## f13-margins-on-buying-and-selling-transactions

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### SECTION I: THE ISSUE — Background and core characteristics
- Dealers, market-makers, foreign exchange bureaus, and other intermediaries may charge for services via a spread between buying and selling prices; margins (spread earnings) are implicit charges for market-making activities.
- Net spread earnings are strongly connected to provision of a service and therefore cannot be treated as holding gains and losses (BPM6, paragraph 3.20 (b) and 2008 SNA, paragraph 3.105).
- In theory, all financial instruments can be traded in ways that generate margins; in practice, propensity to generate margins varies by instrument and by role assumed by market participants (broker-dealer, broker-trader, trader-dealer, etc.).
- Principal compilation impediments:
  - Not all instruments are traded in ways that generate margins.
  - Not all transactions by dealers generate margins.
  - Bid-ask spreads can vary considerably transaction by transaction.
  - Geographic and sectoral allocation depends on residency and sector of counterparties, complicating allocation.

### Instrument-specific propensity to generate margins
- Equities:
  - Trading in equities does not typically generate margins.
  - Equities purchased in primary or secondary markets typically involve only explicit fees.
  - Secondary market situations can exist where trading in equities generates margins.
- Bonds:
  - Trading in bonds often generates margins.
  - Primary bond issuances present little scope for margins.
  - Secondary markets: government bonds often traded by recognized dealers or commercial/investment banks; corporate bonds frequently traded OTC by dealers.
- Foreign exchange:
  - Foreign exchange trading usually generates margins, although inter-bank competition is expected to erode spread earnings.
- Financial derivatives:
  - Financial derivatives are traded in a way that generates margins.
  - OTC derivatives markets are characterized by dealers acting as market-makers quoting purchase and sale prices; trade counterparties may not observe the actual transaction price.

### Compilation challenges, data characteristics, and materiality
- Bid-ask spread is relevant, but a one-size-fits-all bid-ask spread is not an appropriate proxy because spreads depend on:
  - Number of market participants.
  - Type of relationship between parties (dealer-dealer typically lower spreads; dealer-client typically higher spreads).
  - Transaction value and clients’ negotiating power.
  - Internal transfers where counterpart is part of same company and internal transfer prices apply.
- Accurate compilation would require transaction-by-transaction bid-ask spreads; geographical and sectoral breakdowns are difficult because allocation depends on residency and sector of clients rather than issuers.
- Cost–benefit and materiality considerations:
  - Many economies find the cost of estimating margins prohibitively high relative to quality or materiality of outcome; some economies (for instance in the European Union) do not estimate margins or provide low-accuracy estimates.
  - Where sufficient resources are available, quality estimates are possible via surveys of main dealer companies (provision side) and targeted surveys/benchmarks for uses/expenditure side.
  - Some compilers may capture only net spread earnings (earnings net of spending) due to collection or reporters’ accounting systems, creating potential bilateral asymmetries.
- Relevance across countries:
  - Many countries do not estimate margins; removing the item from manuals would not cause revisions for those countries.
  - Margins are highly relevant for some countries: United Kingdom, period 1991–2020 — share of margins out of total exports of financial services ranged between 9 percent and 37 percent, with a median of 22 percent.
- Materiality principle recommended:
  - Allow national compilers not to estimate this item when the relative size is small and does not justify high compilation effort.
  - Materiality threshold could allow implicit recording of the item in the relevant financial account category when service size is small.
  - ECB Working Group on External Statistics Virtual Group recommended careful analysis on whether effort outweighs benefits; materiality exemption may be appropriate.

### Definition and measurement of margins as financial services
- Dealers’ service charges are included indistinguishably in the financial transactions to which they relate; the separable service charge is calculated as the difference (margin) between the reference price and:
  - the dealer’s buying price at the time of purchase, and
  - the dealer’s selling price at the time of sale.
- The reference price is usually a mid-price (average between buying and selling prices); using the reference (mid-) price at the time of purchase or sale excludes holding gains and losses from measurement of services.

