3. Concepts and Principles
- International Monetary Fund
- Published Date:
- May 2002
I. Guidance to Compilers
3.1 The concepts and principles underlying the CPIS are those contained in BPM5. As national compilers apply these concepts and principles, some reporting issues may arise: these practical dimensions are addressed in Chapter 4. In addition, to guide compilers, in 1995 the IMF published the Balance of Payments Compilation Guide, which describes how the conceptual framework in BPM5 can be implemented in practice.
3.2 As discussed in Chapter 2, the CPIS is concerned with collecting information on equity securities and on long-term and short-term debt securities issued by nonresidents and owned by residents. BPM5 defines these securities in Chapter XIX, paragraphs 388 and 390, and discusses the methodological treatment of selected instruments in paragraphs 395 through 408 (see also Appendix VI to this Survey Guide).
3.3 Nonetheless, financial markets continually evolve. Consequently, national compilers face changing classification or valuation or other balance of payments accounting problems.
3.4 To provide national compilers in the European Union (EU) with a reference tool and to encourage a consistent approach in classifying financial instruments, the Bank of England, in response to a request from the European Monetary Institute (EMI), the forerunner of the European Central Bank (ECB), created the Financial Terminology Database15 (FTD). The database provides the economic rationale and the balance of payments treatment for each financial instrument listed. Where appropriate, the relevant BPM5 reference is provided; if the instrument is not directly covered in BPM5, a treatment in line with the IMF methodology is proposed by the Bank of England.
3.5 For the CPIS, national compilers should endeavor to use the methodology of BPM5 to classify financial instruments; however, if compilers desire further guidance, they may find the FTD a valuable reference. It covers, among other things, various types of equity and long-term and short-term debt instruments.
III. Country Attribution and Residence
3.6 A principal requirement of participation in the CPIS is the provision of a country attribution of residents’ investment in securities issued by nonresidents. This requires identification of the residence of the issuer of the security and of the holder of the security so that bilateral information can be exchanged. This section addresses the issues raised by this requirement.
3.7 The concept of residence required for the CPIS is in line with that in the System of National Accounts 1993 (1993 SNA)16 and in BPM5. Thus, the economic territory of a country is the basis upon which residence is determined. It includes the geographic territory administered by a government, territorial enclaves, and free zones and bonded warehouses operated by offshore enterprises under customs control. These principles have been applied to SEIFiCs so that they are treated as resident in the economic territory of which they are a part, regardless of their treatment under local exchange control, tax, or employment regulations.17 Apart from being consistent with the concept of residence recommended in the 1993 SNA and in BPM5, this treatment is critical to ensure consistency in applying a common principle of residence across territories.
3.8 Both the 1993 SNA and BPM5 define the residence of units in terms of their center of interest. The application of this concept to individuals and enterprises for the purposes of the CPIS is the same as in the SNA and BPM5.18 Both the 1993 SNA and BPM5 recommend that offshore enterprises (which may be engaged in manufacture, trade, and financial services) be treated as resident in the economy in which they are located.19BPM5 gives particular attention to the residence and classification of special purpose entities (SPEs) as direct investment enterprises.20 SPEs are commonly engaged in providing financial services.
3.9 For the CPIS it is necessary to provide further clarification of the treatment of so-called “brass-plate” companies, “international business companies” (IBCs), “shell companies,” and special purpose entities (SPEs) that may have a limited physical presence in the economy in which they are located, may be offshore in the sense just defined, and yet may be significant vehicles for cross-border portfolio investment. To ensure their inclusion in the CPIS, the legal domicile of an enterprise is a preferred indicator of residence. In a typical SEIFiC, the transactors that are likely to meet the test of legal domicile may well include: (i) companies that are incorporated in the jurisdiction (including so-called “international business companies” and “exempt” companies) even though they may be managed or administered in another jurisdiction; (ii) branches of companies incorporated abroad (including financial holding companies); and (iii) unincorporated enterprises that are deemed to be legally domiciled, can produce separate accounts, and are expected to be in business for a period of one year or more. This test of residence is consistent with that followed in the draft interagency External Debt Statistics: Guide for Compilers and Users (Washington: IMF, 2002, forthcoming), which treats debt issues on the balance sheet of entities legally incorporated or domiciled in SEIFiCs as external debt of the SEIFiC. However, although international business companies in SEIFiCs are residents of the countries in which they are incorporated, unless they undertake financial intermediation they are not usually regulated and are not usually required to have accounts, so collection of CPIS data on IBCs in SEIFiCs may be very difficult.
3.10 For the CPIS, the residence of individuals that hold securities is established by their center of economic interest, as interpreted by the 1993 SNA and by BPM5. This is determined by the location of their principal residence (as a member of a household) or by their employment status. An individual who is employed for one year or more in a country is deemed to be resident in that country. As explained in BPM5, there are specific guidelines for determining the residence of diplomatic staff and technical assistance personnel, but these are unlikely to be critical for the purposes of the CPIS.
A. Country Attribution of the Issuer of a Security
3.11 The issuer of a security is likely to be a government agency, a public or private corporation (including financial institutions), or a branch or subsidiary of a public or private corporation (including a financial institution). Depending on their data sources, CPIS compilers may have difficulty in determining the country of residence of nonresident issuers of securities held by their residents. As noted below, for some multinational companies, there may be difficulty in determining residence, either of the issuer or of the holder.
3.12 Ensuring the correct country attribution of the issuer of a security is a central element of the CPIS. For data to be consistent, each reporter or compiler must attribute the same security issue to the same country, regardless of whether the national survey is being conducted on a security-by-security basis or whether it is on an aggregated basis (see Chapter 4 for the discussion of these approaches).
3.13 The coding systems used by the securities industry to identify securities can help ensure consistency of geographic attribution of securities by compilers across countries. For example, International Securities Identification Number (ISIN) codes are now allocated to many internationally traded long-term securities by national numbering agencies (NNAs), which have the sole right to allocate numbers within their jurisdiction. Each security has its own unique identifier. For equity securities (but not debt securities), the first two digits can be used to identify the country of the issuer. For debt securities, the ISIN code may identify the residence of the lead manager and not the issuer. It is recommended that national compilers, when discussing their national survey with potential survey respondents, evaluate the use of the ISIN code system in their own country and gauge its potential use in classifying securities in their national survey. More information on the coding system and the associated security databases is provided in Chapter 4.
3.14 Large multinational corporations (MNCs) may have more than one center of economic interest; others appear to have more than one head office. However, there are usually either separate corporations that operate within the larger entity or there may be a standard allocation principle among the countries of residence of the different owners, based on their equity shares. Moreover, some companies, listed on major stock exchanges and having all the characteristics of a resident of that economy, may be incorporated in another jurisdiction altogether. In addition, some MNCs may use a “shell company” or an SPE,21 domiciled and registered in another country or economic territory—typically a SEIFiC—to issue securities, usually debt instruments, even though there is “no physical presence” in the economy or territory. In that instance, the securities should be attributed to the country or territory in which the issuing entity is legally incorporated, as opposed to the country of the parent enterprise, even though the legal entity in the SEIFiC is merely a conduit for raising funds in the parent company.
3.15 Even where the issue is guaranteed by the parent company, either explicitly or implicitly, and the funds are for use by the parent company, the residence of the issuer should be attributed to the place of registration of the special financing vehicle. Even for countries using a security-by-security approach (see Chapter 4), the database should be checked because the country allocation of issuer, especially for such special financing vehicles, is not always attributed correctly.
3.16 Securities issued by international organizations should be recorded as such, and not be attributed to the country in which they are located. Other characteristics of a security, such as the currency of denomination, the market where it is issued, listed, or traded, or the country of the guarantor or underwriter of the issue, should not be used as a substitute for the resident country of the issuer.
B. Country Attribution of the Security Holder
3.17 The holder of a security may be a government entity, a public or private corporation (including a financial institution), a quasi-corporation (including a financial institution), an enterprise as defined in BPM5, a nonprofit institution serving households (NPISH), or an individual. For the CPIS, the national compiler needs to be able to identify all resident holders of securities issued by nonresidents. The following addresses problems that may arise when the residence of the holder cannot readily be determined from the available data sources (such as reporting by investment managers, custodians, or settlement agents), problems related to the treatment of nominee accounts, issues concerning the treatment of insurance company technical reserves, pension funds, mutual funds, and trust service providers, and the treatment of defeasance.
3.18 This identification of residence based on beneficial holders is particularly difficult where the information is provided by investment (fund) managers or custodians. They may not be aware that the registered owner is not the beneficial owner or, alternatively, they may not know the residence of the beneficial owner if the assets are held by nominee companies or trustees. When investment managers or custodians are asked to report the value of securities they hold on behalf of others, it is important that they be provided with guidelines to determine the basis of residence of the asset holder(s). For the most part, they use postal addresses; however, in some instances, this will be inappropriate for reasons noted above.
3.19 Difficulties also arise in regard to whether custodians can readily identify the residence of the beneficial holder. Custodians will sometimes hold securities on behalf of other custodians. Investors may place their portfolios with “global custodians,” which, in turn, use the services of “local” or “sub” custodians. In that case, it is important, where possible, to have the subcustodian ignore its holdings on behalf of the global custodian, which should then be asked to report the information on behalf of the securities’ ultimate owners. This is because the global custodian, in this instance, would be aware of that information, whereas the subcustodian would not. However, it is recognized that this exercise may require considerable coordination and involve substantial resources, especially as cross-border dimensions are involved. There is, moreover, considerable risk that double or undercounting may result.22 Accordingly, it is recommended that this process of “looking through” the subcustodian to the global custodian should be undertaken only where there is a strong likelihood of good interagency coordination and cooperation. If this is not possible, it is probably better not to attempt such an undertaking. Clear instructions to both global and local or subcustodians are necessary to ensure that attribution of country of residence is done consistently between them.
