VIII. Classification and Standard Components of the Balance of Payments
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Capital and Financial Account
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Financial account (2.B)
176. The classification of standard components in the financial account is based on these criteria:
All components are classified according to type of investment or by functional subdivision (direct investment, portfolio investment,
financial derivatives , other investment, reserve assets).For the category of direct investment, there are directional distinctions (abroad or in the reporting economy) and
— for the equity capital,andother capital,and financial derivative components within this category— asset or liability distinctions.For the categories of portfolio investment,
financial derivatives , and other investment, there are the customary asset/liability distinctions.Particularly significant for portfolio investment and other investment is the distinction by type of instrument (equity or debt securities, trade credits, loans, currency and deposits, other assets or liabilities). In this Manual, traditional and new money market and other financial instruments
and derivativesare included in portfolio investment.For portfolio investment,
financial derivatives , and other investment, there are distinctions by sector of the domestic creditor for assets and by sector of the domestic debtor for liabilities. These distinctions serve to facilitate links with the income accounts, the international investment position, the SNA, and other statistical systems.The traditional distinction, which is based on original contractual maturity of more than one year or one year or less, between long- and short-term assets and liabilities applies only to other investment. In recent years, the significance of this distinction has clearly diminished for many domestic and international transactions. Consequently, the long- and short-term distinction is accorded less importance in the 1993 SNA and in the fifth edition of the Manual than previously. However, because the maturity factor remains important for specific purposes—analysis of external debt, for example—it is retained, in the fifth edition of the Manual, for other investment.
177. Direct investment—reflecting the lasting interest of a resident entity in one economy (direct investor) in an entity resident in another economy (direct investment enterprise)—covers all transactions between direct investors and direct investment enterprises. That is, direct investment covers the initial transaction between the two and all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated. Direct investment transactions occurring abroad and in the reporting economy are subclassified into equity capital, reinvested earnings, and other capital (intercompany transactions), and other capital,
178. Portfolio investment covers transactions in equity securities and debt securities; the latter are subsectored and financial derivatives (such as options) when the derivatives generate financial claims and liabilities. Various new financial instruments,
New paragraph
Standard Components of the Balance of Payments
See Selected Supplementary Information table for components.
Memorandum items: 5.1 Gross premiums
5.2 Gross claims
If distributed branch profits are not identified, all branch profits are considered to be distributed.
| Credit | Debit | ||||||||
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| 1. Current Account | |||||||||
| A. Goods and services | |||||||||
| a. Goods | |||||||||
| 1 General merchandise | |||||||||
| 2. Goods for processing | |||||||||
| 3 Repairs on goods | |||||||||
| 4 Goods procured in ports by carriers | |||||||||
| 5. Nonmonetary gold | |||||||||
| 5.1 Held as a store of value | |||||||||
| 5.2 Other | |||||||||
| b. Services | |||||||||
| 1. Transportation | |||||||||
| 1.1 Sea transport | |||||||||
| 1.1.1 Passenger | |||||||||
| 1.1.2 Freight | |||||||||
| 1.1.3 Other | |||||||||
| 1.2 Air transport | |||||||||
| 1.2.1 Passenger | |||||||||
| 1.2.2 Freight | |||||||||
| 1.2.3 Other | |||||||||
| 1.3 Other transport | |||||||||
| 1.3.1 Passenger | |||||||||
| 1.3.2 Freight | |||||||||
| 1.3.3 Other | |||||||||
| 2. Travel | |||||||||
| 2.1 Business | |||||||||
| 2.2 Personal* | |||||||||
| 3. Communications services | |||||||||
