Overview

250. Chapter 4 discusses enterprise surveys (ES) that are used to approach principals to measure liabilities to, and claims on, nonresidents. However, additional collection arrangements may be required in countries in which (a) securities are issued by residents and acquired by nonresidents—particularly if the securities are held by resident custodians (nominees) on behalf of the nonresident principals; (b) securities are issued by nonresidents and acquired by residents; or (c) portfolio managers (banks or fund managers) place funds abroad on behalf of clients. Similarly, a country that uses an ITRS may have to make special arrangements to collect data on transactions that involve resident intermediaries acting on behalf of nonresidents. This chapter examines the role of financial intermediaries and their impact on the BOP and outlines ways in which the compiler may collect appropriate BOP data on international securities. (The term intermediaries is used broadly to include banks and security dealers, as well as companies that manage large share or bond registers in respect of their own shares or bonds.³⁹)

251. The term securities includes shares in corporations, bonds, notes, money market instruments, and derivative instruments such as options, forward contracts, etc. An essential feature of a security is the fact that it may be traded.

252. International security markets are complex, and the compiler may require a number of data sources to compile the BOP statistics related to these markets. Also, security transactions involving nonresidents of an economy may have to be measured in conjunction with similar transactions between two domestic sectors in order to ensure consistency with the national accounts.

Data Requirements

253. It is useful to think of data requirements in terms of a data model. The data model should contain information on stock positions, financial and income flows, financial service flows, and withholding taxes. Also, the data model should distinguish the following categories of information:

• the type of instrument;

• the issuer of the instrument, that is, the entity with the liability;

• the owner of the instrument;

• the country (market) in which the instrument is issued;

• the currency in which the instrument is denominated.

254. The BPM requires that tradable instruments be separated into equity (such as ordinary shares and voting stock); long-term debt securities (such as bonds, debentures, certificates of deposit and notes with original maturities of more than one year, and nonparticipating preference shares); short-term money market debt instruments (such as bills and notes with original maturities of 12 or fewer months); and financial market derivatives (such as options, futures, and interest and currency swaps).

255. Ascertaining issuers and owners of securities is essential to identify external assets and liabilities for BOP purposes. For the BOP, the compiler should measure securities that are issued by residents and acquired or relinquished by nonresidents and, similarly, securities that are issued by nonresidents and acquired or relinquished by residents.

256. The country (market) in which a security is issued can be an important piece of information. It may be a decisive factor in determining the appropriate collection mechanism, and it may be of analytical interest.

257. Data on the currency in which the instrument is denominated is important for analytical purposes and may facilitate compilation if the compiler must estimate certain data items (such as flows or income) from other data items (such as stock positions).

258. For certain types of securities, it may not be possible to obtain data from a single source. Rather, the compiler may have to use information from different sources and collate data to ensure consistency. Anomalies appearing in collated data should be investigated and corrected. In fact, such anomalies may point to important gaps in data. Therefore, the collation process may be a useful tool for improving the overall quality of the BOP.

259. To measure transactions in securities, it is highly desirable to collect gross data on (a) new issues and redemptions and (b) secondary market sales and purchases. Such information is especially useful for international debt analysis—as in the calculation of debt service ratios.

260. Security transactions should be recorded exclusive of fees and commissions, which should be included in financial service items in the BOP. Similarly, when data on interest receivable and payable are collected, withholding taxes should be included in the gross amounts of income recorded, and offsetting entries should be included in withholding taxes in transfers.

Identifying Security Issuers and Owners

261. Institutional arrangements for security transactions vary from country to country. However, some features seem to be generally applicable.

