculate thecost of capital;

• they also claimed to know how to cal-culate capital employed, business bybusiness, and company by company;

• they showed how cash flow—capitalemployed as a return—must exceed

the cost of capital to create value; and• they showed how to calculate the val-

ue of a business, or company, usingcash flows and the cost of capital, en-abling different strategies to be evalu-ated and compared.

Many academics supported shareholdervalue concepts as embracing the basic build-ing blocks of modern financial theory (the cap-ital asset pricing model, etc.); financial advis-ers in investment banks and accounting firmsalso found them useful in persuading compa-nies to adopt new strategies and financings’and corporate financiers accepted the advicethey were given.

That said, what sorts of policies and re-sults did these concepts produce in the 1980sand 1990s? How did they compare with eco-nomic reality or, even, with just plain, soundcommon sense?

Financial policies, of course, cannot be con-sidered in isolation from markets on which theydepend. Most texts about modern corporate fi-nance begin with an outline of “Efficient MarketTheory” and the importance of capital markets.These markets experienced change, major devel-opments, and some turbulence during the finaldecades of the last century. The 1980s came to beknown as the “decade of the deal:” acquisitionsand mergers, CBOs, LBOs and, in the UK,privatization issues were the dominant themes.

A major cause was that falling interestrates, after the high levels of the early 1980shad effectively dealt with inflation, producedhigher corporate returns and led to a growthin investment.

Institutional investors became more andmore powerful, and hedge funds proliferated.In the 1990s, after an early downturn, againfalling interest rates helped to propagate a bullmarket, a surge in investment (the TMT sectorin particular), growing debt, even more rapidgrowth of derivatives, and a general belief thatfinancial engineering was the order of the day.

MBOs continued as a major element of theinvestment scene, private equity became moreand more important, and options became moresignificant than basic salaries and bonuses inmanagement compensation packages.

Over the whole period, the Dow Jones In-dustrial Average progressed from 875 in 1980,through 2600 in 1990 to around 11,000 at theturn of the century. At the same time, the ratio

Clothes, from Page 1

Treasury Strategies

While the blame forwhat has happenedis directed at those

who made themarkets...it is

worthwhile askingwhether basic

financial theory andpractice had

something to dowith the ultimate

fiasco.

Creation of share-holder value...was

to be accomplishedlargely, of course,

by adoptingtechniques that

would result in anincreasing share

price.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 13

of corporate market value to book value movedfrom 1:1 in 1984 to at least 3:1 in 1999. The hopethat this was an efficient valuation, and that itmight move to even higher levels, proved tobe short lived.

As these background developments weretaking place, what ought to have been the pri-orities of financial advisers, and of corporatepractitioners? As far as the priorities are con-cerned, I think we can safely list the following.

Acquisitions: As the equity market becameincreasingly overvalued, the case against ac-quisition became stronger and stronger. Therewas a real probability that an acquisition wouldprove too expensive, especially when the pre-mium payable over and above the market pricewas taken into account.

Organic Investment: In contrast, this be-came more and more attractive, being cheaperthan acquisition, and therefore more likely toearn a satisfactory return.

Leverage: Pursuit of organic investmentmight well call for an increase in leverage, butfinancial executives would need to exercise care.

Rather than basing the company’s debt lev-el on some abstruse calculation of the trade-off between tax benefit of debt and the grow-ing risk of financial distress stemming fromextra debt, it could be wiser to look back at theeffect on the company of the recessions of theearly 1980s and 1990s. From that, it would bepossible to estimate what level of debt couldbe managed even in a severe downside, andtherefore indicate the optimal leverage.

Share Repurchase: Logically, shares shouldbe repurchased only if they are underpriced.The probability, especially during the 1990s,was that they were overpriced.

Finally, with organic investment the orderof the day, in theory new companies, in whichorganic investment is dominant and acquisi-tion rare, should have prospered.

Those are the considerations that shouldhave prevailed. Instead, what financial policiesand moves were recommended by advisersand adopted by companies in the 1980s and1990s, either when programs for growth andthe pursuit of shareholder value, or new strat-egies, were being adopted?

We can list the following again, but with adifferent perspective.

Acquisitions: Most shareholder value calcu-lations aim to achieve the targeted increase in

value within a relatively short time span, e.g., nomore than five years. Acquisition was seen as thequickest way of accomplishing that, and as a re-sult, featured large in corporate strategies. Sincemany acquisitions had to be for cash, the preda-tors’ levels of leverage increased.

Organic Investment: Although there wasan increase in investment, the emphasis onpromotion of “synergy,” largely via cost reduc-tion programs, proved a limiting factor.

Many mature companies curtailed theircapital budgets, as well as their revenue costs.At the same time, and for identical reasons,there was increasing reliance on “outsourcing.”

Sales, Spin-offs, Demergers: These wererecommended, and adopted, largely to help fi-nance acquisitions.

Share Repurchase: The fact that the com-pany’s shares were, in all probability, over-priced was overlooked, the case for repurchasebeing that it would increase earnings per share,which in turn would increase the share price—shareholder value again!

Share repurchase programs became a ma-jor cause of increasing debt, the company need-ing the cash to effect the repurchase. Of course,share repurchase programs could help execu-tives exercising their options and wanting tosell their shares.

Leverage: Acquisitions, investment, andshare repurchases resulted in a massive in-crease in debt, and all the traditional argumentsin favor of high leverage were produced in jus-tification.

In early 2003, it was reported that the debtof U.S. non-financial companies stood at $10.2trillion, equivalent to 26 years’ pre-tax profits.It was also nearly equal to the market value ofthe equity of those companies. Therefore, onthe basis of the ratio of debt to market value ofequity, gearing was to all intents and purpos-es 100 percent. What it was to book value ofequity is hardly worth recording.

Clearly practice deviated considerablyfrom what might be considered logical priori-ty, and much of this was due to the prevailingshareholder value philosophy.

As has been mentioned already, financialengineering became dominant and it has tobe said that the capital market lost sight ofits true mission. That ought to be, via its IPOsand its valuation of equities, to indicate justhow scarce capital resources need to be allo-

Treasury Strategies

See Clothes, Page 14

As the equity marketbecame increasinglyovervalued, the caseagainst acquisitionbecame strongerand stronger. Therewas a real probabili-ty that an acquisi-tion would prove tooexpensive.

