## 1. Notional Amounts by Underlying Exposures

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### I. Key aggregate figures and scope
- BIS reports global OTC derivative notional outstanding:
  - US$80 trillion in 1998
  - US$197 trillion in 2003
- Exchange-traded derivatives notional outstanding:
  - US$14 trillion in 1998
  - US$37 trillion in 2003
- Total amounts outstanding in 2003: US$234 trillion
- Proposed surveillance framework for financial institutions’ derivatives activities has four pillars:
  - (i) analyzing quantitative information on derivatives activities;
  - (ii) determining the adequacy of prudential regulations and supervisory arrangements;
  - (iii) assessing the risk mitigation infrastructure (existence and legal enforceability of master agreements, collateral, and margin agreements);
  - (iv) assessing the degree of market transparency through evaluation of public disclosures by institutions and supervisors.
- Limitation: framework provides information on possible vulnerabilities but cannot accurately predict episodes of systemic distress.

### II. Macroeconomic implications, benefits, and risks
- Benefits:
  - Derivatives facilitate risk hedging and transfer, reduce cost of risky activities and investment.
- Risks:
  - Facilitate leverage and concentration of risks in certain sectors or institutions.
  - Lack of transparency in OTC markets may cause risk accumulation and complicate assessment by other market participants.
  - Abrupt price movements can dry up liquidity for heavily exposed counterparties, triggering unwinding and bank-run–type scenarios.
- Key risk types to monitor:
  - Market risk — potential losses due to movements in market prices.
  - Credit risk — failure of a counterparty, including settlement risk.
  - Liquidity risk:
    - Funding liquidity risk: inability to meet payments or margin calls on time.
    - Market liquidity risk: inability to unwind a position without significant loss.
  - Operational and legal risks.
- Macroeconomic policy effects:
  - Derivatives alter speed of market movements, responsiveness to interest and exchange rates, and information content of traditional policy instruments.
  - Can reduce pass-through between policy rates and lending rates (e.g., firms swapping floating for fixed) and reduce firms’ sensitivity to exchange rate movements via hedging.
- Importance of information:
  - Extent of hedge exposures and market trading venue (domestic vs. international) is important to assess policy effects.

### III. Data sources and recommended CMF data elements
- Main sources:
  - Supervisory information
  - Central bank surveys of aggregate market activity
  - Disclosures by institutions in annual reports
- Supervisory considerations:
  - Financial institutions (banks, securities firms, insurance firms) are typically most active; supervisory data may be available on aggregate basis to avoid confidentiality issues.
  - Unsupervised institutions (e.g., hedge funds) may actively trade derivatives but information might be unavailable.
  - Market roles: dealers (market makers), end-users, insurance firms (noted significant in CDS writing).
- Basel Committee / IOSCO and CMF:
  - CMF applied to internationally active institutions; flexible extension to others; focus on OTC derivatives.
  - Supervisory data should address credit, liquidity, market risks, and effects on earnings; qualitative information on risk management and exposure limits encouraged.
- Basel Capital Accord (1988) related data:
  - Replacement cost under current exposure method; notional information to calculate add-ons by product and maturity.
  - Two methods to calculate credit exposure: current exposure method and original exposure method (conversion factors by original maturity).
  - Exposures should reflect master netting agreements and legally enforceable credit enhancements.
- Market risk information:
  - For non-major dealers: standardized approach data including net long/short positions by currency, commodity type; long/short equity positions by major markets/issuers; interest rate derivatives broken down by time-bands and gross positions by issuer; delta equivalents and gamma/vega risk (for delta-plus).
  - Sophisticated players: internal model outputs (including VaR).

- CMF recommended tables and IAIS suggestions include:
  - Notional amounts by broad risk category and instrument type (forwards, swaps, options).
  - Market values (gross positive/negative) by risk category and purpose (trading/nontrading).
  - Notional amounts by risk category and maturity.
  - Credit exposure (before and after collateral/guarantees) by counterparty credit quality.
  - Book value and gross positive market value of past-due derivatives and credit losses.
  - Maximum, minimum, and average VaR during the period by risk factor; VaR under stress scenarios.
- IAIS suggestions for insurers:
  - Notional amounts by broad risk category, instrument type, and trading type (exchange or OTC).
  - Market values by risk category, instrument type and trading type.
  - Net value of related positions where derivatives relate to management of invested assets and liabilities.
  - For non-asset-management uses, additional information as appropriate using CMF as example.

