Types of corporations

Ownership and control of corporations

3.21 Control of a corporation is the ability to determine the general corporate policy of the corporation. The ownership of a listed corporation is diffused among the institutional units that own its shares. An institutional unit owning more than a half of the voting shares, or equity, of a corporation is able to control its policy and operations. There may be exceptional cases in which certain shareholders enjoy privileged voting rights, such as a “golden share” giving a right to veto. Effective control may also be exercised with less than 50 percent ownership, depending on the corporation’s structure and the diffusion of ownership. However, it is not possible to stipulate a minimum below 50 percent that will guarantee control in all cases.¹

Special cases

NPIs engaged in market production

3.42 Although they are not a source of profit to other institutional units, NPIs can be market producers if they provide services for which they charge economically significant prices. Economically significant prices are prices that have a significant effect on the amounts that producers are willing to supply and on the amounts purchasers wish to buy.⁴ NPIs engaged in market production sell their output at prices that are economically significant, but any surpluses generated cannot be appropriated by other institutional units, including those that control or manage them.

3.43 NPIs engaged in market production are classified as corporations. Schools, colleges, universities, clinics, or hospitals constituted as NPIs are market producers when they charge fees for their services that are based on production costs and are economically significant. Also treated as market producers are NPIs that, because of their status, are able to raise additional funds from donations by households, corporations, or governments, but still charge economically significant prices for their goods and services.

3.44 Other market NPIs restrict their activities to serving a particular subset of other market producers. Such NPIs are created by associations of the enterprises whose interests they promote. They include chambers of commerce, agricultural, manufacturing, or trade associations, employers’ organizations, research and testing laboratories, or other organizations or institutes engaged in activities that are of mutual interest or benefit to the group of businesses that control and finance them. These NPIs are financed by contributions or subscriptions from the group of enterprises concerned. The subscriptions are treated not as transfers but as payments for services rendered and these NPIs are, therefore, classified as market producers (corporations).

NPIs engaged in nonmarket production

3.45 The majority of NPIs in most countries are nonmarket producers that provide most of their output free or at prices that are not economically significant. NPIs engaged mainly in nonmarket production fall into two main groups: (1) those NPIs controlled by government; and (2) those NPIs that are not. The latter group is the NPIs serving households (NPISHs) which constitute a separate sector of the economy.

3.46 Nonmarket NPIs that are controlled by government are included in the general government sector. NPIs are considered to be controlled by government⁵ when: (1) the government has the right to appoint the officers managing the NPI; (2) other provisions exist enabling the government to determine significant aspects of the policy or program of the NPI; (3) a contractual agreement exists between a government and an NPI allowing the government to determine key aspects of the NPI’s general policy; (4) an NPI is financed mainly by the government; or (5) a government is exposed to all, or a large proportion of, the financial risks associated with the NPI’s activities.

3.47 Such government-controlled NPIs may engage in research and development, for example, for the benefit of producers, such as farmers. They may also be concerned with the setting or maintenance of standards for health, safety, the environment, accounting, finance, education, etc. Government-controlled NPIs are allocated to the general government sector, regardless of the types of institutional units that mainly benefit from their activities. Certain entities legally constituted as corporations by government units may have the characteristics of nonmarket NPIs controlled and mainly financed by government. Such entities should be treated as general government units whatever their names.

3.48 NPISHs consist of nonmarket NPIs that are not controlled by government. They provide goods and services to households free or at prices that are not economically significant.

Cross-border workers

3.62 Individuals who cross international borders to work remain residents of their home territories. In some cases, these workers regularly cross the frontier (daily or weekly) to work in a neighboring country. Also included as residents in home countries are seasonal workers, who cross the border for particular periods, such as the harvest or tourist season to attend a place of employment and then return to their households. Other short-term employment may occur for a particular task, such as construction projects, repairs, delivery of advice, and so on. In each case, the residence of the concerned person is based on the principal dwelling, rather than the territory of employment.

3.63 If these workers engage in substantial and sustained economic activity abroad; earn income, consume, and maintain regular residence abroad; and return only briefly or infrequently to their original household, they cease to be considered a member of the household in their home territory and, therefore, are no longer resident in the economy where the household is located. In this case, these individuals have a center of predominant economic interest where they work and consume.

Highly mobile individuals

3.64 Some individuals have close connections with two or more territories; they may have dwellings in more than one territory where they spend a significant amount of time. For individuals who do not have continuous actual or intended presence in any one territory for one year, the territory of the principal dwelling they maintain is the key consideration.

Staff of international organizations and technical assistance personnel

3.65 Although international organizations (see paragraph 3.98) are, by definition, resident in an economic territory of their own (that is, nonresidents of the country where they are physically located), employees of these organizations are residents of the local economies where they have their principal dwelling.

3.66 Technical assistance personnel on long-term (more than one year) assignment should be treated as residents of the countries where they work. Employees of international organizations on long-term assignment in a country different from the location of the headquarters of the organization are residents of the country where they perform their duties. If the assignment is shorter than one year, they are considered residents of the economy in which they reside on a longer-term basis.

Locally recruited staff of diplomatic representations

3.67 Locally recruited staff of embassies and other diplomatic representations continue to have their center of predominant economic interest in the country where they live and in which the embassy (or representation) is located.

Crew members of ships, aircrafts, or similar equipment

3.68 Crew members of ships, aircrafts, oil rigs, space stations, or other similar equipment that operate outside a territory or across several territories continue to be residents of the economies where they have their principal dwelling (even if they are outside their home-base territory for long periods of time) and not of the economies in which they stop or layover but are not living.

Refugees

3.69 The residence of refugees will change from their home territory to the territory of refuge, if they have stayed or intend to stay in their place of refuge for one year or more, even if that residence is involuntary or transient, and its future status is unclear.

General government

3.70 General government includes territorial enclaves, such as embassies, consulates, military bases, scientific stations, information or immigration offices, aid agencies, and other enclaves of governments in host territories with diplomatic status. Usually, these operations are not separate institutional units, but even if they were, they are residents of their home territory, rather than the host territory where they are physically located. However, an entity created by a government under the laws and jurisdiction of the host territory is a corporation resident in the host economy and not part of the general government sector in either economy.

