## Financial derivatives by type

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### SECTION I: THE ISSUE — Background and key problems
- The update of BPM6 and the 2008 SNA is an opportunity to re-examine concepts, treatment, and presentation of derivatives (Guidance Note — GN).
- Current shortcomings identified by the GN:
  - Limited breakdowns of financial derivatives reduce analytical usefulness.
  - Insufficient emphasis on the role of foreign currency derivatives in measures of countries’ gross and net foreign currency investment positions.
  - Treatment of valuation changes for foreign currency derivatives can be simplified.
  - Guidance for recording net/gross transactions can be clarified and further aligned between BPM6 and 2008 SNA.
  - Post-trade processes (novation, clearing, portfolio compression, collateral management) introduced by regulatory changes (e.g., EMIR and the Dodd Frank Act) are not reflected in BPM6 or 2008 SNA.
- Definitions and valuation:
  - Derivatives are financial instruments linked to another specific financial instrument, indicator or commodity through which specific financial risks can be traded in their own right (BPM6, paragraph 5.80; 2008 SNA, paragraph 11.111).
  - Derivatives are treated as a separate functional category in BPM6 (not included in portfolio investment, direct investment, etc.), apart from those included in reserve assets.
  - Valuation: market prices prevailing on balance sheet recording dates or other fair value methods (BPM6, paragraph 7.33).
- Existing presentation limitation:
  - Current supplementary classification: “options” and “forward-type contracts” (BPM6, paragraph 5; 2008 SNA, paragraph 11.115) — analytically limited.
- Alternative classification dimensions identified by the GN:
  - By market risk categories: interest rate risk; foreign exchange risk; equity and commodity price risks; credit risk; other underlying instruments.
  - By instrument: options; forwards and related instruments (i.e., futures); swaps; credit derivatives; marketable employee stock options; other instruments.
  - By trading venue and clearing status: exchange traded; OTC (cleared); OTC (not cleared).
  - By delivery type: physical or cash delivery.
- Foreign currency derivatives considerations:
  - Often involve payment obligations in a foreign currency for the notional amount and are akin to foreign currency debt (BPM6 Appendix 9, Section C).
  - BPM6 includes memorandum tables (Tables A9-I-Ia, A9-I-2a, A9-I-Ib, A9-I-2b) to capture on-balance-sheet positions by currency and notional amounts of off-balance-sheet foreign currency derivatives, but very few countries provide these data.
  - Off-balance-sheet foreign currency derivatives can materially affect measures of gross and net external foreign currency positions (examples cited).
- Revaluation recording inconsistency:
  - Holding gains and losses in financial derivatives are recorded as revaluations (BPM6, paragraph 8.36).
  - BPM6 paragraph 9.31 recommends classifying all revaluations as exchange rate changes when separation is impractical, but paragraph 9.28 defines that exchange rate changes are always zero on instruments denominated in the currency of international accounts compilation, creating inconsistency.
  - ECB practice records revaluations from both market price and exchange rate movements in “other price revaluations” for net financial derivatives.
- Post-trade processes not reflected in current manuals require methodological guidance (novation, clearing, portfolio compression, collateral management).

