Trading and Derivatives Disclosures of Banks and Securities Firms

December 1999

Executive summary

The publication of this fifth annual survey report on the trading and derivatives disclosures of major G10 banks and securities firms represents a continued effort by the Basel Committee on Banking Supervision and the IOSCO Technical Committee to encourage financial institutions to enhance the transparency of their trading and derivatives activities. Transparency through public disclosure is crucial to effective market discipline and can reinforce supervisory efforts to promote high standards in risk management. The two committees consider the transparency of banks' and securities firms' activities and risks to be a key element of an effectively supervised financial system.

This survey examines the public disclosures of trading and derivatives activities of 71 of the world's leading banks and securities firms headquartered in the G10 countries. At the close of the financial year, they represented a total asset base of over USD 17 trillion and a total notional amount of derivatives of more than USD 130 trillion. The average institution had a notional amount of derivatives equal to more than seven times its total assets.

The survey reveals that virtually all surveyed banks and securities firms disclosed information on market risk and their methods of managing this risk in their 1998 financial reports. Examples of common market risk information included model parameters (e.g. holding period, confidence level and method of aggregating risk factors) and value-at-risk numbers generated by the models. While financial institutions generally provided information on credit risk management policies and credit risk exposures, information on credit risk measurement models was much less common. The majority of banks and securities firms also disclosed information on the management of liquidity risk and operational risk.

An important objective of this year's survey effort was to determine the extent to which banks and securities firms meet the updated recommendations for public disclosure of trading and derivative activities issued by the two committees in October 1999. The survey instrument has therefore been substantially updated and revised to reflect this new disclosure guidance. A comparison with previous surveys nevertheless reveals that many leading institutions continued to expand their disclosure of qualitative and quantitative information about market risk and market risk models in their 1998 financial reports.

While financial institutions did not have an opportunity to consider the updated guidance when they designed the disclosures surveyed in this report, institutions that do not already provide the recommended disclosures are strongly encouraged to improve their future disclosures in line with that guidance. In addition, banks and securities firms should consider the types of disclosures provided by their peers at the international level as indicated in this survey report.