Subsidiaries or branches of multinational conglomerates

3.71 Subsidiaries of a multinational corporation should be treated as units separate from the parent company, because they meet the definition of an institutional unit and, therefore, are residents of the economy where they operate. Branches of a multinational corporation should be treated as units separate from the parent company when resident in another economy.

Construction projects

3.72 Construction companies operating in a foreign territory (for instance, for the construction of major projects like roads or dams) may be managed through a branch or local office in the economy where the project is undertaken. Although the branch or local office may have no separate legal identity, it may, nevertheless, be treated as a quasi-corporation and resident of the territory where the project is located. This is applicable particularly to large-scale projects with completion times of several years.

3.73 If the construction project will be finished in less than a year, the construction operations may not satisfy the conditions for recognition as a branch. Consequently, the accounts of the local office should be recorded as accounts of nonresidents for the territory where the project is located.

Units operating mobile equipment

3.74 Mobile equipment can consist of ships, aircrafts, drilling rigs and platforms, railway rolling stock, etc. The same principles of the residence of an enterprise must be applied to an enterprise operating mobile equipment outside the economic territory where the enterprise is a resident. If the operations take place in international waters or airspace, the unit has a predominant center of economic interest where the operator maintains the base of its operations. If operations take place in another economy outside of the home base and are substantial enough to meet the criteria to be classified as a branch, then the branch is considered a resident in the host economy.⁷ Otherwise, production is attributed to the home base of the operator.

Offshore enterprises, offshore banks, and offshore financial centers

3.75 Sometimes a government has a separate physical or legal zone that is under its control, but to which, to some degree, separate laws are applied, such as free trade zones or offshore financial centers. These special zones are part of the economic territory under the control of the government and consequently the enterprises located there are treated as resident units of that economic territory.

3.76 Offshore units engaged in manufacturing processes (including assembly of components manufactured elsewhere) are residents of the economies in which the offshore enterprises are located. This treatment applies even if the units are located in special zones exempted from custom duties or regulations (free trade zones).

3.77 Similarly, offshore banks, which engage exclusively (or almost exclusively) in transactions with nonresidents, are still considered residents of the country where they are incorporated or registered.

3.78 Offshore financial centers are jurisdictions in which the majority of the financial transactions are entered into by FCs located therein and are on behalf of clients who reside outside the offshore financial center. Offshore financial centers have adapted to increased competition resulting from liberalization of financial regulations in advanced economies and account for a significant share of global financial flows. Offshore financial centers should compile data for all corporations incorporated or registered in their jurisdictions.

Pension funds of international organizations

3.79 Separately constituted pension funds of international organizations are not treated as international organizations, but regarded as FCs. They are residents of the economic territory in which they are located or, lacking a physical presence, residents of the economy where they are incorporated or registered.

Ancillary corporations, holding corporations, and special purpose entities

3.80 Domestic ancillaries are treated as an integral part of the parent corporation, rather than as separate institutional units. Ancillary corporations located in a country different from their parent corporations are, however, treated as separate units, and considered residents of the country in which they are legally established.

3.81 Holding corporations and SPEs are often constituted outside the country where their parent unit resides, either for tax purposes or because of legal or accounting considerations. Even if these holding corporations and SPEs are bare trustees, not bearing any market or credit risk, they are treated as separate institutional units and considered residents of the economic territory where they are incorporated or registered.

Nonprofit institutions

3.82 An NPI is a resident of the country under whose laws and regulations it was created and in which its existence as a legal or social entity is officially recognized and recorded. When an NPI engages in charity or relief work on an international scale, it is necessary to specify the residence of any branches it may maintain in dispensing relief in individual territories. If an NPI maintains a branch or unit for one year or more in a particular country, that branch or unit should be considered a resident of that economy.

Currency union central banks

3.83 A currency union central bank (CUCB) is a regional financial institution that acts as a central bank for the member countries of a currency union. The CUCB is an institutional unit in its own right, owning assets and liabilities on its own account. The CUCB is nonresident of any currency union economy, but when compiling monetary statistics for the entire currency union, the CUCB is a resident institutional unit of the union. More detailed information on CUCBs is provided later in this chapter (see paragraphs 3.119–3.122).

Multiterritory enterprises

3.84 Some enterprises may operate as a seamless operation over more than one economic territory. Although the enterprise has substantial activity in more than one economic territory, it is run with no separate accounts and no separate branches can be identified.

3.85 Particular cases of multiterritory enterprises are binational (or multinational) public entities established to construct and operate hydroelectric projects on river borders, bridges, tunnels, or undersea cables that cross borders. Such enterprises may also include shipping lines, airlines, or pipelines.

3.86 Governments usually require separate entities or branches to be identified in each economic territory, but multiterritory enterprises may be exempted from such requirements. In the case of multiterritory enterprises, it is preferable that separate institutional units are identified for each economy. If that is not feasible, it is necessary to prorate the total operations of the enterprise into the individual economic territories. The factor used for prorating should be based on available information that reflects the contributions to actual operations, such as equity shares, equal splits, wages, or tonnage.

Migrant workers

3.89 Migrant workers that earn income, consume, and maintain their principal dwelling abroad for one year or more and who return only briefly or infrequently to their original households are no longer considered part of the household in their home economy but rather are residents of the economy where they work, as this is where they have a predominant center of economic interest. Even if individuals continue to be employed and paid by an enterprise that is resident in their home economy, those persons should be treated as residents of the host economy where they maintain their principal dwelling continuously for one year or more, as the principal dwelling determines their center of predominant economic interest.

3.90 Very often, migrant workers maintain deposit accounts in their country of origin (home economy) for savings purposes or to have access to funds when they visit their country. Accounts of migrant workers should be reported as nonresident accounts and, therefore, as foreign liabilities of the depository corporations (DCs) subsector in their home country. Similarly, any loan granted to a migrant worker in his or her country of origin should be reported as a loan to a nonresident. For DCs, it is often difficult to identify accounts of migrant workers as nonresident accounts, because they are opened by providing a national identification and a national address. In countries with a substantial proportion of their population who live and work abroad, special instructions should be issued to DCs with a view to identifying the accounts of migrant workers.

3.91 If the account opened by a migrant worker in the home economy is a joint account with a resident of that economy, or if the account holder authorizes a resident of the home economy to withdraw funds from such an account, then the account should be considered as belonging to a resident and should be reported under domestic liabilities.