### IV. Central bank and exchange statistics, turnover, and liquidity indicators
- Central banks often collect domestic derivatives information based on CMF with modifications (e.g., eliminate intra-reporting-group transactions).
- Data typically reported include notional amounts by product and risk category, and turnover data.
- Exchange markets publish exchange-traded contract statistics (value of contracts traded and turnover), though double counting can arise.
- Table 2 purpose: Turnover and Notional Outstanding Amounts of Domestic Derivative Markets — compares outstanding amounts to turnover to indicate market liquidity.
- OTC turnover is more difficult to obtain; some central banks collect it.
- Concentration indicators (quantitative or qualitative) of domestic markets should be collected.
- Aggregating Table 1 across sectors and comparing with Table 2 domestic volumes helps infer domestic OTC contracts by product type.
- International OTC liquidity available from BIS central bank surveys.

### V. Role of notional amounts, maturity structure, and market values
- Role of notional amounts:
  - Notional amounts do not reflect risk exposures but track market size and gross transfer of market risk.
  - Table 1 (Notional Amounts by Underlying Exposures) suggested to capture:
    - OTC and exchange-traded notional amounts by risk factor and product type.
    - Proportion of contracts traded domestically vs internationally.
    - Proportion of products held for trading vs other purposes.
  - Comparison with BIS and ISDA surveys helps assess domestic institutions’ share of global markets and composition differences.
  - Notional breakdowns help infer credit, market, and liquidity risks:
    - Higher proportion of OTC contracts sold implies higher credit risk.
    - Higher volumes of sophisticated products (options, non-plain vanilla swaps) imply higher potential for liquidity and market risks, and credit risk if sold positions.
    - Contracts held for purposes other than trading typically reflect hedging; higher proportion held for trading implies larger potential market risks.
- Maturity structure (Table 3):
  - Derivative Contracts’ Notional Amounts by Remaining Maturity provides sensitivity to policy and market risks.
  - Longer maturity contracts are more sensitive to underlying changes (e.g., five-year swap more sensitive than one-year swap).
  - Compare remaining maturity of hedging derivatives with cash position maturities where possible.
  - Maturity brackets indicate funding liquidity risks; details on OTC positions hedged by exchange-traded contracts help identify daily margin cash demands.
  - Collect information on OTC contracts subject to triggering agreements (e.g., collateral posting or liquidation on rating downgrade) to identify funding risks.
- Market values and potential credit exposures (Table 4):
  - Table 4 follows gross market value (replacement cost, marked-to-market) of OTC contracts.
  - Gross positive market value excludes netting agreements, collateral, and guarantees.
  - Comparison of gross positive and negative values for trading books across sectors indicates dealer gains and losses balance and potential liquidity/market risks.
  - Sharp changes in net market value of dealers’ positions may indicate vulnerability to price shocks.
  - Potential credit exposure provides exposure realized over contract remaining life due to price changes.

### VI. Credit quality, credit equivalents, and concentration (Table 5 and Table 6)
- Credit equivalent amounts:
  - Table 5 collects credit equivalent amounts by counterparty credit quality.
  - Credit equivalent amounts equal sum of current and potential credit exposures.
  - Current credit exposures reflect value of legally enforceable bilateral netting agreements.
  - Need to verify enforceability of netting agreements and share of OTC contracts subject to netting.
- Important observations:
  - Derivative credit risk may be small in isolation, but defaults on derivative exposures often coincide with defaults across other exposures; exposures to corporates (Basel credit quality category 3) should be viewed in context of corporate sector balance sheet.
  - If gross positive market value in corporate sector substantially affects corporate profitability or indebtedness, systemic risk to financial system could be substantial.
- Institution-level concentration and past-due derivatives (Table 6):
  - Supervisors might collect institution-by-institution counts of counterparties with current and potential exposures exceeding thresholds (in terms of assets or capital); aggregation is difficult but qualitative information on credit concentration for major holders of derivatives can be obtained.
  - Table 6 items:
    - Book value of derivatives past-due 30-89 days
    - Book value of derivatives past-due 90 days or more
    - Gross positive market value of derivatives past-due 30-89 days
    - Gross positive market value of derivatives past-due 90 days or more
    - Credit losses on derivative instruments during the period

### VII. VaR to capital ratio and supervisory use
- VaR to capital ratio:
  - Provides information on sensitivity of banks' exposures, including derivatives exposures, to shocks in market prices and volatilities.
  - Should be compiled for VaR both under normal conditions and under stress scenarios such as September 11 2001 or the collapse of LTCM.
  - Supervisors can request distributions (average, maximum, minimum) of the highest value of the ratio during the period for institutions considered.
  - Many financial institutions disclose this information in investor reports, but it can also be requested from supervisors.