Acquisitions,investment, andshare repurchasesresulted in amassive increase indebt, and all thetraditional argu-ments in favor ofhigh leverage wereproduced injustification.

14 © WorldTrade Executive, Inc. 2003 July 15, 2003

cated within the economy.In the event, the market’s valuation sys-

tem behaved erratically, and became over in-fluenced by side issues such as taxation, theeffects of inflation, creative accounting andundue reliance on the “greater fool” theory ofinvestment. Finally, companies, in their strate-gic thinking and financing policies, foundthemselves abandoning financial logic.

We have seen the economy and, along withit, the corporate sector swept along and sus-tained by first a stock market bubble, then aproperty bubble, and now a bond market bub-ble. Like the economy, the corporate sector isover-borrowed, and definitely is not savingenough. There is an urgent need for it to re-build its balance sheet.

Now, the situation is made more seriousbecause of the emergence of two new risks: thethreat of deflation and the need to cope withpension and healthcare deficits.

Deflation, if it materializes, will affect thecorporate sector adversely. Profits will be re-duced, the real value of existing debt will be in-creased and, if interest rates do not fall in linewith prices (which they probably will not, givenexisting low interest rates), debt servicing willbecome even more difficult. As for the pensionand healthcare problem, it is already with us, andGeneral Motors has revealed the nature and sizeof the issue. It has to increase the annual pensioncontribution from $1 billion to nearly $3 billion,and it has borrowed $13.6 billion to plug its pen-sions and healthcare deficit.

However, the corporate sector at large, al-ready over-leveraged, cannot indulge in a bor-rowing spree to simply cancel one liability withanother. Only a gradual process of profit re-covery and growth, accompanied by sound fi-nancing, can hope to resolve the problem.

What do I mean by “sound financing?”First of all, much less reliance on sharehold-

er value concepts and clever financing strata-gems; in short, less aggressive pursuit of share-holder value in the form of a rising share price.

Further, the following considerations needto be addressed, which once upon a time wouldhave been the major elements of a CFO’s fi-nancial strategy.

Risk: The important thing is not to be ableto ride the risk/reward curve skillfully, but tobe able to balance financial risk and businessrisk. The business is probably risky enough

anyway, without having masses of financialrisk loaded onto it.

This calls for greater use of equity. Too often,it is forgotten that while, to the investor, equityis risky, to the company it represents the safestform of finance. There was much truth in the say-ing “equity is a pillow, debt is a sword.”

Capital Structure: Do not “Balkanize” it,but keep it simple. Borrow only if cash flowswill clearly cover both interest and repayment.

Acquisitions: Rigorously calculate the in-trinsic value of the target, and pay more onlyif achievable synergies will more than compen-sate for the excess.

Use your own shares as the payment mech-anism if they are over valued. If cash has to beused, ensure that net earnings of the target willexceed the net cost of the debt involved.

Value: Do not be misled into thinking thatliquidity is the same as value, as liquidity isoften not there when it is needed. Only cashequals value.

Dividend Policy: Profits should be rein-vested profitably; if they cannot be, they shouldbe distributed. And share repurchase, as al-ready mentioned, should only be undertakenif the shares are under priced.

At all times, the major concern must be totry to keep the company in a financial state thatwill enable it to withstand the unheard of tidalevent which could submerge it. As LTCM dis-covered, these do occur, even though the lawsof probability decree that they cannot, even intime spans of millions of years. Most of thepolicies that will create this state of prepared-ness have been indicated above.

Those who prefer to remain loyal to thebasic tenets of modern financial theory—espe-cially, to shareholder value—will look uponthese principles as little better than the inco-herent mumblings of a witch doctor. Howev-er, modern finance stands discredited. It hasled any number of companies into some of theworst financial howlers in history.

It is time for a re-think. ❑❑❑❑❑

Alan W. Clements is founder/president of the Asso-ciation of Corporate Treasurers and was formerlyChairman of David S. Smith Holdings plc, the UK’slargest manufacturer of specialty papers. He occasion-ally contributes articles regarding cost of capital, bal-ance sheet structure and other financial theories toF&T and its sister publications.

Treasury StrategiesClothes, from Page 13

Like the economy,the corporate sector

is over-borrowed,and definitely is not

saving enough.There is an urgent

need for it to rebuildits balance sheet.

Do not be misledinto thinking that

liquidity is thesame as value, as

liquidity is oftennot there when it isneeded. Only cash

equals value.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 15

“Thousands of companies throughoutthe world will be required to adopt IFRSin the coming years; the requirements inIFRS1 are designed to ease the transitionfor all concerned...we’re on our way!”

Thus remarked Sir David Tweedie, head ofthe International Accounting StandardsBoard (IASB) when, on June 19th, the IASBtook its first substantial step by releasing acompletely new international financial re-porting standard, IFRS1.

Coupled with the decision in July, 2002, bythe European Union (EU) that, from 2005 for-ward, all listed companies in the EU must pre-pare accounts in accordance with IASB stan-dards, it is clear that big changes are set to come.

However, how will this affect the ac-counting required of companies and whatwill investors make of the new informationbeing presented? Will this lead to a new eraof accounting transparency, or simply pro-vide reams of additional, but ultimately un-helpful, disclosures?

While the principles behind the U.S. andinternational approaches remain so different,how can the readers of accounts get to gripswith what the numbers mean?

This article compares accounting treat-ment of employee benefits, a key battle-ground, under U.S. and international gener-ally accepted accounting principles (GAAP).It draws conclusions that highlight the needfor planning an appropriate strategy. Theneed for planning applies both to those whowill be preparing international reporting dis-closures and those who believe the U.S. maymove towards an international approach.

What Differences?The IASB standard, IAS19, covers ac-

counting for post-retirement benefits (includ-ing pension plans); the corresponding Finan-cial Accounting Standards Board (FASB)standards are SFAS#87, SFAS#88, SFAS#106and SFAS#132.

For employee share options, the IASB

Options, Pensions and GAAPThe shift to international accounting standards will particularly affect recogni-tion of employee benefit programs.

Alex Waite, Lane, Clark & Peacock, LLP

has issued a recent exposure draft, ED2,which covers similar ground to SFAS#123and SFAS#148.

