Abstract

236. Section IV of the template provides supplementary information covering (1) positions and flows not disclosed in Sections I—III but deemed relevant for assessing the authorities’ reserves and foreign currency liquidity positions and risk exposure in foreign exchange; (2) additional details on positions and flows disclosed in Sections I—III; and (3) positions and flows according to a breakdown or valuation criteria different from those found in Sections I—III.

Coverage of Memo Items

236. Section IV of the template provides supplementary information covering (1) positions and flows not disclosed in Sections I—III but deemed relevant for assessing the authorities’ reserves and foreign currency liquidity positions and risk exposure in foreign exchange; (2) additional details on positions and flows disclosed in Sections I—III; and (3) positions and flows according to a breakdown or valuation criteria different from those found in Sections I—III.

237. Information on seven different items is to be disclosed in Section IV of the template. They are as follows:

  • Short-term domestic currency debt indexed to foreign exchange rates.
  • Financial instruments denominated in foreign currency and settled by other means (e.g. in domestic currency).
  • Pledged assets.
  • Securities lent and on repos (as well as gold swapped).
  • Financial derivatives assets (net, marked to market).
  • Derivatives that have residual maturities longer than one year and that are subject to margin calls.
  • Currency composition of reserve assets.

238. In reporting data on the memo items, data pertaining to assets should be separately recorded from those on liabilities, wherever applicable. An exception is financial derivative asset items, for which the “net” basis means that the liabilities are netted from the assets (see discussion on financial derivatives later in this chapter).

239. Types of instruments are to be identified, where applicable.

240. Where instruments are marked to market in a currency other than the reporting currency, endperiod market prices and exchange rates should be used to convert the values to the reporting currency.

241. After presenting some brief comments on the recording of selected memo items as shown below, the rest of this chapter discusses in greater detail the reporting of (1) financial instruments denominated in foreign currency and settled by other means, (2) securities lent and repos, and (3) financial derivatives assets.

Short-Term Domestic Currency Debt—Item IV.(1)(a) of the Template

242. With respect to short-term domestic currency debt indexed to foreign exchange rates, consistent with the rest of the data template, “short term” is determined by the residual maturity of the instruments as defined in Chapter 1. Accordingly, the data to be reported should cover such short term debt with (1) original maturity of up to one year, (2) longer original maturity where remaining maturity is one year or less, and (3) principal and interest payments falling due within the 12 months ahead of debt with remaining maturity of longer than one year. Only the total figure, in nominal value, is to be reported. Detail for the three subperiods within the one-year horizon is not required. Domestic currency debt refers to debt issued by the monetary authorities and the central government, excluding social security funds. Only such short-term debt indexed to foreign exchange rates and settled in the domestic currency is to be included in item IV.(1)(a) of the template. Domestic currency debt settled in foreign currencies is to be covered in Sections II and III of the template, as appropriate.

Pledged Assets—Item IV.(1)(c) of the Template

243. Pledged assets refer only to reserve assets and other foreign currency assets listed in Section I that are pledged. As mentioned in Chapter 2, pledged assets that are clearly not readily available should not be included in reserves or in foreign currency assets. However, if certain pledged assets remain in reserves and other foreign currency assets their values should be reported in item IV.(1)(c) of the template. Pledged assets do not include assets encumbered under repos, securities lending, and similar arrangements. The latter arrangements are to be separately reported under item IV.(1)(d) of the template.

Financial Derivatives with Residual Maturity of Greater than One Year—Item IV.(1)(f) of the Template

244. Financial derivatives with a residual maturity of greater than one year and subject to margin calls are to be reported in item IV.(1)(f) of the template. To ensure that the authorities’ exposure in financial derivatives is not underreported, it is required that derivatives instruments with a maturity of longer than one year but not subject to margin calls also be reported in this item of the template but separately identified from those subject to margin calls.