3.20 When using investment brokers or custodians as a data source for the CPIS, problems may arise regarding the treatment of nominee accounts. A nominee account is a device through which an investor acquires ownership of securities without his/her/its name appearing on the security register. Nominee accounts are offered by nominees, which are usually nominee companies operated by lawyers, accountants, securities dealers, or financial institutions. In countries that use trusts, the nominee usually holds the assets as a trustee and may have no discretion in the management of the assets. Securities acquired via a nominee are registered in the nominee’s name. Nominee accounts are sometimes used to make an initial accumulation of shares, up to the legal limit permitted before disclosure is required, pending a takeover bid. More generally, they are used by investors as a convenient means to buy and sell shares through a securities dealer (which will have its own nominee company). Holdings of securities by a nominee, although registered in the name of the nominee, should be attributed to the country of residence of the beneficial owner. The nominee should always know this information. If the beneficial owner of the securities is a nonresident of the compiling economy, the holdings of the portfolio investment assets should not be included in the portfolio investment assets of that economy. However, if the data are collected from custodians23 rather than directly from the nominee, it may be very difficult for the custodian to determine who the beneficial owner is because the custodian’s records may only record the legal owner (i.e., the nominee). Where the nominee is a resident of the compiling economy and the beneficial owner is a nonresident, ownership of portfolio investment assets may be incorrectly attributed to the resident economy. On the other hand, where the nominee is a non-resident and the beneficiary is a resident, unless the custodian is aware of that situation, the portfolio investment asset holdings will be excluded from the CPIS—thereby understating the compiling economy’s assets because the respondent will be instructed to include holdings of residents only.
3.21 The treatment of pension funds in the CPIS is fully consistent with the 1993 SNA and BPM5. Pension funds to be included as respondents comprise those that are constituted as separate institutional units from the units that created them. Sometimes, the management of pension funds takes place in another jurisdiction from that in which the pension fund itself is resident. For the CPIS, in all such instances the ownership of the pension funds should be attributed to the country in which the pension fund is resident.
3.22 The treatment of collective investment schemes (such as mutual funds) in the CPIS is fully consistent with the 1993 SNA and BPM5. For mutual funds, it is not uncommon, especially in SEIFiCs, for them to be registered in one jurisdiction, managed in another, and administered in a third. “Managing” means the buying and selling of the assets and other front office activity, such as market research and economic analysis. “Administering” in this context means the bookkeeping, legal, and other “back room” activities. Collective investment schemes that are legally incorporated or registered in an economy are deemed to be residents of that economy, even if the managing or administration is undertaken in another economy. It is important that respondents to the survey understand that, for the CPIS, it is the economy of registration of a collective investment scheme that is its domicile.
3.23 Trusts are arrangements where one party (the trusteels) has the legal title to, and often control of, a portfolio of assets while others (the beneficiary/ies) have the right to benefits of the portfolio or income generated by it. Trusts in this use of the term are usually found only in Anglo-American legal systems. The trustee is subject to fiduciary obligations to protect the beneficiaries’ interests (e.g., the trust property is kept separately from the personal property of the trustee). The assets are held off the trustee’s balance sheet. Because their essential aspect is the separation of different aspects of ownership, trusts give rise to questions on the attribution of their ownership and residence.
3.24 A general treatment of trusts as units is not given by the 1993 SNA and BPM5 (which refers to investment trusts along with mutual funds as collective investment schemes). This is because they are not a separate group of units in themselves but, rather, trusts are treated in the same way as entities that undertake equivalent economic functions with different legal structures. This is based on the principle that economic function of the entity is relevant in economic analysis, rather than the particular legal structure that is used. The relevant aspects for identification of the economic function for statistical units are, first, the degree of separation of the unit from others that established and own it, as evidenced by its decision making and whether it has its own accounts and, second, the nature of the activities it undertakes (viz., financial intermediation, market production of goods and services, general government operations, nonprofit production, or simply holding assets).
3.25 Trusts that are used to undertake production of goods and services resemble businesses that use a corporate structure and will usually be treated as nonfinancial corporations. By reasons of the fiduciary duties of the trustee, the trust will have its own accounts and maintain a separate identity from both the trustee and the beneficiaries. Similarly, trusts that undertake financial intermediation (securitization, collateralized securities, and investment pools, such as collective investment schemes) are often found to be separate units and resemble their corporate equivalents undertaking the same activities. For example, unit trusts (which are unincorporated) and mutual funds (which are incorporated) have different legal forms, but both are collective investment vehicles that perform the same economic function. Similarly, pension funds that use corporate structures should be treated the same way in economic statistics as those that use trusts.
3.26 Trusts are also sometimes used solely to hold assets for a small group of people and, in this case, may not be open to the public or be large enough to qualify as a collective investment vehicle.24 Such trusts are often set up by one or more family members for their relatives (and possibly themselves). However, they can also be used as vehicles for small groups of unrelated investors. Trustees may be relatives of the beneficiaries or professional trustees, such as lawyers or licensed trustee companies established for the purpose. In some cases, the trustee has legal title without decision-making power, as the trust deed requires that the trustee follow the instructions of the beneficiary/ies. In these cases, which include nominee companies, the trust is not the effective decision-making unit. However, in other cases, the trustee has independent control of the assets.25 Trusts are often managed by professional trust service providers, who may be potential data sources. Such a collection approach is analogous to custodians, which are used as a convenient data collection point in many countries. The treatment for these trusts is not clearly stated in international standards, but would appear to point to treating the assets as if they were held directly by the beneficiaries. When the trust and beneficiaries are in the same country, this does not present practical problems. However, in practice, beneficiaries and the trust are often located in different countries, particularly for the many trusts operating in SEIFiCs. In these cases, it is unlikely that any data can be collected by the country of the beneficiaries. Nor is it proposed for the 2001 CPIS to collect data in the country of the trust, whether a SEIFiC or not.
3.27 Defeasance requires a particular mention. Defeasance is an arrangement whereby a debtor sets up a device (“defeasance”) into which it places assets of equal value and income stream to match an outstanding liability. Certain countries have practices that permit “defeased” assets and liabilities to be taken off the balance sheet. However, under national accounting, balance of payments, and the CPIS concepts, both the assets and liabilities should be regarded as being on-balance sheet of the defeasing party.
C. International Organizations and Regional Central Banks
3.28 In balance of payments statistics and the CPIS, international organizations (IOs) are not treated as being residents of any country. Although physically located in a given country, they are always treated as nonresident for statistical purposes because they are created by agreements between governments and are outside the authority of an individual government. Any assets or liabilities they may hold are not the assets or liabilities of the countries in which they are physically located. However, it should be emphasized that any pension funds operated by IOs are considered to be residents of the country in which the pension funds are located.
3.29 The IMF will conduct a survey of the portfolio investment assets held by international organizations to complement the results of the CPIS. They will be included in the global CPIS results, as was done in the 1997 CPIS publication.26 Portfolio investment assets of IOs should not be included in national CPIS data because their inclusion would result in double counting. For countries that are hosts to IOs, the IOs’ portfolio investment assets should not be included in their national data. Similarly, any securities issued by residents that are held by an IO are liabilities of the issuing country to a nonresident. Correct classification may be an issue if data are obtained through custodians, and IOs may be incorrectly identified as residents if the classification is based on their physical location.
3.30 Similarly, for the CPIS, holdings of securities issued by international organizations should be reported as a separate category under a specific code for international organizations (code “XX,” the last code in the list of countries in the model forms), rather than under the host country of the international organization.
3.31 Securities held by regional central banks (RCBs) may be included in both foreign exchange reserves and portfolio investment asset holdings. For example, pension fund portfolio investment assets holdings (if not held in a separate institutional unit) or securities held for monetary policy purposes may be recorded as portfolio investment rather than as reserve assets. In some cases, RCBs may hold securities issued by member countries of the RCB. These latter securities are usually not included in the RCB’s reserve assets. In that case, these securities should be reported by the RCB as securities claims on the member countries of the RCB as part of their portfolio investment asset holdings.
3.32 Securities issued by RCBs do not appear to be significant at present, but the holder of any such securities should report them in its portfolio holdings in the “international organizations” line in the country allocation. RCB securities should not be allocated to the member countries of the bank and they should always be treated as having been issued by a nonresident. If securities issued by RCBs become significant in the future, it would be desirable to add a specific line or lines for them in CPIS codes and report forms.
3.33 In paragraph 468, BPM5 recommends that stocks of assets (and liabilities) be valued at current market prices27 at the appropriate reference date; it also provides advice on how to value securities:
For equities that are listed on organized markets or are readily tradable, the value of outstanding stocks should be based on actual [market] 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 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 or 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.)
