Trading and Derivatives Disclosures of Banks and Securities Firms - Results of the Survey of Public Disclosures in 1998 Annual Reports

Trading and Derivatives Disclosuresof Banks and Securities FirmsResults of the survey of public disclosures in 1998 annual reportsJoint report by theBasel Committee on Banking Supervisionand theTechnical Committee of the International Organization of Securities Commissions(IOSCO)December 1999 Table of ContentsExecutive Summary ................................................................................................................ 1I.Introduction ................................................................................................................... 3II.Objective ....................................................................................................................... 4III.Scope and methodological remarks ............................................................................... 5IV.Survey results ................................................................................................................ 7(1)Overall survey results .......................................................................................... 7(2)Disclosure of overview information .................................................................... 11(3)Accounting and valuation methods ...................................................................... 12(4)Qualitative disclosures ......................................................................................... 12(a)Risk management ....................................................................................... 13(b)Risk exposures ............................................................................................ 14(5)Quantitative disclosures ....................................................................................... 14(6)Earnings ............................................................................................................... 16TablesBanks and securities firms included in the surveySurvey results Executive SummaryTrading and Derivatives Disclosuresof Banks and Securities FirmsResults of the survey of public disclosures in 1998 annual reportsThe publication of this fifth annual survey report on the trading and derivatives disclosures ofmajor G10 banks and securities firms represents a continued effort by the Basel Committee onBanking Supervision and the IOSCO Technical Committee to encourage financial institutions toenhance the transparency of their trading and derivatives activities. Transparency through publicdisclosure is crucial to effective market discipline and can reinforce supervisory efforts topromote high standards in risk management. The two committees consider the transparency ofbanks’ and securities firms’ activities and risks to be a key element of an effectively supervisedfinancial system.This survey examines the public disclosures of trading and derivatives activities of 71 of theworld’s leading banks and securities firms headquartered in the G10 countries. At the close of thefinancial year, they represented a total asset base of over USD 17 trillion and a total notionalamount of derivatives of more than USD 130 trillion. The average institution had a notionalamount of derivatives equal to more than seven times its total assets.The survey reveals that virtually all surveyed banks and securities firms disclosed information onmarket risk and their methods of managing this risk in their 1998 financial reports. Examples ofcommon market risk information included model parameters (e.g. holding period, confidencelevel 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 policiesand credit risk exposures, information on credit risk measurement models was much lesscommon. The majority of banks and securities firms also disclosed information on themanagement of liquidity risk and operational risk.An important objective of this year’s survey effort was to determine the extent to which banksand securities firms meet the updated recommendations for public disclosure of trading andderivative activities issued by the two committees in October 1999. The survey instrument hastherefore been substantially updated and revised to reflect this new disclosure guidance. Acomparison with previous surveys nevertheless reveals that many leading institutions continuedto expand their disclosure of qualitative and quantitative information about market risk andmarket risk models in their 1998 financial reports.While financial institutions did not have an opportunity to consider the updated guidance whenthey designed the disclosures surveyed in this report, institutions that do not already provide therecommended disclosures are