| 4. Construction services | |||||||||
| 5. Insurance services** | |||||||||
| 6. Financial services | |||||||||
| 7. Computer and information services | |||||||||
| 8. Royalties and license fees | |||||||||
| 9. Other business services | |||||||||
| 9.1 Merchanting and other trade-related services | |||||||||
| 9.2 Operational leasing services | |||||||||
| 9.3 Miscellaneous business, professional, and technical services* | |||||||||
| 10. Personal, cultural, and recreational services | |||||||||
| 10.1 Audiovisual and related services | |||||||||
| 10.2 Other personal, cultural, and recreational services | |||||||||
| 11. Government services, n.i.e. | |||||||||
| B. Income | |||||||||
| 1. Compensation of employees | |||||||||
| 2. Investment income | |||||||||
| 2.1 Direct investment | |||||||||
| 2.1.1 Income on equity | |||||||||
| 2.1.1.1 Dividends and distributed branch profits** | |||||||||
| 2.1.1.2 Reinvested earnings and undistributed branch profits** | |||||||||
| 2.1.2 Income on debt (interest) | |||||||||
| 2.2 Portfolio investment | |||||||||
| 2.2.1 Income on equity (dividends) | |||||||||
| 2.2.2 Income on debt (interest) | |||||||||
| 2.2.2.1 Bonds and notes | |||||||||
| 2.2.2.2 Money market instruments and financial derivatives | |||||||||
| 2.3 Other investment | |||||||||
| C. Current transfers | |||||||||
| 1. General government | |||||||||
| 2. Other sectors | |||||||||
| 2.1 Workers’ remittances | |||||||||
| 2.2 Other transfers | |||||||||
| 2. Capital and Financial Account | |||||||||
| A. Capital account | |||||||||
| 1. Capital transfers | |||||||||
| 1.1 General government | |||||||||
| 1.1.1 Debt forgiveness | |||||||||
| 1.1.2 Other | |||||||||
| 1.2 Other sectors | |||||||||
| 1.2.1 Migrants’ transfers | |||||||||
| 1.2.2 Debt forgiveness | |||||||||
| 1.2.3 Other | |||||||||
| 2. Acquisition/disposal of nonproduced, nonfinancial assets | |||||||||
| B. Financial account | |||||||||
| 1. Direct investment | |||||||||
| 1.1 Abroad | |||||||||
| 1.1.1 Equity capital | |||||||||
| 1.1.1.1 Claims on affiliated enterprises | |||||||||
| 1.1.1.2 Liabilities to affiliated enterprises | |||||||||
| 1.1.2 Reinvested earnings | |||||||||
| 1.1.3 Other capital | |||||||||
| 1.1.3.1 Claims on affiliated enterprises | |||||||||
| 1.1.3.2 Liabilities to affiliated enterprises | |||||||||
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| 1.2 In reporting economy | |||||||||
| 1.2.1 Equity capital | |||||||||
| 1.2.1.1 Claims on direct investors | |||||||||
| 1.2.1.2 Liabilities to direct investors | |||||||||
| 1.2.2 Reinvested earnings | |||||||||
| 1.2.3 Other capital | |||||||||
| 1.2.3.1 Claims on direct investors | |||||||||
| 1.2.3.2 Liabilities to direct investors | |||||||||
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| 2. Portfolio investment | |||||||||
| 2.1 Assets | |||||||||
| 2.1.1 Equity securities | |||||||||
| 2.1.1.1 Monetary authorities | |||||||||
| 2.1.1.2 General government | |||||||||
| 2.1.1.3 Banks | |||||||||
| 2.1.1.4 Other sectors | |||||||||
| 2.1.2 Debt securities | |||||||||
| 2.1.2.1 Bonds and notes | |||||||||
| 2.1.2.1.1 Monetary authorities | |||||||||
| 2.1.2.1.2 General government | |||||||||
| 2.1.2.1.3 Banks | |||||||||
| 2.1.2.1.4 Other sectors | |||||||||
| 2.1.2.2 Money market instruments | |||||||||
| 2.1.2.2.1 Monetary authorities | |||||||||
| 2.1.2.2.2 General government | |||||||||
| 2.1.2.2.3 Banks | |||||||||
| 2.1.2.2.4 Other sectors | |||||||||
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| 2.2 Liabilities | |||||||||
| 2.2.1 Equity securities | |||||||||
| 2.2.1.1 Banks | |||||||||
| 2.2.1.2. Other sectors | |||||||||
| 2.2.2 Debt securities | |||||||||
| 2.2.2.1 Bonds and notes | |||||||||
| 2.2.2.1.1 Monetary authorities | |||||||||
| 2.2.2.1.2 General government | |||||||||
| 2.2.2.1.3 Banks | |||||||||
| 2.2.2.1.4 Other sectors | |||||||||
| 2.2.2.2 Money market instruments | |||||||||
| 2.2.2.2.1 Monetary authorities | |||||||||
| 2.2.2.2.2 General government | |||||||||
| 2.2.2.2.3 Banks | |||||||||
| 2.2.2.2.4 Other sectors | |||||||||
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See Selected Supplementary Information table for components.
Memorandum items: 5.1 Gross premiums
5.2 Gross claims
If distributed branch profits are not identified, all branch profits are considered to be distributed.