245. Financial derivatives to be reported in this item of the template are similar to those called for in items II.2 and III.4 of the template. That is, they refer to foreign currency commitments in the various types of financial derivative contracts. Such contracts are in foreign currency vis-à-vis domestic currency. The data to be reported are the nominal/notional values of the contracts.

Currency Composition of Reserves—Item IV.(2) of the Template

246. Regarding the currency composition of reserve assets, the template does not require listing of individual currencies; only groups of currencies are to be identified. At a minimum, data on currency composition are to be disseminated under two major categories: currencies in the SDR basket and currencies outside of the SDR basket. Currencies in the SDR basket now include the U.S. dollar, the euro, the Japanese yen, and the pound sterling. Countries can provide detailed information in country notes accompanying the data on the currency composition of their reserve assets if they choose to.

Financial Instruments Denominated in Foreign Currency and Settled by Other Means

Financial Instruments Denominated in Foreign Currency and Settled by Other Means—Item IV.(1)(b) of the Template

247. The rationale for including information on these financial instruments is that they resemble instruments that are settled in foreign currency. These instruments are separately reported in Section IV of the template because they are often issued in the domestic market and held by residents, thus are actually or potentially subject to different legal or regulatory restrictions. Information on this memo item should be broken down by type of instrument.

248. Financial instruments denominated in foreign currency and settled in domestic currency (and other means) may include, for instance, indexed securities and nondeliverable forward [or futures] (NDF) contracts and NDF options.

249. An NDF is an over-the-counter instrument that differs from a normal foreign currency forward contract in that there is no physical settlement of the two currencies at maturity. The financial institution that sold the NDF contract will mark the notional value of the contract to market, using an index (or formula) agreed upon at the time the contract is entered into by the two counterparties. One party will make a cash payment to the other based on the contract’s intrinsic (net) value.

250. The net amount can be settled in local currency or foreign currency (usually U.S. dollars). Whereas, onshore banks trade in NDFs that settle in foreign or local currencies, typically, offshore banks deal in NDFs that settle in hard currencies.

251. In an NDF option, the option buyer pays a premium to protect the foreign currency value of an amount in local currency. If the option expires “in the money,” the writer pays the intrinsic value to the purchaser. There is no exercise of the option; the payment is automatic. If the option expires “out of the money,” no payment is due to either party.

252. NDFs are commonly used to hedge local currency risks in emerging markets where local currencies are not freely convertible, where capital markets are small and undeveloped, and where there are restrictions on capital movements. Under these conditions, the normal forward foreign exchange contracts generally do not work well; they may not be enforceable and they may not be liquid.

253. Item IV.(1)(b) of the template requires disclosure of NDFs settled in local currency only.60 Such information is useful because NDFs can exert substantial indirect pressure on reserves. If market participants anticipate that a local currency will decline, they can buy options that let them purchase foreign currency at a set price at a future date; such widespread buying can, in turn, further depress the value of the local currency.

254. The template prescribes, where applicable, that the notional value of nondeliverable forward positions be shown in the same format as that for the notional value of deliverable forwards/futures in Section II of the template.

Securities Lent and Repurchase Agreements

Securities Lent and on Repos—Item IV.(1)(d) of the Template

255. This memo item is to provide additional information on the repo and securities lending activities that are covered by the template. It concerns such activities of the monetary authorities and the central government that are settled in foreign currency. Thus, whether or not the repo and securities lending activities have been included in Section I of the template along with associated liabilities in Section II, the template requires that securities lent and repoed be recorded in item IV.(1)(d) of the template. The template also requires that the securities lent and repoed be reported in two separate categories, depending on whether or not the repo and related activities have been included in Sections I and II. Such reporting is necessary in order to differentiate repos from traditional loans and from traditional securities transactions. The identification of repo activities would facilitate the assessment of the level of reserve assets before the repo activities and the extent of leverage the authorities have undertaken.

