I. Position Risk Methodology and Requirements

(Japan )

(a) Categorization

For domestic (yen-denominated) debt securities. there are three categories depending on the type of issuer.

• Government Bonds
• Qualifying Bonds
• Other Bonds

Qualifying Bonds include government guaranteed and prefectural / municipal bonds. bank debentures and corporate bonds with a BBB or better rating Other bonds include privately placed bonds or those with a rating of BB or lower.

(b) Risk Weights

For each category of securities. risk-weights are determined according to the maturity period. The risk weights of domestic debt securities will be as follows.

Maturity period	Government Bonds ("JGBs")	Qualifying Bonds	Other Bonds
0-3 months	9. 20%	0. 30%	0.60 %
3-6 months	0.40	0. 65	1.30
6-12 months	0.75	1.20	2.40
1-3 years	1.40	2.25	4.50
3-5 years	2.00	3.20	6.40
5-7 years	2. 50	4. 00	8. 00
1-10 years	3. 20	5 10	10.20
10-15 years	4.20	6.10	13.40
over 15 years	5.00	0.00	16.00

Companies wishing to reduce compliance costs are able to choose the simplified method with broader maturity band. The risk weights table under the simplified method is as follows.

Maturity period	Government Bonds	Qualifying Bonds	Other Bonds
0-12 months	0.75%	1.20%	2.40 %
1-5 years	2.00	3.20	6.40
5-10 years	3.20	5.10	10. 0
over 10 years	4.20	6.70	13. 40

As for foreign currency denominated bonds the determination of the risk weights will be ...............................................!!!!!!! ***Missing text in the original***

( U.K )

(a) Categorization

There are three categories of securities which may be included in the debt securities calculations:

• Government Bonds
• Qualifying Debt securities
• Other Bonds

Qualifying debt security shall mean high quality bond issued other than by a government in its domestic currency. For each category, the risk weight is determined according to maturity period of the securities.

(b) Risk Weights

The risk-weight table is as follows.

Maturity	UK   Gilts	Sterling Denominated Other Fixed Income Securities	Deutschemark Sovereign (_1)	Deutschemark Denominated Other Fixed Income Securities	US Treasuries
0-3 months	0.25 %	0.50%	0.10 %	0.25%	0.25 %
3-6 months	0.50	1.00	0.25	0.50	0.50
6-12 months	0.15	1.50	0.50	1.00	0.75
1-2 years	1.50	2.75	0.75	2.00	1.50
2-5 years	2.75	4.25	1.75	4.00	2.50
5-10 years	3.25	5.00	2.50	5.00	3.50
10-20 years	3.50	5.75	3 00	5 50	4.50
over 20 years	3.50	6.50	3.00	5.50	4.50

Maturity	US Dollar Denominated Other Fixed Income Securities	Yen Sovereign(_2)	Yen Denominated Other Fixed Income Securities	Irish   Gilts	Irish Punt Denominated Other Fixed Income Securities
0-3 months	0.50%	0.10%	0.25 %	0.50 %	0.75 %
3-6 months	1.00	0.25	0.50	1.00	1.25
6-12 months	1.50	0.50	1.00	1.50	2.00
1-2 years	2.75	0.75	2.25	2.75	3.50
2-5 years	4.00	1.50	4.00	3.25	5.50
5-10 years	5.00	2.25	5.00	3 75	6.25
10-20 years	7.00	3.00	5.50	4.25	8.75
over 20 years	1.50	3 00	6.00	4.25	9.50

Maturity	European Currency Unit Denominated Fixed Income Securities	Other Currency Denominated Fixed Income Securities	Non qualifying Debt Securities
0-3 months	0.50%	0.75%
3-6 months	1.00	1. 25	5%
6-12 months	1.50	2.00
1-2 years	2.15	3.50
2-5 years	4.25	5.50	10%
5-l0 years	5.00	6.25

NOTES

(_1)Deutschemark denominated fixed income securities issued by the Federal Republic of Germany

(_2)Yen denominated fixed income securities issued by the Japanese Government

(U.S.)

