Report on Trading and Derivatives Activities of Banks and Securities Firms
December 9, 1997
Circular No. 11003

To All State Member Banks, Bank Holding Companies, and Branches and Agencies of Foreign Banks, in the Second Federal Reserve District:

The following is from a statement by the Board of Governors of the Federal Reserve System:

A joint report on the public disclosure of trading and derivatives activities of banks and securities firms worldwide has been issued by the Basle Committee on Banking Supervision and the Technical Committee of the International Organization of Securities Commissions (IOSCO).

This joint report provides an overview of the disclosures about trading and derivatives activities in the 1996 annual reports of a sample of the largest, internationally active banks and securities firms in the G-10 countries, and notes improvements since 1993. The analysis builds, in part, upon a framework used by the Federal Reserve in analyzing the trading and derivatives disclosures of major U.S. banking organizations.

In total, 79 major banks and securities firms in the G-10 countries comprised the sample reviewed for the 1993-1996 period, representing over $14 trillion in total assets and over $83 trillion in notional amounts of derivative instruments. Disclosures in the 1995 and 1996 annual reports of a major securities firm in Hong Kong were also reviewed.

The analysis revealed that there have been general improvements as well as voluntary innovations in the annual report disclosures of a number of the surveyed firms. In particular, there were notable improvements in quantitative disclosures about market risk in 1996 and 1995. However, despite encouraging advances in disclosure practices by a number of institutions in the G-10 countries, many institutions continued to disclose very little about their trading and derivatives activities.

In addition, the report includes recommendations made by the Basle Committee and IOSCO in 1995 for further improvements in disclosures of qualitative and quantitative information about institutions' involvement in trading and derivatives activities, including their risk exposures and risk management policies, and the earnings impact of these activities.

The report's recommendations draw on concepts developed in the Discussion Paper on Public Disclosure of Market and Credit Risks by Financial Intermediaries released by the Euro-Currency Standing Committee of the G-10 central banks in September 1994, and in the joint report of the Basle Committee and the IOSCO Technical Committee, Framework for Supervisory Information About the Derivatives Activities of Banks and Securities Firms, issued in May 1995.