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Introducing the BarCap carry unwind risk model

Global FX Strategy 16 December 2008

Aroop Chatterjee
aroop.chatterjee@barcap.com
+1 212 412 5622
Sen Dong
sen.dong@barcap.com
+1 212 412 5622
www.barcap.com
We have built a statistical model to predict the likelihood of a sharp unwind of FX carry trade in
the near term. The model uses market risk conditions, the market price of risk, and the positioning
of speculators to estimate the probability of an unwind of a G10 FX carry portfolio. The model
has an out-of-sample hit ratio of 60% from 1999 to 2008. Using the model as a filter to trade a
carry basket, where the investor is flat when the unwind probability is greater than 50%,
downside risk is significantly reduced and the Sharpe ratio is more than doubled. An out-of-
sample back-test on trading an EM FX carry basket and equities also performs well. We plan
weekly updates on what the model is forecasting for carry trades.

Motivation
Carry-based currency strategies, designed to exploit the so-called ‘forward bias’, have
enjoyed a hugely successful run for most of this decade. A simple G10 carry strategy, of
going long the three highest-yielding currencies and short the three lowest-yielding ones
(all equally weighted) would have earned an annualised return of approximately 10% in
excess of the risk-free rate between 2000-07. However, carry trades have suffered huge
losses in the past few months as spiking volatility and increased home bias have led to
dramatic outperformance by low-yielding currencies such as the JPY and the USD. Indeed,
the drawdown associated with the above carry strategy (which we use throughout the
article and will refer to as the ‘carry portfolio’) was nearly 25% in the episode since July, by
far the largest since the 1990s (Figure 1).

Figure 1: Largest drawdowns in the carry portfolio

Jan 95 Apr 97 Aug 98 Feb 04 Feb 06 Jul 07 Oct 07 Feb 08 Jul 08
Drawdown -10.9% -4.8% -12.3% -5.2% -4.5% -5.8% -5.4% -5.5% -24.8%
# of Days 89 28 70 70 28 35 28 28 145
Source: Bloomberg, Barclays Capital

A big debate among currency investors over the past few months has been whether the
rationale behind carry trades as an alpha generating strategy over the long term is still
valid. The key question is whether ways exist to mitigate potential downside risks
associated with periodic episodes of carry trade unwind. If investors can forecast these
carry trade corrections, they will be able to reduce large drawdowns, reduce the volatility of
returns and increase both absolute and risk-adjusted returns.
We believe it is possible to forecast carry trade unwinds with some degree of accuracy. In
this report we propose a model that does just that. It goes without saying that the model
cannot predict event risks (eg, the Lehman bankruptcy) but it can produce useful

Please see analyst certification(s) and important disclosures starting on page 12.
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information on when carry investors should consider moving to the sideline. For the
remainder of the report, we begin by defining an unwind episode, discuss the variables
important for our forecast, and present a statistical model to aggregate them into a signal
about the probability of future carry trade unwinds. The last part of the paper focuses on
analysing the model’s performance in various out-of-sample back-tests.

Defining an unwind episode

There is no common definition of what magnitude drawdown over what horizon
constitutes an unwind. Here, we define the start of a carry trade unwind as when the carry
portfolio declines at least 2% within the next four weeks.
The use of a portfolio of high and low yield currencies allows us to avoid idiosyncratic
variations in a single currency cross. The model also uses weekly data to mitigate higher
frequency bounces and is forward looking by construction. In Figure 2, the shaded areas
represent periods of carry unwind. Our definition has captured all the large downside
moves in the carry portfolio and, in most cases, peaks and troughs are identified in a timely
fashion. We now present a statistical model to predict the likelihood that carry trades will
be unwound in the next four weeks.

Figure 2: Unwind zone of the carry portfolio

Unwind zone G10 carry Portfolio (spot only)

160
150
140
130
120
110

100
90
80
70
Jan 93 Jul 94 Jan 96 Aug 97 Feb 99 Sep 00 Mar 02 Sep 03 Apr 05 Oct 06 May 08

Source: Bloomberg, Barclays Capital

Variables for forecasting carry trade unwinds

Although unwinds in FX carry trades tend to happen quickly and sharply, there are some
clues as to their likely occurrence. The task of our analysis is to aggregate these variables
systematically and test the out-of-sample performance of the approach rigorously. Below,
we summarise some variables that describe the market environment relating to carry
trades, which can be used to alert us about future unwinds. These broadly encompass four
categories: market risk conditions, cross-sectional measures of risk and comovement, the
attractiveness of carry trades, and speculators’ positioning 1.