256. In addition, the template calls for the separate reporting of securities provided as collateral under repo transactions and the securities collateral taken in reverse repos. The data to be reported are the values of the securities. Institutions normally use market values (bid side), including the amount of any accrued interest, to determine the price of securities sold under repos and in security lending transactions.

257. Securities lent/acquired with no cash involved should be noted in Section IV of the template. Similarly, foreign currency flows associated with repos and securities lending that fall due beyond the one-year time horizon are not reflected in Section II of the template; nonetheless, such securities lent or repoed should be reported in Section IV of the template. That is, the value of securities provided (or lent) in repos and the value of securities received (or borrowed) in reverse repos, irrespective of the time horizon of the related cash flows, are to be separately reported under item IV.(1)(d).

258. As discussed in Chapter 2, gold swaps are to be treated similarly to repos. The gold that is swapped should be included, as appropriately, among securities lent or repoed in item IV.(1)(d) of the template. (See also Appendix III.)

259. Note that under repos or securities lending, either initial or variation margins (or both) are usually paid. As a result, the purchaser of the securities normally pays less than the market value of the securities, including the amount of any accrued interest, with the difference representing a predetermined margin. Also, there are cases where the borrower of securities has a need for a specific security, the lender of the securities may receive cash collateral in excess of the value of the securities lent, with the difference representing the margin. That is, due to margining, the value of securities lent or repoed reported in Section IV of the template may not be equivalent to the cash exchanged; the same applies for reverse repos. The level of the margin is usually determined by the size and maturity of the repos, the type and maturity of the underlying securities, and the creditworthiness of the counterparty. Margin requirements allow for the anticipated price volatility of the security until the repos mature. Less marketable securities often require an additional margin to compensate for less liquid market conditions.61

260. The template calls for comprehensive information on repos and security lending because of the increasing importance of these instruments in global financial markets. Repos can be a useful asset management tool for the authorities, but repos can expose the authorities to serious risks if they are not managed appropriately. In particular, the authorities can face credit risks if they do not have effective control over the securities collateralizing the transaction and the counterparty defaults. Such credit risk can be considerable if the authorities engage in repo transactions in volume and in large amounts of foreign currency and if the creditworthiness of the counterparty is uncertain. Similarly, the authorities can use repos to acquire funds, which is a useful tool for managing liabilities. In these circumstances, the authorities would not want to provide the counterparty with excessive margins.

261. As with repos, experience has shown that the collateral securities in security lending may not serve as protection if the counterparty becomes insolvent or fails and the purchasing institution does not have control over the securities. If control of the underlying securities is not established, the authorities may be regarded as an unsecured general creditor of an insolvent counterparty. Under these circumstances, substantial losses are possible.

Financial Derivatives Assets (Net, Marked to Market)

Financial Derivatives Assets—Item IV.(1)(e) of the Template

262. The market values of the authorities’ financial derivatives are to be reported in Section IV of the template under the memo items. Item IV.(1)(e) of the template mentions only “financial derivatives assets,” but data on financial derivatives liabilities also are to be included; the positive (+) sign should accompany the asset data, and the minus (-) sign should precede the liability data.

263. The “net, marked-to-market” designation refers to the following: the difference between asset and liability positions yields the “net”62 asset position. Financial derivatives are to be shown at their market values on a marked-to-market basis. “Marking to market” refers to revaluing the value of the financial derivative using the prevailing market price.

264. This memo item relates to all financial derivative positions of the monetary authorities and the central government that are settled in foreign currency, irrespective of whether the positions are vis-à-vis residents or nonresidents.

265. Financial derivatives are to be disclosed by types of instruments (viz., forwards, futures, swaps, options, and others). All financial derivatives settled in foreign currency are to be disclosed, regardless of whether they have been reported in other sections of the template.

