/EGBS: BA/ML analyst Yuri..........>

US TSYS/RESEARCH: /EGBS: BA/ML analyst Yuri Seliger cited an "early holiday

present for foreign investors" in FX basis action. "For foreign investors, the

cost of dollar funding across year-end has been elevated in recent years," he

said. "This is because many foreign banks measure capital levels at year-end and

thus are incentivized to reduce balance sheet assets."

- "While this excess demand for dollar funding has led to very negative

cross-currency basis swaps, quite unusually this week, we have seen material

improvement, likely as providers of dollar funding have reacted to attractive

levels and stepped in," they said. "For example 3-month cross currency basis

swaps, which constitute a large part of FX hedging costs, tightened 40bs and

22bps this week for EUR and JPY, respectively. Perhaps this is an early sign of

an expected looser regulatory regime for large US banks. Of course, further

improvement is likely starting on one of the last days in December when these

contracts no longer span year-end."