## BPM7 Annex 7. Selected Financial Issues: Annotated Outline

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### Overview of Annex 7
- The annex covers two topics in separate sub-annexes: financial derivatives (Annex 7.A) and reverse transactions (RTs) (Annex 7.B).
- Both sub-annexes maintain the BPM6 definition and concept while combining and clarifying guidance from multiple BPM7 chapters.
- Guidance Notes (GNs) incorporated:
  - GN F.4 and GN F.5 for financial derivatives.
  - GN F.3 for reverse transactions.
- Each sub-annex is organized with Section I providing an overview and Section II addressing specific issues.

### Annex 7.A — Financial Derivatives: Overview (Section I)
- Purpose: Provide definition, concept, and recording of financial derivatives by consolidating guidance across BPM7 chapters.
- Content sources and topics to be combined:
  - Definition and explanation: options, forwards, swaps, credit derivatives, margins, and employee stock options (Chapter 5. Classifications of Financial Assets and Liabilities).
  - Functional categories: financial derivatives in functional categories (Chapter 6. Functional Categories).
  - Valuation and recording: (Chapter 7. International Investment Position).
  - Recording derivative transactions:
    - at inception;
    - in secondary markets;
    - on servicing and margins;
    - at settlement.
    - Recording of employee stock options (Chapter 8. Financial Account and Chapter 12. Earned Income Account).
  - Revaluations (Chapter 9. Other Changes in Financial Assets and Liabilities Account).
  - Currency composition of notional values of foreign exchange derivatives, option/forward breakdowns (Appendix 14).

### Annex 7.A — Financial Derivatives: Specific Issues (Section II)
- Following GN F.4 and GN F.5, guidance with references to relevant BPM7 chapters will be provided on the following topics:

  A. Additional Breakdowns (all these breakdowns are supplementary items)
  - Breakdown by market risk category: foreign exchange, single-currency interest rate, equity, commodity, credit, and other.
  - Breakdown by instrument: options, forwards and related instruments, futures, swaps, credit derivatives, and marketable employee stock options.
  - Breakdown by trading venue and clearing status: exchange traded, over-the-counter (cleared), and over-the-counter (not cleared).

  B. Currency Composition of Notional Values of Foreign Exchange Derivatives
  - Emphasizes the importance of compiling the data as these derivatives often involve delivery of underlying items, making them similar to foreign currency debt.

  C. Revaluation of Foreign Currency Derivatives
  - Record other price changes instead of foreign exchange changes when these two cannot be separated.

  D. Recording of Post Trading Activities
  - Provide guidance on the recording of novation and portfolio compression.

  E. Gross and Net Recording
  - Provide guidance on the cases where net recording is allowed for transactions in assets and liabilities of financial derivatives.

### Annex 7.B — Reverse Transactions: Overview (Section I)
- Purpose: Provide definition, concept, and recording of reverse transactions by consolidating guidance across BPM7 chapters.
- Content sources and topics to be combined:
  - Definitions: securities repurchase agreement, securities lending, and a gold swap under loans (Chapter 5. Classifications of Financial Assets and Liabilities).
  - Valuation and recording (Chapter 7. International Investment Position).
  - Recording in the financial account (e.g., loans) (Chapter 8. Financial Account).
  - Recording of investment income (Chapter 12. Earned Income Account).

### Annex 7.B — Reverse Transactions: Specific Issues (Section II)
- Following GN F.3, guidance with references to relevant BPM7 chapters will be provided on the following topics:

  A. Clarification for Recording a Short Position as a Negative Asset
  - Short positions generated by on-selling are recorded as negative assets for the short-seller (as if the short-seller holds a negative amount of the securities) to address double-counting by both the economic (original) owner and the final owner and the implications for who-to-whom presentations by counterpart sector and geography.

  B. Clarification of Income for Securities Lender, Borrower, and Short-Seller
  - Manufactured interest/dividends are recorded as positive credit entries in interest/dividends for the security lender and negative credit entries in interest/dividends for the security borrower.

  C. Identification of the Partner Economy and Sector for Manufactured Dividends and Interest
  - The partner economy and sector for manufactured interest/dividends are identified by the security issuer, not the security borrower (actual payer), consistent with Item B above.

  D. Clarification on Commodities Under RTs
  - Commodities are also used for RTs in addition to securities and gold.

  E. Supplementary Information on RTs
  - Discuss usefulness of separate identification of RT-related transactions and positions and encourage economies to prepare supplementary information where RTs are significant.
  - Note: BPM7 will discuss the usefulness of separate identification of data on RTs, but it will not introduce a supplementary item for it.

  F. Reclassification of Securities and Monetary Gold Collateral from Reserve Assets
  - Where securities or monetary gold provided as collateral under reverse transactions are not readily available for a balance of payments financing need, they are reclassified to portfolio investment or nonmonetary gold.

### Schematic Overview (structure summary)
- Annex 7.A
  - I Overview
  - II Specific Issues Relating to Financial Derivatives
    - A. Additional Breakdowns
    - B. Currency Composition of Notional Values of Foreign Exchange Derivatives
    - C. Revaluation of Foreign Currency Derivatives
    - D. Recording of Post Trading Activities
    - E. Gross and Net Recording
- Annex 7.B
  - I Overview
  - II Specific Issues Relating to Reverse Transactions
    - A. Clarification for Recording a Short Position as a Negative Asset
    - B. Clarification of Income for Security Lender, Borrower, and Short-Seller
    - C. Identification of the Partner Economy and Sector for Manufactured Dividends and Interest
    - D. Clarification on Commodities Under RTs
    - E. Supplementary Information on RTs
    - F. Reclassification of Securities and Monetary Gold Collateral from Reserve Assets

### References and Key Stakeholders Consulted
- References:
  - GNs F.3, F.4, and F.5. These guidance notes are posted at Update of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) (imf.org).
- Key stakeholders consulted:
  - System of National Account and Balance of Payments Manual editors.
  - IMF Statistics Department Financial Institutions Division and Government Finance Division.

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_Source: https://www.imf.org/-/media/files/data/statistics/bmp7/final-annotated-outlines/bpm7-annex-7-selected-financial-issues-annotated-outline.pdf_