## D.12 Including Intra-Concern [Between Affiliates] Derivatives in Direct Investment

## Source details

**Canonical URL:** [D.12 Including Intra-Concern [Between Affiliates] Derivatives in Direct Investment](https://www.imf.org/-/media/files/data/statistics/bpm6/ditt/d12-including-intraconcern-between-affiliates-derivatives-in-direct-investment.pdf)

## Other formats

- [Markdown version](/-/media/files/data/statistics/bpm6/ditt/d12-including-intraconcern-between-affiliates-derivatives-in-direct-investment.pdf.md)
- [Structured JSON version](/-/media/files/data/statistics/bpm6/ditt/d12-including-intraconcern-between-affiliates-derivatives-in-direct-investment.pdf.json)

---

### Background and issue
- Intra-concern derivatives are financial derivatives between affiliates within multinational enterprise (MNE) groups and are currently excluded from the direct investment (DI) functional category.
- BPM6 paragraph 6.29 states: “Financial derivatives and employee stock options are excluded from DI and included in the functional category financial derivatives (other than reserves) and employee stock options”.
- BD4 paragraph 154 states: “Positions and transactions in financial derivatives between entities in a direct investment relationship should be excluded from direct investment”.
- 2008 SNA paragraph 26.93 highlights that the functional category “financial derivatives (other than reserves) and employee stock options” coincides largely with the corresponding financial instrument class and is identified separately because it relates to risk transfer rather than supply of funds or other resources.
- Data collected under current BPM6 and BD4 do not provide a quantitative assessment of the scale of intra-group derivatives in IIP and balance of payments (BOP).

### Evidence on scale and characteristics
- For a group of 28 European countries, positions of financial derivatives held by “other sectors” accounted on average for between 25 and 30 percent of derivatives positions for the total economy at the end of 2019.
- In Poland, rough estimates suggest even a half of financial derivatives value could be categorized as DIs, that is, half of transactions are conducted between affiliates.
- The share of financial derivatives positions held by “other sectors” has generally tended to increase over the last decade, though it is unclear whether this reflects intra-group positions or arm’s-length positions vis-à-vis non-affiliates.
- The vast majority of countries are not currently able to identify transactions and positions in financial derivatives between affiliated entities.

### Motivations and behavioral differences
- Intra-group derivatives motivations:
  - Centralized risk management and hedging within MNEs (treasury/financial center models), where derivatives can be used to hedge the net position of the financial center against other group members.
  - Tax optimization and transfer pricing (evidence scarce and mainly anecdotal).
- Behavioral uncertainties:
  - It is plausible that some intra-group derivatives differ from arm’s-length derivatives in purpose (e.g., internal treasury, tax strategies), but limited evidence prevents firm conclusions about systematic differences in instrument type or underlying asset category.

### Main issues for discussion identified by the DITT
- Whether intra-group derivatives differ substantially in character or purpose from derivatives between unaffiliated parties.
- Whether intra-group derivatives are closer in nature to other intra-group transactions included in DI or to items excluded from DI (e.g., debt between affiliated financial corporations).
- Whether the activity is widespread enough across countries and has changed sufficiently over the last two decades to warrant a different treatment from BPM6.
- Whether inclusion of intra-group derivatives in DI would reduce the analytical usefulness of DI statistics because of:
  - volatility,
  - netting practices,
  - reconciliation difficulties between flows and stocks,
  - impact on rates of return and external debt presentation.

### Practical and compilation issues
- Presentation basis:
  - Financial derivatives may be presented on a net basis (permitted by BPM6), while DI uses asset/liability presentation; inclusion in DI could complicate interpretation as individual contracts can flip between asset and liability.
- Reconciliation and measurement:
  - Reconciliation between flows and stocks, and computation of rates of return, would be more difficult if derivatives were included in DI.
- Data collection systems:
  - Adding capital relationship identifiers to reporting forms is easier in direct-reporting systems and harder in indirect systems (e.g., financial intermediaries, CCPs, trade repositories) that may lack information on clients’ capital relationships.
- Central counterparties (CCPs):
  - For derivatives intermediated by a CCP, residency of the CCP determines geographical breakdown; CCP-intermediated trades would not count as intra-group derivatives unless the CCP is part of the same group.