Students

3.92 People who go abroad for full-time study generally continue to be resident in the economy in which they were resident prior to studying abroad, even though their course of study may exceed one year. Accounts that they open with FCs in the economy where they study should be reported, therefore, as accounts of nonresidents. If they develop an intention to continue their presence in the territory of study after the completion of the studies, they should then be considered as residents in the host territory.

Medical patients

3.93 People who go abroad for the purpose of medical treatment maintain their predominant center of interest in the territory in which they were resident before they received the treatment, even if they stay longer than one year. As with students, the movement is considered to have a temporary motivation and these patients remain members of households in their home territories.

Foreign diplomatic representations

3.94 Embassies and other diplomatic representations are enclaves of their governments in the host economy and part of the economic territory of the government they represent. Their accounts in the financial system of the host economy are reported as accounts of nonresidents.

3.95 Employees, including members of their household, sent by a government to work in its diplomatic representations continue to have a center of predominant economic interest in their home country, irrespective of the length of their assignment in the foreign country. They continue to be residents in their home economy even if they live in dwellings outside the enclaves. Their accounts in the financial system of the host economy are classified as accounts of nonresidents.

Government entities resident abroad

3.96 If a government uses an entity that is resident in another economic territory to carry out general government activities (i.e., fiscal activities rather than as a public corporation producing goods and services for the market), that entity is not included as part of the general government in either its economy of residence or the economy of the government that uses the entity. Such entities are not treated in the same way as embassies and other territorial enclaves if they are created and operate under the laws of the host economy. However, special imputations of transactions and positions between the government and the entity are adopted to ensure that any fiscal operations undertaken through nonresident entities are reflected in the transactions and positions of the government concerned.

Military personnel

3.97 Military personnel stationed abroad in an enclave of their home country (a military base) or in peace-keeping missions, as well as the military base itself, continue to have their center of predominant economic interest in their home economy, irrespective of the length of duty of their assignment. They and members of their household are considered nonresidents of the territory where they are serving.⁸

International organizations

3.98 International organizations have the following characteristics:

• a. The members are either national states or other international organizations whose members are national states.

• b. They are entities established by formal political agreements between their members that have the status of international treaties; their existence is recognized by law in their member countries.

• c. International organizations are created for various purposes:

  • International financial institutions—these entities conduct financial intermediation at an international level (i.e., channeling funds between lenders and borrowers in different economies). Examples are the IMF, World Bank Group, Bank for International Settlements (BIS), and regional development banks.

  • Other international organizations—these entities provide nonmarket services of a collective nature for the benefit of their member states, such as peacekeeping, education, science, policy issues, and other research.

3.99 The economic territory of an international organization consists of the territorial enclave(s) over which the organization has jurisdiction. International organizations are not considered residents of any national economy and, in particular, are not residents of the economy in which they are located or conduct their affairs. They are treated as extra-territorial (that is, nonresident) by that economy. All accounts that these organizations have with the FCs are treated as nonresidents’ accounts. Regional organizations are a type of international organization whose members are governments or monetary authorities of economies that are located in a specific region of the world.

Central bank [S121]

3.110 The central bank is the domestic financial institution that exercises control over key aspects of the financial system. The central bank functions generally comprise the following: (1) issuing currency;¹² (2) conducting monetary policy, including by regulating money supply and credit; (3) managing international reserves; (4) transacting with the IMF; (5) providing credit to ODCs; and (6) usually acting as banker to government in holding central government deposits and in providing credit in the form of overdrafts, advances, and purchases of debt securities. Central banks in some countries also accept deposits from or provide credit to NFCs, NPISHs, and households.¹³

3.111 The central bank subsector includes the following: (1) central banks, which in most countries are separate identifiable institutional units subject to varying degrees of government control, and have various names such as central bank, reserve bank, monetary authority, national bank, or state bank; (2) currency boards or independent currency authorities that issue domestic currency that is fully backed by foreign exchange reserves; and (3) government-affiliated agencies that are separate institutional units and primarily perform central banking functions, except those exclusively engaged in supervision and regulation of the financial system (see paragraphs 3.113 and 3.175).

3.112 Many central banks act as fiscal agents of their central governments or government-affiliated units. Transactions and financial positions should be attributed to the central bank when it acts on its own behalf and is the actual debtor/creditor. When it acts only as an agent, the transactions or positions should be attributed to the unit that is the actual debtor/creditor. A key factor in determining the creditor/debtor status is the bearing of the financial risks and the appropriation of the benefits from the transactions.

3.113 Many central banks also regulate and supervise deposit-takers and sometimes OFCs. If these activities are performed within the structure of the central bank, they are included in the central bank subsector. However, if the supervisory authority is a separate institutional unit, it is classified as a financial auxiliary outside the central bank subsector.

3.114 Central banks usually have branches in various regions of a country. When compiling the central bank balance sheet, the accounts of all branches must be consolidated with the accounts of the headquarters. Central bank representative offices located in other economies are not consolidated with headquarters but are classified as resident financial auxiliaries in the economy in which they are located (see paragraph 3.172). If such overseas representative offices have diplomatic immunity, they are considered part of the economic territory in which the central bank itself is located.

3.115 In many countries, the central bank performs all central banking functions listed in paragraph 3.110. In some countries, however, certain central banking functions are performed wholly or partly by the central government. These functions might include currency issuance, the holding of international reserves, and conducting transactions with the IMF. In such situations, consideration could be given to compile, in addition to the central bank survey, an expanded set of accounts, referred to as the monetary authorities accounts (described in more detail in Chapter 7). These accounts follow a functional approach—that is, all data relating to central banking functions performed by the central government should be included along with the central bank’s data. The functional approach groups stock positions and flows according to the functions or objectives they serve, as opposed to the institutional approach adopted in macroeconomic statistics. Specifically, if the central government holds part of the international reserves, they are included in the monetary authorities accounts together with the reserves held by the central bank.

Other depository corporations

3.123 For monetary statistics purposes, all FCs (other than the central bank) that incur liabilities included in broad money are classified as ODCs.