266. Netting by novation is allowed if offsetting positions are maintained with the same counterparty and at the same maturity, and insofar as there is a legally enforceable netting agreement in place allowing settlement in net terms. Netting by novation also is allowed for matched positions on organized exchanges. Netting refers to the right to set off, or net, claims between two or more parties to arrive at a single obligation between the parties.63

267. As alluded to in previous chapters, the market value of a financial derivative generally can be derived from the difference between the agreed contract price(s) and the prevailing, or expected prevailing, market price(s) of the underlying instrument, appropriately discounted. If the prevailing market price differs from the contract price, the financial derivative contract has a market value, which can be positive or negative, depending on which side of the contract a party is on. In addition, the market value of a derivative contract can be positive, negative, or zero at various points in the life of the contract. Financial derivatives can be recorded as assets if their market values are positive; they can be shown as liabilities if their market values are negative. Note that options usually have a market value but do not change from asset to liability, or vice versa.

268. Prevailing market prices of an underlying instrument ideally should be observable prices on financial markets. Where they are not, as in some over the-counter contracts, estimates of the prevailing market price can be derived from information available.

269. Key characteristics of internal models used to calculate the market values of financial derivatives are to be disclosed in country notes accompanying the data reported in the template. (See also footnote 16 of the template.)

270. For purposes of the template, the reference date for the market valuation should be the last day of the reporting period.

271. The market value of a forward or a swap can be derived from the difference between the agreed contract price and the prevailing market price or the expected market price discounted accordingly, but the market valuation of options can be complex.

272. Four factors influence the market value of options: the difference between the contract (strike) price and the value of the underlying item; the price volatility of the underlying item; the time remaining to expiration; and interest rates. In the absence of an observable price, market value can be approximated using a financial formula, such as the Black-Scholes formula, which incorporates the four factors.64 An option contract at its inception has a market value equal to the premium paid. Its market value, however, is adjusted as the reference price changes and the settlement date approaches. During the life of an option, the writer of the contract can have a financial derivative liability and the purchaser of the option can have a financial derivative asset. An option contract can expire without value to the holder, that is, it is not advantageous for the purchaser to exercise the option.

273. Unlike forward contracts, futures contracts are marked to market at the end of each trading day and the resulting gains or losses are settled on that day.65 This means that at the end of each trading day the value of outstanding futures contracts is zero. This is in contrast to forwards, for which variation margin payments are not usually made and contracts can build up considerable marked-to-market positions.

1

The concepts of international reserves and foreign currency liquidity are discussed later in this chapter and elaborated on in later chapters of this book.

2

International financial activities here refer to financial transactions and positions in foreign currencies.

3

Work to develop disclosure standards on the trading and investment activities of private market participants was undertaken at the BIS, the Financial Stability Forum, the IMF, and other international bodies. The New Basel Capital Accord, released by the BIS in 2001, was an example of such efforts.

4

Off-balance-sheet foreign currency activities refer to financial transactions and positions in foreign currency not recorded on the balance sheet.

5

See Balance of Payments Manual, Fifth Edition, International Monetary Fund, Washington, D.C., 1993.

6

The term “monetary authorities” is defined later in this chapter under “Key Features of the Data Template.”

7

In the BPM5, the concept of residence is not based on nationality or legal criteria; it is based on the transactor’s center of economic interest. A transactor is considered a resident of a country if its center of economic interest is in the economic territory of the country. The economic territory of a country generally corresponds to its geographical boundaries (although it can extend beyond them). A transactor whose center of economic interest is outside the economic territory of the country is considered a nonresident.

8

As will be elaborated on in Chapter 3 of this document, “net drains” refer to outflows of foreign currency net of inflows of foreign currency.

9

See the definition of “short-term” as provided later under “time horizon” in this chapter.

10

The coverage of both the monetary authorities and the central government is explicit in the template. The operation of a currency board (with stipulations that the central government’s foreign currency obligations are not to be met by resources of the monetary authorities) does not remove the requirement for reporting of data on the central government in the template.

11

Depending on institutional arrangements in a country, the definition of “monetary authorities” in the template could include other public-sector entities, such as government-owned commercial banks actively employed to offset foreign currency drains. In the template, the term “other central government” is used to clarify that the monetary authority functions undertaken by the central government are included in monetary authorities.