### Alternatives proposed for treatment of intra-group financial derivatives
- Option (a): Status quo — financial derivatives between affiliates remain classified under “Financial Derivatives” in BOP/IIP.
- Option (b): Keep classification under “Financial Derivatives” but add a voluntary supplementary item “of which between affiliates”.
- Option (c): Classify financial derivatives between affiliates of all sectors in “DI”.
- Option (d): Classify financial derivatives between affiliates in “DI” except exclude selected financial institutions (mirroring treatment of debt instruments), with exclusion applying when both counterparts are financial corporations as detailed in BPM6 6.28.

### Authors’ analysis and DITT outcomes
- Empirical and analytical conclusions:
  - Financial derivatives between affiliated entities may behave atypically and may differ from market terms; evidence based on individual case studies and limited aggregate data.
- DITT recommendations:
  - The DITT is strongly against inclusion of financial derivatives in DI.
  - The DITT majority supports option (b): retain classification in “Financial Derivatives” and add a supplementary item “of which: between affiliated enterprises” and to further research the issue.
  - Option (a) (no changes) was rejected despite some support because it would not enable presentation of additional information where significant.
  - Option (c) (full inclusion in DI) was rejected because intra-group derivatives are not considered means of long-term investment and their inclusion would introduce higher volatility, reconciliation difficulties, and directional principle complications.
  - Option (d) (include in DI only when at least one counterparty is a financial institution) was rejected for similar reasons as (c) and also due to higher implementation costs and potential data quality problems with sector classification.

### Recommendation and next steps
- Revise manuals by adding a supplementary item "of which: between affiliated enterprises" to the financial derivatives presentation in the balance of payments, international investment position, and external debt statistics.
- Align final data breakdowns with outcomes of GN F.4 "Financial derivatives by type".
- Consider development of detailed guidance in the Compilation Guide on data sources and methods to identify transactions and positions in financial derivatives between affiliated entities, given the reporting challenges across direct and indirect collection systems.

### Pros and Cons of Each Alternative (summary)
- Alternative a – no changes
  - Pros:
    - No changes in reporting systems required
    - No costs
  - Cons:
    - No information on intra-group derivatives
- Alternative b – no changes, but supplementary item
  - Pros:
    - Limited changes in reporting systems, supplementary item on a voluntary basis
    - Limited costs
    - Voluntary disclosure by countries would increase information available for further research, with a view to a possible change in treatment in the future
  - Cons:
    - Information on intra-group derivatives available for selected economies and sectors only
- Alternative c – intra-group derivatives in DI
  - Pros:
    - Consistency (treating transactions between related parties similarly across all instruments)
    - More analytical understanding of the phenomenon
  - Cons:
    - Moves away from FDI's traditional focus on long-term investment (greenfield investment or mergers and acquisitions)
    - Might increase volatility of DI data
    - Practical implementation issues: many countries would need to change survey forms and data collection systems, increasing risk of asymmetries
    - Confidentiality issues in countries with few MNEs using intra-firm derivatives
    - Reconciliation of flows and stocks would become more difficult
    - Rates of return would be harder to compute and interpret
    - Challenging to derive Extended directional Principle data
- Alternative d – intra-group derivatives in DI, except FI
  - Pros:
    - Lower volatility of financial derivatives positions compared to (c)
  - Cons:
    - No information on banking/financial sector, which may generate majority of flows
    - Implementation issues like for (c)
    - Difficulties for reporters in correctly identifying counterpart sectors to exclude derivatives between affiliated financial institutions

### Models of Risk Management — Overview
- Two main organizational cases of enterprise capital dependency affect intra-group derivatives usage:
  - a) subsidiaries in capital group
  - b) parent entity in capital group