262. Prior to issuing a security, the issuing enterprise—or a security broker acting on behalf of the issuing enterprise—usually must approach a government regulatory body or quasi-official body, such as a stock exchange, to obtain certification that the security issue meets certain statutory requirements. Each security is usually assigned a unique reference number, and certain information about the security is published. This information consists of the identity of the issuer, the type of security, income payments, maturity, and currency of denomination. (In the case of equities, not all of these categories apply.) It would therefore be possible for the compiler to develop a database containing information about each security issued—or at least about those issued in the home country. This database would be useful for checking information reported by respondents or for estimating items that may not be directly measurable.⁴⁰ If, in some countries, a unique reference number is unavailable, the compiler may devise a suitable coding system.⁴¹

263. Security ownership may be documented. In some cases, the only evidence may be pieces of paper (such as share or bond certificates). In many other cases, there will be registers containing names and addresses of security owners.⁴² In some countries, primary registers of security owners are held by companies issuing the securities or by security dealers authorized by issuers. In many European countries, banks maintain primary registers of security owners. Security registers are more frequently being held in computer-readable form; for many industrial countries, the paper record is disappearing. The name of an owner may identify a resident individual or enterprise, a resident nominee holding a security on behalf of a client, or a nonresident owner or nominee. The resident nominee may be regarded as holding a secondary register—which, in turn, records the names and addresses of owners. From the secondary register, one can determine whether the security owners are resident individuals, resident enterprises, resident nominees acting on behalf of clients, and/or nonresident owners or nominees. (The word nominee is used in a broad sense to cover portfolio managers, nominees, trustees, custodians, fund managers, banks performing similar functions, etc.) It is possible for a security to be recorded in a number of secondary registers that are maintained by nominees; however, each security may eventually be attributable to a resident individual or enterprise or to a nonresident entity.

264. It should be possible for resident organizations managing primary or secondary registers to identify (for each security that they manage) the issuer, the number, and the value of a security or securities held by residents and by nonresidents. From these registers, it should also be possible to identify income payments to nonresidents and financial fees and withholding taxes paid by nonresidents.

265. Some purchasers of shares or other securities may not wish to have their names recorded on the primary register of a company and therefore arrange to have a nominee registered as the nominal owner. Sometimes the purpose is to mask the identity of a shareholder who is planning some takeover action, although many countries have enacted legislation requiring a shareowner with a beneficial interest greater than a certain threshold, such as 10 percent, to declare his or her ownership interest.

266. More often, the use of a nominee is a matter of administrative convenience. For example, if an investor maintains a portfolio, it may be convenient to have all holdings administered by a portfolio manager (or bank) who may also perform the functions of a nominee. The nominee receives annual reports, ballot papers, income payments, etc. from the holder of the primary register. In turn, the nominee acts according to the general instructions of the investor.

267. Often, nominees also act on their own behalf; therefore, any approach to resident nominees should capture both own-account and client claims that are relevant to the BOP.

268. Generally, when a holding is traced to a nonresident entity, it may be assumed that the owner is a nonresident. However, there are two possible problems. First, the entity could be a nominee acting on behalf of a resident. (Methods for identifying and accounting for residents holding claims on residents through nonresident parties will be discussed subsequently.) Second, the entity could be a nominee acting on behalf of a resident from a third country—a circumstance that would cause an incorrect classification in regional BOP statistics. In practice, little can be done to overcome this problem.

269. When securities issued by nonresidents are owned by residents, it will generally be necessary to approach either the owner of the security or a resident custodian to obtain data required to compile the BOP and the IIP because the security register will typically not be available to the BOP compiler. However, for securities issued by nonresidents in the compiling country’s capital markets, a register will generally be maintained in the compiling country. This register could provide information such as the value of, and the income earned on, securities owned by residents.

270. It may not be necessary to approach resident owners of nonresident securities when securities are part of portfolios managed by resident fund managers, trustees, etc. In these cases, fund managers should be able to provide relevant information on transactions, stocks, and income, as well as related information (such as withholding taxes collected by foreign governments and any financial services provided by nonresidents).

Identifying the Transactors

Derivative Instruments

276. A description of options, traded futures contracts, and other financial derivatives is given in the BPM, which treats most of these as securities. In the BOP, these should be recorded at related transaction prices, and any intermediation or service charges should be eliminated from purchase and sale settlements. These charges should be recorded under financial services.⁴⁴ The market value of options and other financial derivatives should be recorded in the IIP statement. Data on the value of derivatives, transactions in derivatives, and fees for services should be available from derivative traders, financial enterprises, and nominees. Paragraphs 744-759 of chapter 16 provide further information on the compilation of financial derivative items in the BOP.