### Issues for discussion — Observations and options
- Issue 1 — Broad Classification of Financial Derivatives
  - Observation: Forward-type / option-type breakdown is not widely used; users prefer market risk category and clearing status breakdowns. Some derivatives (e.g., CDS) have dual characteristics complicating classification.
  - Options (paragraph 13):
    - a. By market risk category: foreign exchange; single-currency interest rate; equity; commodity; credit; others.
    - b. By instrument: options; forwards and related instruments; futures; swaps; credit derivatives; marketable employee stock options; other instruments.
    - c. By trading venue and clearing status: exchange traded; OTC (cleared); OTC (not cleared).
    - d. Cross classification: market risk category by instrument, trading venue and clearing status.
    - e. By broad type: forward-type derivatives; option-type derivatives; hybrid derivatives.
    - f. No change to current presentation.
- Issue 2 — Compiling Notional Values of Foreign Currency Derivatives
  - Observation: Very few countries compile BPM6 Appendix 9 Tables A9-I-2a and A9-I-2b.
  - Options (paragraph 15):
    - a. Emphasize in the main text that presentation of foreign currency derivatives notional amounts by currency is requested as described in BPM6 Appendix 9, Tables A9-I-Ib and A9-I-2b.
    - b. Remove Tables A9-I-Ib and A9-I-2b and replace with a simplified table that captures only essential information on notional value of foreign currency linked derivatives (as in Annex II).
    - c. No changes.
  - Additional point: Mirror cross-border foreign currency derivatives notional amounts presentation in ESS and NA for domestic and cross-border derivatives.
- Issue 3 — Convention for Recording of Revaluations on Foreign Currency Derivatives
  - Observation: Revaluations arise from market price changes and exchange rate movements; BPM6 paragraphs 9.28 and 9.31 are inconsistent.
  - Options (paragraph 18):
    - a. Change BPM6, paragraph 9.31 so that all revaluation effects are recorded as (other) price revaluations when separation is impractical.
    - b. No change.
- Issue 4 — Recording of Post Trading Activities
  - Observation: Market infrastructure changes since 2008 require guidance for symmetric recording across countries, especially with CCPs and cross-border dimensions.
  - Options (paragraph 20):
    - a. Expand BPM6 Chapter 8 and 2008 SNA Chapter 17 to provide methodological guidance for recording novation and portfolio compression as financial transactions; include a box in the main text and detailed examples in the BPM Compilation Guide.
    - b. No change.
- Issue 5 — Gross and Net Recording of Assets and Liabilities
  - Observation: 2008 SNA and BPM6 recognize net recording in some cases, but guidance for transactions is not fully aligned and can be ambiguous; no guidance on periods when a contract’s classification switches between assets and liabilities.
  - Options (paragraph 22):
    - a. Clarify BPM6 paragraph 8.34 that net recording of transactions is acceptable where separate data on transactions in assets and liabilities are unavailable and the position may change between assets and liabilities; require consistent application during the life of the instrument and mirror this in Chapter 17 of 2008 SNA.
    - b. No change.

### Outcomes and recommendations (SECTION II) — GN decisions and rationale
- Issue 1 — Classification recommendation (paragraph 23):
  - Discontinue the current breakdown by broad type in favor of:
    - (a) By market risk category (standard component).
    - (b) By instrument (supplementary item to be listed among standard components and selected supplementary items/presentation tables [Appendix 9 of BPM6]).
    - (c) By trading venue (supplementary item to be listed as above).
  - Rationale:
    - No strong case to maintain the current broad-type breakdown.
    - GN F.5 previously recommended classifying CDS as option-type but recognized CDS dual nature; current requirement causes issues for hybrids.
    - Cross classification (option d) is not recommended due to likely practical collection burdens.
    - Expanded broad instrument categories (option e) do not add new analytical information.
- Issue 2 — Notional values of foreign currency derivatives:
  - Recommendation: Option a — emphasize reporting of foreign currency derivatives notional amounts by currency as requested in BPM6 Appendix 9, Tables A9-I-Ib and A9-I-2b.
  - Compromise: If compilation is too onerous, introduce a simplified table as in Annex II; retain Tables A9-II and A9-III as supplementary reporting tables.
- Issue 3 — Revaluations convention:
  - Recommendation: Option a — change BPM6, paragraph 9.31 and 2008 SNA Chapter 17 so that for derivatives where separation of exchange rate changes from other revaluations is impractical, all revaluations are recorded as (other) price revaluations rather than exchange rate revaluations.
  - Rationale: Enhances analytical clarity and complies with BPM6, paragraph 9.28.
- Issue 4 — Post-trading activities:
  - Recommendation: Option a — expand BPM6 Chapter 8 (Financial Account) and 2008 SNA Chapter 11 to provide methodological guidance for recording novation and portfolio compression as financial transactions; include a main-text box and detailed examples (Annex III presents one possible solution).
  - Aim: Symmetric recording across countries given market infrastructure changes.
- Issue 5 — Gross and net recording:
  - Recommendation: Option a — expand BPM6, paragraph 8.34, and 2008 SNA Chapter 17 to clarify when net recording of transactions is acceptable; gross recording remains the generic recommendation but net recording is permitted when gross recording is impractical. Option b rejected to avoid discrepant interpretations.