12

Of course, changes in the overall supply and demand for domestic currency assets will influence the balance of payments and thus, indirectly, affect liquid foreign exchange resources.

13

Financial derivatives are financial instruments linked to underlying assets, reference rates, or indexes such as stocks, bonds, currencies, and commodities. Derivative instruments allow users to disaggregate risks, accepting ones that they are willing to manage, and transferring those they are unwilling to bear. Derivative contracts range from simple contracts (forwards, futures, and swaps) to complex products such as options. (See Chapters 3 and 4 for greater detail on this subject.)

14

As will be explained in Chapter 4, a call option is “in-the-money” if the strike price is less than the market price of the underlying security. A put option is “in-the-money” if the strike price is greater than the market price of the underlying security.

15

Under most circumstances, the nominal value of principal payments, expressed in the currency of denomination of the contract, would correspond to the face value of the instrument concerned. However, in some circumstances, the anticipated cash-flow value will differ from the face value.

16

This is consistent with the definition of “short-term” used in the BPM5.

17

Countries’ data on reserve assets are reported to the IMF for publication in the IMF’s monthly International Financial Statistics and the annual Balance of Payments Statistics Yearbook.

18

These resident institutions include ones “headquartered and located in the reporting country” or ones “headquartered abroad but located in the reporting country.” See Section D of this chapter for further detail.

19

Marketable assets refer to those that can be bought, sold, and liquidated with minimum cost and time and for which there are ready and willing sellers and buyers. “Readily available” assets are assets that are available with few constraints.

20

As will be explained later under the section on “Identifying Institutions Headquartered in the Reporting Country,” under certain circumstances, the monetary authorities’ deposits in domestic banks can be included in reserve assets.

21

Equity securities include stocks and shares and similar instruments such as American Depository Receipts (ADRs). Also included are preferred shares and stocks, mutual funds and investment trusts. Debt securities cover (1) bonds and notes, debentures; and (2) money market instruments (such as treasury bills, commercial paper, bankers’ acceptances, negotiable certificates of deposits with original maturity of one year or less) and short term notes issued under note issuance facilities.

22

Including sell/buybacks and other similar collateralized arrangements. Gold swaps are reported under item I.A.(4) of the template.

23

Or on demand, for some contracts.

24

Or on demand, for some contracts.

25

Information available from rating agencies can be supplemented by other criteria (including the creditworthiness of the counterparty) to determine the quality of the securities.

26

The BPM5 (para. 516) defines banks as the “other (than the central bank) depository corporations” and, in the 1993 System of National Accounts (1993 SNA), banks are defined as the “other (than the central bank) depository institutions” in the financial corporate sector. Included are institutional 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 deposits) 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.

27

Reserve-tranche positions in the IMF are liquid claims of members on the IMF that arise not only from the reserve asset payments for quota subscriptions but also, for members in strong external positions, from the sale by the IMF of their currencies to meet the demand for use of IMF resources by other members in need of balance of payments support.

28

Such gold is treated as a financial instrument because of its historical role in the international monetary system.

29

These precious metals and stones are considered goods and not financial assets.

30

If the securities received as collateral are repoed out for cash, a repo transaction should be reported, as discussed earlier under “securities.”

31

Such gold swaps generally are undertaken between monetary authorities and with financial institutions.

32

This treatment is consistent with BPM5 (para. 434) to the extent that the swap is between monetary authorities. The rationale is that in a gold swap, the monetary authorities swap gold for other assets (such as foreign exchange) and that this involves a change in ownership. The ownership of gold is retransferred to the original owner when the swap is unwound at a specific date and at a specific price.