### Calculation for securities
- For debt securities traded on organized markets:
  - Service charge represents the margin added to the estimated market value of the security that makes up the purchase price (ask price) or the price offered to the seller (bid price).
  - Prices of securities may change rapidly; margins on sales and purchases should be calculated in terms of mid-prices to avoid including holding gains and losses.
  - Mid-price = average at a given point in time between the bid and ask price.
  - Margin on the purchase = one half of the difference between the bid and ask prices at the time of the purchase; margin on the sale = the other half of the difference.

### Foreign exchange margins and balance of payments recording
- Transactions denominated in foreign currencies should be converted at midpoint rates applicable at times of transactions (BPM6 Chapter 3).
- Dealers derive income from spread between buy and sell rates; BPM6 recommends use of midpoint rate because the spread reflects provision of services and using actual buy/sell rates could distort balance of payments numbers.
- Example:
  - A dealer sells 100 units of foreign currency to importers for 101 units of domestic currency, and buys 100 units of foreign currency from exporters for 99 units of domestic currency, thereby making a profit of 2 units of domestic currency.
- Recording implications:
  - If transactors convert trade transactions using sell and buy rates, distortions can arise (e.g., an apparent deficit in goods) even if, in foreign currency terms, imports and exports are equal.
  - If foreign exchange dealers and counterparts are residents of different economies, service transactions equal to differences between actual buy or sell rates and the midpoint rate should be recorded in the balance of payments of transactor economies.
  - When a resident dealer transacts with a non-resident other than a dealer, a financial service credit entry should be recorded; when a non-resident dealer transacts with a resident other than a dealer, a financial service debit entry should be recorded.
  - When transactions occur between resident and non-resident dealers, compilers should identify separately transactions where the resident dealer is price-maker (service credits) and where the resident dealer is price-taker (service debits); sometimes transactions occur at the midpoint with neither dealer selling services to the other.

### Data collection, estimation approaches, and compiler guidance
- Direct collection of balance of payments transactions attributable to foreign exchange trading is difficult:
  - Resident consumers unlikely to know implicit service values purchased from non-resident dealers.
  - Resident dealers may be unable to supply information on services provided to non-residents.
- Recommended estimator for foreign exchange:
  - Multiply the average spread between midpoint and buy/sell rates by the volume of foreign exchange transactions with non-residents.
  - Sources for spreads: discussions with dealers; market participants; supervisory/regulatory institutions; BIS triennial global survey on foreign exchange and derivative market activity (useful as a reference point despite low frequency).
- MSITS 2010 guidance:
  - Dealers or market-makers may charge by having a spread between buying and selling prices; such margins are regarded as service charges by securities dealers.
  - Service can be measured by applying dealers’ average margin as a percentage to the value of transactions through dealers.
  - MSITS 2010 Compilers Guide suggests estimating margins on an aggregate basis by multiplying transaction volumes by a spread ratio when micro-data are not available.
- Compilation approaches and practicality:
  - Direct collection for total value of margins plus estimation for counterpart breakdown is most accurate but resource intensive.
  - Compilation on the uses side may require complex methods; comprehensive surveys of all institutional sectors are burdensome, so most compilers may focus on large financial institutions and benchmark results against bilateral data from other compilers.
  - No compilers are known to use a pure direct data collection strategy; a mixed approach (surveys where available, benchmarked and enhanced with external data) is often more appropriate.
  - Increasing availability of granular/micro transaction data may make future estimation easier for national compilers.
- Compilers should examine reporting practices and adjust accounts (or publish findings) when serious misreporting occurs, since reporting at buy and sell rates can introduce errors that may significantly affect the financial account in high-turnover economies.