| Credit | Debit | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1. Current Account | |||||||||
| A. Goods and services | |||||||||
| a. Goods | |||||||||
| 1 General merchandise | |||||||||
| 2. Goods for processing | |||||||||
| 3 Repairs on goods | |||||||||
| 4 Goods procured in ports by carriers | |||||||||
| 5. Nonmonetary gold | |||||||||
| 5.1 Held as a store of value | |||||||||
| 5.2 Other | |||||||||
| b. Services | |||||||||
| 1. Transportation | |||||||||
| 1.1 Sea transport | |||||||||
| 1.1.1 Passenger | |||||||||
| 1.1.2 Freight | |||||||||
| 1.1.3 Other | |||||||||
| 1.2 Air transport | |||||||||
| 1.2.1 Passenger | |||||||||
| 1.2.2 Freight | |||||||||
| 1.2.3 Other | |||||||||
| 1.3 Other transport | |||||||||
| 1.3.1 Passenger | |||||||||
| 1.3.2 Freight | |||||||||
| 1.3.3 Other | |||||||||
| 2. Travel | |||||||||
| 2.1 Business | |||||||||
| 2.2 Personal* | |||||||||
| 3. Communications services | |||||||||
| 4. Construction services | |||||||||
| 5. Insurance services** | |||||||||
| 6. Financial services | |||||||||
| 7. Computer and information services | |||||||||
| 8. Royalties and license fees | |||||||||
| 9. Other business services | |||||||||
| 9.1 Merchanting and other trade-related services | |||||||||
| 9.2 Operational leasing services | |||||||||
| 9.3 Miscellaneous business, professional, and technical services* | |||||||||
| 10. Personal, cultural, and recreational services | |||||||||
| 10.1 Audiovisual and related services | |||||||||
| 10.2 Other personal, cultural, and recreational services | |||||||||
| 11. Government services, n.i.e. | |||||||||
| B. Income | |||||||||
| 1. Compensation of employees | |||||||||
| 2. Investment income | |||||||||
| 2.1 Direct investment | |||||||||
| 2.1.1 Income on equity | |||||||||
| 2.1.1.1 Dividends and distributed branch profits** | |||||||||
| 2.1.1.2 Reinvested earnings and undistributed branch profits** | |||||||||
| 2.1.2 Income on debt (interest) | |||||||||
| 2.2 Portfolio investment | |||||||||
| 2.2.1 Income on equity (dividends) | |||||||||
| 2.2.2 Income on debt (interest) | |||||||||
| 2.2.2.1 Bonds and notes | |||||||||
| 2.2.2.2 Money market instruments and financial derivatives | |||||||||
| 2.3 Other investment | |||||||||
| C. Current transfers | |||||||||
| 1. General government | |||||||||
| 2. Other sectors | |||||||||
| 2.1 Workers’ remittances | |||||||||
| 2.2 Other transfers | |||||||||
| 2. Capital and Financial Account | |||||||||
| A. Capital account | |||||||||
| 1. Capital transfers | |||||||||
| 1.1 General government | |||||||||
| 1.1.1 Debt forgiveness | |||||||||
| 1.1.2 Other | |||||||||
| 1.2 Other sectors | |||||||||
| 1.2.1 Migrants’ transfers | |||||||||
| 1.2.2 Debt forgiveness | |||||||||
| 1.2.3 Other | |||||||||
| 2. Acquisition/disposal of nonproduced, nonfinancial assets | |||||||||
| B. Financial account | |||||||||
| 1. Direct investment | |||||||||
| 1.1 Abroad | |||||||||
| 1.1.1 Equity capital | |||||||||
| 1.1.1.1 Claims on affiliated enterprises | |||||||||
| 1.1.1.2 Liabilities to affiliated enterprises | |||||||||
| 1.1.2 Reinvested earnings | |||||||||
| 1.1.3 Other capital | |||||||||
| 1.1.3.1 Claims on affiliated enterprises | |||||||||
| 1.1.3.2 Liabilities to affiliated enterprises | |||||||||
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| 1.2 In reporting economy | |||||||||
| 1.2.1 Equity capital | |||||||||
| 1.2.1.1 Claims on direct investors | |||||||||
| 1.2.1.2 Liabilities to direct investors | |||||||||
| 1.2.2 Reinvested earnings | |||||||||
| 1.2.3 Other capital | |||||||||
| 1.2.3.1 Claims on direct investors | |||||||||
| 1.2.3.2 Liabilities to direct investors | |||||||||
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| 2. Portfolio investment | |||||||||
| 2.1 Assets | |||||||||
| 2.1.1 Equity securities | |||||||||
| 2.1.1.1 Monetary authorities | |||||||||
| 2.1.1.2 General government | |||||||||
| 2.1.1.3 Banks | |||||||||
| 2.1.1.4 Other sectors | |||||||||
| 2.1.2 Debt securities | |||||||||
| 2.1.2.1 Bonds and notes | |||||||||
| 2.1.2.1.1 Monetary authorities | |||||||||
| 2.1.2.1.2 General government | |||||||||
| 2.1.2.1.3 Banks | |||||||||
| 2.1.2.1.4 Other sectors | |||||||||
| 2.1.2.2 Money market instruments | |||||||||
| 2.1.2.2.1 Monetary authorities | |||||||||
| 2.1.2.2.2 General government | |||||||||
| 2.1.2.2.3 Banks | |||||||||
| 2.1.2.2.4 Other sectors | |||||||||
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| 2.2 Liabilities | |||||||||
| 2.2.1 Equity securities | |||||||||
| 2.2.1.1 Banks | |||||||||
| 2.2.1.2. Other sectors | |||||||||
| 2.2.2 Debt securities | |||||||||
| 2.2.2.1 Bonds and notes | |||||||||
| 2.2.2.1.1 Monetary authorities | |||||||||
| 2.2.2.1.2 General government | |||||||||
| 2.2.2.1.3 Banks | |||||||||
| 2.2.2.1.4 Other sectors | |||||||||
| 2.2.2.2 Money market instruments | |||||||||
| 2.2.2.2.1 Monetary authorities | |||||||||
| 2.2.2.2.2 General government | |||||||||
| 2.2.2.2.3 Banks | |||||||||
| 2.2.2.2.4 Other sectors | |||||||||
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See Selected Supplementary Information table for components.