How do they compare?With regard to post-retirement benefits,

both the IASB and FASB standards use a sim-ilar, market-based approach to place a valueon the liabilities. In that respect, they have alot in common, but numerous relatively mi-nor technicalities can lead to values for bothassets and liabilities that are different by 10percent or more.

However, there are also some major differ-ences of principle between the existing publi-cations, as described in the following sections.

Income Statement Effects: The impact ofbenefit changes on reported profits can bevery different under the two sets of rules.

For example, FASB standards generallyallow the cost of increases to existing bene-fits to be charged against the profit and lossaccount over the working life of the employ-ees affected. IAS19, on the other hand, re-

quires the full cost of such improvements tobe immediately charged against profits as acapitalized lump sum during the accountingperiod in which they are agreed.

The effect of the IFRS treatment could behuge: for example, “amendments” grantedby United Airlines reduced reported profitsin 2002 by $100 million; under IASB rules,the impact that year would have been up to$650 million.

Asset Value Limitations: The IASB lim-its the maximum asset value that can be rec-ognized on a balance sheet, reflecting its de-velopment during the 1990s when pensionplan surplus was the norm. However, it hasno corresponding minimum liability valuethat must be recognized.

Accounting

Numerous (IASB vs. FASB) relatively minor tech-nicalities can lead to values for both assets and

liabilities that are different by 10 percent or more.

See GAAP, Page 22

16 © WorldTrade Executive, Inc. 2003 July 15, 2003

A recent survey of Europe’s capital marketsserves as a timely reminder that the road to a sin-gle market is paved with frustrating uncertainty.Ruben Lee of Oxford Finance Group found competi-tion to be an eminently healthy situation for mostmarket participants, including investors. Howev-er, he also discovered that other issues, such astransparency and price execution, are often not assimple as they appear.

Competition among exchanges and other typesof market participants (e.g., trading systems and so-called “internalizers”) tends to result in better pric-es. However, best execution cannot be judged byprice alone, since many other aspects of a trade arealso important to investors.

Lee also observes that no single transparencyrequirement will suit all investors, as they have di-verse needs. Sensible transparency and choice forinvestors produces better markets than compulso-ry concentration or order routing requirements.

Lee’s report aims to provide a summary of eco-nomic evidence on three topics that are crucial tothe debate about which securities market tradingstructures will best enable Europe to achieve its eco-nomic goals. These are fragmentation, internalization,and transparency. The report addresses the currentstate of research into how these phenomena affectmarket performance and best execution.

The quality of a market with many tradingvenues is dependent on how the various criteriadetermining market performance are assessedover the whole market, and not just across anysingle trading venue.

Moreover, economics, by itself, is not able toassess the fairness of a market, although it can pro-vide an assessment of the costs of choosing one setof values over another.

Finally, many aspects of a trade in addition toits price may be relevant for best execution. Sincedifferent traders have different preferences, no sin-gle definition of best execution is possible. It de-pends on what is important to the investor.

FragmentationWith a few notable exceptions, there is now a

consensus that it is beneficial to have competitionbetween exchanges and other types of market par-ticipants for trading in a particular security.

A number of closely-related themes have been

Capital Markets ConflictA comprehensive study of factors affecting unification of Europe’s capital mar-kets, with extensive comparisons to practices elsewhere.

Oxford Finance Group

raised in the debate over whether all orders in aparticular security should be consolidated on a sin-gle trading system. These are described in the fol-lowing sections.

Competition between Exchanges and OtherTypes of Trading Systems: This makes for competi-tive pricing of services that exchanges and tradingsystems offer, including transaction, clearing andlisting services. It also provides an incentive for themto innovate and enhance their product lines, for ex-ample by automating various aspects of their sys-tems and trading different assets.

Investors go where they believe their ordershave the greatest chance of being executed. Thismeans that trading in any particular security is likelyto be concentrated on a single dealing mechanism,or at most a small number of competing systems.

If, however, trading is fragmented between dif-ferent trading venues for whatever reason, it hasbeen argued theoretically that this dispersal lowersprobability of execution at each location, therebyreducing liquidity, and increasing volatility of trans-action prices. Other theoretical analyses of compe-tition between exchanges identifies the possibilitythat different trading systems may coexist, if trad-ers have diverse needs and desires, and if each trad-ing system satisfies the trading preferences of a par-ticular group of investors.

Some theoreticians show competition betweentrading systems is not always beneficial, and maysometimes decrease, as well as increase, liquidity.

In the European context, a range of empiricalanalyses have been made of the competition be-tween the national exchanges following the “BigBang” in London. Notably, this period was charac-terized by a bout of intense innovation at the vari-ous exchanges concerning their market structure,their technology, and the services they offered.

Most of the measures of market performance,for example, in creating a diversity of trading ven-ues, in linking the markets, and in being able to dealin greater size at the available spreads, show thatsuch competition was beneficial.

A lot of empirical research on effects of compe-tition between trading systems has been undertak-en in the U.S. Much of this work concludes that in-creased competition in securities markets leads totighter bid-ask spreads, and with some exceptions,has also had a range of other beneficial effects.

Capital Markets

The quality of amarket with manytrading venues is

dependent on howthe various criteria

determining marketperformance are

assessed over thewhole market.

Investors go wherethey believe their

orders have thegreatest chance of

being executed. Thismeans that trading

in any particularsecurity is likely to

be concentrated ona single dealing

mechanism.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 17

Preferences of Individual Traders: Differenttrading systems, with distinct market architectures,bring choice to investors. Different benefits are avail-able from different types of trading systems.

Transaction costs of demanding immediacy ofexecution, for example, can be significantly higherthan costs incurred in trading patiently. Large sav-ings can also be achieved by using automated sys-tems instead of traditional intermediated markets.

Existence of multiple trading venues, and di-versity among investor preferences has put pres-sure on what “best execution” means. Contrary tothe historical approach, recent research suggestsboth that the concept of a “best price” is not welldefined in the context of multiple trading systems.This approach postulates that attempts to mandate“best execution” as a consumer protection devicecan limit competition between trading systems, andthus not give the result the consumer wants.

Competition among Dealers: This generallyprovides the same incentives at the dealer level aswere noted when previously analyzing the resultsof competition between exchanges.

