Public Disclosure of Trading and Derivatives Activities
24 February 1999
This initiative forms part of a continued effort by the two Committees to encourage banks and securities firms to provide market participants and the general public with meaningful information on their trading and derivatives activities. The Committees recognise that well-informed market participants can reinforce the objectives of supervision and investor protection by imposing strong market discipline on an institution to conduct its activities in a manner that is both sound and consistent with its stated business objectives.
Mr Michel Prada, Chairman of the IOSCO Technical Committee and President of the Commission des Opérations de Bourse in Paris, stated that "counterparties of financial institutions need to know about the risks to which they are exposed. Implementation of the proposed recommendations will allow market participants to more easily assess the trading and derivatives activities of banks and securities firms and their related risks." Mr William J McDonough, Chairman of the Basle Committee and President of the Federal Reserve Bank of New York, added that "high-quality public disclosure by financial firms provides market participants with the information they need to make sound decisions, and gives banks and securities firms incentives to operate prudently."
The recommendations in the paper follow two main themes.
First, institutions should provide financial statement users with a clear picture of their trading and derivatives activities. They should disclose meaningful summary information, both qualitative and quantitative, on the scope and nature of their trading and derivatives activities and illustrate how these activities contribute to their earnings profile. They should also disclose information on the major risks associated with their trading and derivatives activities and their performance in managing these risks.
Second, institutions should disclose information produced by their internal risk measurement and management systems on their risk exposures and their actual performance in managing these exposures. Linking public disclosure to internal risk management processes helps ensure that disclosure keeps pace with innovations in risk measurement and management techniques.
The recommendations presented in this paper supersede the recommendations issued by the two Committees in 1995 in connection with their first survey report on the trading and derivatives disclosures of banks and securities firms. Since then, various developments have taken place, such as the increase in financial institutions' use of derivatives, changes in the use and design of risk management techniques, and the continued evolution of disclosure standards and practices.
The paper was prepared in collaboration between the Basle Committee's Transparency Group and the IOSCO Working Party on the Regulation of Financial Intermediaries. The Transparency Group is chaired by Ms Susan Krause of the US Office of the Comptroller of the Currency and a member of the Basle Committee, while the IOSCO Working Party on the Regulation of Financial Intermediaries was chaired by Mr Richard Britton of the UK Financial Services Authority.
Note for editors
The Basle Committee on Banking Supervision
The Basle Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Its current chairman is Mr William J McDonough, President of the Federal Reserve Bank of New York. The Committee usually meets at the Bank for International Settlements (BIS) in Basle, where its permanent Secretariat is located.
The IOSCO Technical Committee
The Technical Committee of the International Organization of Securities Commissions (IOSCO) is a committee of supervisory authorities for securities firms in major industrialised countries. It consists of senior representatives of the securities regulators from Australia, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, Ontario, Quebec, Spain, Sweden, Switzerland, the United Kingdom and the United States. Its current Chairman is Mr Michel Prada, President of the Commission des Opérations de Bourse in France.
The survey report was prepared in collaboration between the Transparency Group of the Basle Committee and the IOSCO Working Party on the Regulation of Financial Intermediaries.
The Basle Committee's Transparency Group is chaired by Ms Susan Krause, Senior Deputy Comptroller for International Affairs at the US Office of the Comptroller of the Currency and a member of the Basle Committee. The group's mission is to enhance market discipline, promote stable and efficient markets, and improve effective and comprehensive supervision of banking institutions. The Transparency Group carries out this task by identifying issues and developing guidance on the information needed by supervisors and market participants to assess risk. It consists of supervisory experts on disclosure and reporting from the member institutions of the Basle Committee.
The IOSCO Working Party on the Regulation of Financial Intermediaries was chaired until early February by Mr Richard Britton of the UK Financial Services Authority (FSA) and is now chaired by Mr Paul Wright, also of the FSA. The group has carried out a substantial programme of work in recent years, particularly in the areas of prudential supervision and client protection. It has the lead responsibility under the auspices of the Technical Committee for coordination and consultation with the work of the Basle Committee. It consists of securities regulators from the member institutions of the IOSCO Technical Committee.
Empirical data on trading and derivatives disclosures
Since 1995, the Basle Committee and the IOSCO Technical Committee have annually published a survey on the trading and derivatives disclosures of large, internationally active banks and securities firms headquartered in the G-10 countries. The last survey, published in November 1998, indicated that the amount, detail and clarity of trading and derivatives disclosures have improved substantially in recent years. However, the two Committees also noted that continued improvement in public disclosure is needed. Some institutions do not provide enough information about key aspects of their trading and derivatives activities, including risk profiles and risk management practices.
Invitation to comment
The recommendations contained in the paper are issued for consultation. The two Committees invite comments from all interested parties, including supervisory and regulatory bodies, banks, securities firms, industry groups and accounting standard-setters. Comments must be received no later than 31 May 1999. The two Committees intend to release a final version of the paper in the second half of 1999.
Where can I obtain the full report?
The text of the report, Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms, can be obtained from the BIS website at www.bis.org and from the IOSCO website at www.iosco.org as from the date of publication.