### VIII. Summary of proposed indicators and primary uses (Table 7)
- Notional values:
  - OTC by contract type; Exchange by contract type; OTC by market location; Exchange by market location; By purpose of contract (trading or other)
  - Use: Market activity, uses of derivatives, credit and market liquidity risks when combined with market liquidity info
- Turnover to notional by product:
  - Use: Liquidity risk
- Notional for risk categories by remaining maturity:
  - Use: Potential credit exposure, market and liquidity risk
- Gross positive market value by risk category:
  - Use: Market activity, credit and liquidity risks
- Gross negative market value by risk category:
  - Use: Market activity, liquidity risks
- Gross market value (net position) of trading contracts:
  - Use: Market risk
- Gross positive market value, current and potential credit exposures and credit equivalents by counterparty:
  - Use: Credit risk and effects of mitigates such as netting, collateral and guarantees
- Institutions with credit exposures to the 10 largest counterparties in excess of a given threshold:
  - Use: Concentration of credit risk
- Book and market value of past-due derivatives:
  - Use: Credit risk
- VaR to capital ratio:
  - Use: Market risk

### IX. Prudential framework, supervision, and risk mitigation infrastructure
- Assessing prudential and supervisory framework:
  - Domestic prudential norms should factor in risks from derivatives activities.
  - For banks, at minimum credit exposures incurred through derivatives should be calculated according to the 1988 Basel Accord and included in total exposure to a counterparty for limit setting.
  - If capital risk charges are applied, check that treatment of derivatives for capital charge calculation complies with norms of the 1996 modification to the Basel Accord.
  - Supervisory authorities should ensure institutions’ risk management processes are adequate and periodically require information on practices.
  - Significant departures from Basel and IOSCO benchmark practices should be pointed out in staff assessments.
  - Institutions writing options or trading exotic derivatives should have supervisory validation of internal models; supervisors should ensure models account for implied volatility and correlation risks.
  - Trading positions must be reported to senior management and valued prudently per procedures described in the new Basel Accord.
  - Information on adequacy of supervision may be obtained from assessments of compliance with Basel Core Principles (in particular BCP 12), IOSCO objectives and principles, and IAIS supervisory standards.
  - Supervisors should collect and monitor relevant information; where derivatives activities are material, the CMF or an information subset should be sufficient to assess credit, market, and liquidity risk.
  - Shortcomings in data collection and monitoring by supervisory authorities should be highlighted in assessments.
  - From a macroprudential perspective, central banks should monitor concentration and liquidity of derivatives markets, price dynamics, and market linkages where derivatives activity is substantial.
- Assessing risk mitigation infrastructure:
  - For exchange-traded derivatives: evaluate exchange practices, clearing house risk management, and settlement risk management through securities settlement systems.
  - Important departures from IOSCO and CPSS recommendations for CCPs should be pointed out.
  - In OTC markets: main mitigation instrument is legally enforceable master netting agreements.
    - Verifying enforceability of netting in domestic bankruptcy procedures is essential.
    - Basel Accord allows credit risk reduction only where liquidator cannot unbundle netting contracts to demand selective performance.
    - Information on types of netting contracts recognized under domestic bank capital requirements and volumes that incorporate those practices indicates extent of risk mitigation.
    - Netting by novation and close-out netting are distinct modalities; novation may be subject to phase-in before recognition in weighting frameworks, but not for contracts subject to close-out dates.
    - Collect domestic legal expert opinions on legality of netting and enforceability based on default experiences to verify risk reduction claims.
    - Lack of widespread use of legally enforceable netting and collateral pledging should be noted as impediments to market development and potential vulnerabilities.