Price and Other Primary Priorities: With pricepriority, the highest bids and lowest offers get exe-cuted before other orders. A lack of price prioritymay lead to reduction in speed and accuracy withwhich information about a company is incorporat-ed into the price of its shares, and in the quality ofprice formation of a market.

It may be more difficult to deliver price priori-ty in a market with competing trading systems thanin one centralized trading system, but market par-ticipants have an incentive to ensure that they re-ceive the best price, so that price priority applies.

In order to understand much of the evidenceabout fragmentation, it is important to appreciatethe difference between two types of orders: so-called“informed orders” and “uninformed orders.”

Informed orders are said to come from marketparticipants who have some knowledge about thefuture value of a security they are trading, whereasuninformed orders are from market participantswho have no special information about the futurevalue of the security.

Execution of uninformed orders presents a low-er risk to an intermediary than execution of in-formed orders. This is because when an intermedi-ary trades with an informed order, the likelihood isthat the price of the security will move in favor ofthe informed trader, and against the intermediary.The dealer is thus said to face an ‘adverse selection’problem when trading with informed traders.

Early empirical work concluded that the NewYork Stock Exchange (NYSE) offered better pricesthan those on other trading venues. This has been

used to suggest that trades executed off the NYSEmay therefore not obtain best execution, in terms ofreceiving the best available execution prices.

It has also been argued that payment for orderflow diverts low risk “uninformed” orders awayfrom the primary trading venue, and leaves it onlythe more risky “informed” orders for execution.

On this analysis, “cream-skimming,” as it hasbeen called, may undermine the process of pricediscovery because the diverted orders do not con-tribute to the price discovery on the primary mar-ket. Furthermore, if quote matching is employed,diverted orders may be executed at worse pricesthan would have occurred if those orders had beenentered on the primary market. There is, however,growing evidence suggesting that market quality isnot any worse when trading takes place off the pri-mary market, and furthermore that the quality ofsuch executions, when factors other than price aretaken account of, may indeed be better.

A key difficulty in assessing costs and benefitsof fragmentation is that competition between ordersmay work best in a single consolidated market onwhich all orders can interact against each other. Onthe other hand, competition between exchanges,trading systems, and over-the-counter trading, andall the benefits such competition yields, implies frag-mented markets. The two forms of competition maynot be compatible with each other.

Secondary Priorities: “Time priority” givesmarket participants an incentive to submit limit or-ders early to a trading system, because by doing sothey are more likely to have their orders executed.

Time priority is difficult to enforce in a worldof competing trading systems. It has been suggest-ed, theoretically, that a lack of time priority may leadspreads to widen, and may also reduce the chancesof limit orders being executed.

Advances in automation may, however, de-crease the importance of having an enforceable sec-ondary time-priority rule. This is because a similaroutcome can be achieved by monitoring the mar-ket closely, and by submitting a market order shouldthe price of the relevant stock move to where thelimit would previously have been placed.

This strategy also minimizes the costs to inves-tors who submit limit orders of providing a freeoption to other investors to trade against these limitorders when prices move against them.

Consolidation of Information: “Consolidationof information” means that quote and trade infor-mation about trading in a particular security is readi-ly available from a single source.

It is sometimes argued that consolidation ofsuch information is easier in a consolidated mar-ket, although private solutions to consolidating such

Capital Markets

See Conflict, Page 18

Different tradingsystems, withdistinct marketarchitectures, bringchoice to investors.Different benefitsare available fromdifferent types oftrading systems.

“Time priority”gives marketparticipants anincentive to submitlimit orders early toa trading system,because by doingso they are morelikely to have theirorders executed.

18 © WorldTrade Executive, Inc. 2003 July 15, 2003

information across markets have also been devel-oped in many contexts.

Transparency is widely considered to play a keyrole in consolidating markets, by ensuring pricesare equalized over all trading venues. It allowsarbitrageurs to trade whenever prices on one trad-ing system are inconsistent with another system.

The view that full transparency is required inorder to ensure price equalization across tradingsystems is not, however, universally accepted.

“Public Good” Nature of Various ExchangeServices: These services include price stabiliza-tion, market surveillance, self-regulation andquality certification.

Existence of multiple centers for trading an as-set may reduce the provision of the “public good”that exchanges provide, given the difficulty of fund-ing them. It may also be easier to share regulatorycosts on a fair basis in a consolidated market.

However, various regulatory solutions havebeen proposed and implemented to address theproblems of ensuring that trading on all availablevenues is adequately regulated, and that such reg-ulation is funded appropriately.

InternalizationGiven that “internalization,” execution of trades

in-house rather than on an exchange’s order book,is a form of fragmentation, many themes discussedin the context of fragmentation are repeated here.

The early analysis of internalization stressedtwo key potential costs associated with it. First, in-ternalization was shown, theoretically, to have thepotential to harm the price discovery function of amarket, because it stops all orders in a particularsecurity from competing directly against each oth-er on a single order book. Such fragmentation, itwas said, might also lead to larger bid-ask spreadsand greater price volatility.

A second key problem identified with inter-nalization is that it may divert “uninformed,” lowrisk, trades away from a primary exchange, leav-ing only the “informed,” higher risk orders on thisprimary exchange. This may lead dealers to setwider spreads on the primary exchange in orderto protect themselves from being picked off byinvestors with better information.

If the diverted “uninformed” orders are exe-cuted at prices taken from the primary market, theymay also then be executed at worse prices than ifthey had been entered on the primary market.

Two key benefits with internalization have sub-sequently been noted.

First, it might allow alternative trading venuesto compete with a primary or central market, andsuch competition could lead to enhanced pricing.

Second, it would give market participants a greaterdiversity of choice of where to execute their orders,rather than having only the single option of send-ing them to the central market. This might benefitparticular classes of investors.

For example, the execution of retail traders’ or-ders via internalization may let them obtain betterprices and lower dealing costs than on a primaryexchange, if their orders are “uninformed” orders.If dealers compete for retail orders, they will setsmaller spreads for these low risk orders than wouldoccur in a consolidated market, given that dealersdo not have to protect themselves against dealingwith investors with better information.

In the section on fragmentation, it was shownthat much of the early work on internalization (al-most exclusively about the U.S. markets) conclud-ed that the primary exchange (NYSE) offers betterprices than those available at other trading venues.