### FITT support, presentation changes, and implementation guidance
- FITT majority strongly supported the GN proposals.
- Proposed presentation hierarchy:
  - Standard component: (i) by market risk category.
  - Supplementary items: (ii) by instrument; (iii) by trading venue and clearing type.
- GN proposes the currency breakdown apply to presentation of financial derivatives in both ESS and NA and suggests maintaining the same currency breakdown for balance sheet items in BPM6 Appendix 9 because on- and off-balance-sheet positions both contribute to foreign currency payment receipts and obligations.
- GN stresses:
  - Use price changes when separation of exchange rate changes is impractical (record as other price revaluations).
  - Permit net recording of transactions when gross recording is impractical.
  - Illustrate recording of novation and compression with examples.

### Annex II — Model simplified table for foreign currency derivatives notional amounts (proposed)
- Proposal: Replace existing list of currencies (euro, US dollar, Yen, other) with currencies from a basket that determines SDR value, or those used in COFER, or another set of major currencies.
- Proposed separation: currencies to be received at maturity and currencies to be provided at maturity.
- Stock — Currencies to be received at maturity:
  - Chinese yuan
  - Euro
  - Pound sterling
  - US dollar
  - Yen
  - Other currencies
- Stock — Currencies to be provided at maturity:
  - Chinese yuan
  - Euro
  - Pound sterling
  - US dollar
  - Yen
  - Other currencies

### Annex III — Recording of post-trading activities (novation, portfolio compression) — principles and numerical illustrations
- Novation — principles:
  - Novation replaces a bilateral OTC derivative between two market participants with two bilateral contracts between each participant and a CCP.
  - Timing matters:
    - If novation occurs immediately (within reporting timeframe), only novated contracts vis-à-vis the CCP are reported.
    - If novation occurs with significant delay, original counterparts should report two offsetting transactions in the reference period(s): (i) termination of the initial contract; (ii) creation of an asset position vis-à-vis the CCP of equal market value.
  - When initial parties are not clearing members, each side of the bilateral contract is replaced by two contracts (entity–clearing member and clearing member–CCP), resulting in four transactions/positions.
  - Residence of market participants and CCP determines cross-border recording and national accounts treatment.
- Portfolio compression — principles:
  - Definition: Termination and replacement of submitted derivatives with new derivatives whose combined notional value is less than original combined notional value.
  - Recording: All counterparties should report offsetting transactions terminating initial contracts and creating new positions. Net overall positions remain unchanged for involved parties, but post-compression gross positions and bilateral counterparts may differ substantially.
- Example 1 — Novation (entities A and B resident in country X; CCP resident in country Y):
  - Before novation:
    - Domestic asset position of A: 100
    - Domestic liability position of B: 100
    - No positions recorded in balance of payments and IIP statistics since all residents are in country X.
  - After novation:
    - Vis-à-vis non-residents (IIP): Assets 100 for A; Liabilities 100 for B; CCP records Assets 100 and Liabilities 100 accordingly.
    - Vis-à-vis domestic sectors after novation: Assets 0 for A; Liabilities 0 for B.
  - Global effect: Doubling of positions compared with before novation; net IIPs of countries X and Y remain unchanged at 0.
- Example 2 — Portfolio compression (entities A and B resident in country X; C resident in country Y):
  - Before compression:
    - Vis-à-vis non-residents (IIP) Assets: A 10; B 20
    - Vis-à-vis non-residents (IIP) Liabilities: A 20; B 10
    - Vis-à-vis domestic sectors Assets: B 30
    - Vis-à-vis domestic sectors Liabilities: A 30
    - Net assets position: A -20; B 10; C 10
  - After compression:
    - Vis-à-vis non-residents (IIP) Assets: C 10
    - Vis-à-vis non-residents (IIP) Liabilities: A 10
    - Vis-à-vis domestic sectors Assets: B 10
    - Vis-à-vis domestic sectors Liabilities: B 10; A 10
  - Notes:
    - New deals presented as transactions (increase in liabilities for A and increase in assets for B and C); termination of previous deals also recorded as financial transactions.
    - Net IIP changed for entities A and B in the example (A: assets 10 to zero; B: liabilities 20 to zero); entity C unchanged (asset 10 before and after).
    - Globally, compression may change net international investment positions in cross-border deals and reduces outstanding notional amounts; net positions on combined domestic and cross-border segment do not change.