### X. Transparency, disclosure practices, and BIS survey results
- Disclosure expectations:
  - Basel Committee and many supervisors encourage qualitative and quantitative disclosures by banks, securities firms, and market participants to foster market discipline.
  - Qualitative recommended disclosures:
    - Whether derivatives used mainly for trading or hedging; exchange-traded or OTC.
    - Market role (market maker, arbitrageur, position taker).
    - Risk management policies and accounting treatment of derivative holdings.
  - Quantitative recommended disclosures:
    - End-of-period notional amounts and average market values for major categories of cash and derivative instruments for trading and nontrading purposes.
    - Breakdowns by broad risk category, instrument category (futures, forwards, swaps, options), repricing date; distinction between exchange-traded and OTC.
    - Gross current credit exposures and potential future credit exposure to counterparties, average over reporting period or range mode; maturity band breakdowns.
    - Effect of multilateral netting if member of a multilateral clearing organization.
    - Nominal and market value of collateral provided; aggregated information on counterparty credit quality.
    - If using credit derivatives, disclosure of notional amount and credit derivative exposure by reference asset.
  - 2001 BIS survey: noted low disclosure levels regarding netting arrangements and notional/market values for selected international banks.
  - IAIS public disclosure guidelines for insurers include description of derivatives use and effect on economic position of investment portfolio and liabilities.
- BIS Survey (Box 1) — Disclosure questions on derivatives:
  - Credit Derivatives Disclosures — qualitative and quantitative questions, e.g.:
    - Does the bank disclose the notional amounts and fair value of credit derivatives?
    - Does the bank disclose quantitative information about the effect of credit enhancements on counterparty credit exposures?
    - Does the bank list breakdown of credit derivatives by type (total return swaps, credit default swaps, other)?
  - Derivatives (other than Credit Derivatives) Disclosures — qualitative and quantitative questions, e.g.:
    - Does the bank disclose the gross positive market value of derivatives?
    - Does the bank disclose the gross negative market value of derivatives?
    - Does the bank provide end-of-period and average notional and market values for trading portfolios and nontrading portfolios?
    - Does the bank disclose future potential exposures for derivatives, where appropriate?
  - BIS survey responses coded yes/no/not applicable; percentage disclosure per category is ratio of yes’s to sum of yes’s and no’s.
- Supervisory disclosure minimums:
  - At minimum, publish notional value of contracts traded differentiating by broad risk category for domestic OTC and exchange markets.
  - Publish indications of market liquidity by risk factor and type of product for both OTC and exchange-traded products to help market participants assess scope for liquidating positions.

*Source document content from the supplied IMF PDF content unit.*

### 1. Notional Amounts by Underlying Exposures ..................................................................12

### 1. Notional Amounts by Underlying Exposures ..................................................................12

### Major themes and section headings
- 1. Notional Amounts by Underlying Exposures ..................................................................12
- 2. Turnover and Notional Outstanding Amounts of Domestic Derivative Markets ............14
- 3. Derivative Contracts’ Notional Amounts by Remaining Maturity..................................15
- 4. OTC Notional Amounts, Market values and Potential Credit Exposures .......................16
- 5. Information on Credit Quality of OTC Derivative Contracts ..........................................17
- 6. Information about Past-due Derivatives and Credit Losses.............................................17
- 7. Summary of derivatives data elements and their uses .....................................................18

### Supplementary material
- Box 1. BIS Survey of Disclosure Practices by Banks: Disclosure of Derivatives Activities ..23

*Source: _wp0561 - 1. Notional Amounts by Underlying Exposures ..................................................................12*

### References..............................................................................................................

### _wp0561 - References

### Glossary and abbreviations
- BC — Basel Committee
- BCPs — Basel Core Principles
- BIS — Bank for International Settlements
- CCPs — Central Counter Parties
- CDSs — Credit Default Swaps
- CGFS — Committee on the Global Financial System
- CMF — Common Minimum Framework
- CPSS — Committee for Payment and Settlement Systems
- ECSC — Euro-Currency Standing Committee
- EU — European Union
- FSAP — Financial System Assessment Program
- IAIS — International Association of Insurance Supervision
- IOSCO — Organization of Securities Commissions
- ISDA — International Swap Dealers Association
- OTC — Over-the-Counter
- VaR — Value at Risk

### I. Introduction — scope and framework
- BIS reports global OTC derivative notional outstanding:
  - US$80 trillion in 1998
  - US$197 trillion in 2003
- Exchange-traded derivatives notional outstanding:
  - US$14 trillion in 1998
  - US$37 trillion in 2003
- Total amounts outstanding in 2003: US$234 trillion
- Proposed surveillance framework for financial institutions’ derivatives activities has four pillars:
  - (i) analyzing quantitative information on derivatives activities;
  - (ii) determining the adequacy of prudential regulations and supervisory arrangements;
  - (iii) assessing the risk mitigation infrastructure (existence and legal enforceability of master agreements, collateral, and margin agreements);
  - (iv) assessing the degree of market transparency through evaluation of public disclosures by institutions and supervisors.
- Limitation noted: framework provides information on possible vulnerabilities but cannot accurately predict episodes of systemic distress.

