Statistical classification of financial markets instruments, July … · 2005-07-12 · 3 ECBc Statistical classification of financial markets instruments July 2005 CONTENTS 1 INTRODUCTION

STAT I ST I C AL CLASS I F I C AT ION OF F INANC IAL MARKETS INSTRUMENTS

JULY 2005

In 2005 all ECB publications will feature

a motif taken from the

€50 banknote.

STATISTICAL CLASSIFICATION OF FINANCIAL MARKETS INSTRUMENTS

JULY 2005

© European Central Bank, 2005

AddressKaiserstrasse 2960311 Frankfurt am MainGermany

Postal addressPostfach 16 03 1960066 Frankfurt am MainGermany

Telephone+49 69 1344 0

Websitehttp://www.ecb.int

Fax+49 69 1344 6000

Telex411 144 ecb d

All rights reserved. Reproduction foreducational and non-commercial purposesis permitted provided that the source isacknowledged.

As at 15 June 2005.

ISSN 1830-4664 (print)ISSN 1830-4672 (online)

3ECB c

Statistical classification of financial markets instrumentsJuly 2005

C O N T E N T S1 INTRODUCTION 4

2 STATISTICAL CLASSIFICATION OFFINANCIAL MARKETS INSTRUMENTS 42.1 Definition of a financial market

instrument 42.2 Classification 52.3 Consistency with ESA 95

categories 72.4 Main instruments covered by the

classification and detailed linkswith ESA 95 7

2.4.1 Interest rate instruments 7Deposits, loans and debtsecurities 7Interest rate derivatives 10

2.4.2 Equity-related instruments 10Stocks 11Equity-linked derivatives 11

2.4.3 Investment and money marketfunds’ shares/units and relatedinstruments 11

Investment and money marketfunds’ shares/units 11Derivatives on investmentand money market fundsshares/units 11

2.4.4 Foreign exchange and relatedinstruments 11

Foreign exchange 11Foreign exchange derivatives 12

2.4.5 Commodity derivatives, creditderivatives and other financialmarket instruments 12

3 CHANGE MANAGEMENT POLICY 12

ANNEXES 131 Economic sectors in the ESA 95 132 Statistical treatment of financial

derivatives 14

4ECB cStatistical classification of financial markets instrumentsJuly 2005

1 INTRODUCTION

Financial markets statistics are intensivelyused by central banks to analyse therelationship between monetary policy and thestructure and dynamics of financial markets.These markets are a key channel for thetransmission of monetary policy impulses tothe economy. Moreover, the developments infinancial markets reflect market participants’expectations of future economic developments.

Statistics derived from various financialmarkets instruments provide complementaryinformation for monetary policy purposes.Generally, the collected information focuses onprices (including remuneration rates) andvolumes of financial markets instruments. Theprices of financial markets instruments providevaluable information because of their forward-looking nature and are used to gain insight intomarket expectations and to monitor reactions toshocks to the economy. The transaction volumesare of particular interest in assessing theimportance of an instrument and the relevance ofits price developments. In addition, volumestatistics, including statistics on outstandingamounts and turnover, can shed light on shiftsbetween different types of financial marketsinstruments, which may influence thecomponents of monetary aggregates and thefunctioning as well as the stability of thefinancial system in general. Finally, in the euroarea context, financial market statistics andindicators also enable the euro area-wideintegration of financial markets to be monitored.

Due to the still fragmented character of thefinancial markets in the euro area, the provisionof harmonised, comparable, euro area-widefinancial markets statistics is a particularchallenge for the statisticians of theEurosystem. The work of statisticians andusers is currently also commonly complicatedby the lack of a uniform and universally usedclassification of financial markets instruments.

The classification outlined in this document isbased on market terminology and usage. Since

financial markets data are used for economicanalysis and forecasting, it is important torelate the categories to European andworldwide statistical standards. These are theEuropean System of Accounts (ESA 95) andthe System of National Accounts (SNA 93),which are mutually consistent. However, theESA 95 does not yet provide a detailedbreakdown of financial derivatives and doesnot make an explicit reference to foreignexchange markets. For these variables, thefollowing sections relate the classificationmainly to the BIS Triennial Central BankSurvey of Foreign Exchange and DerivativesMarket Activity.