3.34 It is essential that, as far as possible, there be consistency of reporting across countries. For those securities that are traded, which should be the majority by far, prices should be commonly available from bond and stock exchanges, commercial vendors (for instance, Reuters and Bloomberg), or organizations that maintain security databases (for instance, the International Securities Market Association [ISMA] and Telekurs) (see Box 4.1). Where the bid and asking prices are both quoted, the midpoint should be used. The market value should be that as at the close of business on December 31, 200128 (or any subsequent year if the decision is made to conduct the survey on an ongoing basis) in each compiling country. What this means is that there may be price differences across countries in different time zones for the same securities quoted in different markets. However, for the time being, given that the survey is to be used as input to a country’s international investment position (IIP), the relevant price for that economy is the market price at close of business in that economy. Accordingly, this timing difference is a valuation inconsistency that should be recognized, but at present, it is one that cannot be addressed.
3.35BPM5 recommends that interest accrued, but not yet payable, be included in the price of the debt security (see BPM5, paragraphs 121 and 396): the so-called “dirty” price. In line with that recommendation, this survey should be conducted on the basis that debt securities are to be reported on a dirty price basis. This is particularly important for zero coupon or deep discount instruments with terms to maturity of greater than one year, where the accrual of interest can be large in relation to the initial funds advanced. However, in many countries, the market price of debt securities excludes interest accrued but not yet due: the so-called “clean” price. Wherever possible, data on debt securities, reported on a clean price basis, should be converted to a dirty price basis, but it is recognized that this may not always be possible, especially for countries that use an aggregate approach. Compilers are asked to provide methodological notes setting out the basis of reporting, together with the methods used, if any, to adjust the data to a dirty price basis.
3.36 Respondents may record their security holdings, especially debt instruments on a variety of different valuation principles, notably par value, acquisition cost, amortized value, or market price, depending on the purpose of the investment and the accounting practices of the institution or economy. Compilers should make every effort to endeavor to have securities holdings reported at market prices.
3.37 Market price valuation is recommended because it is
the recommended basis in BPM5;
the only manner in which assets and liabilities can be valued on the same basis;
the basis for economic and portfolio investment theory: for the creditor, it reflects the command it has over resources, while for the debtor, it is the measure of the amount of funds required to eliminate the liability under current market conditions. This is increasingly important in an era where debtors are becoming active liability managers.
3.38 Accordingly, wherever possible, respondents should be asked to report their holdings at market price.
3.39 In some cases, securities have been issued at a substantial premium, as the coupon is much higher than the market rate of interest at the time of issue. The security should be reported at market price, which should approximate the present value of the future stream of payments, discounted by an appropriate current rate of interest.
3.40 Survey respondents may face the same problems that compilers face in obtaining good information on market valuation (Box 3.1). Therefore, when compilers rely on respondents to provide information on the market value of securities, it is important that some method of quality control be introduced. When survey respondents report on a security-by-security basis, compilers are advised to request additional information: for example, the number of equities held, by issuer; or the face value of the debt instrument and the price used to value it. With this information, compilers could confirm that the price looks appropriate, either by using their own knowledge or by comparing prices quoted for comparable or the same securities by other respondents. For infrequently traded securities, the problems are more severe.29 The compiler could use a price index to provide a means for revaluation to market prices if nominal values are provided by the respondent. The index could vary in complexity between that based on similar maturities in the same currency and that which identifies individual issues that mirror the characteristics of the unpriced security. If national compilers intend to create their own price index from information already available, they need to carefully consider technical complexities. See Box 3.2 for some of the problems associated with valuation of a particular type of instrument: asset-backed securities.
Box 3.1:Approaches to Approximating Market Prices
Where market prices are not available for securities (e.g., in private placements and in organized exchanges where they are not actively traded), valuing securities may create difficulties for national compilers.
In France, which has a security-by-security approach, in the absence of a readily observable price, custodians reporting security holdings of clients are instructed to value listed securities at the price chosen for the annual valuation of the respondent’s portfolio for unlisted securities. In Australia—which has an aggregated approach—respondents are given a range of possibilities with which to value both equities and debt; the order of preference is based on the recommendations of BPM5 (including the method of valuing securities issued at a discount, which is outlined in paragraph 396), viz., in descending order of preference: a recent transaction price, directors’ valuation, or net asset value.
Choosing the market price of a comparable company (in the same industry, of similar size, with a comparable number of shares on issue) is not a recommended option since there are too many other factors (not least, the management) that are imponderables and that could produce a considerable distortion in the valuation. At the same time, illiquidity itself tends to depress the price of a security.
3.41 Regarding those respondents who report on an aggregate basis, the compilers’ scope for independently verifying that securities have been correctly valued is more restricted. If the data are being collected within an integrated system, the compiler could, as in Australia, request that the reporters reconcile transactions and position data on the same survey form; alternatively, the compilers themselves could, as in the United Kingdom, reconcile transactions and position data (see Chapters 5 and 6 for more information on quality control). Independent information, such as an entity’s published balance sheet or statement of assets under management or under custody, could also be used. However, it is important to bear in mind when making these comparisons that like be compared with like: accordingly, if the published balance sheet is for the consolidated group’s global activities, it is unlikely to be appropriate for the purpose of this survey (or for balance of payments or the IIP) if there have been issues by nonresident subsidiaries that will be included in that consolidated balance sheet. In addition, for assets under management (or held in custody), it is important that the data adequately reflect what is managed on behalf of residents and what is managed on behalf of nonresidents. If this distinction cannot be made, the comparison for verification purposes is limited. In all cases, where comparison is made, it is necessary that the alternative source of data provide the basis for valuation in notes to the balance sheet or statement of assets under management to ensure that the comparisons with the CPIS are on the same valuation basis.
3.42 Countries that intend to conduct an aggregate survey, particularly a first-time survey targeted at custodians, are advised to gain some idea of the reported value of securities not revalued to end-period market prices. One approach is to ask respondents to report this information (such as holdings at acquisition price) on the survey form. This information could be requested as supplementary to the main data for the CPIS: for example, in the model survey forms in Appendices I and V, this information could be collected at the end of the forms on equities, long-term debt securities, and short-term debt securities as items “of which value of total securities issued by nonresidents held on respondent’s books or on behalf of residents that is not recorded at market price.” Alternatively, the total value of all equity and long- and short-term debt securities could be recorded separately from the information for individual countries’ issues. These figures might provide only a rather rough indication of the size of the problem in value terms, but they may serve as a useful basis for the CPIS because they would help compilers identify, contact, and, perhaps, directly assist those survey respondents who have the most difficulty revaluing securities.
Box 3.2:Valuation of Asset-Backed Securities
The vast majority of asset-backed securities are U.S. securities backed by pools of residential mortgages. As of March 2000, there were approximately 900,000 such securities outstanding, with nonresident ownership estimated at approximately $360 billion.
These securities present a special problem, given that there can be partial repayments of principal at any time. Because the market price is a function of market interest rates and perceived creditworthiness, not just the amount of principal outstanding, simply revaluing the original face value to end-period market prices will cause an overvaluation of position data if there has been a partial repayment. The compiler need only revalue the face value of the remaining amount outstanding—the so-called “factor value.” For example, if the original face value of a security is $1,000,000, and $700,000 of the principal has been repaid, the “factor value” is 0.300.
Problems have arisen—at least when collecting data from U.S. custodians—because some custodians keep track of only the original face value amount of principal outstanding on the security, whereas other custodians keep track of only the remaining principal outstanding. Thus, when collecting data on a security-by-security basis from custodians, compilers are advised to ask for both the original and the remaining principal outstanding; if only one is available, the compiler should at least be clear as to which has been reported so that the appropriate adjustments can be made. If data are collected on an aggregate basis, prior consultation with major respondents is recommended to decide upon the appropriate course of action.
3.43 For some purposes, knowing the sector of the holder is useful for analysis. For custodian or asset manager surveys, providing definitions by sector may help if the compiler is contemplating asking the custodian/asset manager for sectoral information. Because there are a variety of different types of institutions, especially financial, the more detailed sectors set out in the 1993 SNA may be more appropriate than the more limited version in BPM5. Should compilers feel that the more detailed breakdown of the 1993 SNA is too complicated to collect or process yet still seek some sectoral split, the BPM5 sectors (or a still smaller sectoral split) may still provide useful additional information. Alternatively, as the “other sector” of BPM5 covers many different sectors and subsectors in the 1993 SNA, compilers may wish to provide some limited breakdown (of the financial sectors, for example) without adopting the full 1993 SNA sectoral detail.
A. Monetary Authorities
3.44BPM5, paragraph 514, describes monetary authorities as follows:
The monetary authorities sector, which is based on a functional concept, includes the central bank (or currency board, monetary agency, etc.) and certain operations that are usually attributed to the central bank but are sometimes carried out by other government institutions or commercial banks. Such operations include the issuance of currency; maintenance and management of international reserves, including those resulting from transactions with the IMF; and operation of exchange stabilization funds. Such transactions are, in effect, rerouted through the central bank…. In the SNA, the central bank is a subsector of the financial corporate sector.
As discussed in Chapter 2, it is recommended that securities held as part of reserve assets be reported to the IMF under the confidential survey, SEFER.
B. General Government
3.45BPM5, paragraph 515, gives the following description of the general government sector:
The general government sector, with the exception noted in the previous paragraph, is consistent with that sector in the SNA. General government consists of (i) government units that exist at each level—central, state, or local—of government within the national economy; (ii) social security funds operated at each level of government; (iii) nonprofit institutions that are majority financed and controlled by government units; and (iv) unincorporated enterprises that are owned and operated by government units and that produce goods and services, including collective services or public goods. (However, if it is appropriate under SNA guidelines to treat unincorporated enterprises as quasi-corporations, such enterprises are allocated to the financial or nonfinancial corporate sectors.)