1 All variables, except for the market price of risk, are expressed as 52 -week rolling z-scores.

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Market risk conditions

The level of market risk conditions is commonly viewed as a driver of the performance of
carry trades. For example, credit spreads are often found to widen before a carry trade
unwind. Figure 3 shows that most carry unwind episodes are preceded by heightened credit
risk, measured as an equal weighted average of US 2yr and 5yr swap spreads. On the other
hand, the VIX Index tends to be low (relative to its recent history) before a carry trade
unwind and rises sharply as time goes on. This is apparent in Figure 4, where the Z score of
the VIX Index is often at its low before a period of carry unwind.

Figure 3: Swap spread Figure 4: VIX

Unwind zone Swap spread Unwind zone VIX

6
5 5
4
3
3

1 2
1
-1 0
-1
-3
-2
-5 -3
Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 94 Jan 97 Jan 00 Jan 03 Jan 06

Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital

Aggregate price of risk and the comovement of asset prices

Investors’ risk appetite also affects the probability that carry trades will be unwound. We
measure this by estimating the price of risk: the premium demanded by investors for taking
on incremental market risk. This is calculated across a wide array of asset classes in a
CAPM-type model, as shown in the Appendix. If risk appetite is high (the price of risk is
low), investors will be inclined to take on more risky trades, such as FX carry trades, for a
given level of risk. Figure 5 shows that the price of risk tends to be high and rising during
periods of carry unwind, especially during one that is large and prolonged.
Such unwinds often are the result of market-wide contagion and deleveraging. The high
correlation across asset classes in the past year provides strong evidence that a common risk
factor may be driving volatility across asset markets. To capture this phenomenon, we
consider a wide array of assets and estimate their comovement using the Principal
Component Analysis (PCA) technique. We would expect asset prices to comove more than
normal, not only during episodes of cross-market deleveraging, but also at times of
heightened optimism when asset markets often appreciate en masse. By considering the price
of risk and comovement together, we are able to get a clearer picture of the market
environment: a rise in comovement together with an increase in the price of risk may
represent cross-asset market deleveraging of risky assets, which include FX carry trades.
Details regarding the construction of the comovement measure are provided in the Appendix.

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Figure 5: Price of risk Figure 6: Comovement of asset prices

Unwind zone Price of risk Unwind zone Comovement

0.015 5
4
0.01 3
2
0.005 1
0
0 -1
-2
-0.005 -3
-4
-0.01 -5
Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 94 Jan 97 Jan 00 Jan 03 Jan 06

Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital

Attractiveness of carry trades/interest rates spread

The perceived attractiveness of carry trades may affect the probability that they get
unwound. A wider spread of interest rates between high and low carry currencies makes the
carry trade more attractive, other things being equal. However, a wider rates spread may also
imply more crowded positions and greater vulnerability to a future unwind. We construct a
series of the interest rates spread for our carry portfolio. Consistent with the idea that the
attractiveness of carry trades may be associated with excess complacency, the rates spread
tends to rise toward a carry trade unwind zone (Figure 7).

Speculators’ positioning
CFTC speculators’ positioning in carry trades may reflect the sentiment of investors toward
FX carry trades. Figure 8 shows that the CFTC AUD/JPY net speculative longs tend to drop
sharply during a carry unwind and rise gradually afterwards as investors seek to rebuild
their carry positions.