### Options considered, drafting team recommendation, and required guidance
- Options considered:
  - Option A: No change — do not include changes in the guidance on margins in the updated manuals or compilation guides.
  - Option B: Continue to include margins as a financial service in the updated manuals with clearer conceptual explanation; updated compilation guides should recommend compilation options (survey-based, estimation, mixed) and include a materiality threshold allowing national agencies not to compile this item when not relevant or when cost is prohibitive.
- Drafting team recommendation: Option B.
- Rationale and required clarifications for manuals:
  - Clarify that not all transactions by institutions classified as dealers generate margins.
  - State that a one-size-fits-all bid-ask spread is not appropriate.
  - Require disentanglement between the issuer of an instrument and the counterpart in each transaction; do not assume issuer equals counterpart.
  - Acknowledge compilation approaches can be direct data collection, estimation, or mixed; survey-based models are more costly; estimation-based models should provide a list of usable assumptions.
  - Note the challenging experience of European countries (ECB quality report) and outstanding recommendations to improve sources and methods.
  - Reaffirm that margins are a service item and compilers should attempt to estimate it where relevant.
  - Incorporate a materiality principle to allow national compilers not to estimate when the relative size is small and does not justify high compilation effort.
- FITT views:
  - FITT members showed diverse views but nearly all agreed margins are an implicit service charge.
  - Some members considered recording margins implicitly in the financial account rather than as a service due to compilation challenges and small quantitative significance in some economies.
  - The drafting team incorporated a materiality threshold in Option B to allow agencies not to estimate when not materially relevant.

### Country compilation experiences and methodologies (examples)
- United Kingdom (Bank of England):
  - Bank of England collects aggregate data for trading margins generated by UK MFIs via a quarterly survey using Form PL, introduced in 2004.
  - Reporting exemption: firms may be exempt if they believe their aggregate trading margin income amounts to less than £25 million a quarter.
  - Current methodologies allowed:
    - (i) Direct capture method: difference between sale/purchase price and the “mid-market” price for all transactions; margin multiplied by volume traded yields net spread earnings.
    - (ii) Trader’s price approximation: use of a “trader’s price” quoted to the trader by their Treasury unit as an approximation for mid-market price when mid-market is not recorded.
    - (iii) Management information estimation: estimate net spread earnings based on appropriate internal management information (e.g., sales margin amounts for remuneration).
  - Net spread earnings reported for foreign exchange, securities, and derivatives; Bank estimates counterparty breakdowns using the Bank’s semi-annual survey of turnover in the foreign exchange and over-the-counter derivatives market and the BIS Triennial Survey.
- United States (Bureau of Economic Analysis):
  - The U.S. estimates margins rather than attempting direct capture because companies making markets and earning income from margins are unlikely to provide usable micro-data for margins.

### Questions for discussion (as posed by the drafting team)
- 1) Do you agree that currently margins on buying and selling transactions require a significant level of effort to reach a reliable quality of the estimate?
- 2) Which option do you support: Option A or Option B?
- 3) Do you have any other comments on the Guidance Note?

*Guidance Note prepared by the drafting team of the Financial and Payments Systems Task Team (FITT); BPM6 Chapter 12; MANUAL ON STATISTICS OF INTERNATIONAL TRADE IN SERVICES 2010 (MSITS 2010); MSITS 2010 Compilers Guide; 2008 SNA; ESA 2010; Bank of England; Bureau of Economic Analysis; BIS Triennial Survey.*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background
- Dealers, market-makers, foreign exchange bureaus, and other intermediaries may charge for services by having a spread between their buying and selling prices; margins (spread earnings) represent implicit charges for market-making activities.
- Net spread earnings are strongly connected to the provision of a service and therefore cannot be treated as holding gains and losses (BPM6, paragraph 3.20 (b) and 2008 SNA, paragraph 3.105).
- In theory, all financial instruments may be bought and sold in a way that can generate margins; in practice, different instruments exhibit different propensities to generate margins.
- Market participants can assume multiple roles (broker-dealer, broker-trader, trader-dealer, etc.), and institutions fulfilling multiple roles often cannot identify for which transactions they act as dealer versus broker or trader; it should not be assumed that all operations of market participants recognized as dealers generate margins.