Data Sources

277. For countries that do not have established secondary security markets, the collection of security data should be relatively simple. Should an enterprise issue securities abroad or acquire securities issued abroad, relevant data can be collected from the enterprise issuing or acquiring the security. Model form 12 (discussed in chapter 4) is suitable for this purpose. However, additional collection arrangements may be required in countries in which:

• securities are issued by residents in domestic capital markets and acquired by nonresidents-particularly if the securities are held by resident nominees on behalf of nonresident principals;

• securities are issued by nonresidents in domestic capital markets;

• portfolio managers (banks or other fund managers) place funds abroad.

278. Table 6.1 illustrates a set of collection arrangements that may be adopted. These suggest a particular approach, but other approaches (such as the use of an ITRS for some or all of the data) are possible. It is important for collection rules to be clearly defined so that there are no omissions or duplications in the recording of security transactions.

Table 6.1

Collection Sources for Data on Activity Associated with International Securities

Table 6.1

Collection Sources for Data on Activity Associated with International Securities

	Data Items Required	Source
Securities Issued by Residents
1. In domestic capital markets	Nonresident holdings (stock liabilities); income payable to nonresidents (debit); fees and withholding taxes payable by nonresidents (credit)	Primary and secondary registers of securities (for example, shareholders surveys, surveys of nominees)
	Issues to and purchases by nonresidents (credit); redemptions from and sales by nonresidents (debit); brokerage and other fees payable by nonresidents (credit)	Security brokers; adjustments to include off-market transactions
2. In foreign capital markets through a nonresident intermediary	Nonresident holdings (stock liabilities); issues (credit) and redemptions (debit); income and fees payable to nonresidents (debit); withholding taxes payable by nonresidents (credit)	Resident enterprise issuing securities
	Net purchases (debit) or sales (credit) by residents	Resident enterprise issuing securities (from analysis of registers), resident enterprises involved in transactions, or security brokers
3. In foreign capital markets through a resident intermediary or managed (on behalf of the issuer) by a resident manager	Nonresident holdings (stock liabilities); issues (credit) and redemptions (debit); income payable to nonresidents (debit); withholding taxes payable by nonresidents (credit)	Resident enterprise issuing securities or resident portfolio manager
	Net purchases (debit) or sales (credit) by residents	Resident enterprise issuing securities or resident portfolio manager (from analysis of registers); resident enterprises involved in transactions
Securities Issued by Nonresidents
4. In domestic capital markets	Resident holdings (stock assets); income receivable by residents (credit)	Resident owners of securities or primary and secondary registers of securities (for example, shareholders surveys, surveys of nominees)
	Issues to and purchases by residents (debit); redemptions from and sales by residents (credit)	Resident owners of securities or security brokers; adjustments to include off-market transactions
5. In foreign capital markets; owned by residents; not managed by resident portfolio managers	Resident holdings (stock assets); issues to and purchases by residents (debit); redemptions from and sales by residents (credit); income receivable by residents (credit); brokerage, other fees, and withholding taxes payable by residents (debit)	Resident owners of securities or resident nominees
Securities Issued by Residents
6. In foreign capital markets; owned by residents; managed by resident portfolio managers	Resident holdings (stock assets); issues to and purchases by residents (debit); redemptions from and sales by residents (credit); income receivable by residents (credit); brokerage, other fees, and withholding taxes payable by residents (debit)	Resident portfolio managers, resident owners of securities, or resident nominees