A growing body of evidence about internaliza-tion and the practice of some trade execution ven-ues in the U.S. of paying brokers to execute theirorders at the execution venue (“preferencing”), how-ever, highlights the benefits available from internal-ization, and questions both whether better pricesare in fact available from the NYSE, and also moregenerally whether better execution is available.

Using various different measures, internaliza-tion and “preferencing” have been shown not toharm execution of market orders or limit orders, andmay indeed improve such execution.

One example is that market orders traded via“preferencing” on regional exchanges tend to trademore favorably relative to the NYSE, than marketorders placed on regional exchanges; another is thatlimit orders have a greater probability of executingon regional exchanges than on the NYSE.

Internalization also seems to have little short-run effect on posted or effective bid-ask spreads.There is conflicting data about whether internaliza-tion leads to cost competition or to the problem of“adverse selection” noted above, when a dealer islikely to lose money, and therefore set higherspreads, if he deals mainly with informed traders.

The most recent theoretical analysis of how in-ternalization functions takes account both of theprices that investors receive and of the commissionsthey pay for their executions. The conclusions aboutthe effects of internalization on best execution aremore complicated than previous analysis suggests.

In particular, it is shown that payment for or-der flow can lead both to an increase in executionquality, taking into account both the price and com-missions paid, which is consistent with cost com-petition. At the same time, however, it can give riseto an increase in the proportion of higher risk in-

Capital MarketsConflict, from Page 17

Transparency iswidely considered to

play a key role inconsolidating

markets, by ensur-ing prices are

equalized over alltrading venues.

Internalization...may divert

“uninformed,” lowrisk, trades away

from a primaryexchange, leaving

only the “informed,”higher risk orders

on this primaryexchange.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 19

formed trades on a primary exchange, which is con-sistent with cream-skimming.

There is empirical evidence that when best ex-ecution takes account of factors other than merelyprice, the internalization of orders can lead to bet-ter executions than are available on the NYSE.

For example, while execution on the NYSE ap-pears better than internalization using measures oftrade-price quality, internalization provides moretimely executions and produces more liquidity en-hancement than at the NYSE. If potential reductionsin commissions are taken into account as well asexecution prices, previous results showing that bet-ter execution has been available on the NYSE thanelsewhere may need to be revised.

A range of theoretical reasons has been put for-ward as to why institutional traders may like to usea particular form of internalization known as the“upstairs market” (a U.S. term referring to activi-ties of members of an exchange, namely brokers anddealers, when they search for counter-parties for biginstitutional orders off the floor of the exchange).

Upstairs markets may help institutional in-vestors locate trading counter-parties, and therebyexecute large trades without fully revealing theirorders to the “downstairs” market. Upstairscounter-parties may be able to filter out large “in-formed” orders. Upstairs trading may facilitate thecollection of information about the unexpressedsupply of, and demand for, securities. Upstairs trad-ing may also help risk-sharing amongst market in-termediaries, thereby lowering transaction costs.

A broad range of empirical evidence showsbenefits of upstairs trading, which occurs not onlyin the U.S., but also in many other areas, includingEurope. On the NYSE, upstairs trading appears tobe used by investors who can signal credibly thattheir trades are “liquidity” motivated, and not moti-vated because they have better information.

The upstairs market may thus enable transac-tions that would otherwise not occur in the down-stairs market.

In Australia, off-exchange trading—includingECN, upstairs and after-hours trading—is shownto benefit those traders in a position to switch trad-ing venues, by lowering their trading costs. In Can-ada, the upstairs market makers on the TorontoStock Exchange provide a vehicle for screening outorders from investors who have better information,and for executing large liquidity motivated ordersat a lower cost than the downstairs market.

TransparencyThe key effects of transparency on securities

markets, and on the participants in such markets,are complex and contradictory.

Almost all evidence shows that greater trans-parency improves speed and accuracy with whichinformation about a company is incorporated intoits share price. It may allow traders to select whichtrading system delivers the best quoted price, thusfacilitating arbitrage between different systems,ensuring price priority, and enhancing the price dis-covery process. In turn, this is often believed to en-hance best execution.

There is growing evidence, however, that great-er transparency may also harm market performancein various ways.

Not all investors are willing to expose their or-ders publicly, given the risks they run by doing so.Enhanced transparency can reduce their willingnessto participate in the market, and has been shown todecrease liquidity in various contexts.

Traders with superior information are likely toprefer trading systems with less pre-trade transpar-ency, so that they can keep confidential their trad-ing intentions. However, uninformed traders, withno particular information advantage, prefer great-er transparency. No single transparency regime willtherefore be seen as optimal by everybody.

Transparency may make bid-ask spreads wid-en because market makers have less incentive topay to capture the information that a trade with aninformed trader will bring.

Alternatively, spreads may decrease becauseinformation about transactions reaches all partici-pants, or because dealers are aware of each others’positions and compete more strongly.

Transparency may encourage stabilizing spec-ulation that helps absorb order flow imbalancesbetween buy and sell orders, and reduce volatility.Alternatively it may exacerbate market participants’strategic behavior towards each other, with the pos-sibility of increasing volatility.

The level of transparency in a market also af-fects how trading systems compete against eachother. Several commentators suggest that tradingsystems should own the property rights in the in-formation arising from their trading systems, andthat they have the appropriate incentives in mostcircumstances to determine the appropriate levelsof transparency for their trading systems. ❑❑❑❑❑

Ruben Lee is managing director at the Oxford FinanceGroup. He can be reached at the following e-mail ad-dress: [email protected]. Copies of the com-plete study can be obtained at apcims.co.uk/public/pub-lications/discussions/pdf/capitalmarkets.pdf. Copiescan also be obtained by contacting Brian Mairs, Head ofInformation at the Association of Private Client In-vestment Managers and Stockbrokers (APCIMS), [email protected] or +44 20 7247 7080.

Capital Markets

When best execu-tion takes accountof factors other thanmerely price,internalization oforders can lead tobetter executionsthan are available onthe NYSE.

Not all investors arewilling to exposeorders publicly,given the risks theyrun by doing so.Enhanced transpar-ency may reducetheir willingness toparticipate in themarket.

20 © WorldTrade Executive, Inc. 2003 July 15, 2003

In a bid to secure competitive advantage,firms everywhere are striving to lower theircost bases and improve their bottom line.Streamlining supply chain systems and pro-cesses are among the favorite goals of thesecorporate architects.