(a) Categorization

• There are following category by types of issuer.
• Securities issued or guaranteed by the U.S. Government and its agencies
• Municipal securities
• Securities issued or guaranteed by the Canadian Government
• Non convertible debt securities rated in one of the top four categories
• Others

(b) Risk weights (Hair Cut)

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Maturity	Securities Issued/ Guaranteed by the US Gov’t or its Agencies & Canadian Gov’t (_1)	Municipals Bonds(_2)		Non-Convertible Debt Securities rated in one of the top four categories	Others I	Others II
0-1 months	0 %	1.00%	0 %	2.0%	30% (15%)	40%
1-3 months			1/8%
3-6 months	0.50 %		1/4%
6-9 months	0.75 %		3/8%
9-12 month	1.00 %		1/2%
1-2 years	1.50%	2.00%	3/4%	3.0%
			1.00%
2-3 years	2.00%	3.00%		5.0%
3-5 years	3.00%	4.00%		6.0%
5-7 years	4.00%	5.00%		7.0%
7-10 years		5.50%
10-15 years	4.50%	6.00%		7.5%
15-20 years	5.00%	6.5%		8.0%
20-25 years	5.50%	7.00%		8.5%
over 25 years	6.00%			9.00%
(_5)

NOTES

(_1)Subcategorization is made for the U.S. government bond category. The subcategories are shown by dotted lines. .

(_2) There are two sets of percentages for municipal securities. The right column applies to those that have a maturity of less than 732 days at the time of issuance. The left column applies to all other municipal securities,

(_3)Others l" category includes those securities that have three or more market makers. The figure in the parenthesis shows a Percentage used in the alternative method,

(_4)Others II category includes those securities that have one or two market makers.

(_5)In the case of primary dealers these percentages are adjusted as 75%. of those figures that apply each category.

(France)

(a) Categorization

• There is no category either by type of issuers or maturity.

(b) Risk Weight

• 4%, in all cases.

The attached Annexes compare the risk weights applied in Japan, the U.K. and the U.S. for various types of issuer of fixed rate bonds.

2. Basic Philosophy of the Regulations in Japan, U.S., U.K. and France

These four countries adopt the same approach to administration of risks which are associated with a firm's bond portfolio: positions are recognized on a trade date basis; these positions are marked to market; and the aggregate amount of calculated risks are deducted from firms' capital.

With respect to risk weights, French regulations apply a single risk weights of 4% to all bond positions. In the other three countries, risk weights are determined according to the type of issuers and maturity.

In these three countries. the longer the maturity is and, therefore, the higher the price volatility, the greater the risk weight is. The risk weights also differ according to the creditworthiness of the issuer.

Risk weights are determined by the volatility and the liquidity of the bonds. U.K. risk weights for government bonds are calculated with a 9S% confidence interval over 1 week, in the U.S., 90% over 1 month (which is the same as the U.K.) and in Japan 95% over one month. In other words, a greater risk weight is applied to those bonds for which the issuer's creditworthiness is lower, takes longer time for liquidation. and whose maturity is longer (that is, their volatility is higher).

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In France. a single risk weight of 4% is adopted in order to simplify the regulation. and the weight seems to reflect the market risk.

From the standpoint of simplification of the regulations, the Japanese regulator adopts an alternative and simplified method for those firms whose bond position is comparatively small. This alternative method, which allows less detailed categorization in terms of maturity, is adopted so that the compliance cost of these firms are lowered, This method. however, contains risk weights which are more conservative (greater) than those of the regular method. The U.K. regulators also offer simple high requirements for such firms.

II Summary of the Offset Rules

1. Summary

(Japan )

The offset will be allowed only to Japanese Government Bonds (JGBs) and qualifying bonds. Complete offset will be allowed only between long and short positions of the same issue. In other cases, the offset will be allowed only two the extent that the risk is actually reduced. Thus, even in the case of holdings of two government bonds with the same maturity a complete offset will not be allowed because, in the short term, the prices can move apart significantly.