*Source: The Guidance Note (GN).*

### SECTION I: THE ISSUE

### SECTION I: THE ISSUE

### Background

- The update of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6) and the System of National Accounts 2008 (2008 SNA) is an opportunity to re-examine concepts, treatment, and presentation of derivatives in the new international standards.  
- Current shortcomings identified by the Guidance Note (GN):
  - Limited breakdowns of financial derivatives reduce analytical usefulness.
  - Insufficient emphasis on the role of foreign currency derivatives in measures of countries’ gross and net foreign currency investment positions.
  - Treatment of valuation changes for foreign currency derivatives can be simplified.
  - Guidance for recording net/gross transactions can be clarified and further aligned between BPM6 and 2008 SNA.
  - Post-trade processes (novation, clearing, portfolio compression, collateral management) are not reflected in BPM6 or 2008 SNA despite regulatory changes (e.g., EMIR and the Dodd Frank Act) that increased clearing and reporting obligations.
- Definitions and current presentation:
  - Derivatives are financial instruments linked to another specific financial instrument, indicator or commodity through which specific financial risks can be traded in their own right (BPM6, paragraph 5.80; 2008 SNA, paragraph 11.111).
  - BPM6 distinguishes derivatives as a separate functional category (not included in portfolio investment, direct investment, etc.), apart from those included in reserve assets.
  - Derivatives are valued at market prices prevailing on balance sheet recording dates or using other fair value methods (BPM6, paragraph 7.33).
- Existing supplementary classification in BPM6 and 2008 SNA: two broad categories — “options” and “forward-type contracts” (BPM6, paragraph 5; 2008 SNA, paragraph 11.115) — noted as analytically limited.
- Alternative, more analytically useful classification dimensions identified (paragraph 5):
  a. By market risk categories: interest rate risk, foreign exchange risk, equity and commodity price risks and credit risk or risks to other underlying instruments.  
  b. By instrument: options; forwards and related instruments (i.e., futures); swaps; credit derivatives; marketable employee stock options; other instruments.  
  c. By trading venue and clearing status: exchange traded; over-the-counter (OTC) (cleared); OTC (not cleared).  
  d. By delivery type: physical or cash delivery.
- Not all classifications above are explicitly recommended by BPM6; BPM6 paragraphs 5.85–5.96 describe instruments, but presentation tables only contain the two broad categories.
- Foreign currency derivatives:
  - Often involve payment obligations in a foreign currency for the notional amount and are akin to foreign currency debt (BPM6 Appendix 9, Section C).
  - BPM6 includes memorandum tables (Tables A9-I-Ia, A9-I-2a, A9-I-Ib, A9-I-2b) to capture on-balance-sheet positions by currency and notional amounts of off-balance-sheet foreign currency derivatives, but very few countries provide these data.
  - Off-balance-sheet foreign currency derivatives can materially affect measures of gross and net external foreign currency positions (examples cited: BIS estimates on US dollar obligations from swaps/forwards; Data Template on International Reserve and Foreign Liquidity).
- Revaluation recording:
  - Holding gains and losses in financial derivatives are recorded as revaluations (BPM6, paragraph 8.36).
  - BPM6 recommends classifying all revaluations as exchange rate changes when separation of exchange rate changes from other revaluations is impractical (paragraph 9.31), but BPM6 paragraph 9.28 defines that exchange rate changes are always zero on instruments denominated in the currency of international accounts compilation, creating inconsistency.
  - The ECB practice records revaluations from both market price and exchange rate movements in “other price revaluations” for net financial derivatives.
- Post-trade processes introduced since the 2008 standards (e.g., novation, clearing, portfolio compression, collateral management) are not reflected in BPM6/2008 SNA and require methodological guidance.