A taut supply chain can produce a vital com-bination of reduced stock levels and lead times,work-in-process savings, better asset utilization,improved use of production sites, higher produc-tivity and superior customer service.

However, what would be the incrementalbenefit if the long term financial benefits ofthese initiatives could also be improved?

By restricting improvements to operationsalone, it’s possible that the supply chain teamcould be missing a trick. Groups committed tototal improvement are leveraging supplychains by means of integrated tax planning,thereby proactively managing a business costthat is often ignored.

A reduction in taxation levels could have asubstantial income statement effect and it couldhappen quickly. A manufacturer with revenuesof 500 million ($1.66:£1) and seven manufactur-ing sites could typically expect to save about £10million in tax costs by optimally structuringmanufacturing, distribution and sales functions.

Imagine the amount of supply chainstreamlining that would be necessary to real-

Optimizing the Supply ChainThere is more to taking the slack out than simply making operational adjust-ments; consider fine tuning tax and financial considerations.

Sally Cheshire, Deloitte & Touche

ize similar results solely through cost reduc-tion projects or revenue generation projects.

Optimizing the supply chain by means oftax-efficient restructuring involves designingbusiness processes that are both fiscally andoperationally effective.

The critical factor for success lies in ensur-ing that tax opportunities afforded by a sup-ply chain project are identified at an early stageand developed as an integral part of the project.The tax team also needs to identify and solveany prospective tax exposures that may arise.

Creating Synergy: 1+1=4An optimized supply chain may reduce

operating costs by up to 20 percent, with ben-efits derived from:

• process standardization to allow forsharing of best practices;

• more effective levels of performanceand control;

• lower cost base, creating a significantsource of competitive advantage;

• introduction of shared services; and• harmonization of systems to expedite

consistent data standards for financialand management reporting.

In the same way, tax-integrated projects can beexpected to shave significant amounts fromcorporate tax liabilities.

If that is the case, why not create synergies

Smart Structure: A Case Study

A multinational manufacturer of engineered products operates seven production sitesand sells through a global network of sales affiliates. Under the new tax-efficient structure,the management function (principal) is located in Ireland, controlling all aspects of the sup-ply chain. These include: sourcing and purchasing; demand planning; distribution; and qual-ity assurance.

Services such as warehousing, marketing and research and development are providedlocally under “service level agreements” between local sites and the principal.

Activities of each party were defined in the new model and priced accordingly. Majortrading risks are now assumed by the Irish principal and, as such, the majority of the profitwill reside in that entity.

The tax structure supports the commercial needs of the business and the profit generat-ed will benefit from the low Irish tax rate, with an anticipated annual group bottom-line addi-tion of £6 million.

International Taxation

A manufacturer withrevenues of 500

million ($1.66:£1)and seven sitescould typically

expect to save about£10 million by

optimally structur-ing manufacturing,

distribution andsales functions.

The critical factorfor success lies in

ensuring that taxopportunitiesafforded by asupply chain

project are identi-fied at an early

stage and devel-oped as an integralpart of the project.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 21

by linking the two concepts? By harnessing com-bined knowledge of tax planners and supplychain experts, incremental savings can be real-ized, which would be significantly higher thanthe stand-alone results of non-integrated projects.

Supply chain processes adopted by a busi-ness will depend upon its structure and strat-egies. Likewise, the optimum tax structureneeds to be tailored to the organization.

That said, aligning the new business struc-ture with an optimized tax strategy does notinvolve an inordinate commitment of resourc-es. The process involved recognition of VATand transfer pricing issues and identifying thekey drivers affecting profitability, includingpurchasing, sales, manufacturing and logistics.

The objective of the integrated approachshould be to balance tax requirements withcommercial needs of the business, achievingstatutory and fiscal compliance, while mini-mizing effects on day-to-day operations.

In order to deliver tax benefits, centralizedcontrol and risk management must be imple-mented, though this does not necessarily implysubstantial shifts of people or responsibilities.

In any case, transparency is a key attributeof an optimized supply chain, providing en-hanced visibility and planning capabilitythroughout the organization.

There is no doubt that an integrated ap-proach to supply chain planning represents asignificant commitment of time and physicalresources. However, the returns on the exer-cise will almost certainly exceed those of astand-alone supply chain project. Reductionsin tax costs will enhance payback and long-term competitive advantage.

Will It Work for Me?A tax-efficient supply chain project may rep-

resent a significant opportunity for a firm if oneor more of the following circumstances exists:

• group operations are located in sever-al countries;

• the supply chain structure is complex,with multiple multi-product manufac-turing sites;

• revenues in the area under consider-ation exceed £100 million;

• the organization is profitable, so thatlosses are not channeled to a low-taxjurisdiction; and

• the supply chain has not recently beenlooked at from either a fiscal or anoperational perspective.

Benefits that are Hard to IgnoreA combined supply chain and tax redesign

should produce:• a more efficient business;• a tax structure that maximizes the fi-

nancial returns of the operational re-organization; and

• rapid payback, making the project self-funding.

In light of the attributes mentioned in thepreceding section, consider whether such aproject would be feasible for your organization.If so, take the necessary actions to implement itamong the tax and other functions involved. ❑❑❑❑❑

Sally Cheshire is a director in the UK consultingpractice of Deloitte & Touche, LLP. She can bereached by phone at +44 161 4556909 or directlyby e-mail at [email protected].

INTERNATIONAL

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International Taxation

Centralized controland risk manage-ment must beimplemented,though this doesnot necessarilyimply substantialshifts of people orresponsibilities.

Returns on theexercise will almostcertainly exceedthose of a stand-alone supply chainproject. Reductionsin tax costs en-hance payback andlong-term competi-tive advantage.

22 © WorldTrade Executive, Inc. 2003 July 15, 2003

Conversely, the FASB standards do notlimit the upside, but instead may require aso-called “additional minimum liability” tobe recognized if the assets are insufficient.

Again, this can be very significant: BritishAirways still reports such a large surplus that itwould be restricted under IASB rules at March31st, 2002, by around $1.7 billion. Conversely,Ford recognized an additional liability of $9 bil-lion at December 31st, 2002, under FASB rules,an impact that would not have come throughunder existing IASB accounting standards.