Memorandum items: 5.1 Gross premiums
5.2 Gross claims
If distributed branch profits are not identified, all branch profits are considered to be distributed.
XIII. Other Services
[…]
Definitions
[…]
258. Financial services cover financial intermediary and auxiliary services (except those of insurance enterprises and pension funds) conducted between residents and nonresidents. Included are intermediary service fees, such as those associated with letters of credit, bankers’ acceptances, lines of credit, financial leasing, and foreign exchange transactions. (For the latter, the spread between the midpoint rate and the buying/selling rate is the service charge.) Also included are commissions and other fees related to transactions in securities—brokerage, placements of issues, underwritings, and arrangements of swaps, options, and other hedging instruments; services related to asset management
XIV. Income
[…]
Definition and Classification
[…]
274. Investment income (property income in the SNA) covers income derived from a resident entity’s ownership of foreign financial assets under Net interest flows arising from interest rate swaps also are included (See paragraph 406). Interest is payable in accordance with a binding agreement between the creditor and the debtor.
[…]
Portfolio investment income
280. Portfolio investment income comprises income transactions between residents and nonresidents and is derived from holdings of shares, bonds, notes, and money market instruments and associated with financial derivatives. This category is subdivided into income on equity (dividends) and income on debt (interest). See Chapter 19 for details on new financial instruments and treatment of financial derivatives, such as options.
XVI. Structure and Characteristics of the Capital and Financial Account
Coverage
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308. The standard components of both the current account and the capital and financial account are discussed in Chapter 8. Coverage of the capital and financial account is described in paragraphs 172 through 181, and the classification of components appears at the end of the chapter. Capital and financial account transactions presented in this Manual are the same as those reflected in the capital and financial accounts of the SNA external accumulation accounts. However, in the balance of payments, the primary basis for classification of the financial account is functional category (i.e., direct investment, portfolio investment,
[…]
Financial Account
Coverage
[…]
315. However, options and other in accordance with the treatment of these items in the SNA. These instruments commitments Thus, Both parties to a derivative contract recognize a financial instrument instruments appears in Chapter 19
[…]
Transactions in assets
[…]
318. To establish whether a transaction involving a foreign asset is a transaction between a resident and a nonresident, the compiler must know the identities of both parties. The information available on transferable claims constituting foreign assets may not, however, permit identification of the two parties to the transaction. That is, a compiler may not be able to ascertain whether a resident, who acquired or relinquished a transferable claim on a nonresident, conducted the transaction with another resident or with a nonresident, or whether a nonresident dealt with another nonresident or with a resident. Thus, a recommendation that the balance of payments be confined solely to asset transactions between residents and nonresidents would be difficult or impossible to implement. Also, the introduction, in the Manual, of a domestic sectoral breakdown for the portfolio investment,
[…]
Net recording
324. Two or more changes in a specific asset, or changes in two or more different assets classified in the same standard component, are consolidated in a single entry. This entry reflects the net effect of all the increases and decreases that occur during the recording period in holdings of that type of asset. For example, purchases (by nonresidents) of securities issued by resident enterprises of an economy are consolidated with sales (by nonresidents) of such securities, and the net change is recorded for that item. Net decreases in claims or other assets and net increases in liabilities are recorded as credits; net increases in assets and net decreases in liabilities are recorded as debits.