3.46 The 1993 SNA (paragraphs 4.104 and 4.105) describes general government as follows:
Government units may be described as unique kinds of legal entities established by political processes which have legislative, judicial or executive authority over other institutional units within a given area. Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or to individual households and to finance their provision out of taxation or other incomes; to redistribute income and wealth by means of transfers; and to engage in non-market production. In general terms:
(a) A government unit usually has the authority to raise funds by collecting taxes or compulsory transfers from other institutional units…a government unit…must also be able to borrow funds on its own account;
(b) Government units typically make three different kinds of final outlays:
(i) The first group consists of actual or imputed expenditures on the free provision to the community of collective services such as public administration, defense, law enforcement, public health, etc. which, as a result of market failure, have to be organized collectively by government and financed out of general taxation or other income;
(ii) The second group consists of expenditures on the provision of goods or services free, or at prices that are not economically significant, to individual households. These expenditures are deliberately incurred…by government in the pursuit of its social or political objectives, even though individuals could be charged according to their usage;
(iii) The third group consists of transfers paid to other institutional units, mostly households, in order to redistribute income or wealth.
Within a single country, there may be many separate government units when there are different levels of government—central, state, or local government. In addition, social security funds also constitute government units.
Excluded from government are government-owned (more than 50 percent of voting shares30) entities that charge economically significant prices for their output. These units are to be included in either financial or nonfinancial corporations, depending on the nature of the unit’s activities. For example, government owned entities that provide export insurance, housing programs, housing finance, are excluded from general government and included in financial corporations if the programs’ costs are priced in such a fashion as to influence the extent of demand. Similarly, government owned transportation systems, or utilities (such as electricity supply or telephone companies) should be included in non-financial corporations if the output is priced so as to recover at least 50 percent of operating costs.
3.47BPM5, paragraph 516, describes the banking sector as follows:
The banking sector is identical with the “other (than the central bank) depository corporations” subsector of the financial corporate sector in the SNA…. Included are all resident units engaging in financial intermediation as a principal activity and having liabilities in the form of deposits or financial instruments (such as short-term certificates of deposit) that are close substitutes for deposits. Deposits include those payable on demand and transferable by check or otherwise usable for making payments and those that, while not readily transferable, may be viewed as substitutes for transferable deposits. Thus, in addition to commercial banks, the banking sector encompasses institutions such as savings banks, savings and loan associations, credit unions or cooperatives, building societies, and post office savings banks or other government-controlled savings banks (if such banks are institutional units separate from government).
3.48 The 1993 SNA (paragraphs 4.93 and 4.94) goes on to describe these institutions as follows:
Deposit money corporations…consist of resident depository corporations and quasi-corporations which have liabilities in the form of deposit payable on demand, transferable by check or otherwise usable for making payments. Such deposits are included in the concept of money in the narrow sense. These corporations include so-called “clearing banks” which participate in a common clearing system organized to facilitate the transfer of deposits between them by checks or other means.
[Other depository corporations]…consist of all…resident depository corporations and quasi-corporations which have liabilities in the form of deposits that may not be readily transferable or in the form of financial instruments such as short-term certificates of deposit which are close substitutes for deposits and included in measures of money broadly defined. These corporations compete for funds with deposit money corporations in financial markets even if they are unable, or unwilling, to incur liabilities in the form of transferable deposits. They may include corporations described as savings banks (including trustee savings banks and savings banks and loan associations), credit cooperatives and mortgage banks or building societies. It must be emphasized that such corporations are described in different ways in different countries and they can only be identified by examining their functions rather than their names. They may also include post office savings banks or other savings banks controlled by the government, provided these are separate institutional units from government. As a result of financial innovation, improved technology in the field of computers and communications, and also financial deregulation in many countries,…drawing a clear distinction between “deposit money corporations” and “other” depository corporations may be too blurred to be operational in some countries.
D. Other Sectors in BPM5
3.49BPM5 (paragraph 517) describes “other sectors” and their components as follows:
The other sectors category is comprised of nonfinancial corporations (private, public, and quasi-corporations), insurance companies, pension funds, other nondepository financial intermediaries, private nonprofit institutions, and households.
(i) Other financial intermediaries, except insurance corporations and pension funds (1993 SNA, paragraph 4.95)
This subsector consists of all resident corporations and quasi-corporations primarily engaged in financial intermediation except depository corporations, insurance corporations and pension funds. Financial corporations included under [this] heading are those which raise funds on financial markets, but not in the form of deposits, and use them to acquire other kinds of financial assets. The types of corporations which may be included under this heading are those engaged in financing investment or capital formation; for example, investment corporations, corporations engaged in financial leasing, hire purchase corporations and other corporations engaged in the provision of personal finance or consumer credit.
Most mutual funds (unit trusts) are also included.
(ii) Insurance corporations and pension funds (1993 SNA, paragraphs 4.97 and 4.98)
This subsector consists of insurance corporations and quasi-corporations and autonomous pension funds. Insurance corporations consist of incorporated, mutual and other entities whose principal function is to provide life, accident, sickness, fire or other forms of insurance to individual institutional units or groups of units. Pension funds included…are those which are constituted in such a way that they are separate institutional units from the units which create them. They are established for purposes of providing benefits on retirement for specific groups of employees. They have their own assets and liabilities and they engage in financial transactions in the market on their own account. These funds are organized, and directed, by individual private or government employers, or jointly by individual employers and their employees; and the employees and/or employers make regular contributions. They do not cover pension arrangements for the employees of private or government entities which do not include a separately organized fund nor an arrangement organized by a nongovernment employer in which the reserves of the fund are simply added to that employer’s own reserves or invested in securities issued by that employer.
(iii) Financial auxiliaries (1993 SNA, paragraph 4.96)
This subsector consists of all resident corporations and quasi-corporations engaged primarily in activities closely related to financial intermediation but which do not themselves perform an intermediation role. They consist of corporations such as securities brokers, loan brokers, flotation corporations, insurance brokers, etc. They also include corporations whose principal function is to guarantee, by endorsement, bills or similar instruments intended for discounting or refinancing by financial corporations, and also corporations which arrange hedging instruments such as swaps, options, and futures or other instruments which are continually being developed as a result of wide-ranging financial innovation.
(iv) Nonfinancial corporations (1993 SNA, paragraphs 4.68 and 4.69)
Nonfinancial corporations or quasi-corporations are corporations or quasi-corporations whose principal activity is the production of market goods or nonfinancial services. The nonfinancial corporations sector is composed of the following set of resident institutional units:
(a) All resident nonfinancial corporations, irrespective of the residence of the shareholders;
(b) All resident nonfinancial quasi-corporations including the branches or agencies of foreign-owned nonfinancial enterprises that are engaged in significant amounts of production on the economic territory on a long-term basis [i.e., more than one year];
(c) All resident nonprofit institutions [NPIs] that are market producers of goods or nonfinancial services.
Some nonfinancial corporations or quasi-corporations may have secondary financial services: for example, producers or retailers of goods and services may provide consumer credit directly to their own customers…Such corporations or quasi-corporations are nevertheless classified as belonging in their entirety to the nonfinancial corporate sector provided their principal activity is nonfinancial. Sectors are groups of institutional units, and the whole of each institutional unit must be classified to one or another sector…even though that unit may be engaged in more than one type of economic activity.
That having been said, however, if a financing arm of a nonfinancial corporation or quasi-corporation maintains a separate set of books from its parent, and can acquire financial and nonfinancial assets and liabilities in its own name then it should be treated as a separate institutional unit and be classified to financial corporations.
(v) Nonprofit institutions serving households (NPISHs) (1993 SNA, paragraphs 4.161 and 4.162)
The NPISH sector comprises legal or social entities that are nonmarket producers of goods and services (i.e., which provide their output free of charge or at prices that are not economically significant) and which are not financed or controlled by government. Their status does not permit them to be a source of profit. The NPISH sector includes two main kinds of NPISH:
(a) Trade unions, professional or learned societies, consumers’ associations, political parties (except in single-party states), churches or religious societies (including those financed by governments), and social, cultural, recreational and sports clubs;
(b) Charities, relief and aid organizations financed by voluntary transfers in cash or in kind from other institutional units.
While NPISHs are separate institutional units, for most statistical systems it is very difficult to separate them, so they are usually included with households as a result.
(vi) Households (1993 SNA paragraph 4.132)
A household may be defined as a small group of persons who share the same living accommodation, who pool some, or all, of their income and wealth and who consume certain types of goods and services collectively, mainly housing and food. In general, each member of a household should have some claim upon the collective resources of the household. At least some decisions affecting consumption or other economic activities must be taken for the household as a whole. Households often coincide with families, but members of the same household do not necessarily have to belong to the same family so long as there is some sharing of resources and consumption.
Members of the household who have resided abroad for more than one year are considered to be nonresidents and do not form part of the resident household, unless the member of the household is studying abroad or is a medical patient abroad. In these cases, students and patients remain residents as long as their center of economic interest remains with the resident households.
Households sometimes establish trusts. See the discussion on trusts, paragraphs 3.23 through 3.26.