View Table

Table 6.1

Collection Sources for Data on Activity Associated with International Securities

	Data Items Required	Source
Securities Issued by Residents
1. In domestic capital markets	Nonresident holdings (stock liabilities); income payable to nonresidents (debit); fees and withholding taxes payable by nonresidents (credit)	Primary and secondary registers of securities (for example, shareholders surveys, surveys of nominees)
	Issues to and purchases by nonresidents (credit); redemptions from and sales by nonresidents (debit); brokerage and other fees payable by nonresidents (credit)	Security brokers; adjustments to include off-market transactions
2. In foreign capital markets through a nonresident intermediary	Nonresident holdings (stock liabilities); issues (credit) and redemptions (debit); income and fees payable to nonresidents (debit); withholding taxes payable by nonresidents (credit)	Resident enterprise issuing securities
	Net purchases (debit) or sales (credit) by residents	Resident enterprise issuing securities (from analysis of registers), resident enterprises involved in transactions, or security brokers
3. In foreign capital markets through a resident intermediary or managed (on behalf of the issuer) by a resident manager	Nonresident holdings (stock liabilities); issues (credit) and redemptions (debit); income payable to nonresidents (debit); withholding taxes payable by nonresidents (credit)	Resident enterprise issuing securities or resident portfolio manager
	Net purchases (debit) or sales (credit) by residents	Resident enterprise issuing securities or resident portfolio manager (from analysis of registers); resident enterprises involved in transactions
Securities Issued by Nonresidents
4. In domestic capital markets	Resident holdings (stock assets); income receivable by residents (credit)	Resident owners of securities or primary and secondary registers of securities (for example, shareholders surveys, surveys of nominees)
	Issues to and purchases by residents (debit); redemptions from and sales by residents (credit)	Resident owners of securities or security brokers; adjustments to include off-market transactions
5. In foreign capital markets; owned by residents; not managed by resident portfolio managers	Resident holdings (stock assets); issues to and purchases by residents (debit); redemptions from and sales by residents (credit); income receivable by residents (credit); brokerage, other fees, and withholding taxes payable by residents (debit)	Resident owners of securities or resident nominees
Securities Issued by Residents
6. In foreign capital markets; owned by residents; managed by resident portfolio managers	Resident holdings (stock assets); issues to and purchases by residents (debit); redemptions from and sales by residents (credit); income receivable by residents (credit); brokerage, other fees, and withholding taxes payable by residents (debit)	Resident portfolio managers, resident owners of securities, or resident nominees

279. Some comments on table 6.1 are necessary. Data on securities issued in the domestic capital market both by residents (category 1) and nonresidents (category 4) are best collected in surveys of security registers and intermediaries, such as brokers. Alternatively, in the case of category 4, resident owners of the securities could be surveyed as sources of data. However, if there are numerous resident owners or if the owners are difficult to survey, this approach may not produce the best results. These problems are particularly likely to occur if resident households have significant holdings of securities issued domestically by nonresidents. A combined approach (for example, a survey of owners to measure enterprise holdings and surveys of security registers and intermediaries to measure household holdings) may be used. In using the combined approach, the compiler should carefully define the boundary between the collections to ensure that no duplication or omission of reporting occurs. Typically, a combined approach would be successful only if security registers and intermediaries could identify the types of owners.

280. For securities issued abroad by resident enterprises (categories 2 and 3 of table 6.1), most of the necessary information could be collected from issuing enterprises. However, when a resident intermediary is involved in the issue or when a resident institution manages the register on behalf of the issuer, it may be preferable to survey these organizations for some or all of the data items. Also, it would be important to define reporting rules clearly. There may be an assumption that securities issued abroad are wholly acquired by nonresidents or that any resident acquisition is small enough to ignore. However, if this is not so, data on transactions of resident enterprises should be collected so that such transactions can be deducted from the total reported by the issuing entity.⁴⁵ Information on resident ownership of securities issued abroad by residents could be obtained from issuing enterprises (or the security register manager), resident enterprises involved in the transactions, or resident security dealers. For bearer securities, the first-mentioned approach would not be feasible.

281. Data on securities issued abroad by nonresidents and owned by residents could be collected from the owners. However, when such securities are managed by a resident portfolio manager, it may be preferable, for two reasons, to approach the manager rather than the owner.⁴⁶ First, the manager will most likely have the information required by the compiler. Second, the number of portfolio managers will probably be relatively small, in comparison with the number of owners, and the portfolio managers will be more easily identifiable. These observations are particularly true for securities owned by households. ES cannot measure investments made directly abroad by the resident household sector.

282. It may not be possible to collect the full range of information outlined in the Data Items Required column of table 6.1. However, it may be possible to estimate missing items by using other information. For example, if it is not possible to collect data on financial transactions, it may be possible to derive these from stock information. On the other hand, it may be possible to derive stocks from transactions. Techniques that can be used to make these derivations are discussed in chapter 16, paragraphs 732-743. Investment income may be derived from information on the scheduling of income payments or from the known (or assumed) relationship between stocks and income. Techniques for estimating investment income are described in chapter 13, paragraphs 598-601.