[…]
Functional types of investment
330. Four
Direct investment
The direct investor seeks a significant voice in the management of an enterprise operating outside his or her resident economy. To achieve this position, the investor must almost invariably provide a certain, often substantial, amount of the equity capital of the enterprise. The direct investor may also decide to supply other capital to further enterprise operations Because of the direct investor’s special relationship to the enterprise, his motives in supplying capital will be somewhat different from those of other investors. Thus, the capital supplied by a direct investor will probably exhibit characteristic behavior. Direct investment is classified primarily on a directional basis—resident direct investment abroad and nonresident investment in the reporting economy—and is subdivided into equity capital, reinvested earnings, and other capital
Portfolio investment
Cross-border investment in equity and debt securities (other than direct investment) is both quantitatively and analytically significant. Such cross-border investment therefore warrants separate recording and coverage, particularly in view of the trend towards free international movement of capital and the growth of new financial instruments and new market participants. Coverage of this category is expanded to reflect these developments and to include money market debt instruments and financial derivatives, as well as longer-term debt and equity securities.
Financial Derivatives
Other investment
This residual group comprises many different kinds of investments. In practice, it is not feasible to draw any further functional distinctions among the various types because the reasons underlying the flows are too numerous and varied. Other breakdowns are therefore used to distinguish behavioral differences among components of this category (i.e., trade credits, loans, currency and deposits, use of Fund credit, loans from the Fund, etc.).
Reserve assets
These are foreign financial assets available to, and controlled by, the monetary authorities for financing or regulating payments imbalances or for other purposes. Reserve assets consist of monetary gold, SDRs, reserve position in the Fund, foreign exchange, and other claims. Changes in the holdings of reserves may reflect payments imbalances or responses to them, official exchange market intervention to influence the exchange rate, and/or other actions or influences.
[…]
Type of instrument
332. For portfolio investment, the type of instrument is the primary classification (i.e., equity and debt securities). Debt securities are subdivided into bonds and notes and financial derivatives. Although the sectoral subdivision for portfolio investment is secondary, there is no implication that, in certain instances, it may not be of equal interest to the compiling economy. The same holds true for
Domestic sector
333. For assets, the institutional sector of the domestic (resident) creditor and, for liabilities, that of the domestic debtor often are factors that influence transactions in financial items. The sectoring also improves links with the IMF and other statistical systems, including the SNA. This Manual distinguishes four sectors—monetary authorities, general government, banks, and other sectors—for both portfolio investment,
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Long- and short-term investment
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339. In the categories of direct investment, portfolio investment,
XVIII. Direct Investment
[…]
Direct Investment Capital
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369. The components of direct investment capital transactions, which—as noted in paragraph 330—are recorded on a directional basis (i.e., resident direct investment abroad and nonresident direct investment in the recording economy), are equity capital, reinvested earnings, and other capital associated with various intercompany debt transactions,
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New paragraph
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372.
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Extent of Net Recording
375. Direct investment is often referred to as an asset for the economy of the direct investor and as a liability for the economy in which the direct investment enterprise operates. Actually, investor and enterprise have claims on, or liabilities to, each other—although the investor could be expected to have net foreign claims and the enterprise to have net foreign liabilities. It is recommended in the Manual that direct and other capital (intercompany debt),
XIX. Portfolio Investment
Coverage
385. Portfolio investment includes in addition to equity securities and debt securities in the form of bonds and notes and financial derivatives such as options. Excluded are any of the aforementioned instruments included in the categories of direct investment and reserve assets. The expanded coverage in transactions reflects changes in international financial markets in recent years and includes the introduction of many new financial instruments within the framework of continuous innovation.
[…]
Classification and Definitions
387. The categories of financial instruments classified and defined in the Manual are generally consistent with those in the SNA. The major components of portfolio investment, which are classified under assets and liabilities, are equity securities and debt securities. Both are usually traded (or tradable) in organized and other financial markets. Debt securities are subdivided into bonds and notes and financial derivatives, including varieties of new financial instruments.
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389. Debt securities cover (i) bonds, debentures, notes, etc. and (iii) financial derivatives or secondary instruments, such as options, that usually do not extend to actual delivery and are utilized for hedging of risks, investment, and trading purposes.
390. Bonds, debentures, notes, etc. usually give the holder the unconditional right to a fixed money income or contractually determined variable money income. (Payment of interest is not dependent upon the earnings of the debtor.) With the exception of perpetual bonds, bonds and debentures also provide the holder with the unconditional right to a fixed sum as a repayment of principal on a specified date or dates. Included are nonparticiparing preferred stocks or shares; convertible bonds; and bonds with optional maturity dates—the latest of which is more than one year after issue.9 This category also includes negotiable certificates of deposit with maturities of more than one year; dual currency bonds; zero coupon and other deep discounted bonds; floating rate bonds; indexed bonds; and asset-backed securities, such as collateralized mortgage obligations (CMOs) and participation certificates. (Mortgages are not classified as bonds but are included under loans.)