E. Offshore Financial “Sector”
3.50 There is no offshore financial sector, in either the 1993 SNA or BPM5. However, in economies that have
(a) a financial services industry that is primarily engaged in business with nonresidents,
(b) where the institutional units in this industry have assets and liabilities out of proportion to the domestic financial intermediation designed to finance domestic economies, and
(c) where many or most of these institutional units are direct investment enterprises,
the authorities may wish to distinguish between an “onshore” and an “offshore” financial sector, even though all the institutional units are considered residents. Users can then choose to ignore or include this “sector,” as they prefer, in their analysis of the national accounts, the balance of payments, the IIP, and the CPIS.
VI. Distinguishing Between Direct and Portfolio Investment in Securities
3.51 The objective of the CPIS is to collect data on residents’ investment in securities issued by nonresidents for use in the compilation of portfolio investment data. If the securities held are considered to be issued by an enterprise that is in a direct investment relationship with the holder, they should be excluded. Hence, not all holdings of securities issued by a nonresident come under the auspices of the CPIS.
3.52 The definition of direct investment is in Chapter XVIII of BPM5 and in the OECD Benchmark Definition of Foreign Direct Investment (third edition; Paris: OECD, 1996).
3.53 Paragraph 359 of BPM5 describes direct investment as follows:
Direct investment is the category of international investment that reflects the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy. (The resident entity is the direct investor and the enterprise is the direct investment enterprise.) The lasting interest implies the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise. Direct investment comprises not only the initial transaction establishing the relationship between the investor and the enterprise but also all subsequent transactions between them and among affiliated enterprises, both incorporated and unincorporated.
3.54 This description is elaborated further in paragraph 362 of BPM5:
…[A] direct investment enterprise is defined in this Manual as an incorporated or unincorporated enterprise in which a direct investor, who is resident in another economy, owns 10 percent or more of the ordinary shares or voting power (for an unincorporated enterprise). Direct investment enterprises comprise those entities that are subsidiaries (a nonresident investor owns more than 50 percent), associates (an investor owns 50 percent or less [but usually more than 20 percent]) and branches (wholly or jointly owned unincorporated enterprises) either directly or indirectly owned by the direct investor…. Subsidiaries in this connotation also may be identified as majority owned affiliates.
3.55 Therefore, both the equity held that establishes the direct investment relationship and any other holdings of equity or debt31 that are issued by the direct investment enterprise or the direct investor or its affiliates and owned by them should be excluded from the CPIS. The one exception is transactions between affiliated financial intermediaries. Only those securities that can be regarded as permanent debt (loan capital reflecting a permanent interest) and equity (share capital) are to be classified as direct investments. Other securities transactions of related financial intermediaries are classified as portfolio investment (see BPM5, paragraphs 365 and 372). In practice, the method by which they are excluded may well depend on the general collection method adopted.
3.56 In an end-investor survey, the reporting instructions should be clear as to what should be included and what should be excluded. Because end-investors are best informed about the composition of their investments, they should be able to distinguish portfolio from direct investment assets. Indeed, as direct investment statistics themselves are commonly collected through a survey of investors, the reporting instructions can make clear to respondents that securities reported as direct investment should not be reported as portfolio investments. Countries usually require separate reporting of direct and portfolio investment data. The compiler can also compare the direct and portfolio investment returns for each respondent as an additional check.
3.57 In a custodial survey, the instructions should also clearly state that securities that have been issued by an enterprise that is considered to be in a direct investment relationship with the holder should be excluded; however, the applicability of these instructions might well vary among countries. The experience among Task Force members is that, in some markets, investors tend to hold all portfolio investment securities with custodians, whereas securities issued by an enterprise in a direct investment relationship are frequently held separately from their portfolio investments and away from custodians. It is recommended that national compilers conducting a custodian survey evaluate market practice in their own country and ensure that custodians understand the direct investment relationship and that any holdings of securities between direct investment enterprise and the direct investor are to be excluded from the survey. In markets where investors tend to hold all securities with custodians, compilers collecting data for the CPIS from custodians will need to be particularly vigilant in ensuring that securities that should be classified as direct investments are excluded.32 (Alternatively, as a quality check, such securities could be identified separately as a memorandum item.) This could take the form of monitoring particularly large holdings of securities and comparing data from direct investment survey returns with those from the CPIS. Box 3.3 illustrates how Austria ensures that direct equity investment securities are excluded from its survey of portfolio investment.
Box 3.3:Austria’s Experience in Excluding Direct Investment from the National Survey Results
In Austria, custodians provide the Oesterreichische Nationalbank (ONB) with information on individual securities at par value. The custodians are not able to distinguish between portfolio investment securities and securities held for direct investment purposes. Hence, all securities are included in the report by custodians, and the data are adjusted by the ONB using an estimate of direct investment securities held with domestic custodians.
As in many countries, the data on outward direct investment in Austria are based on reports by the domestic direct investors. The ONB, using these reports, chooses a sample of domestic companies—based on their size, the type of industry, the geographical breakdown of their investment abroad, and so on—and requests that they provide information on the custody of their direct investment equity securities. The approximate breakdown was as follows:
|No equities issued||11|
|Equities held in safekeeping abroad||12|
|Equities held in custody with nonresident banks||29|
|Equities held in domestic safekeeping||20|
|Equities held in custody with domestic banks||28|
It is assumed that the sample is representative of all domestic companies that held direct investment securities. Consequently, 28 percent of the total amount of the nominal capital of outward direct investment—the amount of equities held in custody with domestic banks—is deducted from the custodians reports on residents’ holdings of nonresident-issued equities.
3.58 Finally, national compilers—whether they approach end-investors or custodians—need to be careful when classifying securities issued by entities based in offshore centers. If held by the parent enterprise or associated affiliate, these securities should be classified under direct investment. As noted in paragraph 3.55, an exception is made for some holdings by financial intermediaries when the nonresident entity that issued the security and the resident owner of the security are affiliated financial intermediaries.
VII. Treatment of Securities Where There Is Potential for Double Counting
3.59 In this section, four types of transactions of growing importance, which could lead to potentially significant under- or double counting of securities holdings between countries, are identified. These types of transactions are (i) repurchase agreements, (ii) securities lending agreements, (iii) depository receipts, and (iv) stripped securities.
A. Repurchase Agreements
3.60 A repurchase agreement33 (repo) is an arrangement involving the sale of securities at a specified price with a commitment to repurchase the same or similar securities at a fixed price on a specified future date or on demand. A reverse repo is the same transaction seen from the other side; that is, an agreement whereby a security is purchased at a specified price with a commitment to resell the same or similar securities at a fixed price on a specified future date or on demand. Repos sometimes require that the value of the security be greater than the cash provided, to provide (initial) margin against the possible default on the part of the repo party. If the value of the security falls, additional securities (variation margin) may be required; on the other hand, if the value of the security rises, part of the original margin may be returned to the repo party (depending on country practice). In other cases, substitution of the security provided is permitted (which may arise if the security goes “special” or if the repo party needs the security to make delivery on another contract).
3.61 There is more than one type of repo. In some repo transactions, ownership of the underlying security remains with the seller; in others, the underlying security is, in essence, held by a third party for safekeeping (so-called tri-party repos); and in others, the ownership of the underlying security changes hands. Some repos are “cash driven”; that is, the primary purpose of the transaction is for the repo party to acquire cash. In other instances, the transaction may be “security driven”—that is, where the reverse-repo party has need for a particular security, if the security has gone “special” or the reverse-repo party needs to make delivery on a contract. Provided that cash is exchanged, regardless of whether the transaction is “cash driven” or “security driven,” the economic nature is the same, and both types of transaction are treated in the same manner as collateralized loans (see ahead). Regardless of the type of repo transaction, the market risks of owning the security and all significant benefits remain with the “seller.”
(ii) Potential for double counting
3.62 Repurchase agreements were developed primarily as a method of financing security positions. Hence, they have been used as a means of leverage,34 but they also have become a method by which investors can borrow securities to cover “short positions.” Accounting practice in many countries is to regard the securities involved in repo transactions as remaining on the books of the seller and to record the cash received as a collateralized loan. On the other hand, some countries—for institutional, legal, or other reasons—treat repos, where ownership changes hands, as transactions in the underlying security; that is, as an outright sale of the security for cash. The subsequent repurchase is regarded as a separate and independent security transaction. The IMF Committee, at its 2000 meeting, endorsed an IMF recommendation that a repo be treated as a collateralized loan, reflecting the economic nature of the transaction.
3.63 In practice, national compilers in some countries find that they have no realistic choice other than to require data on security holdings (and transactions) to be reported in line with the accounting or regulatory conventions prevailing in their countries. It appears that the vast majority of countries prefer that repos be treated as collateralized loans (so that the “seller,” not the “buyer,” reports the holding).35 Only a few countries record repos as a transaction in securities; however, it is also probable that in many countries, the recording practices are not universally applied, so compilers should be very careful in their preparation for the survey to be sure that the respondents know what is required and can comply. This concern applies particularly to countries that obtain the data for the CPIS from custodians (see the next section, “Treatment of repos in the CPIS”). Compilers are encouraged to discuss the nature of recording of these transactions with custodians and to see to what extent they can be identified and reported on the basis required for the CPIS. In particular, it is important that reporting of repos (and securities lending) is consistent within an economy.