Stock Options: The IASB approach foremployee share options is currently set outin ED2 and is to be a compulsory standard,rather than the current “disclosure only”FASB standard. As currently drafted, thereare many differences between the IASB ap-proach and FASB’s.

For example, the IASB require rules to onlytake account of new options granted to employ-

ees. This means that, over the next few years, wewill see a “ramping-up” as new options are grant-ed with a three-year vesting period.

The FASB’s disclosure and retrospectiveapplication avoids the ramp-up effect whenthe numbers are taken into the accounts.

Aren’t the Standards Converging?Changes are afoot in both the IASB and the

FASB camps and, with both having publicly com-mitted to convergence, one might expect chang-es to be in the direction of harmonization. How-ever, this is not necessarily the case.

Currently, both FASB and IASB use thesame method of smoothing any unexpectedexperience, such as the poor investment per-formance in global equities since 2000,known as the “10 percent corridor.” Thissmoothing allows the impact of any unex-pected developments to be drip fed into thebalance sheet and income statement.

However, the IASB is expected to drop thisapproach before the 2005 implementation datein favor of the recently released UK approach.

The UK standard, set out in FRS#17, ful-ly recognizes the impact of such experience

at each balance sheet date. However, the fullimpact is not recognized through the tradi-tional profit line; rather a segregated perfor-mance statement is presented.

Since the IASB’s Sir David Tweedie was thearchitect of this move in the UK, it appears likelythat the IASB will head away from the U.S. ap-proach that it adopted in the late 1990s, in favorof a “mark-to-market” methodology.

If convergence does then occur, accountsprepared under U.S. GAAP may also lookvery different in a few years time.

There is some good news, however. Theinitial draft of ED2, “International Accountingfor Employee Share Options,” looked very dif-ferent from the U.S. standard. Recent noisesfrom the IASB indicate that a more pragmaticapproach may be drafted, which would bebroadly in line with one of the approaches thatis endorsed already by FASB.

Some Practical IssuesAlthough the move to the IASB standards

will occur from 2005 onward, there will effec-tively be a transition from local accountingpractice to IAS as of January 1st, 2004, since oneyear of comparative figures are required.

Issues to be carefully considered at thisstage include:

• how international subsidiaries willbe reporting to the central account-ing function;

• how these reports will be convertedinto the various sets of internationalfigures required;

• how budgets will be prepared for thecoming “transition” years; and

• whether introduction of accounting foremployee share options will affect earn-ings per share (which, in turn, may af-fect value of employee share options).

Each of the above issues will need con-sideration in the context of a particular or-ganization’s needs.

For example, the impact of changes on sub-sidiaries will depend on the extent to whichIASB rules are currently relevant and the po-tential for those rules to become relevant.

Treatment of SubsidiariesThere are currently many approaches to

accounting for post-retirement benefits inmultinational companies:

AccountingGAAP, from Page 15

Changes are afoot in both IASB and FASB camps...(which) one might expect to be (toward) harmoni-zation. However, this is not necessarily the case.

International Finance & Treasury © WorldTrade Executive, Inc. 2003 23

• some entities just book contributionspaid and figures are adjusted centrally;

• others book costs in accordance withlocal GAAP, centrally adjusted if nec-essary; and

• still others book U.S., UK or interna-tional GAAP numbers, as instructedcentrally.

Whatever the current approach, does thisapproach remain appropriate up to, and beyond,2005? The country-by-country impact will needto be monitored in terms of materiality and thelevel of prudence within the local numbers.

It may be argued that, currently, any pru-dence in local accounting practice does not mat-ter in the long term, as the “true” cost of operat-ing a pension fund will emerge. However, un-der the approach envisaged herein for interna-tional accounting standards, the impact of pru-dence will have been to reduce past profits with-out this charge being recouped going forward.

Appropriate “best estimate” assumptionsshould therefore be adopted where practica-ble at the earliest opportunity.

Conclusion and Proposed Transition StrategyIt is easy to be baffled when so many

changes occur simultaneously, but in themajority of cases the approach is to deter-mine a simple strategy that will evolve asnew information becomes available.

A possible transition strategy for a typi-cal multinational organization affected byIASB changes is to:

• consider how the move to Interna-

tional GAAP will impact on thegroup accounts;

• consider the impact on disclosure re-quirements and the information provid-ed from subsidiaries around the world;

• ensure there is no unnecessary pru-dence in the current accountingnumbers;

• monitor the impact of changes asthey are announced, including thedevelopments regarding employeeshare options in ED2 as it transforms

into a full accounting standard; and• ensure the aforementioned changes

are recognized in any projections orbudget numbers.

There is no doubt that in accountingterms we are at the dawn of a new age. Whilethis is just one small step for the IASB, it isalready apparent that the walk ahead will beno “Sea of Tranquility.” ❑ ❑ ❑ ❑ ❑

Alex Waite is the partner responsible for the in-ternational accounting team at Lane Clark andPeacock LLP, a UK-based actuarial consultancyproviding international benefit advice to a widevariety of multinational clients. The views ex-pressed in this article are those of the author andare not necessarily those of LCP as a firm.

EuroWatch® © WorldTrade Executive, Inc. 1998 1

The InternationalBusiness Information

SourceTM

WorldTrade Executive, Inc.

Post-EMU Cash and Debt ManagementBANK OF ULSTER

A TWICE-MONTHLY BRIEFING ON EUROPE'S CHANGING LEGAL AND FINANCIAL LANDSCAPE

continued on page 2

Europe Positioning for Boom in Asset-Backed Securities

W.B. SCHATZMAN (BRUSSELS)

continued on page 12

IN THIS ISSUE

March 15, 1998Volume 10, Number 5

Cash ManagementHandling Cash and Debt After EMUThe euro should simplify cash and debtmanagement, but the transition periodwill be tricky.Page 1

Capital MarketsAsset-Backed Securities Poised forGrowthFavorable regulatory changes and cur-rency unification are behind an expectedsurge in European ABS transactions.Page 1

ProcurementECJ Clarifies Procurement RulesA recent judgment tackles tough issuesrelated to public procurement in Europe.Page 3

Food StandardsEU-U.S. Tensions Flare AgainParliament voices concerns about com-promise of EU standards.Page 4

ShippingThe Customs Morass in EasternEuropePage 5

Monetary UnionCompanies Discuss Expectations forPost-EMU EnvironmentPage 7

Regular FeaturesTax Round-UpPage 8

EU BriefsPage 10

EuroWatch

Across Europe, finance directors and treasurers are anticipating the im-pact of monetary union, and foremost the introduction of the euro, on theirbusiness operations. Much of the cost of EMU will be borne in the preparatorystage, whereas the benefits will only be seen once the single currency is underway. This is particularly true of the corporate treasury function.