283. All the collection approaches set out in table 6.1 are based upon the assumption that enterprises and intermediaries can distinguish between resident and nonresident issuers and holders. Many institutions may not readily know which entities are resident and which are nonresident. Therefore, for BOP requirements to be met, enterprises and intermediaries could be asked to enter codes or flags in their databases to identify resident and nonresident clients. In many cases, the distinction may be made with reference to some type of legislation or official administrative arrangement that “classifies” entities as residents or nonresidents for particular purposes. For example, entities that are exempt from value-added tax or those that pay withholding taxes may be regarded as nonresidents—although such “classifications” may not be good proxies for residency or nonresidency in all cases. Or, determination of residency status may be made on the basis of address. Some cases may not always be clear, and the compiler should provide guidelines to enterprises and intermediaries and advise them of the residency status of particular entities. The compiler must have a good understanding of institutional arrangements and the nature of record-keeping practices in order to give the best advice to enterprises.

284. Alternatively, the compiler may have to examine security registers directly. This task could be immense and may only be a periodic option. The aim should be to capture large transactions and holdings, and this activity should be supplemented by properly designed sample surveys to measure smaller holdings and transactions.⁴⁷

Model Collection Forms

285. Model form 12 (discussed in chapter 4) could be used to collect from principals data on (1) securities issued by resident enterprises and owned by nonresidents and (2) securities issued by nonresidents and owned by resident enterprises. However, different approaches may be preferred and additional collection forms may be necessary for some types of securities [for example, (a)securities issued by resident enterprises and held by resident nominees on behalf of nonresidents and (b) securities owned by residents, issued by nonresidents, and managed by resident portfolio managers]. Whatever methodology is adopted, instructions should be added to form 12 to specify clear rules about what should be included and omitted from that form. If resident enterprises hold bearer securities that are issued internationally by other resident enterprises, form 12 could easily be amended to collect the necessary information for clarifying data reported by the issuing enterprise.

286. Similarly, ITRS forms may be used to collect data on security transactions. However, in countries where international intermediation is significant, the rules of the ITRS must clearly define which institutions should report which transactions. Also, it will generally be necessary to supplement the ITRS with a collection of data on stock positions.

287. Model form 13 has been designed to collect data from intermediaries (such as brokers and nominees and/or institutions responsible for managing security registers) and is based on a number of assumptions.

288. Via the form, intermediaries are asked to report—for each combination of security and owner—details of stock positions, transactions (issues, redemptions, sales, and purchases), income, fees, and withholding taxes. However, in practice, it may not be possible to obtain the full range of information about each combination from one respondent. For example, for securities issued by resident enterprises, nominees might have details on stocks but not on transactions—which, in turn, may have to be reported by brokers. Other cases will arise as reflections of circumstances in the compiler’s country, and the compiler should take care to ensure that reporting instructions are clear and appropriate. It is particularly important that duplication of reporting be avoided or, if this is not possible, identified so that any double counting can be eliminated.

289. For resident enterprises issuing securities, reporters are asked to provide an identification or reference number and an owner code for each combination of security and owner. The reference code, when linked to a database on security issues, would establish the type of security, the currency of denomination, the redemption date, income payments, etc. The owner code would identify the country of residence (and, perhaps, sector) of the nonresident party. Different owners having the same owner codes and holding the same securities could be combined. Combinations would permit reporters to maintain the confidentiality of owners’ identities. Alternatively, owners’ identities could be provided; these, in turn, could be used by compilers to determine sectors and countries of residence of nonresident parties.

290. For nonresidents issuing securities, reference numbers of securities and resident owner codes would be provided. Security reference numbers would permit identification of sectors and countries of residence of nonresident parties, and resident owner codes would permit identification of sectors and industry codes of resident owners.⁴⁸ Identities of clients could be kept confidential if holdings of different owners having the same owner code are combined.

291. With regard to security reference numbers, it is possible that these could be specially established by the BOP compiler. The disadvantage with this task, though, is that it would be onerous to maintain the list and communicate the information to respondents. A better alternative would be to use a domestic, or preferably international, security reference system that has been accepted by organizations most likely to be approached in the collection of information.