#### Model 1 — Subsidiary in Capital Group
- Structure and practices:
  - A subsidiary is usually supervised by the parent company, which has a Treasury department at its head office.
  - Under Treasury supervision, subsidiaries present risks among themselves, commonly managed through cash pooling (joint liquidity management and/or consolidation of bank accounts).
  - Cash pooling is conducted by the leading—pool leader.
  - Subsidiaries may use natural hedging (matching cash flows on the asset and liabilities side) at the single-entity level to balance their position to a net position before the group's cash pooling.
  - Intermediate-level companies simultaneously balance their position at an appropriate level of liquidity management, for example at the level of companies in the same country.
- Hedging scheme elements:
  - Natural hedging — Financial Liquidity Management at single company level
  - Cash pooling — Financial Liquidity Management at group level
  - Net exposition — Financial Liquidity Management at Treasury level

#### Model 2 — Parent Entity in Capital Group
- Structure and practices:
  - A parent company organizes the group's day-to-day liquidity management for its subsidiaries.
  - Once the intra-group position has been settled (balance compensation) it is hedged on the market.
  - Due to the nature of the risks, hedges are most often tailor-made OTC derivatives and are most often concluded with a financial institution.
  - This situation also applies to self-employed companies which do not have the possibility of internally offsetting balances.
- Hedging scheme elements:
  - Cash pooling — Financial Liquidity Management by pool leader
  - Net position of group — Financial Liquidity Management by parent company; immunization of financial risk by conducting transaction in financial derivatives with external entities

### Typical Risks and Instruments Used by Nonfinancial Corporations
- Common exposures observed in annual financial statements of Polish entities (for example nonfinancial stock companies):
  - Primary exposures: foreign exchange risk and interest rate risk
  - Instruments used to mitigate these risks:
    - Forward contracts (exchange rate hedging)
    - IRS contracts (usually converting future payments from fixed rate to variable rate or vice versa)
    - CIRS contracts (used to mitigate both risks)

*Prepared by the Direct Investment Task Team (DITT) for public consultation.*

### Section 1

### D.12 Including Intra-Concern [Between Affiliates] Derivatives in Direct Investment

### Background and issue
- Intra-concern derivatives are financial derivatives between affiliates within multinational enterprise (MNE) groups and are currently excluded from the direct investment (DI) functional category.
- BPM6 paragraph 6.29 states: “Financial derivatives and employee stock options are excluded from DI and included in the functional category financial derivatives (other than reserves) and employee stock options”.
- BD4 paragraph 154 states: “Positions and transactions in financial derivatives between entities in a direct investment relationship should be excluded from direct investment”.
- 2008 SNA paragraph 26.93 highlights that the functional category “financial derivatives (other than reserves) and employee stock options” coincides largely with the corresponding financial instrument class and is identified separately because it relates to risk transfer rather than supply of funds or other resources.
- Data collected under current BPM6 and BD4 do not provide a quantitative assessment of the scale of intra-group derivatives in IIP and balance of payments (BOP).

### Evidence on scale and characteristics
- For a group of 28 European countries, positions of financial derivatives held by “other sectors” accounted on average for between 25 and 30 percent of derivatives positions for the total economy at the end of 2019.
- In Poland, rough estimates suggest even a half of financial derivatives value could be categorized as DIs, that is, half of transactions are conducted between affiliates.
- The share of financial derivatives positions held by “other sectors” has generally tended to increase over the last decade, though it is unclear whether this reflects intra-group positions or arm’s-length positions vis-à-vis non-affiliates.
- Limited aggregate evidence and country-level identification capabilities: the vast majority of countries are not currently able to identify transactions and positions in financial derivatives between affiliated entities.