33

This treatment applies only when an exchange of cash against gold occurs, the commitment to buy back the gold is legally binding, and the repurchase price is fixed at the time of the spot transaction. The logic is that in a gold swap the “economic ownership” of the gold remains with the monetary authorities, even though the authorities temporarily have handed over the “legal ownership.” The commitment to repurchase the quantity of gold exchanged is firm (the repurchase price is fixed in advance), and any movement in gold prices after the swap affects the wealth of the monetary authorities. Under this treatment, the gold swapped remains as a reserve asset and the cash received is a repo deposit. Gold swaps commonly permit central banks’ gold reserves to earn interest. Usually, the central banks receive cash for the gold. The counterparty generally sells the gold on the market but typically makes no delivery of the gold. The counterparty often is a bank that wants to take short positions in gold and bets that the price of gold will fall or is one that takes advantage of arbitrage possibilities offered by combining a gold swap with a gold sale and a purchase of a gold future. Gold producers sell gold futures and forwards to hedge their future gold production. Treating gold swaps as collateralized loans instead of sales also obviates the need to show frequent changes in the volume of gold in monetary authorities’ reserve assets, which, in turn, would affect world holdings of monetary gold as well as the net lending of central banks.

34

See also Chapter 5 for a discussion on reporting of marked-to-market values of financial derivatives in the template, including “netting by novation.”

35

“Branches” refer to unincorporated entities wholly owned by the parent (headquarters) institution; and subsidiaries, to incorporated entities more than 50 percent owned by the parent institution.

36

Usually, these are the quoted sales price at the close of trading on the revaluation date.

37

Netting by novation should be distinguished from closure netting. The latter generally refers to cases of insolvency and bankruptcy, where netting ensures that financial market participants can terminate or close out and net financial market contracts; closure netting allows market participants to liquidate collateral pledged by the defaulting counterparty in connection with these contracts.

38

A country’s IIP is represented by its balance sheet of external assets and external liabilities.

39

Including amortized payments of instruments with remaining maturities of longer than one year.

40

The central government is a component of the general government, which also consists of local and state jurisdictions.

41

Other types of nonresident entities should be included if they hold deposits with the authorities of the reporting country.

42

Brady bonds, which are dollar denominated and issued in euromarkets, should be treated as bonds and notes. The principal amount usually is collateralized by specially issued U.S. Treasury 30-year zero-coupon bonds purchased by the debtor country using a combination of IMF, World Bank, and its own reserve assets. Interest payments on Brady bonds in some cases are guaranteed by securities of at least double A-rated credit quality held with the New York Federal Reserve Bank.

43

See also Chapter 4 on securities with embedded put options.

44

For example, an initial sum in U.S. dollars is exchanged for its equivalent in pounds sterling (a spot transaction) and a reverse exchange taking place at the maturity of the swap. Both spot/forward and forward/forward swaps are included. Short-term swaps carried out as “tomorrow/next day” transactions also are included in this category.

45

For example, a “cross-currency swap” is a multicurrency interest rate swap.

46

The notional value of other financial derivative instruments (such as structured notes) should be included in Section II.2. and their markedto market values in IV.(l)(e) if they are in the authorities’ portfolio. Structured notes normally take the form of customized instruments with a bullet redemption and with either the redemption value or the coupon linked to movements in one or more economic variables: typically a currency, an interest rate, an asset or commodity price, or a combination thereof.

47

Examples include global bond issues of the Federal National Mortgage Association (Fannie Mae) in the United States.

48

From the perspective of creditors, put options shorten the contractual minimum maturity of the debt while giving creditors the right to extend the maturity on the original interest rate basis. This affords creditors the opportunity to withdraw early and benefit from any increase in yields by exercising the put and relending the resources at a higher spread, as well as the ability to lock in a favorable yield if interest rates decline. Debtors write put options as a means to achieve lower spreads. Recent financial crises have shown that debtors accepting put options may not have fully anticipated the difficulties they would face if options were exercised at the time they experienced a substantial loss of market access. This practice has exacerbated financial crises.

49

A bullet loan or bond is a loan or bond whose principal repayments all take place at maturity.