292. Security reference numbers—when properly utilized—would allow the compiler to develop comprehensive information about each security traded internationally. Such information would be of assistance in identifying and rectifying any errors, duplications, or omissions in reporting.

293. The categories of securities reported are broadly consistent with table 6.1. They include:

• securities issued in the domestic economy by residents and owned by nonresidents;

• securities issued in the domestic economy by nonresidents and owned by residents;

• securities issued abroad by residents and owned by nonresidents;

• securities issued abroad by nonresidents and owned by residents;

• securities issued abroad by residents and owned by residents.

The last category permits collection of details that help clarify BOP data, particularly in the case of bearer securities. The model form does not contain precise rules (such as who should report what) about reporting arrangements or define the relationship between forms 12 and 13. The individual compiler is left to determine these arrangements. Part C of the form collects data on the intermediary’s own account.

294. It is assumed that intermediaries will report data in computer-readable form or at least on computer printout. While not stated on the model form, it should be possible to introduce, if the use of such techniques would reduce reporting and processing costs, suitable thresholds or sampling techniques for smaller holdings and transactions. These techniques are discussed in further detail in chapter 18.

Overcoming Possible Problems

295. It may appear that model form 13 represents a highly ambitious approach. However, a number of countries collect—at least to an extent—data on the basis outlined previously. Australia, for example, collects data—from a survey of share registers and a survey of nominees—on the number and value of individual securities held by nonresidents; securities are classified by countries of residence of nonresident parties. Canada collects information on the number and value of issues, redemptions, purchases, and sales of individual securities, which are classified by country of residence of nonresident transactor and by sector and industry of the resident party. Germany collects the number and value of transactions in each security issued in Germany; the information collected includes the security code and the country of residence of the nonresident party. In each case, data are collated to obtain complete information on investment in each enterprise. Resource costs associated with the collection of these data are moderate because of the high level of computer technology involved. Certain assumptions may be made about undercoverage, income payments, etc. to develop a complete set of financial and income transactions and stock position data.

296. Obviously, when data come from two or more sources, such as both nominees and brokers, it may be difficult to collate the information. By collecting the data on a security reference number basis, it should be possible to resolve, through accurate validation and careful querying procedures, most inconsistencies between stocks and transactions. Such inconsistencies could be the result of errors in coverage or classification of data. When data come from different sources, it may be necessary to develop several types of forms to collect appropriate information.

297. Some compilers may not have the necessary authority to collect all data required or may prefer not to collect detailed information. In these instances, an intermediary could be asked to prepare tabulations that the compiler would otherwise prepare. At a minimum, the compiler should attempt to obtain items (in columns C through L in parts A and B of form 13) that are classified by (a) sector of issuer and owner’s country of residence (for securities issued by residents) and (b) issuer’s country of residence and sector of owner (for securities issued by nonresidents and held by residents). To identify liabilities constituting foreign authorities’ reserves (LCFAR), some data on the sector of the nonresident owner of securities issued by residents is also needed. The use of analyses undertaken by intermediaries to provide the compiler with various tables is akin to the use of an ITRS that does not give the compiler access to individual records. In these situations, the compiler should attempt to ensure that those who undertake the basic compilation (in the case of an ITRS, commercial banks, and, in the case of securities, intermediaries) have a thorough understanding of the requirements and the type of approach that the compiler wishes to be taken.

298. If a respondent tabulates data, there may be no need to maintain security reference numbers. If no readily available system of reference numbers exists and the cost of establishing such a system is high, the compiler may adopt an aggregate approach rather than seeking information about individual securities.

299. There may be numerous problems in collecting information on international security transactions, which constitute one of the most complex areas of the BOP. However, more accurate data are likely to be collected if the compiler is very familiar with institutional arrangements and record-keeping practices, has the necessary legislative authority to require that suitable information be reported, can persuade the industry to provide necessary data, and is in a position to analyze data closely to correct any apparent anomalies. One should not underestimate the research necessary to gain an understanding of institutional arrangements in each country. Intermediary enterprises are often complex, and the compiler may have to review the activities of each department, subsidiary, etc. of the intermediary to determine whether it performs one of the many functions that the compiler should measure. Chapter 19, which examines the issue of form design and testing, is particularly applicable to collections from intermediaries.