Non-MMF investment funds [S124]

3.149 Non-MMF investment funds are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested predominantly in long-term financial assets, such as equity shares, bonds, and mortgage loans, and nonfinancial assets, such as real estate. Non-MMF investment funds may also invest a small percentage of their total assets in highly liquid short-term financial instruments to ensure that requests to redeem shares or units are met without delay. They can be run under several denominations, such as mutual funds, investment pools, investment trusts, unit trusts, or institutions for collective investment. Shares or units issued by non-MMF investment funds are not close substitutes for deposits because of the following reasons: (1) they are not transferable by means of checks or other means of third-party payments; and (2) their price can fluctuate according to market conditions and so they are not a reliable store of nominal value. Consequently, shares or units issued by non-MMF investment funds do not meet the definition of broad money and are not included therein.

3.150 It is possible to distinguish between open-ended and closed-ended non-MMF investment funds. Open-ended investment funds issue and redeem shares on a continuous basis: each time a new investment is made by an investor, new shares or units are created; when shares are redeemed, an investment must be sold to match such redemption. Closed-ended investment funds are open for subscription only during a specified period at the launch of the scheme; thereafter, investors can acquire shares only by buying them on a secondary market from other investors.

3.151 Depending on the investment strategy, different kinds of non-MMF investment funds can be identified: (1) equity-based investment funds; (2) security-based investment funds; (3) real estate investment funds, which invest in debt and equity securities of companies that purchase real estate; (4) mortgage real estate investment trusts (mortgage REITs),¹⁸ which provide dividends to shareholders by investing in real estate mortgages or mortgage-backed securities; (5) index funds, which are index-tracking funds that mirror the performance of a specific group of shares; (6) exchange-traded funds, which are a subset of index funds that are priced continuously throughout the trading day, and therefore trade like a stock; (7) funds of funds, which hold a portfolio of other investment funds shares rather than investing directly; and (8) hedge funds involving high minimum investments and light regulation, which invest in financial derivatives, take long and short positions in securities, and may sell over-the-counter derivative contracts.

3.152 Private equity funds (PEFs) are collective investment schemes that invest in unlisted equity. They are usually constituted as closed-ended investment funds or as limited partnerships. Investments into PEFs are made mainly by institutional investors, such as ICPFs or large financial groups. Venture capital funds are a subcategory of PEFs that invest in start-up companies. PEFs are included within non-MMF investment funds.

Other financial intermediaries except insurance corporations and pension funds [S125]

3.153 Other financial intermediaries except ICPFs consist of FCs that are engaged in providing financial services by incurring liabilities, in forms other than currency, deposits or close substitutes for deposits, on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market. It is a feature of a financial intermediary that transactions on both sides of the balance sheet are carried out in open markets.

3.154 FCs in the other financial intermediaries subsector generally raise funds on wholesale financial markets, and usually not in the form of deposits, and use the funds to extend loans and acquire other financial assets. The intermediaries often specialize in lending to borrowers in particular sectors of the economy and for specialized financial arrangements. Some of the types of units classified as other financial intermediaries are described in the following paragraphs.

3.155 Finance companies extend credit mainly to NFCs and households. They are less regulated than units in the ODCs subsector and often are subject to fewer reporting requirements. Finance companies offer such services as consumer loans, credit cards, small business loans, mortgage loans, economic development loans, and purchases of bankers’ acceptances and trade receivables. If finance companies accept deposits included in broad money, they should be classified in the ODCs subsector.

3.156 Financial leasing companies engage in financing for the purchase of tangible assets. The leasing company is the legal owner of the financed goods (airplanes, automobiles, machine tools, mainframe computers, etc.); economic ownership (see paragraph 4.9) is conveyed to the lessee who incurs the benefits, costs, and risks associated with ownership of the assets.

3.157 Central clearing counterparties (CCPs) provide clearing and settlement of market transactions in securities and derivatives. This can include tri-party repos (see paragraph 4.79). Clearing refers to the process of offsetting obligations and entitlements vis-à-vis counterparties to transactions so that settlement—which involves the actual exchange of securities, derivatives, and funds—can occur more efficiently on a net basis. The CCPs take the financial risk of the transaction between the counterparties onto their own account and so mitigate counterparty risk to the other parties involved. CCPs are FCs, but not money issuers as the margin deposits they collect to mitigate the financial risks they assume are restricted and held as collateral, and so are not included in broad money (see paragraphs 6.37 and 6.76). CCPs should, therefore, be classified as other financial intermediaries except ICPFs.

3.158 Investment banks assist corporations in raising funds in equity and debt markets and provide strategic advisory services for mergers, acquisitions, and other types of financial transactions. In addition to assisting with raising funds for their corporate clients, investment banks invest their own funds, including in the securities offerings of their clients, and hedge funds dedicated to direct investments in corporations. Investment banks do not usually have deposit liabilities that meet the definition of broad money.

3.159 Underwriters and dealers specialize in securities market activities, operating through public exchanges, over-the-counter markets, and privately negotiated deals. They assist firms in issuing securities through the underwriting and market placement of new securities issues, and may trade in new or outstanding securities on their own account. Only underwriters and dealers that act as financial intermediaries are classified in this category. Securities brokers and other units that arrange trades between securities buyers and sellers but do not purchase and hold securities on their own account are classified as financial auxiliaries.

3.160 Financial derivative intermediaries consist of units that engage primarily in issuing and/or taking positions in financial derivatives.

3.161 Securitization vehicles are created to raise funds by selling securities backed by specific assets or future income streams. Securitization is the practice whereby an asset or a pool of cash–flow producing assets is converted into marketable securities.¹⁹ For example, an originating mortgage lender could sell a portfolio of loans to a special purpose vehicle that issues securities to investors. The originator may continue to provide administrative services, but the vehicle is the legal owner of the portfolio. Such vehicles are included in other financial intermediaries except ICPFs if the entity is the legal owner of a portfolio of assets, sells a new financial asset that represents an interest in the portfolio, and has—or it would be possible and meaningful to compile—a full set of accounts. When the portfolio is not transformed, or the vehicle does not bear market or credit risks, then it should be combined with its parent (if resident in the same economy) or treated as a captive intermediary (if in a different economy to that of its parent).

3.162 Specialized financial intermediaries are a diverse group of highly specialized intermediaries such as: (1) export/import finance firms, which offer a broad range of financial and documentary services associated with international trade; (2) factoring companies, which acquire accounts receivables from commercial enterprises, extend credit by rediscounting the receivables, and provide guarantees that cover late or defaulted payments; (3) venture capital funds that pool funds of third-party investors in start-up companies; and (4) mezzanine companies that provide short-term financing for corporate mergers and acquisitions.