### Instrument-specific propensity to generate margins
- Equities:
  - Trading in equities does not typically generate margins.
  - Equities purchased in primary or secondary markets typically involve only explicit fees.
  - Secondary market situations can exist where trading in equities generates margins.
- Bonds:
  - Trading in bonds often generates margins.
  - Primary bond issuances (similar to initial public offerings) present little scope for margins.
  - Secondary markets: government bonds are often traded by recognized dealers or commercial/investment banks; corporate bonds are frequently traded OTC by dealers.
- Foreign exchange:
  - Foreign exchange trading usually generates margins, although inter-bank competition is expected to erode spread earnings.
- Financial derivatives:
  - Financial derivatives are traded in a way that generates margins.
  - OTC derivatives markets are characterized by dealers acting as market-makers quoting purchase and sale prices; trade counterparties may not observe the actual transaction price.

### Compilation challenges and data characteristics
- The bid-ask spread is relevant, but a one-size-fits-all bid-ask spread is not an appropriate proxy for estimating margins because spreads depend on:
  - Number of market participants.
  - Type of relationship between parties (dealer-dealer typically lower spreads; dealer-client typically higher spreads).
  - Transaction value and clients’ negotiating power.
  - Internal transfers where the counterpart is part of the same company and internal transfer prices apply.
- Accurate compilation would require transaction-by-transaction bid-ask spreads.
- Geographical and sectoral breakdowns are difficult because allocation depends on the residency and sector classification of clients rather than issuers; “Know Your Customer” regulations may allow determination of residency of trading partners.
- Principal reasons margins are difficult to compile:
  - Not all instruments are traded in ways that generate margins.
  - Not all transactions by dealers generate margins.
  - Bid-ask spreads can vary considerably transaction by transaction.
  - Geographic and sectoral allocation of the service is complex.

### Cost–benefit and materiality considerations
- Many economies find the cost of estimating margins prohibitively high relative to the quality or materiality of the outcome; some economies (for instance in the European Union) do not estimate margins or provide low-accuracy estimates for that reason.
- Where sufficient resources are available, quality estimates are possible:
  - Provision side (earnings): surveys of main dealer companies can facilitate accurate compilation of margins and their sectoral and geographical allocation, though dealers may not identify the proportion of transactions generating margins or the bid-ask spread; estimation methods combined with “Know Your Customer” regulations can be used but imply high costs.
  - Uses/expenditure side (spending): compilation is more challenging because all institutional sectors can consume/import the service; an all-encompassing survey could overburden compilers and respondents, so most compilers may survey large financial institutions and benchmark results against bilateral data from other compilers.
- Some statistical compilers may capture only net spread earnings (earnings net of spending) due to existing collection or reporters’ accounting systems; this can create asymmetries in bilateral data.

### Relevance across countries
- Many countries do not estimate margins; removing the item from the manuals would not cause revisions for those countries (example cited: Luxembourg analysis by STATEC found margins not relevant on the export side for many financial industry players).
- Margins are highly relevant for some countries. Example:
  - United Kingdom, period 1991–2020: share of margins out of total exports of financial services was estimated to range between 9 percent and 37 percent, with a median of 22 percent.
- Dropping the methodological requirement for margins would produce sizeable revisions for countries where margins are relevant while not affecting countries where they are not.

### Data collection and estimation approaches
- Direct collection for total value of margins plus estimation for counterpart breakdown is the most accurate but resource intensive.
- Compilation on the uses side may require complex methods; comprehensive surveys of all institutional sectors are burdensome, so most compilers may focus on large financial institutions, accepting unknown quality.
- No compilers are known to use a pure direct data collection strategy; a mixed approach (surveys where available, benchmarked and enhanced with additional external data) may be more appropriate.
- Increasing availability of granular/micro transaction data may make future estimation easier for national compilers.