### Motivations and behavioral differences
- Intra-group derivatives may arise for centralized risk management and hedging within MNEs (treasury/financial center models), where derivatives can be used to hedge the net position of the financial center against other group members.
- Intra-group derivatives may also be used for tax optimization and transfer pricing; evidence is scarce and mainly anecdotal.
- It is plausible that some intra-group derivatives differ from arm’s-length derivatives in purpose (e.g., internal treasury, tax strategies), though limited evidence prevents firm conclusions about systematic differences in instrument type or underlying asset category.

### Main issues for discussion identified by the DITT
- Whether intra-group derivatives differ substantially in character or purpose from derivatives between unaffiliated parties.
- Whether intra-group derivatives are closer in nature to other intra-group transactions included in DI or to items excluded from DI (e.g., debt between affiliated financial corporations).
- Whether the activity is widespread enough across countries and has changed sufficiently over the last two decades to warrant a different treatment from BPM6.
- Whether inclusion of intra-group derivatives in DI would reduce the analytical usefulness of DI statistics due to volatility, netting practices, reconciliation difficulties between flows and stocks, and impact on rates of return and external debt presentation.

### Potential practical and compilation issues
- Presentation of financial derivatives on a net basis (permitted by BPM6) contrasts with DI’s asset/liability presentation; inclusion in DI could complicate interpretation as individual contracts can flip between asset and liability.
- Reconciliation between flows and stocks, and computation of rates of return, would be more difficult if derivatives were included in DI.
- Adding capital relationship identifiers to reporting forms is easier in direct-reporting systems and harder in indirect systems (e.g., financial intermediaries, CCPs, trade repositories) that may lack information on clients’ capital relationships.
- For derivatives intermediated by a CCP, residency of the CCP determines geographical breakdown; such CCP-intermediated trades would not count as intra-group derivatives unless the CCP is part of the same group.

### Alternatives proposed for treatment of intra-group financial derivatives
- Option (a): Status quo — financial derivatives between affiliates remain classified under “Financial Derivatives” in BOP/IIP.
- Option (b): Keep classification under “Financial Derivatives” but add a voluntary supplementary item “of which between affiliates”.
- Option (c): Classify financial derivatives between affiliates of all sectors in “DI”.
- Option (d): Classify financial derivatives between affiliates in “DI” except exclude selected financial institutions (mirroring treatment of debt instruments), with exclusion applying when both counterparts are financial corporations as detailed in BPM6 6.28.

### Authors’ analysis and DITT outcomes
- Authors’ analysis and DITT discussion confirm that financial derivatives between affiliated entities may behave atypically and may differ from market terms; evidence is based on individual case studies and limited aggregate data.
- The DITT is strongly against inclusion of financial derivatives in DI.
- The DITT majority supports option (b): retain classification in “Financial Derivatives” and add a supplementary item “of which: between affiliated enterprises” and to further research the issue.
- Option (a) (no changes) was rejected despite some support because it would not enable presentation of additional information where significant.
- Option (c) (full inclusion in DI) was rejected because intra-group derivatives are not considered means of long-term investment and their inclusion would introduce higher volatility, reconciliation difficulties, and directional principle complications.
- Option (d) (include in DI only when at least one counterparty is a financial institution) was rejected for similar reasons as (c) and also due to higher implementation costs and potential data quality problems with sector classification.

### Recommendation and next steps
- Revise manuals by adding a supplementary item "of which: between affiliated enterprises" to the financial derivatives presentation in the balance of payments, international investment position, and external debt statistics.
- Align final data breakdowns with outcomes of GN F.4 "Financial derivatives by type".
- Consider development of detailed guidance in the Compilation Guide on data sources and methods to identify transactions and positions in financial derivatives between affiliated entities, given the reporting challenges across direct and indirect collection systems.