50

This allows creditors seeking to maintain their exposure to relend the resources and to benefit from the higher spread and permits creditors wanting to unwind their exposure to do so at an attractive price.

51

Most puttable instruments include one or two put dates, although a few instruments are puttable semiannually. (Few instruments are puttable on a continuous basis.)

52

Full payment under a hard put brings closure to the issue, while a default resulting from a breach of a loan covenant may trigger cross default/cross acceleration clauses in other external debts, at least until the default has been covered by a full payment on the debt in question.

53

Other contingent financial arrangements are in the form of private market-based insurance: the debtor pays an insurance premium to compensate the writers of the option (the creditor) for the risks undertaken. The insurance is against adverse liquidity risks.

54

The GAB and the NAB are standing borrowing arrangements between the IMF and a number of lenders. They comprise a series of individual credit arrangements between lenders and the IMF. Calls under these credit lines can be made only under certain circumstances and for specific amounts. Once calls have been approved, the IMF is authorized to draw under these arrangements up to the agreed amount.

55

Drawings take place under the GAB in domestic currency; they also occur under the NAB in domestic currency unless the lender is an institution of a nonmember. In such cases, foreign currency (i.e., the currency of another IMF member) is used. For IMF members, although lending under the GAB and the NAB is in domestic currency, such lending increases the country’s reserve position in the IMF. A country’s claims on the IMF under the GAB and the NAB are reserve assets because the country can obtain an equivalent amount of convertible foreign currency from the IMF if it represents that it has a balance of payments need.

56

A “test date” is a date at which end-of-period “performance criteria” (e.g., a floor on net international reserves or a ceiling on the fiscal deficit) have to be observed if any drawings are to be made thereafter without a waiver.

57

Although Fund drawings generally also depend on “continuous” performance criteria, these performance criteria are generally of a form that requires the authorities to refrain from taking certain actions, and these criteria are thus not taken to be material conditionalities (see para. 206). The usual continuous performance criteria include, for instance, absence of introduction of multiple currency practices and nonincurrence of official external payment arrears.

58

For instance, amounts may be available as of end-January under the “up to one month” heading (based on observance of performance criteria for end December) that will not be available as of end-March (as continued availability will depend on observance of performance criteria for end-March, which will not be ascertained for several days or weeks).

59

There are also other types, such as option contracts, giving the holder the right, but not the obligation, to buy (i.e., call) or sell (i.e., put) a specified underlying asset at a pre-agreed price (the strike price) at a number of specified times in the future (Bermudan options).

60

The notional value of NDFs settled in foreign currency are to be included in item II.2 of the template and their market value, in financial derivative assets under item IV(l)(e) of the template, preferably in a separate line.

61

Written repo contracts normally require that repo securities be marked to-market and the gains and losses be settled daily. Margin calculations also usually consider accrued interest on underlying securities and the anticipated amount of accrued interest over the term of the repos, the date of interest payment, and which party is entitled to receive the payment.

62

This is different in this context from the term “netting by novation.”

63

In financial market transactions, netting can serve to reduce the credit exposure of counterparties to a failed debtor and thereby to limit “domino failures” and systemic risks. As concerns limiting credit exposure, the ability to net contributes to market liquidity by permitting more activity between counterparties within prudent credit limits. This liquidity can be important in minimizing market disruptions due to failure of a market participant.

64

Institutions that undertake significant options operations often use more complex variants of the Black-Scholes formula.

65

The price of a futures contract is set in such a way that no cash changes hands when a contract is entered into. The payments associated with the contract occur as daily price movements are reflected in cash flows into and out of margin accounts of the contract parties. To ensure that market participants pay for their losses, the exchanges require futures contract users to pay an initial margin (a collateral). If the daily settlement process results in a loss, which, in turn, reduces the initial margin below a specified amount, the user is required to restore the initial margin by paying additional sums of money. The level of margin called is set by the exchanges and is usually a function of the volatility of the cash market of the underlying asset.