### Issues for Discussion

Issue 1 — Broad Classification of Financial Derivatives

- Observations:
  - The forward-type / option-type breakdown is not widely used; users favor market risk category and clearing status breakdowns.
  - Some derivatives (e.g., credit default swaps, CDS) have dual characteristics (option-like and forward-like), complicating classification.
- Proposed shift:
  - Drop current presentation by broad type and replace with more analytically useful classifications: (i) by market risk categories, (ii) by instruments, and (iii) by trading venue and clearing status. Cross-classification is more ambitious but potentially burdensome.
- Options listed (paragraph 13):
  a. By market risk category: foreign exchange; single-currency interest rate; equity; commodity; credit; others;  
  b. By instrument: options; forwards and related instruments; futures; swaps; credit derivatives; marketable employee stock options; other instruments;  
  c. By trading venue and clearing status: exchange traded; OTC (cleared); OTC (not cleared);  
  d. Cross classification: market risk category by instrument, trading venue and clearing status;  
  e. By broad type: forward-type derivatives; option-type derivatives; hybrid derivatives;  
  f. No change to the current presentation of derivatives in BPM6 and 2008 SNA.

Issue 2 — Compiling Notional Values of Foreign Currency Derivatives

- Observation:
  - Very few countries compile the BPM6 Appendix 9 Tables A9-I-2a and A9-I-2b that capture currency composition of notional amounts of derivatives with foreign currency payment obligations crossed by sector.
- Options (paragraph 15):
  a. Emphasize in the main text of the updated BPM and SNA that presentation of foreign currency derivatives notional amounts by currency is requested as described in BPM6 Appendix 9, Tables A9-I-Ib and A9-I-2b.  
  b. Remove Tables A9-I-Ib and A9-I-2b and replace them with a simplified table that captures only the essential information on the notional value of foreign currency linked derivatives (as in Annex II).  
  c. No changes to this item in the updated BPM and SNA and related documents (compilation guide).  
- Additional point: The same presentation of cross-border foreign currency derivatives notional amounts in ESS should be mirrored in NA for both domestic and cross-border derivatives.

Issue 3 — Convention for Recording of Revaluations on Foreign Currency Derivatives

- Observations:
  - Revaluations arise from changes in market prices and from exchange rates if a derivative is quoted in a foreign currency.
  - BPM6 paragraph 9.28 defines that exchange rate effects are always zero on instruments denominated in the currency of international accounts compilation, while paragraph 9.31 allows classifying revaluations as exchange rate changes when separation is impractical — creating inconsistency.
- Options (paragraph 18):
  a. Change the convention in BPM6, paragraph 9.31 so that all revaluation effects are due to (other) price revaluations rather than exchange rate revaluations for those derivatives where separation is impractical.  
  b. No change to the convention currently included in BPM6, paragraph 9.31.

Issue 4 — Recording of Post Trading Activities

- Observations:
  - Market infrastructure changes (e.g., central clearing, novation, portfolio compression) were not included in BPM6 and 2008 SNA; methodological guidance is needed for symmetric recording across countries, especially when CCPs and cross-border dimensions are involved.
- Options (paragraph 20):
  a. Expand BPM6 Chapter 8 and 2008 SNA Chapter 17 to provide methodological guidance for recording novation and portfolio compression as financial transactions; include a box for the main text in the updated manuals and detailed examples in the BPM Compilation Guide.  
  b. No change to the current presentation of derivatives in BPM6 and 2008 SNA.

Issue 5 — Gross and Net Recording of Assets and Liabilities

- Observations:
  - 2008 SNA and BPM6 recognize net recording in some cases, but guidance for transactions is not fully aligned and may be insufficiently detailed.
  - Positions should be recorded on a gross basis and can switch between assets and liabilities (2008 SNA, paragraph 17.290; BPM6, paragraphs 7.36–7.37).
  - BPM6 permits net recording of transactions when gross reporting is impractical (paragraph 8.34) but lacks clarity and linkage to position recording; 2008 SNA guidance on derivatives is limited and ambiguous (paragraph 11.114).
  - No guidance on recording transactions in periods when a contract’s classification changes between assets and liabilities.
- Options (paragraph 22):
  a. Clarify in BPM6 paragraph 8.34 that net recording of transactions is acceptable where separate data on transactions in assets and liabilities are unavailable and the position may change between assets and liabilities (e.g., forwards, swaps); require consistent application during the life of the instrument and mirror this in Chapter 17 of 2008 SNA.  
  b. No change to the current presentation of derivatives in BPM6 and 2008 SNA.