The classification of financial marketsinstruments described here has been craftedwith a statistical perspective in mind. It ismeant to be used by market participants,researchers and statisticians. It thus does notfully mimic other existing classifications likethe ISO CFI (Classification of FinancialInstruments), which provides a set of codes thatcan be used by all market participants in anelectronic data processing environment andpermits electronic communication of relateddata between participants.

2 STATISTICAL CLASSIFICATION OFFINANCIAL MARKETS INSTRUMENTS

2.1 DEFINITION OF A FINANCIAL MARKETSINSTRUMENT

The definition of financial markets instrumentsused here is based on two internationalstandards that are relevant for financialmarkets and statistics: the InternationalAccounting Standards (IAS) and the ESA 95.IAS 32.11 defines a financial (markets)instrument as a contract that gives rise to afinancial asset of one entity and a financialliability (or equity instrument) of anotherentity, highlighting the fact that financialmarkets instruments represent a store of valuewithout possessing an intrinsic value of theirown. In turn, this classification makes use of

5ECB c


STATISTICALCLASSIFICATION

OF FINANCIALMARKETS

INSTRUMENTS

the ESA 95 to define financial assets.According to paragraph 7.20, financial assetsare economic assets1, comprising a means ofpayment (e.g. currency), financial claims andeconomic assets which are close to financialclaims in nature (e.g. shares).

Following the IAS definition, the classificationbelow thus disregards those financial assets forwhich no counterpart liability exists, namelythose financial assets classified in the ESAcategory monetary gold and special drawingrights (AF.1). Moreover, the financialasset categories currency (AF.21), insurancetechnical reserves (AF.6) and other accountsreceivable/payable (trade credits and the like,AF.7) are not included here.

For the sake of completeness, thisclassification will also include foreignexchange transactions and derivatives, and – asmemo items – commodities (including non-monetary gold). The latter are clearly notfinancial markets instruments, but areregularly traded on financial markets. Inaddition, from an economic perspective theseare the commodities underlying commodityderivatives contracts, which clearly arefinancial markets instruments. Finally, the factthat commodity derivatives contracts areincluded in this classification does not implythat all commodities or their related derivativesare relevant for monetary policy purposes.

2.2 CLASSIFICATION

The classification deals with financial marketsinstruments traded in the following markets:– markets for interest rate instruments;– equity markets;– markets for investment and money market

funds’ shares/units– foreign exchange markets; and– other financial markets.

Moreover, the classification builds on theESA 95 and is thus consistent with thestatistical framework of the European Systemof Central Banks (ESCB). The prevailing

statistical framework is also used to determineto which category a specific financial marketsinstrument should be allocated.

Table 1 presents an overview of the statisticalclassification of financial markets instrumentsand the main breakdowns to be considered foreach instrument.2 The first column contains thefive categories in which financial marketsinstruments are classified: interest rateinstruments; equity-related instruments;investment and money market funds’ shares/units and related instruments; foreignexchange and related instruments; andcommodity derivatives, credit derivatives andother financial markets instruments.Commodities are added as a memo item. Theadditional columns include further instrumentdetails/breakdowns and other statisticalfeatures. Among these breakdowns, the ESA 95and Regulation ECB/2001/13 have a clear viewon residence for statistical purposes: residenceis determined by the location of the creditor,the debtor, the issuer or the notional residentunit which incurs the liability, and not by thelocation of a possible parent institution. Thus,the Frankfurt subsidiary of an American bank istreated as a monetary financial institution(MFI) resident in Germany and contributes tothe euro area MFI balance sheet, monetary andother statistics. Residence is a relevant featureof the classification because it may shed lighton the integration of markets.

Derivatives are included in the same maincategory as the underlying instruments becausetheir prices contain market expectations aboutfuture prices of the underlying instrument andbecause a close economic linkage existsbetween derivatives and their underlyinginstruments, e.g. for hedging purposes or, moregenerally, to manage risk exposure.3 As the

1 The ESA 95 in turn defines economic assets as entitiesfunctioning as a store of value over which ownership rights areenforced by institutional units, individually or collectively, andfrom which economic benef its may be derived by their ownersby holding them or using them over a period of time.