(iii) Treatment of repos in the CPIS
3.64 Because of the ambiguity of the nature of the transaction—they are, in part, transactions in securities, where there has been a legal change in ownership; equally, by their nature, they are more akin to a financing activity and should therefore be classified as collateralized loans—differences in the statistical recording of repos can lead to miscounting of cross-border holdings of the securities involved. Accordingly, the Task Force recognized that a practical and consistent approach should be adopted regarding the reporting of securities holdings underlying repos. It is recommended, at least for the purposes of this survey, and in line with the endorsement of this approach by the IMF Committee at its 2000 meeting, that repo transactions be recorded as collateralized loans. However, implementing this proposal is not always straightforward, particularly in countries where accounting and statistical practices are not in line with this proposal, or where there is asymmetry in the recording of repos versus the recording of reverse repos. There is an added problem in countries where custodians are a primary source of information as securities on repo are not necessarily identified or identifiable by the custodian (for either the repo party or the reverse-repo party). In that case, the custodian may only be able to report what is held in custody at any one time—therefore, a security on repo may not be identifiable and will be excluded from the custodian’s (and, consequently, the repo party’s) holdings. Similarly, a security acquired under reverse repo may not be identifiable as such on the books of the custodian and may, therefore, be recorded inappropriately as part of the custodian’s holdings on behalf of clients (and hence the reverse-repo party’s holdings).
3.65 There are several elements to this exercise. As a first step, national compilers are encouraged to obtain some idea of the importance of the securities repurchase market in their own economy. If it is significant, then national compilers should gain an understanding of the market.
3.66 Second, compilers should ascertain the recording practices of respondents and attempt to ensure internal consistency within the economy. If the treatment of repo holdings is not consistently applied among all respondents within a creditor country, claims on the debtor country will be inaccurately measured. Box 3.4 explains the reasoning behind these conclusions. However, ensuring internally consistent instructions is not necessarily straightforward, particularly for those countries that conduct a custodian survey. They will, for instance, need to capture “short positions”; otherwise, the security holdings could be double-counted (see Box 3.4). Boxes 3.5 and 3.6 provide examples of some of the problems that can result from the measurement of repos (and securities lending).
3.67 For those countries that collect data through an end-investor survey, the respondents should be asked to report repos and reverse repos as collateralized loans, in other words, as if the security has not changed hands. If the reverse-repo party then repos the security, the transaction should be treated in the same manner—as a collateralized loan. However, if a security acquired under reverse repo is sold outright, the reverse-repo party should record a short position (as described in Box 3.4). Where, due to accounting and legal requirements, the practice in the country is to record repos as transactions in securities, end-investor respondents should be asked to make every effort to report them as collateralized loans. It is especially important that there be consistency within an economy on the treatment of repos of nonresident-issued securities to ensure that the overall position of that economy vis-à-vis the issuing economy is correctly stated. If some respondents report on one basis (as collateralized loans) and others on another basis (as transactions in securities), the result could be a substantial over- or underestimate of the claims on the issuing economy.
3.68 Countries that collect data from custodians will need to discover whether their custodians are able to separately identify securities held under repo agreements when reporting clients’ holdings. (This should not be an issue with regard to their own account holdings, where securities on repo or acquired under reverse repo should be clearly identifiable.) In some countries, the custodian of the repo party will know that the security is on repo because the records are set up to identify securities on repo to ensure that they are not sold twice. However, in these countries, even the custodian for the reverse-repo party frequently will not be aware that the security has been acquired under reverse repo. There is no need for the custodian to know this information in many instances: if the security can be on-sold, to all intents and purposes as far as the custodian is concerned, the security acquired is no different from any other transaction in a security and can be sold in the same way. Moreover, in many countries, the custodian will not know whether a security is on repo. Accordingly, in all instances where custodians are principal sources of information, compilers should explain to custodians the importance of being able to identify securities on repo or reverse repo, and ways should be sought to ensure that they can meet the survey’s needs.
Box 3.4:Statistical Treatment of Repurchase Agreements
Explaining the possible statistical entries arising from repurchase agreements (repos) can soon become immensely complicated, not least because there are frequently three variables to consider: the two counterparties to the repo transaction and the issuer of the underlying security (and, in a tri-party repo, the custodian holding the security).
Provided that both the counterparties are domestic residents and provided that their statistical treatment of repos is identical (that is, national compilers ensure that all respondents have the same instructions), then claims vis-à-vis the country of issuance of the underlying security remain unchanged. For example, in the example in Box 3.5, if resident X of country A repos 100 security liabilities of country B to resident Y of country A, then regardless of whether X maintains this holding on its books and Y does not, or vice versa, country A has a claim of 100 on country B; that is, only one entity in country A has a reported claim on country B.
If, however, resident X treats repos as a collateralized loan, and resident Y treats repos as a purchase of securities, then country A’s claim on B will be incorrectly measured at 200; that is, both X and Y report a claim on country B. Similarly, if resident X treats repos as a sale of securities and resident Y treats repos as a collateralized loan, then country A’s claim on B will be incorrectly measured at zero, since neither X nor Y reports a claim on country B.
However, holdings data may not necessarily be “correct” even if both X and Y treat repo transactions in a consistent manner. Assume that X and Y both treat repos as collateralized loans, but Y on-sells the securities outright, not as a repo, to fellow resident Z.Y’s sale of the security may be accurately reported in the transactions data, but given that Y has sold a security that was not on its balance sheet, then Y has a “short” or negative position. If country A’s collection system cannot record negative positions, then country A’s claim on country B will again be incorrectly measured at 200, because both X and Z will report claims on country B, even though only one claim exists.
The potential reporting possibilities become more complex if one of the counterparties is a nonresident (see Box 3.5). From the viewpoint of the CPIS, the residence of the counterparty to the repo transaction is not directly relevant. It is rather the residence of the issuer of the security used for the repo that is relevant, because the CPIS is measuring security claims on nonresidents. However, the residence of the counterparty is of relevance to the extent that the treatment of the securities underlying repos differs between countries. To the extent that national compilers adopt different treatments, there is potential for under- and overrecording at the global level for the same reasons as explained above in the domestic context.
The same considerations that apply to repos also apply to securities lending.
3.69 An additional avenue to ensure consistency across borders in the recording of repos is for national compilers to consult their counterparts in the appropriate foreign country(s)—where the issuer(s) of the securities is (are) resident—to discover whether both countries are treating repos in a consistent manner. Different approaches can lead to asymmetric reporting of securities holdings; given the size and growth of the repo market in the 1990s, this could cause problems when the results are aggregated and when data are exchanged. Bilateral exchanges of additional information might be required to meet both countries’ needs.
3.70 Because of the overwhelmingly common practice of treating repos (and reverse repos) as collateralized loans, and because of the IMF Committee’s endorsement of this approach, that is the recommended approach for the CPIS and is used in the model survey forms (Appendices I to V).
3.71 Finally, information on how countries are intending to treat repo holdings should be supplied to the IMF (along with other documentation regarding the conduct of the survey at the national level) so that inconsistencies in approach between countries can be monitored and, if need be, brought to the attention of the relevant national compilers.36
3.72 A further complication may be the manner in which repo data are collected for balance of payments purposes, which may influence the way the data are collected for the IIP and for the survey. For example, repos with nonresidents may be reported by securities dealers and banks as transactions in securities but then reclassified as collateralized loans by a compiler who uses a program that identifies all trades and treats all matches of similar characteristics and counterparty; this can only be done ex post facto. Therefore, if any repo agreement is still extant at the reference date, it will not be known that it is to be reversed until the next reporting period. If that occurs, and if the repo transactions that have not had their reverse leg completed are large, the compiler is asked to provide revisions to the IMF as soon as they become available.
Box 3.5:Repurchase Agreements: Examples of International Position Data-Reporting Possibilities of Portfolio Investment
|Method of treatment||Country A claims on C||Country B claims on C||Reported nonresident claims on C|
|1. Both countries treat repos as collateralized loans||100||0||100|
|2. Both countries treat repos as sales and purchases of securities||0||100||100|
|3. Country A treats repos as collateralized loans, B as sales and purchases of securities||100||100||200|
|4. Country A treats repos as sales and purchases of securities, B as collateralized loans||0||0||0|
|Method of treatment||Country A claims on B||Reported nonresident claims on B|
|1. Both countries treat repos as collateralized loans||100||100|
|2. Both countries treat repos as sales and purchases of securities||0||0|
|3. Country A treats repos as collateralized loans, B as sales and purchases of securities||100||0|
|4. Country A treats repos as sales and purchases of securities, B as collateralized loans||0||100|
|Method of treatment||Country B claims on A||Reported nonresident claims on A|
|1. Both countries treat repos as collateralized loans||0||0|
|2. Both countries treat repos as sales and purchases of securities||100||100|
|3. Country A treats repos as collateralized loans, B as sales and purchases of securities||0||100|
|4. Country A treats repos as sales and purchases of securities, B as collateralized loans||100||0|
3.73 From the foregoing, the importance of recording repos on a consistent basis, and preferably as collateralized loans, can be appreciated.
3.74 However, as noted in Box 3.6, a country’s debt security liabilities may be overstated when a reverse repo is followed by an outright sale. If both the original holder and the final purchaser are nonresidents and the security has been issued by a resident, the security holders will both record ownership. This issue is one that requires continuing work to resolve. A Technical Group set up by the IMF Committee is exploring means to overcome the potential double counting.
B. Securities Lending
3.75 Securities lending is an arrangement whereby the ownership of a security is transferred usually in return for collateral,37 typically another security, under the condition that similar securities are returned to the original owner on a specified future date or on demand.38 If cash exchanges hands, the transaction has the same economic nature as a repo and should be treated as a repo. A fee is paid by the “borrower” to the “lender.”