### Outcomes and Recommendations (SECTION II)

- Recommendation for Issue 1 (paragraph 23):
  - Discontinue the current breakdown by broad type in favor of classifications that are more analytically useful:
    - (a) By market risk category (standard component).  
    - (b) By instrument (supplementary item to be listed among standard components and selected supplementary items/presentation tables [Appendix 9 of BPM6]).  
    - (c) By trading venue (supplementary item to be listed as above).  
  - Rationale:
    - The authoring team does not see a strong case to maintain the current broad-type breakdown.
    - GN F.5 recommended classifying CDS as option-type but recognized CDS dual nature and called for potential review; the current requirement causes issues for hybrids.
    - Cross classification (option d) is not recommended because collecting granular data could be challenging for many reporters.
    - Expanded broad instrument categories (option e) are not recommended because they do not add new analytical information.

- Recommendation for Issue 2:
  - Option a (emphasize reporting of foreign currency derivatives notional amounts by currency as requested in BPM6 Appendix 9, Tables A9-I-Ib and A9-I-2b) is proposed.

*Source: The Guidance Note (GN).*

### 24.      The importance for compiling the currency composition of the notional values of the

### f4-financial-derivatives-by-type - 24.      The importance for compiling the currency composition of the notional values of the

### Key proposals and recommendations (Guidance Note — GN)
- Emphasize compiling the currency composition of the notional values of derivatives linked to foreign currencies in the updated BPM and SNA; present current Tables A9-I-2a and A9-I-2b of BPM6 Appendix 9 more prominently.  
- If compilation is too onerous, introduce a simplified table (see Annex II) as a compromise; retain Tables A9-II and A9-III of BPM6 Appendix 9 as supplementary reporting tables.
- Recommendation for Issue 3 — Option a: Change the convention in BPM6, paragraph 9.31, and 2008 SNA Chapter 17 so that for financial derivatives where it may not be practical to separate exchange rate changes from other revaluations, all revaluations are recorded as (other) price revaluations rather than exchange rate revaluations; this enhances analytical clarity and complies with BPM6, paragraph 9.28.
- Recommendation for Issue 4 — Option a: Expand BPM6 Chapter 8 (Financial Account) and 2008 SNA Chapter 11 to provide methodological guidance for recording novation and portfolio compression as financial transactions; guidance addresses market infrastructure changes and aims for symmetric recording across countries (Annex III presents one possible solution).
- Recommendation for Issue 5 — Option a: Expand BPM6, paragraph 8.34, and 2008 SNA Chapter 17 to clarify when net recording of transactions is acceptable; gross recording remains the generic recommendation, but net recording is permitted when gross recording is impractical. Option b rejected to avoid discrepant interpretations.

### FITT support and presentation changes
- Majority of FITT members strongly supported the GN proposals.
- The GN proposes a single standard component breakdown by market risk category; other breakdowns are supplementary:
  - Standard component: (i) by market risk category
  - Supplementary items: (ii) by instrument; (iii) by trading venue and clearing type
- The GN proposes the currency breakdown apply to presentation of financial derivatives in both ESS and NA, and implicitly suggests maintaining the same currency breakdown for balance sheet items in BPM6 Appendix 9 because on- and off-balance sheet positions both contribute to foreign currency payment receipts and obligations.
- The GN stresses using price changes when separation of exchange rate changes is impractical, and permitting net recording when gross recording is impractical.
- The GN illustrates recording of novation and compression related trades with two examples.

### Questions for discussion (as posed by the GN)
- Do you agree with discontinuing the current breakdown by broad type and introducing the new breakdowns: (i) by market risk category (standard component), (ii) by instrument (supplementary item), and (iii) by trading venue and clearing type (supplementary item)?
- Do you agree with reviewing GN F.5 Treatment of Credit Default Swaps in light of discontinuation of derivatives aggregate breakdown by broad type?
- Do you agree to emphasize in the main text of the updated BPM and SNA that compilation of notional values of foreign currency derivatives by currency is requested as described in Tables A9-I-2a and A9-I-2b of BPM6 Appendix 9?
- Do you agree to change the convention in BPM6, paragraph 9.31, so that for derivatives where separation of exchange rate changes from other revaluations is impractical, all revaluations are recorded as (other) price revaluations?
- Do you agree to introduce a Box in BPM6 Chapter 8 and in 2008 SNA Chapter 11 providing methodological guidance for recording novation and portfolio compression as financial transactions?
- Do you agree to recommend recording transactions on a gross basis in paragraph 8.34 of BPM6 and Chapter 17 of 2008 SNA while permitting net recording when gross recording is impractical (e.g., for derivatives that can be either asset or liability depending on valuation—swaps)?