Cash ManagementThe introduction of the euro will simplify cash flow management for com-

panies operating across Europe and will allow them to manage their pan-Eu-ropean cash flow in one currency. They will also have the ability to hold allaccounts in euros with uniform interest rates, which will make cash flow fore-casting easier.

The euro will also allow treasuries to pool cash held in different memberstates. Corporations will be able to take advantage of the single currency byholding a euro account in each of the member states in which they operate. Alleuro balances held overnight in the accounts of their pan-European bank couldbe set off against each other, reducing working capital borrowing requirements.The treasury would then only have to manage one working capital balance.

Following the boom in the asset-backed securitization market (ABS) inthe United States in 1997, underwriters are poised to spread their wings inEurope. Unlike in Asia or Latin America, the one-time snail-paced market inEurope is continually evolving into a viable sector and issuances in the ABSmarket will likely jump this year due to recent favorable regulatory changes,as well as the approaching launch of the euro. (See related ABS item, page 10 ofthis issue)

The most significant regulatory change that Europe has seen occurred lastMay, when German banks were given authorization to securitize their ownloans. Regulations have also been improving in France and as a result, a surgein asset-class activity may make a large impact on the already changing ABSvolume in Europe.

ABS activity so far has been centered mainly on residential mortgagesand, to a lesser extent, credit cards. Unlike in the U.S., there is no distinctionbetween mortgage-backed and asset-backed securities in Europe—all dealsuse an ABS structure.

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• recent judicial and legislative developments• trade• single market and currency• labor• tax• intellectual property

Whether you’re looking to structure a deal, start a joint venture or just buyand sell in Europe, you will find the legal and financial information youneed in EuroWatch. ($854/year, U.S. delivery, $904/year, non-U.S.)For more information, call WorldTrade Executive, Inc. at (978) 287-0301, or visit our website (http://www.wtexec.com).

Accounting

In the majority of cases, the approach is to deter-mine a simple strategy that will evolve as new

information becomes available.

24 © WorldTrade Executive, Inc. 2003 July 15, 2003

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Council Adopts Comprehensive EU Tax PackageThe international tax service DutchTax.net advises that, on June 3rd, the EU Council adopted the so-called “Tax Package.”

The package consists of a “Code of Conduct” for elimination of deemed harmful tax competition, directives on the elimination ofwithholding taxes on interest and royalties between related companies and the so-called “Savings Directive.”

The Code of Conduct requires Member States to refrain from new harmful tax measures and to roll back any existing mea-sures. Measures are deemed harmful if they have a significant impact on the location of business in the EU; this includes ring-fencing; low tax for low substance activities; and use of artificial taxable bases.

Most regimes currently deemed harmful have to be rolled back by the end of 2005. However, the Belgian Coordination Centersand the Dutch Group Financing Regime may continue until 2010, with the Belgians possibly being allowed to issue extensions of theBCC regime for existing Coordination Centers in the meantime. The Council still has to take a definite decision on the last matter.

The interest and royalty directive will become effective on January 1st, 2004. A number of interim measures apply: Greeceand Portugal are only subject to the directive for interest from 2005 and are allowed an interest withholding tax of 10 percentfrom 2005-2008 and 5 percent from 2009-2012; Spain is only subject to the directive for royalties from 2005 and can apply a 10percent royalty withholding tax until the end of 2010.

Under the Savings Directive, member states must provide information on interest paid to individual savers resident in otherstates. Belgium, Luxembourg and Austria opted for a withholding tax on interest instead; the rates will be 15 percent from 2005-2007;20 percent from 2008-2010; and 35 percent thereafter. A quarter of the proceeds from the tax will be retained by these states and 75percent will be paid on to the resident states. The Directive might be applicable as of January 1st, 2005, depending on the outcome ofnegotiations with a number of third countries (Switzerland; U.S.; Liechtenstein; Monaco; Andorra and San Marino).

New Argentine Guidelines for Short-Term AdvancesThe Argentine Law firm Estudio Beccar Varela reports that the Argentine central bank (BCRA) has published communications

regulating minimum terms for short term loans and investments in the Argentine market, in accordance with Decree 285/2003(Decree) dated June 30th, 2003. In addition, the BCRA made access to the foreign exchange market more flexible for advancepayments of debts with foreign creditors.

Communication “A” 3972 regulates the Decree and establishes that any financial credit facility assumed by the private financialand non-financial sector shall remain in the country not less than 180 days. Until now, the valid term was 90 days and was onlyapplicable to the non-financial private sector.

Certain concepts in the Decree have been defined: (i) “registry requirement” for foreign exchange negotiations includesany agreement for settlement of transactions in the local market; “excluded foreign trade transactions” comprise paymentsfor export of goods and services, as well as payments for advances or loans of export pre-financings; (iii) “excluded directinvestments” comprise agreements for settlement of foreign exchange transactions for capital contributions made by non-residents in direct investment companies in Argentina; and (iv) the “registry date” shall be the date of the agreement forsettlement of the foreign exchange transaction.

Communication “A” 3973 makes access to theforeign exchange market more flexible foradvance payments of financial debts of the non-financial private sector, facilitating debt nego-tiation processes by eliminating prior authori-zation of the BCRA for such transactions madein compliance therewith.

It allows payment of capital services of debtsfrom the non-financial private sector for financialloans, bond issues and other debt securities owedto foreign residents, within 15 business daysprior to maturity.

In case the payment should be made morethan 15 days in advance, the current value of thedebt as maximum cancellation value must bedetermined. Such current value shall be calcu-lated considering as discount interest rate, suchannual rate implicit for foreign exchange futurestransactions in regulated markets.

Finally, in processes of debt restructurings, thisCommunication allows payment of non-maturedand accrued interests for financial debts withforeign creditors of the non-financial private sector.

This article does not constitute legal adviceand should not be relied on in that way. Specificadvice should be sought about specific circum-stances of individual transactions. ❑❑❑❑❑