Irving Fisher Committee on Central Bank Statistics IFC Bulletin No 35 Data requirements for monitoring derivative transactions Proceedings of the workshop organised by the People’s Bank of China and the Irving Fisher Committee, Zhengzhou, 27–29 September 2010 February 2012 Papers in this volume were prepared for the workshop organised by the People’s Bank of China and the Irving Fisher Committee in Zhengzhou on 27–29 September 2010. The views expressed are those of the authors and do not necessarily reflect the views of the BIS or the central banks represented at the meeting. Individual papers (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2012. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited. ISSN 1991-7279 (print) ISBN 92-9131-104-9 (print) ISSN 1991-7511 (online) ISBN 92-9197-104-9 (online) Foreword This volume is a collection of the presentations and papers from the workshop on “Data requirements for monitoring derivative transactions”, which was co-hosted by the People’s Bank of China (PBoC) and the Irving Fisher Committee on Central Bank Statistics (IFC). The event was held at the PBoC training centre in Zhengzhou, China, from 27–29 September 2010. The objectives of the workshop were threefold: to present an overview of key issues related to data requirements for monitoring derivative transactions, including: an overview of derivative instruments, markets and users; a review of existing international frameworks with respect to derivatives data; and challenges in gathering and using derivatives data from various policy perspectives. to share experiences with respect to the monitoring of derivative transactions and other financial innovations between experts from IFC member institutions and participants from China. to allow the PBoC and other Chinese institutions represented at the workshop to identify best practices and next steps to improve data for monitoring derivative transactions. Some 150 persons took part in the workshop. They included officials from the headquarters and branches of the PBoC, various supervisory agencies in China and the Ministry of Finance, as well as representatives of financial institutions and other market participants. The workshop was very successful. It will contribute to the development of a strategy to capture relevant information on derivative transactions in the People’s Republic of China. The publication of the proceedings of the workshop should allow other experts, inside and outside the IFC, interested in data requirements for monitoring derivative transactions to familiarise themselves with the topics and issues involved. Jianhong Ruan Paul Van den Bergh Deputy Director-General of Financial Survey Head of Statistics and Research Support and Statistics Department and Head of IFC Secretariat People’s Bank of China Bank for International Settlements and Member of the Executive of the Irving Fisher Committee on Central Bank Statistics IFC Bulletin No 35 iii Contents Foreword.................................................................................................................................. iii Session 1: Derivatives: overview of instruments, markets and participants Derivatives markets, products and participants: an overview Michael Chui.............................................................................................................................3 Derivative market: the experience of Chile Luis A Opazo R.......................................................................................................................12 Development and utilisation of financial derivatives in China Jinan Yan................................................................................................................................20 Session 2: Review of existing international frameworks with respect to derivatives data The treatment of financial derivatives in BPM6 Eduardo Valdivia-Velarde.......................................................................................................31 The BIS framework for monitoring financial derivatives Karsten von Kleist...................................................................................................................43 Cross-border derivatives statistics in France: the use of accounting data Alain Christophory ..................................................................................................................54 Session 3: Challenges in gathering and using derivatives data from various policy perspectives The regulation and supervision of banks’ derivatives activities: existing practices, challenges, and preliminary proposals from data perspective Yuanfeng Hou.........................................................................................................................65 The role of oversight in collecting derivatives data Marc Hollanders......................................................................................................................70 Development of derivative statistics: challenges for the Bank of Japan Satoru Hagino.........................................................................................................................80 Session 4: Other types of financial innovations and data requirements for monitoring them Statistics on securities issuance and holdings Paul Van den Bergh and Branimir Gruić.................................................................................89 Developing database on securities holders information: the case of Japan Yoshiko Sato.........................................................................................................................102 Closing ceremony: comments on joint PBC-IFC workshop on “Data requirements for monitoring derivatives transactions” Guanglei Song......................................................................................................................113 Hong Hu................................................................................................................................115 Zhu Jiang..............................................................................................................................116 IFC Bulletin No 35 v Session 1 Derivatives: overview of instruments, markets and participants Papers: Derivatives markets, products and participants: an overview Michael Chui, BIS Representative Office for Asia and the Pacific Derivative market: the experience of Chile Luis A Opazo, Central Bank of Chile Development and utilisation of financial derivatives in China Jinan Yan, Bank of China IFC Bulletin No 35 1 Derivatives markets, products and participants: an overview Michael Chui1 1. Introduction Derivatives have been associated with a number of high-profile corporate events that roiled the global financial markets over the past two decades. To some critics, derivatives have played an important role in the near collapses or bankruptcies of Barings Bank in 1995, Long-term Capital Management in 1998, Enron in 2001, Lehman Brothers in and American International Group (AIG) in 2008. Warren Buffet even viewed derivatives as time bombs for the economic system and called them financial weapons of mass destruction (Berkshire Hathaway Inc (2002)). But derivatives, if “properly” handled, can bring substantial economic benefits. These instruments help economic agents to improve their management of market and credit risks. They also foster financial innovation and market developments, increasing the market resilience to shocks. The main challenge to policymakers is to ensure that derivatives transactions being properly traded and prudently supervised. This entails designing regulations and rules that aim to prevent the excessive risk-taking of market participants while not slowing the financial innovation aspect. And it also calls for improved data quantity and quality to enhance the understanding of derivatives markets. This chapter provides an overview of derivatives, covering three main aspects of these securities: instruments, markets and participants. It begins with a quick review of some key concepts, including what derivatives are; why they exist; who use these instruments and for what purpose. It also discusses the factors that have contributed to the rapid growth of the markets over the past few decades. In section 3, the main types of derivative contracts will be discussed. Section 4 examines how specific derivatives contracts are written on various underlying asset classes. Section 5 discusses two main types of markets: exchange-traded and over-the-counter. The key differences of these markets will be highlighted. Section 6 reviews some recent credit events and to what extent counterparty risk has played a role. Finally, section 7 concludes. 2. Derivative securities: some basic concepts The Oxford dictionary defines a derivative as something derived or obtained from another, coming from a source; not original. In the field of financial economics, a derivative security is generally referred to a financial contract whose value is derived from the value of an underlying asset or simply underlying. There are a wide range of financial assets that have been used as underlying, including equities or equity index, fixed-income instruments, foreign currencies, commodities, credit events and even other derivative securities. Depending on the types of