### II. Derivatives activities and macroeconomic stability — implications and risks
- Benefits and risks:
  - Derivatives facilitate risk hedging and transfer, reduce cost of risky activities and investment.
  - Derivatives facilitate leverage and concentration of risks in certain sectors or institutions.
  - Lack of transparency in OTC markets may cause risk accumulation in certain institutions and complicate assessment by other market participants.
  - Abrupt price movements can dry up liquidity for heavily exposed counterparties, triggering unwinding and bank-run–type scenarios.
- Key risk types to monitor:
  - Market risk — potential losses due to movements in market prices.
  - Credit risk — failure of a counterparty, including settlement risk.
  - Liquidity risk — includes:
    - Funding liquidity risk: inability to meet payments or margin calls on time.
    - Market liquidity risk: inability to unwind a position without significant loss.
  - Operational and legal risks are also present.
- Macroeconomic policy effects:
  - Derivatives affect monetary policy formulation and implementation by altering speed of market movements, responsiveness to interest and exchange rates, and the information content of traditional policy instruments.
  - Derivatives may reduce pass-through between policy rates and lending rates (e.g., firms swapping floating for fixed) and may reduce firms’ sensitivity to exchange rate movements via hedging.
- Importance of information:
  - Information on extent of hedge exposures and market trading venue (domestic vs. international) is important to assess likely directions of these effects.

### III. Collecting and analyzing information on derivatives activities — sources and recommended data framework

A. Sources of information
- Main sources:
  - Supervisory information
  - Central bank surveys of aggregate market activity
  - Disclosures by institutions in annual reports
- Supervisory considerations:
  - Financial institutions (banks, securities firms, insurance firms) typically most active in derivatives; supervisory data may be available on aggregate basis to avoid confidentiality issues.
  - Unsupservised institutions (e.g., hedge funds) may actively trade derivatives but information might be unavailable.
  - Market roles:
    - Dealers (market makers) — main banks and securities firms in OTC markets.
    - End-users — smaller institutions and investment funds.
    - Insurance firms — significant in CDS writing, often end-users for hedging.
  - EU directives tend to limit insurers’ derivatives activities to hedging/efficient risk management; credit derivatives may be treated as investment products with less strict limits.
- Basel Committee / IOSCO framework (1998):
  - Catalogue of important data for evaluating derivatives risks and a Common Minimum Framework (CMF) of data elements.
  - CMF applied to internationally active institutions with significant derivatives operations; flexible extension to other institutions.
  - Focus on OTC derivatives given lower credit risk in exchange-traded derivatives.
  - Supervisory data address credit, liquidity, market risks, and effects on earnings; qualitative information on risk management systems and exposure limits is encouraged.
- Basel Capital Accord (1988) data availability for banks:
  - Replacement cost under current exposure method; notional information to calculate add-ons by product and maturity.
  - Two methods to calculate credit exposure under the Accord: current exposure method and original exposure method (conversion factors by original maturity).
  - Exposures should reflect master netting agreements and legally enforceable credit enhancements.
- Market risk information:
  - For non-major dealers, Basel standardized approach data: net long/short positions by currency, commodity type; long/short equity positions by major markets/issuers; interest rate derivatives broken down by time-bands and gross positions by issuer; delta equivalents and gamma/vega risk (for delta-plus).
  - Sophisticated players: internal model outputs (including VaR).
- Additional CMF tables and IAIS suggestions:
  - CMF recommended tables include:
    - Notional amounts by broad risk category and instrument type (forwards, swaps, options).
    - Market values (gross positive/negative) by risk category and purpose (trading/nontrading).
    - Notional amounts by risk category and maturity.
    - Credit exposure (before and after collateral/guarantees) by counterparty credit quality.
    - Book value and gross positive market value of past-due derivatives and credit losses.
    - Maximum, minimum, and average VaR during the period by risk factor; VaR under stress scenarios.
  - IAIS quantitative supervisory suggestions for insurers (non-standardized):
    - Notional amounts by broad risk category, instrument type, and trading type (exchange or OTC).
    - Market values by risk category, instrument type and trading type.
    - Net value of related positions where derivatives relate to management of invested assets and liabilities.
    - For non-asset-management uses, additional information as appropriate using CMF as example.
- Central bank information:
  - Central banks often collect domestic derivatives information based on CMF with modifications (e.g., eliminate intra-reporting-group transactions).
  - Data reported typically include notional amounts by product and risk category, and turnover data.
  - Exchange markets publish exchange-traded contract statistics (value of contracts traded and turnover), but double counting issues arise.
- Institutional public disclosures:
  - Basel Committee and many supervisors encourage qualitative and quantitative disclosures by banks, securities firms, and market participants to foster market discipline.
  - Qualitative recommended disclosures:
    - Whether derivatives used mainly for trading or hedging; exchange-traded or OTC.
    - Market role (market maker, arbitrageur, position taker).
    - Risk management policies and accounting treatment of derivative holdings.
  - Quantitative recommended disclosures:
    - End-of-period notional amounts and average market values for major categories of cash and derivative instruments for trading and nontrading purposes.
    - Breakdowns by broad risk category, instrument category (futures, forwards, swaps, options), repricing date; distinction between exchange-traded and OTC.
    - Gross current credit exposures and potential future credit exposure to counterparties, average over reporting period or range mode; maturity band breakdowns.
    - Effect of multilateral netting if member of a multilateral clearing organization.
    - Nominal and market value of collateral provided; aggregated information on counterparty credit quality.
    - If using credit derivatives, disclosure of notional amount and credit derivative exposure by reference asset.
  - 2001 BIS survey result noted low disclosure levels regarding netting arrangements and notional/market values for selected international banks.
  - IAIS public disclosure guidelines for insurers include description of derivatives use and effect on economic position of investment portfolio and liabilities.