[…]
392. Certain financial instruments give the holder the qualified right to receive an economic benefit in the form of cash, a primary financial instrument, etc. at some future date. These instruments are referred to as derivatives or secondary instruments in that they are linked to either specific financial instruments or indicators (foreign currencies, government bonds, share price indices, interest rates, etc.) or to particular commodities (gold, sugar, coffee, etc.) that may be purchased or sold at a future date. Derivatives also may be linked to a future exchange, according to a contractual arrangement, of one asset for another. The instrument, which is a contract, may be tradable and have a market value. When that is the case, the characteristics of the instrument as a contingent asset or liability (not to be recorded in the balance of payments or in SNA sectoral balance sheets) change and give rise to treatment of the instrument as an actual financial asset or liability in the financial account. Among derivative instruments are options (on currencies, interest rates, commodities, indices, etc.), traded financial futures, warrants, and arrangements such as currency and interest rate swaps.
393. Transactions in derivatives are treated as separate (mainly financial) transactions rather than being included as integral parts of underlying transactions to which they may be linked as hedges. There are several reasons for this treatment, which is consistent with that in the SNA. The counter party to a derivative transaction will be a different transactor than the transactor for the underlying transaction being hedged. Also, the two parties to the derivative transaction may have different motives— hedging, dealing in the instrument involved, or acquiring the derivative as an investment. Even if both parties are hedging, the hedging may be associated with different financial or other assets. If derivative transactions were included as integral parts of underlying transactions, such treatment would lead to asymmetries of measurement in the balance of payments accounts. For example, the counter party to a derivative contract that hedges an underlying position with a resident may also be a resident. In such an instance, the inclusion of the derivative as part of the underlying transaction would result in the incorrect inclusion of transactions in the balance of payments.
Selected Recording Issues
395. The expanded coverage, which includes traditional and new money market and derivative instruments and innovative long-term securities, of portfolio investment raises issues concerning the recording of balance of payments entries associated with these instruments. Such issues are discussed, for selected instruments, in subsequent paragraphs.
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398. Among money market and derivative instruments and arrangements, the treatments of short-term notes issued under NIFs, options, warrants, swaps, traded financial futures, and forward rate agreements are noted subsequently.
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401. Options are contracts that give the purchaser of the option the right, but not the obligation, to buy (a call option) or to sell (a put option) a particular financial instrument or commodity at a predetermined price (strike price) within a specific time span or on a specified date. Some leading types of options are those on foreign currencies, interest rates, equities, commodities, specified indexes, etc. The buyer of the option pays a premium (the option price) to the seller (writer or issuer) for the latter’s commitment to sell or purchase the specified amount of the underlying instrument or commodity or to provide, on demand of the buyer, appropriate remuneration. By convention, in this Manual and in the SNA, that commitment is treated as a liability of the seller and represents the current cost to the seller of buying out his contingent liability.
402. Conceptually, the payment of the premium referred to previously includes two elements: the purchase price of a financial asset and a service charge. In practice, it often is not possible to identify the service element separately. If the latter can be distinguished, it should be entered under financial services. If not, it is recommended that the full premium be recorded in the balance of payments as the acquisition of a financial asset by the buyer and as an incurrence of a liability by the seller. Subsequent trading (sales) of options is recorded in the financial account, as is the exercise or purchase/sale of the underlying financial instrument. If an option actually proceeds to delivery, which is not the usual case, the acquisition or sale of the underlying asset (real or financial) is recorded at the prevailing market price in the appropriate balance of payments component. Offsetting that entry is the actual amount payable or receivable; the difference between that amount and the prevailing market price is reflected in an entry that extinguishes the option contract. If an option contract is closed out prior to delivery, the actual amount payable or receivable is offset by the entry extinguishing the option contract. When initial margin payments and subsequent increases or decreases are payable by the parties to options, the payments should be recorded as both assets and liabilities in the financial account under other investment, currency and deposits in the financial account. Payments into, and withdrawals from, these accounts sometimes may be reflected in transactions in the traded options to which the accounts relate and, if so, are recorded under option transactions in the financial account.
403. Warrants (a particular form of option) are tradable instruments giving the holder the right to buy from the issuer of the warrant (usually a corporation) a certain number of shares or bonds under specified conditions for a designated period of time. Warrants can be traded apart from the underlying securities to which the warrants are linked and thus have a market value. The treatment of warrants is the same as that for other options, and the issuer of the warrant is considered, by convention, to have incurred a liability, which is the counterpart of the asset held by the buyer and reflects the current cost of buying out the issuer’s contingent liability.
404. Another variety of tradable warrant (usually issued by investment intermediaries) is a currency warrant, the value of which is based on the amount of one currency required to purchase another currency at or before the expiration date of the warrant. Currency warrants and cross-currency warrants with payments denominated in third currencies should be treated in a similar manner to other warrants.