3.163 Asset management companies (AMCs) and bank restructuring agencies are created to address the workout of nonperforming loans (NPLs) or other impaired financial assets through the acquisition, management, and disposal of the impaired assets, often in the context of a banking crisis. These entities can function as fast-disposal units for selling loans and/or other impaired financial assets, medium-term corporate restructuring agencies, warehouses for holding the NPLs for extended periods, and hybrid units performing multiple functions. Most bank restructuring agencies have been established by governments as public institutions, but AMCs have also been created as subsidiaries of FCs to facilitate the management of their own NPL portfolios. For AMCs that are subsidiaries of ODCs and resident in the same economy as their parent, their balance sheets are consolidated with the balance sheets of their parent ODCs unless they meet all the criteria of an institutional unit (see paragraph 3.4).

3.164 If the entity is government-controlled, the extent to which it is engaged or not in financial intermediation will determine whether it is classified as a general government unit or an FC. The following criteria should be considered in determining whether the entity is an FC or part of general government, given that the economically significant price criteria are usually insufficient for this purpose:

• a. An entity is more likely to be included in the general government sector if it (1) serves only government or primarily government; (2) sells or buys financial assets at a value other than market values; and/or (3) takes low risks because it has strong public financial support and, by law or effectively, acts on behalf of government.

• b. An entity should be classified in the FCs sector if it (1) is a genuine holding company controlling and managing a group of subsidiaries; and/or (2) borrows on the market at its own risk to acquire financial or nonfinancial assets that it actively manages.

3.165 If the government-controlled entity is considered to be operating as an FC, it is sectored as an FC according to the nature of its operations, usually in the subsector other financial intermediaries except ICPFs. Otherwise, it should be classified as a general government unit, with its transactions, and assets and liabilities consolidated with those of the government.

Financial auxiliaries [S126]

3.166 Financial auxiliaries consist of FCs that are principally engaged in activities associated with transactions in financial assets and liabilities or with providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary taking ownership of the financial assets and liabilities being transacted. Financial auxiliaries do not act as intermediaries. Some of the most common types of financial auxiliaries are described in the next paragraphs.

3.167 Public exchanges, securities markets, and clearing houses²⁰ provide facilities in which commodities, debt and equity securities, and financial derivatives are transacted and/or settled. An exchange is often responsible for ensuring the qualifications of its members, guaranteeing the completion of transactions, clearing and netting transactions, arranging payments, resolving disputes, and guarding against fraud. Exchanges are identified as such if they (1) are legally determined to be exchanges by regulators or courts; (2) maintain insurance or capital reserves; (3) exercise control over the trading of exchange members; or (4) operate a margining system or collect collateral. Provided they do not act as a principal to the transactions being conducted, the subsector includes the exchange and a number of entities such as securities depository companies, accounting and clearing offices, other specialized providers of securities trading services, and entities (private and government-controlled) that regulate or supervise exchanges and securities markets.

3.168 Brokers and agents are individuals or firms that arrange, execute, or otherwise facilitate client transactions in financial assets. Included are brokers and agents who handle the purchase and sale of securities or other financial contracts for their clients, as well as providers of financial advisory services to brokers and their clients. Brokerage firms are distinguished from underwriters and dealers that are classified as other financial intermediaries except ICPFs. Only brokers and agents that clearly specialize in brokerage and related activities and do not take their own positions in financial assets should be included in this subsector.

3.169 Foreign exchange companies, or bureaux de change, are separate institutional units that buy and sell foreign exchange in retail or wholesale markets. They are classified as financial auxiliaries because their main function is to intermediate in foreign exchange, earning a buy-sell spread, rather than obtaining their income from taking positions in foreign exchange. In many countries, foreign exchange corporations are licensed and regulated, and high-quality data on their activities can be collected. In economies with foreign exchange controls, individuals or enterprises such as travel agencies engage in informal foreign exchange trade, complicating the measurement of overall activity.

3.170 Insurance and pension funds auxiliaries include agents, adjusters, and salvage administrators. The unique nature and the large scale of their activities in some countries justify the separate identification of these units.

3.171 Financial derivative corporations facilitate the issuance of financial derivative contracts, without issuing the financial derivatives or taking financial positions in them. Although these units may have financial assets, they are not classified as other financial intermediaries except ICPFs, because they do not intermediate by incurring liabilities in order to acquire financial assets. These financial derivative corporations are distinguished from financial derivative intermediaries that issue or take positions in financial derivatives, and which are classified as other financial intermediaries except ICPFs.

3.172 Representative offices of foreign banks that do not accept deposits or extend credits are classified as resident financial auxiliaries, even though they promote and facilitate transactions of the nonresident parent company.

3.173 Corporations primarily involved in the operation of electronic payment mechanisms are classified as financial auxiliaries if they can be separately identified as institutional units, are primarily engaged in this specialized activity, and do not incur liabilities against the electronic payment instruments. If they incur liabilities against the issuance of electronic money, they are included in the ODCs subsector (if the electronic money is included in broad money).

3.174 Third-party payment processors, which provide banks with a payment platform, are classified as financial auxiliaries. Examples include online payment corporations, prepaid card corporations, and financial payment corporations.

3.175 Supervisory agencies and regulatory bodies that regulate or supervise FCs are sectored as financial auxiliaries if they are separate institutional units, even if they are agencies affiliated with the government. When the regulation is exercised by the central bank through one of its departments, such regulatory activities are subsumed within the central bank. Regulatory bodies may become involved in extending emergency credits, or acquiring assets and liabilities of FCs during bankruptcies or reorganizations. When holdings of financial assets and liabilities become substantial and the unit engages in financial intermediation, it should be reclassified as other financial intermediary except ICPFs.

3.176 Managers of pension funds and of mutual funds are responsible for implementing the fund’s investment strategy and managing the trading of the portfolio. They are paid a fee for their services, which is usually a percentage of the fund’s average assets under management. The fund’s managers are allocated to the financial auxiliaries subsectors; the funds they manage are sectored either as MMFs, non-MMF investment funds, or pension funds.

3.177 Head offices of FCs that are engaged principally in controlling FCs or groups of FCs, but that do not themselves conduct financial intermediation are sectored as financial auxiliaries. They are classified as financial auxiliaries only if all or most of their subsidiaries are FCs; otherwise they are allocated to the NFCs sector.