B. Analyzing compiled information — tables, aggregation, and interpretation
- Data sources for analysis:
  - Tables follow CMF formats (except Table 2); data likely available in CMF-participating countries.
  - VaR information should be collected to assess market risk profiles.
  - Confidential supervisory information can be requested in aggregate; sector-level requests can reveal relative participation by banks, securities, insurance.
  - Information for largest players (e.g., 3, 5, or 10) should be requested to assess concentration.
  - Data horizons: collect for last three to five years, at highest available frequency to analyze trends and evolution.
- Role of notional amounts:
  - Notional amounts do not reflect risk exposures but track market size and gross transfer of market risk.
  - Table 1 (Notional Amounts by Underlying Exposures) suggested to capture:
    - OTC and exchange-traded notional amounts by risk factor and product type.
    - Proportion of contracts traded domestically vs internationally.
    - Proportion of products held for trading vs other purposes.
  - Comparison with BIS and ISDA surveys helps assess domestic institutions’ share of global markets and composition differences.
  - Notional breakdowns help infer credit, market, and liquidity risks:
    - Higher proportion of OTC contracts sold implies higher credit risk.
    - Higher volumes of sophisticated products (options, non-plain vanilla swaps) imply higher potential for liquidity and market risks, and credit risk if sold positions.
    - Contracts held for purposes other than trading typically reflect hedging; higher proportion held for trading implies larger potential market risks.
- Market liquidity and turnover:
  - Table 2 (Turnover and Notional Outstanding Amounts of Domestic Derivative Markets) compares outstanding amounts to turnover to indicate market liquidity.
  - Exchange-traded turnover available from exchanges; OTC turnover more difficult to obtain but some central banks collect it.
  - Concentration indicators (quantitative or qualitative) of domestic markets should be collected.
  - Aggregating Table 1 across sectors and comparing with Table 2 domestic volumes helps infer domestic OTC contracts by product type.
  - International OTC liquidity can be obtained from BIS central bank survey of foreign exchange and derivatives market activity.
- Maturity structure:
  - Table 3 (Derivative Contracts’ Notional Amounts by Remaining Maturity) provides sensitivity to policy and market risks:
    - Longer maturity contracts are more sensitive to underlying changes (e.g., five-year swap more sensitive than one-year swap).
    - Compare remaining maturity of hedging derivatives with cash position maturities where possible.
    - Maturity brackets indicate funding liquidity risks; details on OTC positions hedged by exchange-traded contracts help identify daily margin cash demands.
    - Collect information on OTC contracts subject to triggering agreements (e.g., collateral posting or liquidation on rating downgrade) to identify funding risks.
- Market values and potential credit exposures:
  - Table 4 (OTC Notional Amounts, Market Values and Potential Credit Exposures) follows gross market value (replacement cost, marked-to-market) of OTC contracts.
    - Gross positive market value excludes netting agreements, collateral, and guarantees.
    - Comparison of gross positive and negative values for trading books across sectors indicates dealer gains and losses balance and potential liquidity/market risks.
    - Sharp changes in net market value of dealers’ positions may indicate vulnerability to price shocks.
    - Potential credit exposure provides exposure realized over contract remaining life due to price changes.
- Credit quality and credit equivalent amounts:
  - Table 5 (Information on Credit Quality of OTC Derivative Contracts) collects credit equivalent amounts by counterparty credit quality:
    - Credit equivalent amounts equal sum of current and potential credit exposures.
    - Current credit exposures reflect value of legally enforceable bilateral netting agreements.
    - Need to verify enforceability of netting agreements and share of OTC contracts subject to netting.
    - Important observation: derivative credit risk may be small in isolation, but defaults on derivative exposures often coincide with defaults across other exposures; exposures to corporates (Basel credit quality category 3) should be viewed in context of corporate sector balance sheet.
    - If gross positive market value in corporate sector substantially affects corporate profitability or indebtedness, systemic risk to financial system could be substantial.
- Data caveats and aggregation adjustments:
  - To avoid double counting, subtract difference between domestically traded derivatives and derivatives traded with corporations assuming corporate trades are domestic.
  - BIS data adjusted to avoid double counting among reporting group; data generally collected at consolidated level excluding intra-group transactions.
  - Bankscope and other compilations can be used for international comparisons where available.