*Prepared by the Direct Investment Task Team (DITT) for public consultation.*

### Section 2

### d12-including-intraconcern-between-affiliates-derivatives-in-direct-investment - Section 2

### Pros and Cons of Each Alternative
- Table 1 presents pros and cons for four proposed alternatives (a, b, c, d).

- Alternative a – no changes
  - Pros:
    - No changes in reporting systems required
    - No costs
  - Cons:
    - No information on intra-group derivatives

- Alternative b – no changes, but supplementary item
  - Pros:
    - Limited changes in reporting systems, supplementary item on a voluntary basis
    - Limited costs
    - Disclosure by countries on a voluntary basis would increase information available for further research, with a view to a possible change in treatment in the future
  - Cons:
    - Information on intra-group derivatives available for selected economies and sectors only

- Alternative c – intra-group derivatives in DI
  - Pros:
    - Consistency (treating transactions between related parties similarly across all instruments)
    - More analytical understanding of the phenomenon
  - Cons:
    - It would further increase the distance from what FDI traditionally was supposed to measure (long-term investment in the form of greenfield investment or mergers and acquisitions)
    - Might increase volatility of DI data.
    - Practical implementation issues: Many countries would need to change their survey forms and even whole data collection systems (with increasing risk of asymmetries if some countries are not able to collect data on intra-group derivatives)
    - There might be confidentiality issues in countries in which only few MNEs actually use intra-firm derivatives
    - Reconciliation of flows and stocks would become more difficult
    - Rates of return would be harder to compute and interpret
    - It would be very challenging to derive Extended directional Principle data on those potential DI intra-group derivatives.

- Alternative d – intra-group derivatives in DI, except FI
  - Pros:
    - Lower volatility of financial derivatives positions compared to (c)
  - Cons:
    - No information on banking/ financial sector, that may generate majority of flows
    - Implementation issues like for (c)
    - Reporters might face difficulties in the correct identification of counterpart sectors (which would be necessary to exclude derivatives between affiliated financial institutions)

### Models of Risk Management — Overview
- Two main organizational cases of enterprise capital dependency are identified that affect intra-group derivatives usage:
  - a) subsidiaries in capital group
  - b) parent entity in capital group

### Model 1 — Subsidiary in Capital Group
- Structure and practices:
  - A subsidiary is usually supervised by the parent company, which has a Treasury department at its head office.
  - Under Treasury supervision, subsidiaries present risks among themselves, commonly managed through cash pooling (joint liquidity management and/or consolidation of bank accounts).
  - Cash pooling is conducted by the leading—pool leader.
  - Subsidiaries may use natural hedging (matching cash flows on the asset and liabilities side) at the single-entity level to balance their position to a net position before the group's cash pooling.
  - Intermediate-level companies (subsidiaries and parent companies) simultaneously balance their position at an appropriate level of liquidity management, for example at the level of companies in the same country.
- Hedging scheme elements:
  - Natural hedging — Financial Liquidity Management at single company level
  - Cash pooling — Financial Liquidity Management at group level
  - Net exposition — Financial Liquidity Management at Treasury level

### Model 2 — Parent Entity in Capital Group
- Structure and practices:
  - A parent company organizes the group's day-to-day liquidity management for its subsidiaries.
  - Once the intra-group position has been settled (balance compensation) it is hedged on the market.
  - Due to the nature of the risks, hedges are most often tailor-made OTC derivatives and are most often concluded with a financial institution.
  - This situation also applies to self-employed companies which do not have the possibility of internally offsetting balances.
- Hedging scheme elements:
  - Cash pooling — Financial Liquidity Management by pool leader
  - Net position of group — Financial Liquidity Management by parent company; immunization of financial risk by conducting transaction in financial derivatives with external entities

### Typical Risks and Instruments Used by Nonfinancial Corporations
- Common exposures observed in annual financial statements of Polish entities, for example nonfinancial stock companies:
  - Primary exposures: foreign exchange risk and interest rate risk
  - Instruments used to mitigate these risks:
    - Forward contracts (exchange rate hedging)
    - IRS contracts (usually converting future payments from fixed rate to variable rate or vice versa)
    - CIRS contracts (used to mitigate both risks)

---


_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/ditt/d12-including-intraconcern-between-affiliates-derivatives-in-direct-investment.pdf_