The offset coefficient, which reflects the interrelations of the volatility among these bonds. will be used for offsetting. The offset coefficient is 0.6 for JGBs against JGBs, 1. 0 for JGBs against qualifying bonds and 1.0 for qualifying bonds against qualifying bonds.

However, long and short positions in bonds may not be offset against each other when the duration of one position is less than one year and that of the other is a year or more. In addition, the offset is not allowed for other bonds. The offset will not be allowed when the alternative method is used.

The offset will be allowed for foreign bonds in the same manner as the domestic bonds as long as the currency is the same.

(U.K.)

The basic philosophy of the offset is the same as Japan s. The detailed offset coefficients are used for each currency category of qualifying bonds. The offset will be allowed only between the position of the same maturity band and adjacent maturity band.

Basically, a complete offset will be allowed only between long and short positions of the same issue. No offset is permitted between good quality and tow quality bonds or between two low quality issues because the low quality issues are subject to considerable specific risk which makes such hedges highly imperfect. The offsets allowed in the U.K. for Sterling fixed income instruments are set out below:

STERLING	Same Maturity Band	Adjacent Maturity Band
Gilts v Gilts	0.55	0.65
Gilts v Other Qualifying	0.95	1.0
other Qualifying v other Qualifying	0.75	0.85

(U.S.)

Instead of specifying the offset coefficient, the U.S. ruses allow for offsetting on positions to which risk weights (hair cut percentages) are applied.

(a) Complete Offset

As for bonds issued or guaranteed by the U.S. government, its agencies and the Canadian government, a complete offset is allowed between long and short positions in the same subcategory of maturity.

The long and short positions of the same issue will also be completely offset. In addition the long and short positions of the different categories of maturity will be offset under certain circumstances.

(b) Partial Offset

For U.S. municipal bonds and bonds rated in one of the top four categories, the greater of the long or short positions is regarded as the position at risk --- that means offset coefficient of 1.0 is used for matched positions. In some cases, complete offset can be allowed between the positions of the bonds with rating in one of the top four categories under certain circumstances.

For other bonds, a hair-cut rate of 30% shall be applied first to the market value of the greater of the long or short positions regardless of the category of maturity. Second, in the case the market value of the lesser of the long or short positions 25% of the market value of the greater of the long or short positions- a hair-cut rate of 15% shall be applied to these excessive positions (that means, an offset coefficient of 1.0 is used for a quarter of the matched position and an offset coefficient of 1.5 is used for the rest of the matched position).

When the alternative method is used the hair-cut rate for the first step is 15X and that of the second step is 30%.

(France)

French regulations contain general provisions which allow for partial offsetting.

20% of the matched part of long and short positions of bonds of the same type and the same issuer is regarded as the position at risk --- that means an offset coefficient of 0.2 is used for matched positions.

2. Derivative Products

All four countries have rules for the treatment of financial futures or options on debt or interest rate products. The rules basically provide for these instruments to be treated individually or under separate hedging arrangements in which case the underlying actual or notional debt security is included in the offsetting rules referred to below In one country, only exchange traded derivative instruments are allowed as an offset against the underlying cash instrument In the case of options three of the countries have regard in the allowable treatment to the extent to which the option is likely to be exercised In those countries which investment firms which undertake interest rate swaps the rules treat the swaps for the purposes of market risk as national government bonds

3. Comparison of the offset rules

All four countries have offset rules between long and short positions.

Japan, the U.K. and France do not allow for complete offset other than between the long and short positions of the same issue. And in the U.S.. a complete offset is allowed only in the same subcategory of the bonds issued or guaranteed by the government or its agencies.

The offset coefficients. which reflect interrelation of the volatility between the long and short positions that are being matched, is used for offset. The offset is allowed to the extent the risk is reduced. The reason for not allowing complete offsets is that prices can move apart significantly in the short term.

SUMMARY OF % OFFSETS FOR GOVERNMENT BONDS IN THE SAME MATURITY BAND

FRANCE	JAPAN	U.K.	U.S.
20%	60%	55%	100%