### Annex II — Model table for foreign currency derivatives notional amounts (simplified)
- Proposal: Replace existing list of currencies (euro, US dollar, Yen, other) with currencies from a basket that determines SDR value, or those used in COFER, or another set of major currencies.
- Proposed table separates currencies to be received at maturity from currencies to be provided at maturity.
- Stock — Currencies to be received at maturity:
  - Chinese yuan
  - Euro
  - Pound sterling
  - US dollar
  - Yen
  - Other currencies
- Stock — Currencies to be provided at maturity:
  - Chinese yuan
  - Euro
  - Pound sterling
  - US dollar
  - Yen
  - Other currencies

### Annex III — Recording of post-trading activities in financial derivatives (novation, portfolio compression)
- Context: Post-2008 regulatory changes (EMIR, Dodd Frank Act) introduced post-trade processes (novation, clearing, portfolio compression, collateral management) and required methodological guidance for consistent recording.
- Novation:
  - Definition: Bilateral OTC derivative between two market participants is replaced by two bilateral contracts between each participant and a CCP.
  - Timing matters: If novation occurs immediately (within reporting timeframe), only novated contracts vis-à-vis the CCP are reported. If novation occurs with significant delay, original counterparts should report two offsetting transactions in the reference period(s): (i) termination of the initial contract; (ii) creation of an asset position vis-à-vis the CCP of equal market value.
  - When initial parties are not clearing members, each side of the bilateral contract is replaced by two contracts (entity–clearing member and clearing member–CCP), resulting in four transactions/positions.
  - Residence of market participants and CCP determines cross-border recording and national accounts treatment.
- Portfolio compression:
  - Definition: Bilateral or multilateral process where submitted derivatives are wholly or partially terminated and replaced by new derivatives whose combined notional value is less than original combined notional value.
  - Recording: All counterparties should report offsetting transactions terminating initial contracts and creating new positions. Net overall positions remain unchanged for involved parties, but post-compression gross positions and bilateral counterparts may differ substantially; comprehensive recording is required.

### Examples and numerical illustrations
- Example 1 — Novation (entities A and B resident in country X; CCP resident in country Y):
  - Before novation:
    - Domestic asset position of A: 100
    - Domestic liability position of B: 100
    - No positions recorded in balance of payments and IIP statistics since all residents are in country X.
  - After novation:
    - Vis-à-vis non-residents (IIP): Assets 100 for A; Liabilities 100 for B; CCP records Assets 100 and Liabilities 100 accordingly.
    - Vis-à-vis domestic sectors after novation: Assets 0 for A; Liabilities 0 for B.
  - Global effect: Doubling of positions compared with before novation; net IIPs of countries X and Y remain unchanged at 0.
- Example 2 — Portfolio compression (entities A and B resident in country X; C resident in country Y):
  - Before compression:
    - Vis-à-vis non-residents (IIP) Assets: A 10; B 20
    - Vis-à-vis non-residents (IIP) Liabilities: A 20; B 10
    - Vis-à-vis domestic sectors Assets: B 30
    - Vis-à-vis domestic sectors Liabilities: A 30
    - Net assets position: A -20; B 10; C 10
  - After compression:
    - Vis-à-vis non-residents (IIP) Assets: C 10
    - Vis-à-vis non-residents (IIP) Liabilities: A 10
    - Vis-à-vis domestic sectors Assets: B 10
    - Vis-à-vis domestic sectors Liabilities: B 10; A 10
  - Notes:
    - New deals presented as transactions (increase in liabilities for A and increase in assets for B and C); termination of previous deals also recorded as financial transactions.
    - Net IIP changed for entities A and B in the example (A: assets 10 to zero; B: liabilities 20 to zero); entity C unchanged (asset 10 before and after).
    - Globally, compression may change net international investment positions in cross-border deals and reduces outstanding notional amounts; net positions on combined domestic and cross-border segment do not change.

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_Source: https://www.imf.org/-/media/files/data/statistics/bpm6/fitt/f4-financial-derivatives-by-type.pdf_