(ii) Potential for double counting
3.76 Securities lending is an activity usually associated with securities dealers needing to meet commitments to deliver securities that they have sold but do not own—that is, covering a “short” position. Basically, a securities loan, in the absence of cash collateral,39 involves swapping the borrowed securities for other acceptable securities (or other acceptable collateral). Depending on the nature of the transaction and the relative credit risks of the parties involved, the value of securities received as collateral may be the same or greater than the value of the securities “lent.” As with repos, the market risks of owning the securities involved in a securities loan (and all significant benefits) remain with the original owners. In all cases, the ownership of the securities “lent” changes hands. Unlike repos, the methodological treatment of securities lending is not covered in either BPM5 or the 1993 SNA.
Box 3.6:Example of a Reverse Repo Followed by Outright Sale
Treating a repo as a collateralized loan may result in an incorrect statement of a country’s external securities liability.
Where a nonresident repos a security issued by a resident to another resident, who in turn sells outright the security so acquired to another nonresident, an overstatement of the country’s securities liabilities will result.
A resident in country A repos a security worth 100 issued by the government of country B to a resident of country B. In turn, the security acquired under this reverse repo is sold outright to a resident of country C. Country B’s external securities liabilities would be recorded as follows under a collateralized loan approach, while, at the same time, recording a “short” position:
|Securities liability to country A (under the collateralized loan approach)||100|
|Securities liability to country C (as recorded through the outright sale)||100|
|Total securities claims by nonresidents on country B||200|
Even though the resident of country B who on-sells the security acquired under the reverse repo with the resident of country A will record his or her claim on the issuer of the security (a resident of country B) as a short position, the nonresidents’ claims in the form of securities will be overstated by 100.
Country B’s IIP will not be overstated, however, because the resident of country B (the reverse-repo party) will record a loan asset receivable under the reverse repo with the resident of country A that offsets the overstatement of the securities liability.
The same situation applies with a securities loan of a resident-issued security by a nonresident “lender” to a resident “borrower,” who followed the loan with an outright sale to another nonresident.
Other circumstances may produce a similar overstatement of a country’s debt securities liabilities.
3.77 In most countries, the statistical practice is to regard the securities (both those lent and those provided in return as collateral) as remaining on the books of the original owner. If a borrowed security is on-sold (which is usually the case), then both the original owner and the third party will each regard itself as owning the security, while the “borrower” will regard itself as having a negative holding (a “short” position). In essence, what this means as far as the initial “borrowing” is concerned is that no transaction is recorded—the nature of the initial “borrowing” is similar to that of a repo, without cash being exchanged. Because it is only the cash portion of a repo that is recorded—the exchange of ownership of the securities is ignored—for securities lending, the same applies. Therefore, since no cash is involved in securities lending, to be consistent with the treatment of repos, no transaction is recorded for the exchange of securities under securities lending. This treatment was endorsed by the IMF Committee at its 2000 meeting. However, in some countries, the practice is to regard securities lending as a transaction in its own right: the lent security becomes owned by the “borrower,” and the collateral becomes owned by the “lender,” even where there is an imbalance between the value of the security provided and the value of the security received. If a “borrowed” security is on-sold outright, then the “borrower” (the reverse repoing party) should record a “short” position. From the above, it can be readily seen that, as with repos, there is the possibility of asymmetric reporting within and among countries.
(iii) Treatment of securities lending in the CPIS
3.78 The preferred treatment for the purposes of the survey is for securities lending/borrowing to be regarded as an off-balance-sheet transaction—that is, that it not be recorded as a transaction so that the original owners continue to report that they still hold the security. If (when) the security is on-sold, the “borrower” of the security should record a “short” position.
3.79 As can be seen, the issues for securities lending are similar to those for repos, and the importance of both internal and external consistency of approach is equally valid. Therefore, the recommendations with regard to repos apply equally to securities lending: the importance that the market be assessed; internally consistent reporting instructions, developed after consultation with potential survey respondents; investigation of the scope for the lending to nonresidents of securities issued by nonresidents; bilateral contacts established with national compilers in the appropriate countries; and information on the intended treatment sent to the IMF. The problems of collecting information from custodians are similar for both repos and security lending: custodians, especially for the “borrower,” may be unaware that a security has only been “lent/borrowed” and may have no means of identifying that the security is to be returned, or that a “short” position should be recorded, in the event of an onsale. It is strongly recommended that compilers make every effort to ensure that the custodian understands the requirements and can provide the information on the bases recommended. It is suggested that contacts with all respondents regarding securities lending and repos, but especially for custodians, be undertaken simultaneously.
C. Depository Receipts
3.80Depository receipts are securities that represent ownership of securities held by a depository.40 The country of residence of the issuer of the underlying securities is different from the country in which the receipts are issued.
(ii) Potential for double counting
3.81 The issuance of depository receipts is becoming increasingly prevalent: issuers and intermediaries are finding that investors frequently prefer to acquire securities in the financial markets where payment and settlement systems, registration procedures, and so on are familiar, rather than in the home market of the issuer, where systems and procedures may not be as familiar or as efficient. The potential for double counting lies in the existence of both the underlying security, held by the depository, and the depository receipts. That is, two securities could be reported as held, but only one liability exists. Clear guidance to survey respondents is required in order to avoid double counting.
(iii) Treatment of depository receipts in the CPIS
3.82 The way in which depository receipts should be recorded is that the financial institution “issuing” the receipts should be “looked through”; that is, the holder of the receipts should be taken to have a claim on the unit that underlies the receipts.
3.83 The reporting should follow the guidelines below.
3.84 Depository receipts are certificates that represent ownership of securities held by a depository. These receipts should be allocated to the country of residence of the issuer of the original (or underlying) security and not to the residence of the financial intermediary that issues the receipts. In other words, American depository receipts (ADRs) are liabilities of the non-U.S. enterprise whose securities underlie the ADR issue and not of the U.S. financial institution that issued the ADRs.
3.85 Financial intermediaries should not report holdings of any securities issued by nonresidents against which depository receipts have been issued and sold. If a depository receipt has been issued before the financial institution arranging the issue has acquired the original (or underlying) securities, then that financial institution should report a negative holding in the original (or underlying) securities.
D. Stripped Securities
3.86Stripped securities (strips) are securities that have been transformed from a principal amount with periodic coupons into a series of zero-coupon bonds, with the range of maturities matching the coupon payment dates and the redemption date of the principal amount. Strips can be created in two ways. Either the owner of the original security can ask the settlement or clearinghouse in which the security is registered to create strips from the original security, in which case the strips replace the original security and remain the direct obligation of the issuer of the original security; or the owner of the original security can issue strips in its own name, backed by the original security, in which case the strips represent new liabilities of the owner of the original securities and are not the direct obligation of the issuer of the original security.
(ii) Potential for double counting
3.87 The issuance of stripped securities is becoming more prevalent. The creation through strips of zero-coupon bonds eliminates the reinvestment risk inherent in a bond with a coupon and allows investors greater leverage; that is, less money needs to be invested to gain the same market exposure as with an equivalent bond with a coupon. When the entity issuing the strips is creating new liabilities, double counting does not arise. The potential for double counting arises when the strips have replaced the original security even though the latter has not been redeemed. In essence, the original security is “dormant” in the settlement or clearinghouse, until such time as it is reconstituted or redeemed.
Box 3.7:Treatment in 1997 CPIS of Financial Transactions That May Lead to Under- or Double Counting
Portugal—Reporting instructions on these issues were drawn up according to the Survey Guide (note, however, that stripped securities were not covered in the Portuguese Survey). Any question could be clarified with the Banco de Portugal and contacts with major reporters were made, so the reported data provided guarantees that double counting was excluded. Double counting is also avoided because the resident custodians report to the Banco de Portugal the number of the opened dossiers of foreign securities (this is attributed by the Banco according to its technical instructions); that number is also used in the direct report by final investors. Each dossier number of the foreign securities is given an enterprise register number that allows the Banco to identify the underlying client. This feature allows the implementation of a quality control and data capture system. Furthermore, these aspects are in accordance with the collection and statistical production of the balance of payments system, which assures better reconciliation of flows and stocks.
United States—Respondents were instructed to report as if repo and securities lending activities do not exist. That is, if a custodian has securities that are temporarily involved in a repo agreement, they are to report these securities as if they are continuously held. Further, the counterparty is instructed not to report these securities that they have temporarily acquired. Collateral received as part of the repo agreement is not to be reported, and collateral given is to be reported as continuously held. Likewise, securities lent are to be reported as continuously held, securities borrowed are not to be reported, and any collateral involved is to be reported as if held by the original owner (in the same manner as for repos).
(iii) Treatment of stripped securities in the CPIS
3.88 The reporting instructions should follow the guidelines below.
3.89 If strips have been issued by an entity in its own name, then the residence of the issuer is that of the entity that issued the strips, and the issuing entity should report its holdings of the existing securities issued by nonresidents.
3.90 If strips have been created from a nonresident security and remain the direct obligation of the original issuer, then the residence of the issuer remains the same as for the original security.
3.91 Dealers who request that a settlement or clearing house create strips from an existing nonresident security should not report their holdings of the underlying nonresident security after the strips have been created.
3.92 Strips with an original maturity of less than one year are money market instruments. If identifiable, they should be reported as such.