### Options considered
- Option A: No change — do not include changes in the guidance on margins in the updated manuals or compilation guides.
- Option B: Continue to include margins as a financial service in the updated manuals with clearer conceptual explanation; updated compilation guides should recommend compilation options (survey-based, estimation, mixed) and include a materiality threshold allowing national agencies not to compile this item when not relevant or when cost is prohibitive.

### Drafting team recommendation and required guidance (Outcome)
- The drafting team recommends Option B.
- Rationale and required clarifications:
  - Current standards insufficiently reflect complexity of margin-generating/consuming behaviors; further explanation and compilation guidance are needed.
  - Manuals should:
    - Clarify that not all transactions by institutions classified as dealers generate margins.
    - State that a one-size-fits-all bid-ask spread is not appropriate.
    - Require disentanglement between the issuer of an instrument and the counterpart in each transaction; do not assume issuer equals counterpart.
    - Acknowledge compilation approaches can be direct data collection, estimation, or mixed; survey-based models are more costly; estimation-based models should provide a list of usable assumptions.
    - Note the challenging experience of European countries (ECB quality report) and outstanding recommendations to improve sources and methods.
    - Reaffirm that margins are a service item and compilers should attempt to estimate it where relevant.
  - Incorporate a materiality principle to allow national compilers not to estimate this item when the relative size is small and does not justify high compilation effort:
    - The materiality threshold could allow implicit recording of the item in the relevant financial account category when service size is small.
    - The ECB’s Working Group on External Statistics Virtual Group recommended careful analysis to determine whether effort outweighs benefits; a materiality exemption may be appropriate.
    - Growing availability of transaction-by-transaction data could allow more accurate future estimates.

### Diversity of views and final approach
- FITT members showed diverse views but nearly all agreed margins are an implicit service charge.
- Some members considered recording margins implicitly in the financial account rather than as a service due to compilation challenges and small quantitative significance in some economies.
- The drafting team incorporated a materiality threshold in Option B to allow agencies not to estimate when not materially relevant.

### Questions for discussion
- 1) Do you agree that currently margins on buying and selling transactions require a significant level of effort to reach a reliable quality of the estimate?
- 2) Which option do you support: Option A or Option B?
- 3) Do you have any other comments on the Guidance Note?

*Guidance Note prepared by the drafting team of the Financial and Payments Systems Task Team (FITT).*

### 12.106 This type of service is often related to the activities of dealers in f inancial instruments such as

### f13-margins-on-buying-and-selling-transactions - 12.106 This type of service is often related to the activities of dealers in financial instruments such as

### Definition and measurement of margins as financial services
- Dealers’ service charges are included indistinguishably in the financial transactions to which they relate; the separable service charge is calculated as the difference (margin) between the reference price and:
  - the dealer’s buying price at the time of purchase, and
  - the dealer’s selling price at the time of sale.
- The reference price is usually a mid-price (i.e., an average between the buying and selling prices).
- Using the reference (mid-) price at the time of purchase or sale excludes holding gains and losses from the measurement of services.

### Calculation for securities
- For debt securities traded on organized markets:
  - The service charge represents the margin added to the estimated market value of the security that makes up the purchase price (ask price) or the price offered to the seller (bid price).
  - Prices of securities may change rapidly; margins on sales and purchases should be calculated in terms of mid-prices to avoid including holding gains and losses.
  - The mid-price of a security is the average at a given point in time between the bid and ask price.
  - The margin on the purchase of a security is one half of the difference between the bid and ask prices at the time of the purchase; the margin on the sale is the other half of the difference.