*Source: _wp0561 - References*

### 1.    For banks, category 1 identifies counterparties given a 0 percent risk weight under the Basel Capital

### _wp0561 - 1.    For banks, category 1 identifies counterparties given a 0 percent risk weight under the Basel Capital

### Counterparty categories and Basel/ratings mapping
- For banks, category 1 identifies counterparties given a 0 percent risk weight under the Basel Capital Accord.
- For securities firms, category 1 identifies counterparties rated AA and above.
- For banks, category 2 identifies counterparties given a 20 percent risk weight under the Basel Capital Accord.
- For securities firms, category 2 identifies counterparties rated BBB and above.
- For banks, category 3 identifies counterparties given a 50 percent risk weight under the Basel Capital Accord.
- For securities firms, category 3 identifies counterparties rated below BBB.

### Institution-level concentration and past-due derivatives (Table 6)
- Supervisors might collect institution-by-institution counts of counterparties with current and potential exposures exceeding thresholds (in terms of assets or capital); aggregation is difficult but qualitative information on credit concentration for major holders of derivatives can be obtained.
- Table 6: Information about Past-Due Derivatives and Credit Losses
  - Book value of derivatives past-due 30-89 days
  - Book value of derivatives past-due 90 days or more
  - Gross positive market value of derivatives past-due 30-89 days
  - Gross positive market value of derivatives past-due 90 days or more
  - Credit losses on derivative instruments during the period

### VaR to capital ratio: use and compilation
- The VaR to capital ratio provides information on the sensitivity of banks' exposures, including derivatives exposures, to shocks in market prices and volatilities.
- The ratio should be compiled for the VaR both under normal conditions and under stress scenarios such as September 11 2001 or the collapse of LTCM.
- Supervisors can request distributions (i.e., average, maximum, and minimum) of the highest value of the ratio during the period for the institutions considered.
- Many financial institutions disclose this information in investors’ reports, but it can also be requested from supervisors.

### Summary of proposed indicators and their uses (Table 7)
- Elements and primary uses:
  - Notional values
    - OTC by contract type
    - Exchange by contract type
    - OTC by market location
    - Exchange by market location
    - By purpose of contract (i.e. trading or other)
    - Use: Market activity, uses of derivatives, credit and market liquidity risks when combined with information on market liquidity
  - Turnover to notional by product
    - Use: Liquidity risk
  - Notional for risk categories by remaining maturity
    - Use: Potential credit exposure, market and liquidity risk
  - Gross positive market value by risk category
    - Use: Market activity, credit and liquidity risks
  - Gross negative market value by risk category
    - Use: Market activity, liquidity risks
  - Gross market value (net position) of trading contracts
    - Use: Market risk
  - Gross positive market value, current and potential credit exposures and credit equivalents by counterparty
    - Use: Credit risk and effects of mitigates such as netting, collateral and guarantees
  - Institutions with credit exposures to the 10 largest counterparties in excess of a given threshold
    - Use: Concentration of credit risk
  - Book and market value of past-due derivatives
    - Use: Credit risk
  - VaR to capital ratio
    - Use: Market risk