Figure 7: Rates spread Figure 8: Speculators’ positioning

Unwind zone Rates spread Unwind zone Position

5 4
4 3
3 2
2 1
1 0
0 -1
-1 -2
-2 -3
-3 -4
-4 -5
Jan 94 Jan 97 Jan 00 Jan 03 Jan 06 Jan 94 Jan 97 Jan 00 Jan 03 Jan 06

Source: Bloomberg, Barclays Capital

Source: Bloomberg, Barclays Capital

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The logit model and the unwind probability

Our model is related to the existing body of work relating to risk appetite measures
proposed by financial institutions, central banks and in the academic literature. See [1], [2]
and [3] in the reference list at the end for a survey and comparison between the different
well known indicators. Though these have similar motivations, they focus on measuring
different aspects of risk appetite (through variations of CAPM or option-implied measures)
or the simple ad-hoc combination of observed prices like VIX, credit spreads, and so on. An
interesting finding is that these alternative indicators have a low correlation with each
other, in some cases even negative. The starting point of our approach is the assumption
that some variables are going to tell us more than others about the likelihood of a carry
trade unwind. Therefore, ours is an eclectic approach that seeks to combine different
variables to enhance our ability to forecast carry trade unwinds.
We model the impact of the combined set of our variables on the probability of future carry
trade unwinds using a logistic regression. 2 Let Pt,t+4 be the conditional probability of an
unwind over the next four weeks, given the information available at time t. Xt is a vector
including the price of risk, comovement, swap spread, VIX, rate spread and speculators’
position. The specification used is then simply:

⎡ Pt ,t + 4 ⎤
Log ⎢ ⎥ = α + βX t + ε t + 4
⎢⎣1 − Pt ,t + 4 ⎥⎦

On a real time basis, the logit is re-estimated using an expanding window starting with 300
weeks of data. The predicted probability at time t+4 for a carry unwind over the next four
weeks is then:

1
Pˆt ,t + 4 =
1 + exp[− (α + β X t )]

The unwind indicator is ON if the predicted probability of an unwind is greater than 50%.
)
S t ,t + 4 = 1( Pˆt ,t + 4 > 50%)

where 1(.) is an indicator variable which is equal to one if the condition in the bracket is
satisfied and zero otherwise.

Performance of the unwind model

We provide some analysis of the unwind model to gauge how well it has performed in
predicting carry unwinds. Figure 9 shows the forecasted carry unwind probability and
actual carry unwind episodes since 1994 based on our definition. The period since October
1999 uses real-time data in that the model is estimated using data available at the time and
the forecasted unwind probability is out of sample. The forecasted unwind probability
tracks the shaded bar (periods of unwind) closely. In many cases, it rises before the unwind
zone starts and falls sharply right after an unwind zone ends.

2 Although each of our explanatory variables is related to the probability that carry trades are unwound, following

the intuition we discussed earlier, aggregating them provides more forecasting power and consistent performance.
We discuss more of this in later sections.

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Figure 9: Forecasted unwind probability and actual carry trade unwind

Actual unwind Predicted probability Threshold

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08

Source: Bloomberg, Barclays Capital

In Figure 10, we report the out-of-sample hit ratio of the unwind model calculated using
real-time data since October 1999. The unwind indicator is ON roughly 60% of the time
when an actual carry unwind is about to occur. The model yields false positives, defined as
when a carry unwind is signalled but does not actually occur, only 26% of the time. This
implies that the model is accurate in 72% of the 472 weeks of out-of-sample back-testing.

Figure 10: Hit ratio for the unwind model (since October 1999)
Carry unwind No carry unwind
Number of weeks 55 417
% indicator is ON 60.7% 26.4%
% indicator is OFF 39.3% 73.6%
Source: Bloomberg, Barclays Capital

Trading based on the model

We now examine how successful the unwind model is in terms of mitigating large
drawdowns and improving the risk-return trade-off in investing in FX carry trades. For this
purpose, we test a strategy that trades the carry portfolio using the forecasted unwind
probability as a filter. As reported in Figure 11, the annualised average currency returns
(without carry) is -11.6% when the carry unwind indicator is ON and 5.3% when it is OFF.
The volatility of currency returns is also significantly lower (6.7% versus 13.0%) when the
unwind indicator is OFF.

Figure 11: Unwind indicator and carry performance (out of sample)

No filter Indicator is ON Indicator is OFF
Annualised mean currency return from carry 0.1% -11.6% 5.3%
Annualised std. dev of currency return 9.2% 13.0% 6.7%
Source: Bloomberg, Barclays Capital

In assessing the forecast performance, we consider two strategies (Figure 12). The long-
neutral strategy is long the carry basket in the next week if the unwind indicator is OFF and

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earns Libor when it is ON. There is improvement in every performance measure in the long-
neutral strategy compared with the long-only carry strategy. The Sharpe ratio increases
from 0.51 to 1.19, due to a higher mean excess return (6.7% versus 4.7%) and lower
volatility (5.6% versus 9.1%). The downside risk is cut in half and the maximum drawdown
is -7.8%, compared with a hefty -24.6% in the long only strategy.

