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4 FINANACIAL DERIVATIVES: DATA GAPS AND NEEDS
4 FINANACIAL DERIVATIVES: DATA GAPS AND NEEDS
Pages 114-134
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From page 114... ...
Their rapid growth can be attributed to the need of investors and borrowers to manage risks in an environment of fluctuating exchange rates, interest rates, and commodity prices. Adverse changes in exchange rates, for example, can eliminate a firm's overseas profits; commodity price fluctuations can increase input prices of production; and changes in interest rates can put pressure on a firm's financial costs.
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From page 115... ...
USES AND GROWTH OF FINANCIAL DERIVATIVES Financial derivatives are secondary instruments, the values of which are dependent on changes in the value of the underlying financial instrument or commodity. They are generally linked to a primary financial instrument or an indicator (such as foreign currencies, government bonds, corporate equities, certificates of deposit, stock price indices, and interest rates)
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From page 116... ...
In principle, portfolio managers can realign financing risks through cash markets without using financial derivatives. For example, borrowers and investors can diversify their foreign exchange risks by holding assets and liabilities in different currencies.
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From page 117... ...
Furthermore, financial derivatives can be combined with a fleet issuance to unbundle the financial price risk from other risks inherent in the process of raising capital. By coupling its bond issues with swaps, for example, a firm can separate interest rate risk from traditional credit risk (Rawis and Smithson, 1989~.
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From page 118... ...
As in the case of cash instruments, it is not uncommon for financial derivatives to be cross-listecl in international capital markets. Through arbitrage, these secondary instruments link different derivative markets, as well as the cash markets.
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From page 119... ...
Globally, the key uses of swaps lie in the arbitrage of yield and credit clifferentials across borders, the management of interest and exchange rate risk, and the global diversification of funcling and investing. Swaps can
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From page 120... ...
· The Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency, using the Call Report, collect ciata on interest rate contracts, foreign exchange rate contracts, and contracts on other commodities and equities, as well as on other offbalance-sheet items. The data are limited to derivatives transac2Ann M
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From page 121... ...
The survey was to be performed in conjunction with the triennial central bank survey of foreign exchange markets. In addition to ciata on the cash foreign-currency markets, the 1995 survey was to collect data on derivative markets in foreign exchange, interest rates, equities, and commodities.
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From page 122... ...
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From page 123... ...
is only a fraction of the notional value (Federal Reserve Board of Governors et al., 1993~. Therefore, notional value is a misleading indicator of the economic significance of derivative transactions; it is, however, a useful measure for comparing relative importance of differing types of derivatives and their growth.
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From page 124... ...
The lack of standard accounting practices and designated reporting, the complexity of the instruments, the multiple purposes they serve, and the growing volume of derivative transactions, especially in OTC markets, have posed difficulties for their coverage in the balance of payments. These ctifficulties inclucle, among others, identifying derivatives transactions, determining their cash (anc!
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From page 125... ...
accounting profession anti international organizations (see below) will help the TIC data collection system to capture such transactions.
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From page 126... ...
on the cash foreign exchange market. Had the securities purchase been hedged by a derivative transaction, the analyst, lacking information on the derivative transaction, might overestimate the net new demand in the exchange market.
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From page 127... ...
Overall, data on derivatives are useful in gauging potential exchange market and interest rate pressures. Evidence of a strong builcl-up in short positions against the dollar might be useful in judging the timing and extent of exchange market intervention.
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From page 128... ...
The revisions to these systems present closely coordinated criteria for determining whether derivative instruments are ciassified as financial assets that should be recorded in the SNA financial account, the balance-of-payments capital account, and the national and sectoral balance sheets. The fifth edition of the IMF Manua]
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From page 129... ...
These marketable instruments have characteristics that give rise to actual financial assets or liabilities in the current period, such as a required margin payment or a current resale value. ACCOUNTING AND REGULATORY ISSUES Currently, the treatment of secondary financial instruments in the accounts of corporate enterprises varies according to the purpose for which the instrument is being held that is, whether it is used for hedging, investment, or trading.
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From page 130... ...
In this alternative approach, derivatives would not be viewed in isolation, but instead would be considered in the context of a portfolio of cash market and derivatives positions exposed to the same underlying risk factors.5 Financial Accounting Standards Board The Financial Accounting Standards Board (FASB) acIded to its agenda in May 1986 a project on financial instruments and offbalance-sheet financing.
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From page 131... ...
, now require banks to submit certain information about derivatives. Currently, the quarterly Call Report covers financial contracts on interest rates, foreign exchange, and stock indexes as well as those on commodities and individual stocks {see Table 3-3 in Chapter 3~.6 Bank hobbling companies 6Financial guarantees (such as guarantees of loans, performance bonds, and letters of credit} are also covered by the Call Reports.
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From page 132... ...
Both reports cover the notional values of interest rate swaps, futures and forward contracts, option contracts, and similar contracts involving commodities and equities. They exclude market value data for certain exchangetraded contracts, as well as foreign exchange contracts with original maturities of less than 14 |
From page 133... ...
also examine the coverage, quality, and consistency of the limited data on financial derivatives currently collected by the Federal Financial Institutions Examination Council, the Commodity Futures Trading Commission, the Securities and Exchange Commission, anti private institutions and determine ways to expand coverage, eliminate cluplication, standardize definitions, and, whenever appropriate, integrate the data. The group should Tin addition, Section 305 of the FDIC Improvement Act requires increased disclosure of derivative exposures, and Section 308 requires banks to establish standards to evaluate their exposure to weak institutions, including those arising from derivative products {see Federal Reserve Board et al., 1993~.
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From page 134... ...
The pane! believes that the concepts and procedures proposed in the Manual and in the revised international System of National Accounts are useful to facilitate the clevelopment of data reporting frameworks on financial derivatives for balance-of-payments purposes.
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