3.93Box 3.7 indicates the experience in two countries in the 1997 CPIS in attempting to avoid double or undercounting of holdings that may result from repo, securities lending, depository receipts, and stripped securities.
3.94Appendix VI to this Survey Guide describes in detail many of the instruments that are available to investors. The information may assist both compilers and respondents to classify these instruments as equity or long-term or short-term debt. Table 3.1 sets out the instruments covered by all of the participants in the 1997 CPIS.
|Shares and stocks (excluding nonparticipating preferred shares)||X||X||X||X||X||X|
|Shares in mutual funds and investment trusts||X||X||X||X||X||X|
|Long-term debt securities||1|
|Nonparticipating preferred stocks or shares||X||—||X||X||X|
|“Straight” (coupon) bonds||X||X||X||X||X||X|
|Convertible bonds and bonds with optional maturity dates, the latest of which is more than one year after issue||X||X||X||X||X||X|
|Negotiable certificates of deposit with maturities of more than one year||X||X||X||X||X|
|Dual currency bonds||X||X||X||X||X||X|
|Zero coupon bonds and other deep discount bonds||X||X||X||X||X||X|
|Floating rate bonds||X||X||X||X||X||X|
|Asset-backed securities, such as collateralized mortgage obligations (CMOs) and participation certificates||X||X||X||X||X||—|
|Money market instruments||1|
|Commercial and finance paper||X||X||X||—||X||—|
|Negotiable certificates of deposit with original maturity of one year or less||X||X||X||—||X||—|
|Short-term notes issued under note issuance facilities (NIFs)||X||X||X||—||X||—|
|Shares and stocks (excluding nonparticipating preferred shares)||X||X||X||X||X||X||X|
|Shares in mutual funds and investment trusts||X||X||X||X||—||X||X|
|Long-term debt securities|
|“Straight” (coupon) bonds||X||X||X||X||X||X||X|
|Nonparticipating preferred stocks or shares||X||X||—||X||—||X||X|
|Convertible bonds and bonds with optional maturity dates, the latest of which is more than one year after issue||X||X||X||X||X||X||X|
|Negotiable certificates of deposit with maturities of more than one year||X||X||X||X||—||X||X|
|Dual currency bonds||X||X||X||X||—||X||X|
|Zero coupon bonds and other deep discount bonds||X||X||X||X||X||X||X|
|Floating rate bonds||X||X||X||X||—||X||X|
|Asset-backed securities, such as collateralized mortgage obligations (CMOs) and participation certificates||X||X||X||X||—||X||X|
|Money market instruments|
|Commercial and finance paper||—||X||—||—||X||—||X|
|Negotiable certificates of deposit with original maturity of one year or less||—||X||—||—||X||—||X|
|Short-term notes issued under note issuance facilities (NIFs)||—||X||—||—||—||—||X|
|Shares and stocks (excluding nonparticipating preferred shares)||X||X||X||X||X||X||X||X|
|Shares in mutual funds and investment trusts||X||8||X||X||X||X||X||X|
|Long-term debt securities|
|“Straight” (coupon) bonds||X||X||X||X||X||X||X||X|
|Nonparticipating preferred stocks or shares||X||—||X||X||X||X||X||12|
|Convertible bonds and bonds with optional maturity dates, the latest of which is more than one year after issue||X||X||X||X||X||X||X||12|
|Negotiable certificates of deposit with maturities of more than one year||X||13||X||X||X||X||X||X|
|Dual currency bonds||X||X||X||X||X||X||X||12|
|Zero coupon bonds and other deep discount bonds||X||X||X||X||X||X||X||12|
|Floating rate bonds||X||X||X||X||X||X||X||12|
|Asset-backed securities, such as collateralized mortgage obligations (CMOs) and participation certificates||X||X||X||X||X||X||X||X|
|Money market instruments|
|Commercial and finance paper||X||X||X||X||—||—||—||X|
|Negotiable certificates of deposit with original maturity of one year or less||X||10||X||X||—||—||—||X|
|Short-term notes issued under note issuance facilities (NIFs)||X||X||X||X||—||—||—||—|
|Singapore||Spain||Sweden||Thailand||United Kingdom||United States||Venezuela|
|Shares and stocks (excluding nonparticipating preferred shares)||X||X||X||X||X||X||X|
|Shares in mutual funds and investment trusts||X||X||X||X||X||X||X|
|Long-term debt securities||20|
|“Straight” (coupon) bonds||X||X||X||X||X||X||X|
|Nonparticipating preferred stocks or shares||X||X||X||X||X||X||X|
|Negotiable certificates of deposit with maturities of more than one year||X||X||—||X||—||X||X|
|Dual currency bonds||X||X||X||X||X||X||X|
|Zero coupon bonds and other deep discount bonds||X||X||X||X||X||X||X|
|Floating rate bonds||X||X||X||X||X||X||X|
|Money market instruments||22|
|Commercial and finance paper||X||X||X||—||X||—||X|
|Negotiable certificates of deposit with original maturity of one year or less||X||X||—||—||X||—||X|
|Short-term notes issued under note issuance facilities (NIFs)||X||X||X||—||X||—||X|
See Bank of England, Financial Terminology Database (London, 1997).
Commission of the European Communities, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, and World Bank, System of National Accounts 1993 (Brussels/Luxembourg, New York, Paris, Washington, 1993).
Both the 1993 SNA and BPM5 say that liability to pay taxes is an indicator in helping to determine the residence of an entity. This is so regardless of the rate of tax. The important consideration is whether the entity is subject to the laws and taxes of the jurisdiction in which it is located.
For the purposes of balance of payments statistics, enterprises comprise: “(i) incorporated enterprises (e.g., corporations, joint stock companies, limited liability partnerships, cooperatives, or other business associations recognized as independent legal entities by virtue of registration under company and similar acts, laws, or regulations); (ii) unincorporated enterprises; and (iii) nonprofit institutions” (BPM5, paragraph 76).
Although the term “offshore” is used as an adjective in both the 1993 SNA and in BPM5, no definition is given. For the CPIS, an offshore enterprise is one that is wholly or largely owned by nonresidents of the jurisdiction in which it is domiciled and is wholly or largely engaged in providing goods and/or services to nonresidents.
That an SPE may be a direct investment enterprise does not necessarily mean that it is excluded from the CPIS because it is the nature of its assets, not its liabilities, that determines whether or not any holdings of securities are portfolio or direct investment. See Section VI of this chapter for a fuller discussion of the distinction between portfolio investment and direct investment.
See paragraph 3.9 for discussion of “shell companies,” “brass plate companies,” “international business corporations,” and SPEs.
For example, if the subcustodian does not remove its holdings on behalf of the global custodian and the latter reports the holdings as well, overcounting will result, while undercounting will result if both the subcustodian and the global custodian make the adjustment.
Custodians hold securities on behalf of investors. These securities may be held in physical form, although nowadays they are overwhelmingly “dematerialized”—that is, in electronic form. Custodians qua custodians do not actively trade securities, though they may perform that function separately as investment managers or brokers.
Similarly, shelf companies are often used only to hold financial assets.
Indeed, the objective of many trusts is to take advantage of the trustee’s asset management skills or to protect the beneficiaries from their lack of management skills (for example, infants or the not yet born).
The data will be reported on a confidential basis to the IMF and will be included in the published results in a single separate vector, so that confidentiality is maintained.
Defined in BPM5 as prices that willing buyers pay to acquire something from willing sellers.
In some markets, December 31 is a very light day of trading, or no trading is undertaken at all. In cases where there is very light volume on December 31 for any given security, it may be preferable to use an average (perhaps weighted by volume) of the three days up to the end of the year or the last two trading days in 2001 and the first two trading days in 2002 (and similarly in following years, should the CPIS become an annual survey).
The boundary between securities and loans, may, in certain circumstances, be difficult to draw. In principle, one of the defining features of securities is that they are tradable, whereas other instruments are not. However, recently there have been instances where loans have been sold to third parties, usually at a discount to their nominal value. Unless there is evidence that these transactions are likely to prompt similar types of sales, the loans should not be reclassified to securities.
If general government has a holding in another institutional unit of less than 50 percent, that unit is not considered to be a government owned enterprise.
Already held when the threshold of 10 percent is reached or other securities acquired subsequent to the reaching of that threshold.
Surveys that give the number of securities held can provide a useful check against the total number of shares on issue to determine whether any one investor holds more than 10 percent.
Also included are sale/buy backs, carries, and bond/stock lending against cash, which, while having some minor technical differences, are essentially the same transaction as a repo.
Repo is a common means whereby a mutual fund may leverage investors’ funds. As a consequence, an investment of $100 million in securities may be used, via repo, to increase the value of the fund several times over the initial investment. In these instances (sometimes known as “hedge funds”), the survey should collect data on the fund’s total portfolio investments, including those on repo.
If the “buyer” on-sells the security acquired under a repo to a third party, then a negative or “short position” in the security should be reported; otherwise, the holding of the security will be double counted (see Box 3.6).
Cross-border transactions in repos have been growing so rapidly in recent years that it may be valuable for countries to collect this information for balance of payments purposes in its own right, given the importance of repos as a financing and leveraging tool.
In some instances, no collateral is provided.
Often, the collateral provided to the securities “lender” cannot be on-sold except on default by the “borrower.”
If cash is given as collateral, the transaction should be treated as a repo.
A depository is an entity to whom securities are entrusted for safekeeping.