Figure 12: Model performance statistics (out of sample) Figure 13: Carry portfolio and forecasted unwind zones

Forecasted Unwind Zone Carry portfolio (spot only)

Carry Portfolio Unwind indicator as filter
160
Long only Long-neutral Long-short
Mean return 4.7% 6.7% 8.8% 150

Std. deviation 9.1% 5.6% 9.1% 140

Sharpe ratio 0.51 1.19 0.97 130

% + returns 63.2% 76.1% 59.0% 120

Max drawdown -24.6% -7.8% -12.5% 110

Upside dev. 6.1% 4.6% 7.7% 100

Downside dev. 6.9% 3.5% 5.1% 90

Oct 99 Oct 01 Oct 03 Oct 05 Oct 07

Source: Bloomberg, Barclays Capital Source: Bloomberg, Barclays Capital

The long-short strategy, on the other hand, goes short the carry strategy when the
indicator is ON. This filter-based strategy will get penalised more for inaccurate forecasts;
specifically, it will be less tolerant of false positives. However, even in this case the
drawdown can be reduced by half, to -12.5%, while achieving an average excess return of
8.8% and a Sharpe ratio of 0.97.
Figure 13 plots the cumulative currency returns of the carry portfolio and the forecasted
unwind zone. We find that many drawdowns would have been avoided by using the carry
unwind indicator as a filter. Further, the unwind indicator would have successfully signalled
the start of the 2007-08 period, the most significant episode. Although the model was not
able to capture the initial sell-off during the 2004 episode, it was able to reduce half of the
large drawdown of the carry portfolio. The excess return indices for the three portfolio return
strategies are shown in Figure 14. We find that much of the outperformance for the filter-
based strategies on an absolute return basis occurs post May 2008. However, they do exhibit
outperformance in terms of risk adjusted returns even before the current carry sell-off. Prior
to May 2008, the Sharpe ratio of the long-neutral was 1.23 versus 1.09 for the long only
strategy. The long-short strategy does slightly worse with a Sharpe Ratio of 0.80.

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Figure 14: Excess return indices for the three carry portfolio strategies
240 G10 carry portfolio: long only
Long-neutral
220
Long-short
200

180

160

140

120

100

80
Oct 99 Oct 00 Oct 01 Oct 02 Oct 03 Oct 04 Oct 05 Oct 06 Oct 07 Oct 08

Source: Bloomberg, Barclays Capital

Predicting unwind in other risky assets

A danger of any out of sample backtest based is that it may be ‘overfitted’ to the data– it is
able to perform well on the time series on which it is based. Since we use historical data in
our backtest, a test of the robustness of the unwind signal would be to extend our backtest
to other risky assets. If the risk of a downturn is related between different asset markets, we
would expect trading based on the carry unwind signal to be profitable. However, the
trading performance would be robust if unwind episodes don’t completely overlap with
each other.
We examine whether our model would have been useful in trading other risky assets –
namely, an EM carry portfolio and an equity portfolio, even though it was based on G10 FX.
For EM carry, we use an equal-weighted basket composed of TRY, BRL, MXN, HUF, ZAR, COP
and IDR against USD. For the equity portfolio, we choose the MSCI World index. This is
another out-of-sample test, as no idiosyncratic information about EM carry and equity
performance is used in the construction of the unwind model. Figure 15 shows the
correspondence between the G10 carry unwind episodes and similar unwind episodes
constructed for the MSCI and EM carry. Although there is some correspondence between
unwinds in the different markets, the overlap is not one-for-one.

