Cross-Border
Derivatives Reporting System Becomes Operational
Questions and Answers
1. Question: Why is Treasury collecting this data?
Answer.
Global
derivatives markets have grown substantially in recent years, and international
cross-border derivatives contracts are a significant part of that market. The
TIC form D collects information needed for the inclusion of derivatives
transactions and positions in reports on cross-border transactions and holdings
such as the U.S. Balance of Payments and the U.S. International Investment Position.
2. Question: What is a derivative?
Answer:
A
derivative contract is a financial contract whose value is derived from the
values of one or more underlying assets, reference rates, or indices of asset
values or reference rates. Derivative contracts include interest rate
derivative contracts, exchange rate derivative contracts, equity derivative
contracts, commodity derivative contracts, and credit derivatives.
To
be more technical, the TIC form D collects data on derivatives contracts that
meet the FASB Statement No. 133 (FAS 133) definition. FAS 133 defines a derivative as a financial
instrument or other contract with all three of the following characteristics:
a. It has (1) one
or more underlyings (i.e., specified interest rate, security price, commodity
price, foreign exchange rate, index of prices or rates, or other variable) and (2)
one or more notional amounts (i.e., number of currency units, shares, bushels,
pounds, or other units specified in the contract) or payment provisions or
both. Those terms determine the amount of the settlement, and, in some cases,
whether or not a settlement is required;
b. It requires
no initial net investment or an initial net investment that is smaller than
would be required for other types of contracts that would be expected to have
similar response to changes in market factors; and
c. Its terms require
or permit net settlement, it can be readily settled net by a means outside the
contract, or it provides for delivery of an asset that puts the recipient in a
position not substantially different from net settlement.
3. Question: Why aren’t the derivatives data collected on
existing TIC forms?
Answer:
Because
of some important aspects of derivative contracts, a new reporting form was
designed instead of trying to use existing TIC reporting forms.
There
is an issue with collecting derivatives positions data on other TIC forms
because, for some derivatives, it is not clear if the contract is a claim or a
liability. For example, over the lives of derivatives such as interest rate swaps,
the fair market value may be positive at times and negative at other times,
possibly switching signs several times within a quarter. So these instruments are neither strictly
claims, with consistently positive fair values and payments to
4. Question: Who reports derivatives data on the
TIC Form D?
Answer.
All
U.S.-resident banks, securities dealers, and other firms with worldwide holding
of derivatives in their own and in their customers’ accounts exceeding $100
billion in notional value are required to file the data quarterly.
5. Question:
How are the derivatives data reported by country – by the location of the transaction
as is done with the S-data on transactions in long-term securities, or by the location
of the holder as is done in the annual surveys of securities holdings?
Answer:
The
gross fair (market) values and net settlement payments on derivatives are
reported by country based on the residence of the direct foreign counterparty.
Positions of foreign customers on
6. Question: What do some of the terms mean in
the website tables on derivatives?
Answer.
(a)
Fair (market) Value.
Fair value is generally defined as the
amount for which a derivative contract could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale. If a quoted market price is available for a contract, the fair value is
calculated as the number of trading units of the contract multiplied by the
market price. If a quoted market price
is not available, the institution’s best estimate of fair value based on the
quoted market price of a similar contract or on valuation techniques such as
discounted cash flows is reported (see FASB Statement No. 133, Appendix F,
paragraph 540 for additional information about estimating fair (market) value.)
The
fair value is different from a derivative’s “notional” amount, which is the
number of currency units, shares, bushels, pounds, or other units specified in
a derivative instrument and used to compute the payouts from the contract.
For
example, consider a foreign exchange (FX) forward contract that specifies future
delivery of $100 million to a foreigner at an exchange rate of 2.1 foreign
currency units (fcu) per dollar. For this contract the notional value of the
contract is $100 million, and if the market exchange rate on the delivery date
is 2.0 fcu/$ then the fair value is $5 million. A review of the settlement may
help explain the fair value. The foreigner sends fcu 210 million, under the
contract terms, and the
(b) Over-the-Counter
(OTC) and Exchange-Traded contracts. The terms of OTC contracts such as
forwards are negotiated on a contract-by-contract basis between the two parties
to the contract. Contracts such as
futures that trade on organized exchanges have standardized contract dates,
contract terms, and quantities.
(c) Forwards and
futures. Forwards are OTC contracts that represent agreements for delayed delivery
of financial instruments or commodities in which the buyer agrees to purchase
and the seller agrees to deliver, at a specified future date, a specified
commodity or instrument at a specified price or yield. Futures contracts are similar to forwards, except
that they trade on exchanges and are subject to daily settlement of profits and
losses (variation margin).
(d) Options. Contracts
that convey either a right or an obligation to buy or sell a financial
instrument at a specified price by a specified future date. Options may trade
on an organized exchange or in OTC markets.
-- Bought Options: The buyer of an option contract has, for
compensation (such as a fee or premium), acquired the right (or option) to sell
(put) or purchase (call) the specified amount of the
underlying or its cash equivalent at a stated price on a specified future date.
-- Written Options: The seller (writer) of the contract has, for
compensation, become obligated to purchase or sell the specified amount of the
underlying or its cash equivalent at a stated price on a specified future date at
the option of the buyer of the contract.
(e) Swaps. Contracts
in which two parties agree to exchange assets or their cash equivalent, or
periodic interest payments in the case of interest-rate swaps, based on a
specified notional amount for a specified period.
(f)
The following are some examples of net settlements:
Example 1. A
Example 2: Two commodity forward contracts (one on
copper and one on oil) are entered into by a
Department of Treasury