### Foreign exchange margins and balance of payments recording
- Transactions denominated in foreign currencies should be converted at midpoint rates applicable at the times of the transactions (BPM6 Chapter 3).
- Dealers derive income from the spread between buy and sell rates; BPM6 recommends use of the midpoint rate because the spread reflects provision of services and using actual buy/sell rates could distort balance of payments numbers.
- Example facts:
  - A dealer sells 100 units of foreign currency to importers for 101 units of domestic currency, and buys 100 units of foreign currency from exporters for 99 units of domestic currency, thereby making a profit of 2 units of domestic currency.
- Recording implications:
  - If transactors convert trade transactions using sell and buy rates, distortions can arise (e.g., an apparent deficit in goods) even if, in foreign currency terms, imports and exports are equal.
  - If foreign exchange dealers and counterparts are residents of different economies, service transactions equal to differences between actual buy or sell rates and the midpoint rate should be recorded in the balance of payments of transactor economies.
  - When a resident dealer transacts with a non-resident other than a dealer, a financial service credit entry should be recorded; when a non-resident dealer transacts with a resident other than a dealer, a financial service debit entry should be recorded.
  - When transactions occur between resident and non-resident dealers, sometimes transactions occur at the midpoint with neither dealer selling services to the other; other times one dealer is price-maker (producer) and the other price-taker (consumer). Compilers should identify separately transactions where the resident dealer is price-maker (service credits) and where the resident dealer is price-taker (service debits).

### Data collection, estimation, and compiler guidance
- Direct collection of balance of payments transactions attributable to foreign exchange trading is difficult:
  - Resident consumers are unlikely to know implicit service values purchased from non-resident dealers.
  - Resident dealers may be unable to supply information on services provided to non-residents.
- Recommended estimator model:
  - Multiply the average spread between midpoint and buy/sell rates by the volume of foreign exchange transactions with non-residents.
  - Sources for spreads: discussions with dealers; market participants; supervisory/regulatory institutions; BIS triennial global survey on foreign exchange and derivative market activity (useful as a reference point despite low frequency).
- Compilers should examine reporting practices and make adjustments to accounts (or publish findings) when serious misreporting occurs, since reporting at buy and sell rates can introduce errors that may significantly affect the financial account in high-turnover economies.
- MSITS 2010 guidance:
  - Dealers or market-makers may charge by having a spread between buying and selling prices; such margins are regarded as service charges by securities dealers.
  - Service can also be measured by applying dealers’ average margin as a percentage to the value of transactions through dealers.
- MSITS 2010 Compilers Guide (BPM6 CG Chapter 12 paragraphs 114–116) suggests estimating margins on an aggregate basis by multiplying transaction volumes by a spread ratio when micro-data are not available.
- 2008 SNA and ESA 2010 alignment:
  - 2008 SNA paragraph 6.174 treats margins on purchases of foreign currencies as provision of financial services similar to securities.
  - ESA 2010 paragraph 3.73 states ask price equals estimated market value plus a margin; bid price equals market value minus a margin; margins apply to equities, investment fund shares, and foreign currencies.

### Country compilation experiences and methodologies
- United Kingdom (Bank of England) compilation strategy:
  - The Bank of England collects aggregate data for trading margins generated by UK MFIs via a quarterly survey using Form PL, introduced in 2004.
  - Reporting exemption: firms may be exempt if they believe their aggregate trading margin income amounts to less than £25 million a quarter.
  - BoE allows flexibility in how firms derive quarterly estimates; current methodologies include:
    - (i) Direct capture method: difference between sale/purchase price and the “mid-market” price for all transactions; margin multiplied by volume traded yields net spread earnings.
    - (ii) Trader’s price approximation: use of a “trader’s price” quoted to the trader by their Treasury unit as an approximation for mid-market price when mid-market is not recorded.
    - (iii) Management information estimation: where mid-market price cannot be determined, estimate net spread earnings based on appropriate management information used internally (e.g., sales margin amounts for remuneration).
  - Net spread earnings are reported for foreign exchange, securities, and derivatives; the Bank estimates counterparty breakdowns using sources such as the Bank’s semi-annual survey of turnover in the foreign exchange and over-the-counter derivatives market and the BIS Triennial Survey.
- United States (Bureau of Economic Analysis) approach:
  - The U.S. estimates margins rather than attempting direct capture because companies making markets and earning income from margins are unlikely to provide usable micro-data for margins.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/fitt/f13-margins-on-buying-and-selling-transactions.pdf_