### Assessing the quality of prudential and supervisory framework
- Domestic prudential norms should factor in risks from derivatives activities.
- For banks, at minimum credit exposures incurred through derivatives activities should be calculated according to the 1988 Basel Accord and included in total exposure to a counterparty for limit setting.
- If capital risk charges are applied, check that the treatment of derivatives for capital charge calculation complies with the norms of the 1996 modification to the Basel Accord.
- Supervisory authorities should be satisfied that institutions’ risk management processes are adequate for the scope of derivatives activities and should periodically require information on practices.
- Significant departures from Basel and IOSCO benchmark practices should be pointed out in staff assessments.
- Institutions writing options or with substantial trading in exotic derivatives should have supervisory validation of internal models.
  - Supervisors should ensure internal models account for implied volatility and correlation risks.
  - Trading positions must be reported to senior management and positions prudently valued following procedures described in the new Basel Accord.
- Information on adequacy of supervision may be obtained from assessments of compliance with:
  - Basel Core Principles (in particular BCP 12 dealing with market risk management)
  - IOSCO objectives and principles for securities activities (no single international standard for securities firms’ derivatives supervision)
  - IAIS supervisory standards for derivatives (1998, currently under revision) and IAIS insurance core principles
- Supervisors should collect and monitor relevant information; where derivatives activities are material, the CMF or an information subset should be sufficient to assess credit, market, and liquidity risk arising from these activities.
- Shortcomings in data collection and monitoring by supervisory authorities should be highlighted in assessments.
- From a macroprudential perspective, central banks should monitor concentration and liquidity of derivatives markets, price dynamics, and market linkages where derivatives activity is substantial.

### Assessing the risk mitigation infrastructure
- For exchange-traded derivatives, evaluate exchange practices, clearing house risk management, and settlement risk management through securities settlement systems.
- Important departures from IOSCO and CPSS recommendations for central counterparties (CCPs) should be pointed out; such shortcomings may be obtained from CPSS-IOSCO assessments in FSAP contexts.
- In OTC markets, the main mitigation instrument is legally enforceable master netting agreements.
  - Verifying enforceability of netting in domestic bankruptcy procedures is essential.
  - The Basel Accord allows credit risk reduction only where the liquidator of a failed counterparty cannot unbundle netting contracts to demand performance selectively.
  - Information on types of netting contracts recognized under domestic bank capital requirements and volumes of contracts that incorporate those practices indicates extent of risk mitigation.
  - Netting by novation and close-out netting are distinct modalities; novation may be subject to phase-in before recognition in weighting frameworks, but not for contracts subject to close-out dates.
  - Collect domestic legal expert opinions on legality of netting and enforceability based on default experiences to verify risk reduction claims.
  - Lack of widespread use of legally enforceable netting and collateral pledging should be noted as impediments to market development and potential vulnerabilities.

### Assessing transparency of derivatives activities and disclosure practices
- Evaluate quality of institutions’ disclosures on derivatives against Basel Committee and IOSCO recommendations.
- For banks, compare disclosures in annual reports with BIS survey requirements on disclosure practices by international banks.
  - The BIS survey covers multiple categories, including two categories referring to derivatives activities (one specifically credit derivatives); responses are yes, no, or not applicable; percentage disclosure per category is the ratio of yes’s to the sum of yes’s and no’s.
- Supervisory disclosure minimums:
  - At minimum, publish notional value of contracts traded differentiating by broad risk category for domestic OTC and exchange markets.
  - Publish indications of market liquidity by risk factor and type of product for both OTC and exchange-traded products to help market participants assess scope for liquidating positions.

### BIS Survey (Box 1) — Disclosure questions on derivatives
- Credit Derivatives Disclosures
  - Qualitative:
    - Does the bank discuss how credit derivatives are used, including strategy and objectives?
  - Quantitative:
    - Does the bank disclose the notional amounts and fair value of credit derivatives?
    - Does the bank disclose quantitative information about the effect of credit enhancements on counterparty credit exposures?
    - Does the bank disclose the amount of credit risk bought or sold using credit derivatives?
    - Does the bank list breakdown of credit derivatives by type of instrument (e.g., total return swaps, credit default swaps or other credit derivatives)?
    - Does the bank disclose information on the effect of credit enhancement on the bank’s counterparty exposure from OTC contracts?
- Derivatives (other than Credit Derivatives) Disclosures
  - Qualitative:
    - Does the bank discuss the objectives for use of nontrading derivatives?
    - Does the bank describe how derivatives are used to hedge risks (strategies)?
    - Does the bank discuss the overall business objectives of trading activities and strategies for achieving those objectives?
  - Quantitative:
    - Does the bank disclose the gross positive market value of derivatives?
    - Does the bank disclose the gross negative market value of derivatives?
    - Does the bank provide summary information about the effect of nontrading derivatives on earnings of off-balance sheet (hedging) positions held by the organization (e.g., to manage interest rate risk, currency risk, and other risks)?
    - Does the bank disclose the quantitative effect of legally enforceable bilateral and multilateral netting agreements?
    - Does the bank provide end-of-period and average notional and market values for trading portfolios and nontrading portfolios?
    - Does the bank disclose future potential exposures for derivatives, where appropriate?

*Italic: Source document content from the supplied IMF PDF content unit.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2005/_wp0561.pdf_