405. A swap is a contractual arrangement involving two parties who agree to exchange, over time and according to predetermined rules, streams of payment on the same amount of indebtedness. The two most prevalent varieties of swaps are interest rate swaps and currency swaps. An interest rate swap involves an exchange of interest payments of different character (e.g., fixed rate and floating rate, two different floating rates, fixed rate in one currency and floating rate in another, etc.). A currency swap involves an exchange of specified amounts denominated in two different currencies and subsequent repayments reflecting principal and/or interest. (Central bank currency swap arrangements usually undertaken for exchange rate policy purposes and involving the temporary exchange of deposits as of a particular date and the reversal of the transaction at a future date are referred to in paragraph 434.)
406. Balance of payments entries for streams of interest payments associated with swap transactions are recorded, on a net basis, in the current account, and streams of principal repayments are recorded in the financial account. Although neither party to a swap arrangement is considered to be the provider of a service to the other, any payment to a third party involved in arranging the swap is recorded under financial services.
407.A futures contract is an agreement between two parties to exchange a real asset for a financial asset, or to exchange, on a specified date at a predetermined rate, two financial assets. Traded financial futures, including those for interest rates, currencies, commodities, equities, or other indices, are recorded in the financial account in a manner similar to the recording of options. Transactions associated with nontraded financial futures are likely to occur infrequently and are recorded under the other assets or other liabilities components of other investment.
408. A forward rate agreement (FRA) is an arrangement according to which two parties agree on an interest rate to be paid, on a specified settlement date, on a notional amount of principal that is never exchanged. At that time, the settlement payment (i.e., the difference between the rate agreed upon and the prevailing market rate at the time of settlement) is recorded as a transaction in the balance of payments. The buyer of the FRA receives payment from the seller if the prevailing rate exceeds the rate agreed upon; the seller receives payment from the buyer if the prevailing rate is lower than the rate agreed upon. These payments are recorded as interest income in the current account of the balance payments. Because there is only a notional (not an actual) underlying asset, there are no entries in the financial account.
XX. Other Investment
Coverage
411. Other investment is a residual category that includes all financial transactions not covered in direct investment, portfolio investment,
Classification
412. As is the case with portfolio investment, assets and liabilities for other investment are classified primarily on an instrument basis. The sectors of domestic creditor or debtor—the secondary basis for the classification—are monetary authorities, general government, banks, and other sectors. (For the definitions of sectors, see Appendix 2.) In contrast to and portfolio investment,
413. The instrument subclassification for other investment (as is that for portfolio investment) is closely linked to the SNA categories for financial assets. (See Chapter 3.) While the relative importance of types of investment differs considerably among economies, the types reflect most of the financial instruments and channels utilized for the acquisition of assets and incurrence of liabilities—other than for direct investment, portfolio investment,
Definitions and Recording
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421. Deposits comprise both transferable and other deposits. Transferable deposits consist of deposits that are exchangeable on demand at par without restriction or penalty, freely transferable by check or giro order, and otherwise commonly used to make payments. Deposits may be denominated in domestic or foreign currencies. include
422. Other assets and liabilities cover any items other than loans and currency and deposits. For example, capital subscriptions to international nonmonetary organizations are classified under this category
423. As noted in paragraph 372, transactions
XXI. Reserve Assets
Concept and Coverage
424. Reserve assets, the fourth
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Classification
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New paragraph
XXIII. International Investment Position
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Classification
464. Classification of the international investment position (and of changes to the IIP) has two dimensions. (See the table at the end of this chapter.) In the rows of the table, the primary distinction is between assets and liabilities; the difference between the two represents the net position. Fully consistent with the balance of payments financial account, the first IIP subclassification is by function. Assets are divided into direct investment, portfolio investment,
465. Within the functional categories and in concordance with the income component of the current account and with the financial account in the balance of payments, direct investment is subdivided into equity capital plus reinvested earnings, and other capital (intercompany debt), and financial derivatives—and secondarily by appropriate sectors. Included are
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Valuation of Components
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468. Portfolio investment (equity securities and financial derivatives) is valued at current market prices at the appropriate reference dates. For equities that are listed in organized markets or are readily tradable, the value of outstanding stocks should be based on actual prices. The value of equities that are not quoted on stock exchanges or otherwise traded regularly should be estimated by using the prices of quoted shares that are comparable as to past, current, and prospective earnings and dividends. Alternatively, the net asset values of enterprises to which the equities relate could be used to estimate market values if the balance sheets of the enterprises are available on a current value basis. For debt securities that are listed in organized markets or are readily tradable, the outstanding value of stocks also should be determined on the basis of current market prices. For debt securities that are not readily tradable, the net present value of the expected stream of future payments/receipts associated with the securities could be used to estimate market value. (The net present value of any future receipt is equal to the value of that receipt when discounted at an appropriate interest rate.)