2 The list of breakdowns might be condensed or modif ieddepending on the purpose of the statistics or data availability.

3 See also Annex 2 on the statistical treatment of derivatives.


Bank for International Settlements alsocollects comprehensive data on derivatives, theclassification in this note generally follows thecategorisation and conventions used by theBIS. Derivatives belong to two broadcategories: forward-type derivatives andoption-type derivatives. The most relevanttypes of derivatives are: swaps, options,futures, outright forwards and forward rateagreements. Derivatives with more than oneunderlying instrument should be allocated tothe main underlying instrument or, if this is notfeasible, be classified in the risk-type categorywhich is highest in the following list.

I. Credit

II. Commodity

III. Equity

IV. Investment and money market funds

V. Foreign exchange

VI. Interest rate

This means that, for instance, a derivativeprotecting the holder equally against a creditevent and an interest rate risk is classified as acredit derivative (see Table 1, item 5.2),whereas a derivative linked to commodities andinterest rates is categorised as a commodityderivative (see Table 1, item 5.1).

In turn, this implies that instruments classifiedas interest rate derivatives (see Table 1, item1.2) are the purest kind of derivatives.

Table 1 presents the conceptual classificationof financial markets instruments traded onvarious markets.

2.3 CONSISTENCY WITH ESA 95 CATEGORIES

The consistency with ESA 95 categories isbased on the use of ESA 95 definitions for themain types of instruments.

Table 2 summarises the close links between theESA 95 categories and the classification offinancial markets instruments. It shows thatsome financial assets as defined in the ESA 95are not regarded as relevant for a classificationof financial markets instruments and aretherefore excluded from this classification.

In terms of terminology, it has been intended touse definitions of relevant financial marketsinstruments that are consistent with theESA 95. This facilitates the linkage of all kindsof statistics, which in turn enhances theiranalytical usefulness.

2.4 MAIN INSTRUMENTS COVERED BY THECLASSIFICATION AND DETAILED LINKSWITH THE ESA 95

2.4.1 INTEREST RATE INSTRUMENTSThe term “Interest rate instruments” as adescription of a category of financial marketsinstruments occurs neither in the ESA 95 nor inother statistical classifications. As Table 2illustrates, its components can however berelated to ESA 95 categories.

Deposits, loans and debt securitiesDeposits and loansThe ESA 95 states that the initiative to contracta loan normally lies with the borrower (and,implicitly, that the initiative in placing adeposit lies with the creditor). The ECB’s bank(MFI) balance sheet statistics include thecategory “deposits” only on the liabilities sideof the balance sheet, and the category “loans”only on the assets side. As the explanatorynotes explain (Regulation ECB/2001/13,Annex I, Part 3), an interbank placement is thusto be recorded as a deposit by the MFI takingthe funds and as a loan by the MFI placingthem. The distinction between deposits/loansand debt securities (see below) is that securitiesare evidenced by negotiable documentsrecording the debt, while deposits/loans arenot.

7ECB c



OF FINANCIALMARKETS

INSTRUMENTS

Tab l e 1 S t a t i s t i c a l c l a s s i f i c a t i on o f f i n anc i a l marke t s i n s t r ument s t r aded on va r i ou s marke t s

1 Interest rate instruments

1.1 Deposits, loans and debt securities

1.1.1 Deposits and loans

1.1.1.1 1) Short term (up to and including 1 year)

Further potential breakdown by:i. deposits versus loans;ii. currency of denomination;iii. type of collateralisation (e.g. repos);iv. rating;v. residence of counterparty;vi. counterparty sector (according to ESA 95); vii. industry (partially, according to NACE).