3.178 Solicitor nominee companies are bare trusts that receive funds from private sources for lending secured by property. The nominee company holds the asset in its own name, but on behalf of the investors, who are the beneficial owners of the loan.

3.179 Peer-to-peer lending companies facilitate the lending of money from individuals and other lenders to unrelated individuals or small businesses (“peers”), circumventing traditional financial intermediaries. The loans are for relatively small amounts, and made mostly to individuals for consumption or credit refinancing. Peer-to-peer lending companies operate online by matching individual investors and other lenders with borrowers. They are classified as financial auxiliaries. Their main source of income is the fees collected from borrowers and lenders. Using several credit checking tools they are able to assign differentiated risk ratings to potential borrowers and so set customized interest rates. The interest rate is lower than for similar loans provided by banks because of the lower overhead costs of peer-to-peer lending companies, but the lenders receive a yield significantly higher than for a deposit. Nonetheless, the loans are generally unsecured and the lenders bear the default risk. Peer-to-peer lending companies typically assume no liability or risk for the loans being made, although sometimes they also use own funds for lending. If the latter is the case, they act as financial intermediaries and should be classified as other financial intermediaries except ICPFs.

3.180 Credit rating agencies assess the creditworthiness of an issuer of debt securities with regard to its financial obligations. They evaluate the issuer’s overall financial capacity and willingness to make scheduled payments on a specific issue.

Captive financial institutions and money lenders [S127]

3.181 Captive financial institutions and money lenders consist of institutional units providing financial services other than insurance where most of either their assets or liabilities are not transacted on open financial markets. They include entities transacting within only a limited group of units or subsidiaries of the same holding corporation, or entities that extend loans from own funds provided by only one sponsor.

3.182 Captive financial institutions are corporate subsidiaries that act as financial agents for their parent corporations, raising funds for lending to their parent corporations or for purchase of parent corporations’ accounts receivables. Captive financial institutions are sometimes operated by deposit-taking corporations for engaging in specialized activities or for regulatory reasons. If they do not qualify to be treated as units separate from their parent corporations, they are subsumed within the balance sheets of the parent corporations unless they are resident in an economy different from that where the parent is resident. They are classified in the OFCs subsector if they qualify to be treated as separate institutional units. Captive insurance companies and pension funds that serve their owners are not included in this subsector, but classified as insurance corporations or pension funds, respectively.

3.183 Holding companies are units that hold the assets of a group of subsidiary corporations as their principal activity, and do not provide any other service to the enterprises in which the equity is held (i.e., they do not administer or manage other units). Holding companies are always allocated to the FCs sector and treated as captive financial institutions, even if all the subsidiary corporations are NFCs.

3.184 Trusts are arrangements that provide for legal control of financial assets and liabilities and specify the use of the portfolio holdings and the income generated thereby.²¹ Personal trusts control portfolios of assets owned by individuals, and assets within personal trusts are treated as part of the direct holdings of the households that control the trust. Similarly, many pension funds are organized as trusts. In general, trusts are not recognized as separate institutional units and are consolidated within the units that control or benefit from them. Only in two circumstances are trusts treated as separate institutional units, that is, as quasi-corporations: (1) if they are constituted in a different economy to that of any of the beneficiaries; or (2) otherwise satisfy the definition of a quasi-corporation. For instance, trusts established for some types of financial intermediation (e.g., securitization, collateralized security issuance, investment pooling) may be recognized as separate units if (1) they act like financial intermediaries, and (2) no other unit can reasonably be considered as controlling the portfolio. Data on trusts administered by DCs that are located in the same economy as their parent should be reported together with the accounts of the parent corporations.

3.185 Classified in this subsector are also units that provide financial services exclusively with own funds, or funds provided by a sponsor, to a range of clients and incur the financial risk of the debtor defaulting. The following units are included here, provided that they qualify as quasi-corporations: (1) money lenders (persons or groups) that offer small personal loans at a high rate of interest; (2) corporations engaged in lending (e.g., student loans, import and export loans) from funds received from a sponsor such as a government unit or an NPI; and (3) pawnshops or pawnbrokers that extend loans to individuals who use personal property as collateral.

3.186 Special purpose entities that qualify as separate institutional units and raise funds in open markets to be used by their parent corporation are classified as captive financial institutions. In this regard, it is essential to establish whether the SPE has a full set of accounts and is acting as a financial intermediary, such that it bears financial risk; otherwise its accounts are consolidated with those of its parent, if resident in the same economy. Accounts that SPEs hold at financial institutions should be classified in the same sector as their parent units if the SPE is not treated as a separate corporation. An SPE established in a different economy to its parent is always treated as a separate unit and sectored as other financial intermediaries except ICPFs in the economy in which it is incorporated.

3.187 Sovereign wealth funds (SWFs) are created and owned by the general government to hold, manage, or administer assets to achieve financial objectives. They employ a set of investment strategies, which include investing in foreign financial assets. The funds are commonly established out of balance of payments surpluses, official foreign currency operations, privatization proceeds, fiscal surpluses, and/or receipts resulting from natural resources or commodity exports. The establishment of an SWF thus raises the issue of whether it is a separate institutional unit of the OFCs subsector or part of the general government. As with SPEs, the decision will depend on whether the SWF actively manages its portfolio and provides financial services on a market basis to government or simply acts as a passive holder of the government’s assets.

3.188 Sometimes, the SWF engages the central bank as an agent to handle its transactions in foreign assets, but retains all investment decisions and the risks and rewards associated with them. In such cases, the accounts of the SWF should be kept by the central bank off balance sheet. On other occasions, the SWF constitutes deposits with the central bank, which represent the value of the fund, with the central bank bearing all risks and rewards associated with managing those assets. In such cases, the deposits of the SWF are recorded by the central bank on its balance sheet as a liability to the SWF, and the corresponding assets are recorded as part of total central bank assets.

3.189 If the SWF is an entity incorporated abroad or a quasi-corporation located abroad, it is treated as a separate institutional unit in the OFCs sector of the economy in which the entity is legally incorporated or domiciled.

Insurance corporations [S128]

3.190 Insurance corporations consist of incorporated, mutual, and other entities whose principal function is to provide life, accident, sickness, fire, or other forms of coverage to individual institutional units or groups of units, or reinsurance services to other insurance corporations. Captive insurances, which are insurance companies that serve only their owners, and reinsurance corporations are also included in this subsector. Insurance corporations may also operate pension plans, as indicated in the next section.