469. Principles for valuation of financial derivatives in the investment position are, in some respects, less definitive than for other portfolio investment instruments. There are ongoing efforts by national and international accounting bodies to define standards for the measurement and recording of derivatives. Thus, in the Manual, a thorough treatment of derivative valuation is not attempted particularly in view of continued innovations in this area. Rather, brief valuation guidelines that are consistent with those in the SNA and applicable to a number of existing derivatives are presented subsequently.
470. Traded options, warrants, and traded financial futures, all of which are treated as financial assets, are included in the position at market values on the appropriate accounting dates. For an option, the market value recorded is either the current value of the option—that is, the prevailing market rate value value of buying out A contract for a currency swap
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New paragraph
Standard Components of the International Investment Position
Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and, in the reporting economy, under the heading Liabilities—claim/liability breakdowns
| Changes in Position Reflecting | |||||||||||
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| Position at | Exchange | Other | Position | ||||||||
| Beginning | Trans- | Price | Rate | Adjust- | at End | ||||||
| of Year | actions | Changes | Changes | ments | of Year | ||||||
| A. Assets | |||||||||||
| 1. Direct investment abroad* | |||||||||||
| 1.1 Equity capital and reinvested earnings | |||||||||||
| 1.1.1 Claims on affiliated enterprises | |||||||||||
| 1.1.2 Liabilities to affiliated enterprises | |||||||||||
| 1.2 Other capital | |||||||||||
| 1.2.1 Claims on affiliated enterprises | |||||||||||
| 1.2.2 Liabilities to affiliated enterprises | |||||||||||
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| 2. Portfolio investment | |||||||||||
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| 2.1.1 Monetary authorities | |||||||||||
| 2.1.2 General government | |||||||||||
| 2.1.3 Banks | |||||||||||
| 2.1.4 Other sectors | |||||||||||
| 2.2 Debt securities | |||||||||||
| 2.2.1 Bonds and notes | |||||||||||
| 2.2.1.1 Monetary authorities | |||||||||||
| 2.2.1.2 General government | |||||||||||
| 2.2.1.3 Banks | |||||||||||
| 2.2.1.4 Other sectors | |||||||||||
| 2.2.2 Money market instruments | |||||||||||
| 2.2.2.1 Monetary authorities | |||||||||||
| 2.2.2.2 General government | |||||||||||
| 2.2.2.3 Banks | |||||||||||
| 2.2.2.4 Other sectors | |||||||||||
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| B. Liabilities | |||||||||||
| 1. Direct investment in reporting economy* | |||||||||||
| 1.1 Equity capital and reinvested earnings | |||||||||||
| 1.1.1 Claims on direct investors | |||||||||||
| 1.1.2 Liabilities to direct investors | |||||||||||
| 1.2 Other capital | |||||||||||
| 1.2.1 Claims on direct investors | |||||||||||
| 1.2.2 Liabilities to direct investors | |||||||||||
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| 2.1.1 Banks | |||||||||||
| 2.1.1 Other sectors | |||||||||||
| 2.2 Debt securities | |||||||||||
| 2.2.1 Bonds and notes | |||||||||||
| 2.2.1.1 Monetary authorities | |||||||||||
| 2.2.1.2 General government | |||||||||||
| 2.2.1.3 Banks | |||||||||||
| 2.2.1.4 Other sectors | |||||||||||
| 2.2.2 Money market instruments | |||||||||||
| 2.2.2.1 Monetary authorities | |||||||||||
| 2.2.2.2 General government | |||||||||||
| 2.2.2.3 Banks | |||||||||||
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Because direct investment is classified primarily on a directional basis—abroad under the heading Assets and, in the reporting economy, under the heading Liabilities—claim/liability breakdowns
| Changes in Position Reflecting | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Position at | Exchange | Other | Position | ||||||||
| Beginning | Trans- | Price | Rate | Adjust- | at End | ||||||
| of Year | actions | Changes | Changes | ments | of Year | ||||||
| A. Assets | |||||||||||
| 1. Direct investment abroad* | |||||||||||
| 1.1 Equity capital and reinvested earnings | |||||||||||
| 1.1.1 Claims on affiliated enterprises | |||||||||||
| 1.1.2 Liabilities to affiliated enterprises | |||||||||||
| 1.2 Other capital | |||||||||||
| 1.2.1 Claims on affiliated enterprises | |||||||||||
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| 2. Portfolio investment | |||||||||||
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| 2.1.1 Monetary authorities | |||||||||||
| 2.1.2 General government | |||||||||||
| 2.1.3 Banks | |||||||||||
| 2.1.4 Other sectors | |||||||||||
| 2.2 Debt securities | |||||||||||
| 2.2.1 Bonds and notes | |||||||||||
| 2.2.1.1 Monetary authorities | |||||||||||
| 2.2.1.2 General government | |||||||||||