Figure 15: Correspondence with unwind in other markets (1999-2008)

G10 carry unwind G10 carry: no unwind
MSCI unwind 40 165
EM carry unwind 23 23
Source: Bloomberg, Barclays Capital

In the out-of-sample back-test for October 1999 to November 2008, the performance of the
EM carry trade is greatly improved when the forecasted unwind probability is used as a long-
neutral filter. The Sharpe ratio rises from 0.72 to 1.11, while the maximum draw-down is
decreased to -8.6% from -27.2%. For equities, the unfiltered MSCI World Index delivers a
negative 7.7% average return and a Sharpe ratio of -0.42. Here as well, filtering it with the
carry unwind signal improves the Sharpe ratio to -0.01. The improvement in maximum

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drawdown (-49.2% versus -59.5%) is limited due to the fact that the forecasted unwind
probability was largely muted in the bear market of 2000-02 (Figure 9). This was a period
when equity markets underperformed other risky assets to an unusually large extent.
However, the unwind indicator successfully limited draw-downs for trading MSCI World after
2002 (-8.7% compared with -54.4% if unfiltered).

Figure 16: EM carry and equity returns filtered with unwind probability
EM carry MSCI-World
Unfiltered Long-neutral Unfiltered Long-neutral
Mean return 6.5% 6.6% -7.7% -0.1%
Std. deviation 9.1% 5.9% 18.4% 11.5%
Sharpe ratio 0.72 1.11 -0.42 -0.01
Max. drawdown -27.2% -8.6% -59.5% -49.2%
Source: Bloomberg, MSCI, Barclays Capital

Benefits from diversification of signals

The unwind indicator combines a variety of different signals. Our eclectic approach was
motivated by the benefits from diversifying between different signals. We would expect the
combined unwind indicator to perform well, ie, be a better predictor of future unwind, if
two conditions are met. First, the correlation between the various signals needs to be low.
This is indeed seen in Figure 17, where the highest correlation is 39% between VIX and
swap spread.
Second, none of the individual signals should dominate the others consistently over time in
forecasting carry trade unwinds. Combining signals would be useful if at different points in
time different signals are more informative than others. To test that, we estimate unwind
probabilities based on single variable logit regressions. In Figure 18, we present the results
by ranking the out-of-sample returns from following a long-neutral trading strategy based
on each single variable indicator. Clearly, no variable dominates all of the others.

Figure 17: Correlation of explanatory variables in the logit model

Comovement Price of risk VIX Swap spread Rates spread Positioning
Comovement 100.0%
Price of risk 4% 100%
VIX 16% 15% 100%
Swap spread 3% -24% 39% 100%
Rate spread -6% 4% -5% 11% 100%
Positioning -14% 0% -23% -23% 1% 100%
Source: Bloomberg, Barclays Capital

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Figure 18: Univariate model ranked by out-of-sample trading returns (1=best,

6=worst)
Comovement Price of risk VIX Swap spread Rates spread Positioning
Dec-00 1 2 5 4 6 3
Dec-01 3 6 4 1 5 2
Dec-02 5 6 2 1 3 4
Dec-03 4 6 1 2 3 5
Dec-04 3 5 1 2 4 6
Dec-05 2 1 3 4 6 5
Dec-06 4 3 5 2 6 1
Dec-07 5 3 4 1 6 2
Nov-08 6 2 4 1 5 3
Source: Bloomberg, Barclays Capital

Conclusion
Our empirical carry unwind indicator is informed by different variables which affect carry
trade performance. The statistical model presented in this research piece allows these
signals to be combined in a systematic manner. The model derives an estimate for the
probability of future carry trade unwinds. We show how this can be used successfully as a
filter to trade the G10 carry portfolio. The unwind indicator also shows good performance
when applied to an EM carry portfolio and equities.

Appendix
Calculation of price of risk
The price of risk refers to the premium demanded by investors for taking on any
incremental market risk. This is estimated across different asset classes as in a CAPM-type
model, as shown below. 3 In the first regression, individual asset betas to a market-wide risk
factor are calculated using time series data. The second regression is a cross-sectional one,
in which each asset’s expected returns are regressed on the estimated asset betas. The price
of risk (λ) is then given by how expected returns vary in the cross-section to the different
asset betas. As in the finance literature, we use average realised returns as an estimate for
the asset’s expected returns. The set of assets used in estimating the price of risk
encompasses currencies, equities, fixed income and commodities.
i,M
Rti − Rt f = β t ( RtM − Rt f ) + ε ti

i,M
E[ Rti − Rt f ] = β t λtM + ηti
The price of risk will be time-varying. In times of higher risk aversion, assets with high betas
would typically need to be compensated by a higher expected return, implying that the
price of risk will be higher.