3.191 Life insurance corporations invest premiums to build up portfolios of financial assets to be used to meet future claims of policyholders, spreading risks of the policyholders over time. Non-life insurance corporations provide financial benefits to policyholders in the event of accidents, fire, property loss, health-related expenses, etc., spreading current risk or expenses among clients. Some individual insurance corporations sell both life and non-life insurance, in which case they are called composite insurance companies.

3.192 Some corporations create captive insurance subsidiaries to handle their insurance needs. Captives are units separate from their parents and are included in this subsector. Captives collect premiums from their parent corporation, then reinsure themselves, or invest their assets to build up reserves against future claims of the parent corporation.

3.193 Reinsurance corporations insure the insurance policies written by other insurance corporations in exchange for insurance premiums. Insurance corporations purchase reinsurance to offset policy risk, thereby capping the net loss incurred if the insured event occurs.

3.194 Financial guarantee corporations, including national deposit guarantee schemes and similar deposit protection arrangements, insure customers against financial loss on specific securities or other contracts, or against losses from the collapse of financial institutions. Deposit insurers, issuers of deposit guarantees, and other issuers of standardized guarantees that are separate institutional units and function like insurers by constituting reserves and charging premiums proportional to the cost of the service provided, are sectored as insurance corporations. Very often, guarantees on financial instruments are provided by banks, securities brokers, and other financial intermediaries as secondary activities and so are treated as an integral part of these institutional units.

3.195 A financial protection scheme may be classified as part of the general government, as a public FC, or a private FC outside the public sector according to the same sectoring principles that apply to any other entity. A resident financial protection scheme may satisfy the criteria to be an institutional unit or not. If it is not an institutional unit, it is treated as an integral part of the institutional unit that controls it. Where fees for such financial protection schemes are set by government, or when the government or a public corporation has control over the protection scheme through other means, the scheme is to be classified as a public financial (insurance) corporation, if it is a separate institutional unit. A protection scheme will be part of the general government sector if: (1) fees payable to the government for such a protection scheme are compulsory, that is, if beneficiaries cannot opt out of the scheme; (2) fees are clearly out of proportion to the service provided (fees are not determined based on the associated risks covered); and (3) fees payable to the government are not set aside in a fund, or can be used for other purposes (see also GFSM 2014, paragraph 2.135).

Pension funds [S129]

3.196 The pension funds subsector consists of autonomous pension funds that are established to provide retirement benefits for specific groups of individuals. These pension funds have their own separate sets of pension-fund assets and liabilities, with specific obligations to their contributors. Pension schemes can be established on a voluntary basis, or they can be compulsory with mandated contributions from the employee, employer, or both. Pension schemes may be administered by a separately constituted pension fund, or a fund that is operated by the employer. Governments also sometimes organize pension schemes for their employees, which are independent of the social security system.

3.197 Autonomous pension funds are separate funds (i.e., separate institutional units) established for purposes of providing incomes on retirement for specific groups of employees that are organized, and directed, by private or public employers or jointly by the employers and their employees. Nonautonomous pension funds are not separate institutional units and are therefore not separated from the entity who has organized them, and so their assets and liabilities are reflected in the accounts of that entity.

3.198 Pension schemes may be funded or unfunded. Funded pension schemes have separate pools of financial assets, or reserves, assigned for the payment of benefits. Unfunded pension schemes are administered by employers or the government, who do not create specific pension-fund reserves for the payment of benefits. By definition, unfunded pension schemes have no separated pool of assets and are not a separate institutional unit from the administrator of the scheme.

3.199 There are three types of funded pension schemes: (1) those operated by insurance corporations, (2) those operated as autonomous pension funds, and (3) those operated as nonautonomous pension funds. If funded, all three types of pension funds will hold reserves dedicated to the payment of pensions and other retirement benefits to the policyholders or other beneficiaries.

3.200 Depending on how the benefits are determined, pension plans may operate as defined benefit plans or defined contribution plans. Under a defined benefit plan, the future retirement benefits are determined by an actuarial formula related to participants’ length of service and salaries, expected retirement ages, mortality rates, etc. Under a defined contribution plan, the benefits to be received by a participant are based on the participant’s contributions to the pension fund and the investment performance of the fund.

3.201 Excluded from the pension fund subsector are nonautonomous pension funds managed by the employer, government-sponsored pension schemes funded through social security schemes (pay-as-you-go schemes), and arrangements organized by nongovernment employers for which the reserves of the fund are simply included among the employer’s own resources or are invested in securities issued by that employer. A nonautonomous pension fund is not a separate unit, and the assets of the fund belong to the employer. All assets, liabilities, transactions, and other flows of nonautonomous pension funds are consolidated in the accounts of the employer who operates the scheme.

National private nonfinancial corporations

3.216 National private NFCs include all resident NFCs that are not controlled by government or by nonresident institutional units.

3.217 Some private NFCs may produce goods or services for the government (that is, public goods or public services) or goods or services for which production is subsidized by the government. Even if the goods or services are not being produced for the market, corporations that produce the goods or services and charge economically significant prices should be classified as private NFCs.

3.218 This subsector also includes NPIs that produce goods or nonfinancial services for the market, such as units engaged in providing education or health services on a fee basis, or trade associations serving enterprises.

Foreign-controlled nonfinancial corporations

3.219 Foreign-controlled NFCs comprise all resident NFCs that are controlled by nonresidents. The classification is based on majority control (more than 50 percent of the shares) and is therefore not identical to the balance of payments concept of direct investment enterprises, which includes associated firms (those with 10–50 percent ownership by nonresidents). In other words, all foreign-controlled corporations are foreign direct-investment enterprises by definition, but not all direct investment enterprises may be foreign-controlled.²³ This subsector includes: (1) subsidiaries (but not associates) of nonresident corporations; (2) corporations controlled by a foreign government, or by a group of nonresident units acting in concert; and (3) branches or other unincorporated entities controlled by nonresidents that engage in significant amounts of production in the economic territory on a long-term basis and therefore are treated as resident quasi-corporations.