3 See Cochrane (2001) for background behind these regressions.

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Calculation of comovement measure

The measure of comovement is derived from PCA. We set the level of comovement equal to the
amount of the covariation explained by the first principal component. We choose the
correlation matrix instead of the variance-covariance matrix since different assets have very
different scales and volatilities, which would skew the factor loadings to the more volatile assets.
For N assets, the eigenvalue decomposition of the correlation matrix of payoffs is given by:
cov(x, x′) = Σ = QΛQ ′
The (NxN) matrix Λ is the diagonal matrix of eigenvalues, Q is orthonormal matrix of
eigenvectors. We form factors z = Q′x , which are orthogonal to each other
cov(z, z ′) = Q′QΛQ′Q = Λ .
The level comovement is then given by the ratio of the largest eigenvalue to the sum of all
N eigenvalues.
N
max Λ ii
i =1
I= N

∑Λ
i =1
ii

Figure 19: Aggregate price of risk and asset price comovement

0.015 Price of risk 6
Comovement 5
0.01 4

3
0.005 2

0 0

-1

-0.005 -2
-3

-0.01 -4
Jan 94 Jan 96 Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08

Source: Bloomberg, Barclays Capital

References
[1] V. Coudert and M. Gex, 2008. ‘Does Risk Aversion Drive Financial Crises? Testing the Predictive Power of
Empirical Indicators’, Journal of Empirical Finance.

[2] Deutsche Bundesbank, 2004. Indicators of International Investors’ Risk Aversion, Monthly Report No 57-10.

[3] M. Misina, 2006. Benchmark Index of Risk Appetite, Bank of Canada Working Paper 2006-16.

[4] J. Cochrane, 2001. ‘Asset Pricing’, Princeton University Press.

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Analyst Certification: The persons named as the authors of this report hereby certify that: (i) all of the views
expressed in the research report accurately reflect the personal views of the authors about the subject securities and
issuers; and (ii) no part of their compensation was, is, or will be, directly or indirectly, related to the specific
recommendations or views expressed in the research report.

Important disclosures: On September 20, 2008, Barclays Capital Inc. acquired Lehman Brothers’ North American
investment banking, capital markets, and private investment management businesses.
During the transition period, disclosure information will be provided via the sources listed below.
For complete information, Investors are requested to consult both sources listed below.
https://ecommerce.barcap.com/research/cgi-bin/public/disclosuresSearch.pl
http://www.lehman.com/USFIdisclosures/
Clients can access Barclays Capital research produced after the acquisition date either through Barclays Capital’s
research website or through LehmanLive.
Any reference to Barclays Capital includes its affiliates.
Barclays Capital does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that Barclays Capital may have a conflict of interest that could affect the objectivity of this report.

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Global FX Strategy Research Analysts

Barclays Capital
5 The North Colonnade
London E14 4BB
David Woo Toru Umemoto Paul Robinson
FX Strategy FX Strategy (Tokyo) FX Strategy
Head of Global FX Strategy Chief FX Strategist Japan Chief Sterling Strategist
+44 (0)20 7773 4465 +81 3 4530 5038 +44 (0)20 777 30903
david.woo@barcap.com toru.umemoto@barcap.com paul.robinson3@barcap.com
Mathieu Zaradzki Adarsh Sinha Aroop Chatterjee
FX Strategy FX Strategy FX Strategy (New York)
Chief FX Options Strategist +44 (0)20 7773 2972 +1 212 412 5622
+33 1-44 58 3138 adarsh.sinha@barcap.com aroop.chatterjee@barcap.com
mathieu.zaradzki@barcap.com
Sen Dong Steve Englander
FX Strategy FX Strategy
+1 (0) 212 526 1763 +1 (0) 212 412 1551
sen.dong@barcap.com steven.englander@barcap.com

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results, which may differ substantially from those reflected.
This communication is being made available in the UK and Europe to persons who are investment professionals as that term is defined in Article 19 of
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