Unincorporated enterprises within households

3.220 Household unincorporated market enterprises are created for the purpose of producing goods or services for sale or barter on the market. They can engage in any kind of productive activity and can range from individuals working as street vendors with no capital or premises of their own, to manufacturing, construction, or service enterprises with several employees. These enterprises also include unincorporated partnerships in which the partners belong to different households.

3.221 Unincorporated enterprises within households that are not quasi-corporations are not separate institutional units from their owners and are classified as part of the household sector. However, if these unincorporated enterprises have their own sets of accounts independent of the households, their assets are separable from those of the owners, and their owners do not bear unlimited liability for the debts of the enterprise, they are treated as quasi-corporations and are classified in the nonfinancial corporations sector (see 2008 SNA, paragraphs 4.155–4.157).

Nonmarket NPIs controlled by government

3.231 Nonmarket NPIs controlled by the central government should be classified as part of the central government sector. Governments may choose to use NPIs rather than government agencies to carry out some government policies. Government NPIs take the form of research and development institutes, standard-setting agencies, environmental protection agencies, etc.

3.232 A nonmarket NPI primarily financed by the central government through the national budget should be considered a central government agency, even if it charges fees for its services or has a source of income through the sale of its products. For instance, it is common for standard-setting agencies to charge for the issuance of certificates of quality, or for research and development institutes to copyright and sell their discoveries. However, these proceeds are not their main sources of income, and they continue to rely primarily on government transfers to finance their activities.

Autonomous agencies

3.233 Within the central government sector are numerous units created for special purposes that enjoy substantial administrative autonomy in terms of policy setting and budget management. Central government entities with individual budgets not fully covered by the general budget are considered extrabudgetary. Nevertheless, these should be classified as part of the central government, because they are funded mainly through the national budget.

3.234 Special agencies may have separate legal identity and discretion over the volume and composition of their expenditures, and may have a direct source of revenue in the form of earmarked taxes. Such agencies are often established to carry out specific functions such as road construction or the nonmarket production of health or education services.

3.235 Market regulatory agencies act on behalf of a government (or a regional organization with governments as its members), and influence the market for specific goods or services directly and/or indirectly. The nature of these market regulatory agencies may differ, and should be investigated to decide the sector classification. If the agencies merely distribute subsidies, or have solely administrative, advisory, or price setting functions, they should be classified in the general government sector. Those agencies with principal activity to buy, hold, and sell goods or services at economically significant prices should be classified in the nonfinancial public corporations sector. Those market regulatory agencies that meet the definition of an international or regional organization are classified as residents of the rest of the world.

3.236 Sinking funds are separate accounts that may or may not be institutional units. They are made up of segregated contributions provided by the units that make use of the funds (the “parent” units) for the gradual redemption of the parent units’ debt. Sinking funds may also be established to provide for major repairs or replacements. Public sector sinking funds are classified to sectors according to whether they are separate institutional units and, if so, whether they provide their services at economically significant prices or not. Sinking funds that are separate institutional units and provide services as market producers are classified as public financial corporations. Sinking funds that are separate institutional units and provide services as nonmarket producers are classified as general government units. Sinking funds that are not separate institutional units are classified with the unit that controls them.

3.237 Agencies that manage internationally financed development projects, such as those financed by multilateral organizations (e.g., the World Bank) or donor agencies (e.g., the United States Agency for International Development), usually have the power to hire staff, acquire goods, and contract work for project implementation. These resident agencies open special accounts, either at central banks or at commercial banks, for the project funds. These agencies enjoy autonomy, but their expenditures are project-related. They are usually classified as part of the central government. The central government (generally the ministry of finance or the ministry of development) negotiates the loans or grants with the international organizations and assumes the financial liability for the project.²⁴ For analytical purposes, separate identification of the government accounts related to projects financed by international agencies is recommended.

3.238 National universities are a special case of units providing nonmarket education services. Even if they are incorporated into the ministry of education and receive most of their funding through the national budget, they enjoy a much greater degree of policy and financial autonomy than primary or secondary schools. If the universities are controlled by a central government unit (e.g., the ministry of education) and their main source of funding is the central government, their accounts should be part of the central government accounts, even if the universities can freely spend the funds provided by the central government. If controlled at the state level, the university is part of the state government subsector.

3.239 Political parties are usually part of the NPISHs sector. In single-party states, the relationship between the central government and the government party may determine that the party should be classified within the central government subsector.

Public-private partnerships

3.240 Public-private partnerships (PPPs) are long-term contracts between two units, whereby one unit acquires or builds an asset or set of assets, operates it for a period, and then hands the asset over to a second unit. Such arrangements are usually between a private enterprise and government, but other combinations are possible, with a public corporation as one of the parties or a private NPI as the second party. These schemes are described variously as PPPs; private finance initiatives (PFIs); build, own, operate, transfer schemes (BOOTs); and so on.

3.241 A PPP arrangement may or may not result in the creation of a separate institutional unit. When a separate institutional unit is established as a result of a PPP arrangement, its sector classification is determined by the economic nature of its activities, including whether it is a market producer or not, and who controls it. If the PPP is a market producer, it is classified as an NFC; whether it is a PNFC or other NFC will depend on the control (whether it is controlled by a government unit or a private corporation).²⁵ If the PPP is a nonmarket producer controlled by a government unit, it is classified as part of the general government sector. Relevant for monetary statistics compilers is the sectoring of FCs’ claims on and liabilities to PPP units.

Special purpose entities of government

3.242 Governments may set up SPEs that may be involved in fiscal or quasi-fiscal activities, such as securitization of assets or borrowing. Resident SPEs that function only in a passive manner relative to general government and that carry out fiscal and quasi-fiscal activities do not satisfy the criteria to be institutional units and are therefore treated as part of government, regardless of their legal status.

3.243 Resident SPEs acting independently, acquiring assets and incurring liabilities on their own behalf, and accepting the associated risk, are treated as separate institutional units and classified to a sector according to their principal activity.

3.244 SPEs that are resident in a different country than their controlling government are always classified as separate institutional units in the economy where they are established. A government may create nonresident SPE to undertake government borrowing or incur government outlays abroad for fiscal purposes. Even if there are no actual flows recorded between the government and the SPE related to these fiscal activities, flows and stock positions should be imputed in the accounts of both the government and the rest of the world to reflect the fiscal activities of the government undertaken by the SPE (see BPM6, paragraphs 8.24–8.26).