1.1.1.2 1) Long term (over 1 year)

1.1.2 Debt securities

1.1.2.1 Short term (up to and including 1 year 2))

Further potential breakdown by:i. original maturity (in particular debt securities up

to and including 1 year and debt securities from 1 year up to and including 2 years);

ii. currency of denomination;iii. type of collateralisation/securitisation

(e.g. covered bonds, asset-backed securities, mortgage-backed securities);

iv. rating;v. coupon type (fi xed, variable, zero);vi. residence of issuer;vii. sector of issuer (according to ESA 95);viii. industry (partially, according to NACE).

1.1.2.2 Long term (over 1 year 2))

1.2 Interest rate derivatives

1.2.1 Forward-type derivatives Further potential breakdown by:i. type of market (exchange traded/OTC);ii. type of instrument; iii. counterparty sector.

1.2.2 Option-type derivatives

2 Equity-related instruments

2.1 Stocks 2.1.1 Quoted stocks Further potential breakdown by: i. residence of issuer;ii. ESA sector of issuer;iii. industry (partially, according to NACE).

2.1.2 Unquoted stocks

2.1.3 Other equity

2.2 Equity-linked derivatives

2.2.1 Forward-type derivatives Further potential breakdown by:i. type of market (exchange traded/OTC);ii. type of instrument;iii. counterparty sector.2.2.2 Option-type derivatives

3 Investment and money market funds’ shares/units and related instruments

3.1 Investment and money market fundsÕ shares/units

3.1.1 Money market funds Further potential breakdown by: i. rating;ii. residence of fund.3.1.2 Bond funds 3)

3.1.3 Equity funds 3)

3.1.4 Mixed funds 3)

3.1.5 Real estate funds 3)

3.1.6 Hedge funds 3)

3.1.7 Other funds 3)

3.2 Derivatives on investment and money market funds’ shares/units

3.2.1 Forward-type derivatives Further potential breakdown by: i. type of market (exchange traded/OTC);ii. type of instrument;iii. counterparty sector.3.2.2 Option-type derivatives

4 Foreign exchange and related instruments

4.1 Foreign exchange

4.1.1 First currency pair

…

4.1.n n-th currency pair

4.2 Foreign exchange derivatives

4.2.1 Forward-type derivatives Further potential breakdown by:i. type of market (exchange traded/OTC);ii. type of instrument;iii. counterparty sector.


5 Commodity derivatives, credit derivatives and other financial markets instruments

5.1 Commodity derivatives

5.1.1 Forward-type derivatives Further potential breakdown by:i. type of market (exchange traded/OTC);ii. type of instrument;iii. counterparty sector.


5.2 Credit derivatives

5.2.1 Forward-type derivatives Further potential breakdown by:i. type of instrument;ii. rating;iii. sector of the derivative writer.


5.3 Other fi nancial markets instruments

Memo item: commodities

Gold

Oil

Other commodities

1) Original maturity.2) Residual maturity.3) The type of funds and their definitions will be reviewed once the ECB has established its new approach for collecting statistics from investment funds.


Tab l e 2 S t a t i s t i c a l c l a s s i f i c a t i on o f f i n anc i a l marke t s i n s t r ument s w i th l i nk s t o the E SA 95

Financial assets as defined in the ESA 95

1 Interest rate instruments

1.1 Deposits, loans and debt securities

1.1.1 Deposits and loans

1.1.1.1 1) Short term (up to and including 1 year)

AF.22 Transferable deposits. AF.29 Other deposits. AF.4 Loans.

1.1.1.2 1) Long term (over 1 year)

1.1.2 Debt securities

1.1.2.1 Short term (up to and including 1 year 2))

AF.33 Securities other than shares, excluding fi nancial derivatives.

1.1.2.2 Long term (over 1 year 2))

1.2 Interest rate derivatives

1.2.1 Forward-type derivatives AF.34 Financial derivatives.


2 Equity-related instruments

2.1 Stocks 2.1.1 Quoted stocks AF.511 Quoted shares, excluding mutual funds shares.

2.1.2 Unquoted stocks AF.512 Unquoted shares, excluding mutual funds shares.

2.1.3 Other equity AF.513 Other equity.

2.2 Equity-linked derivatives



3 Investment and money market funds’ shares/units and related instruments

3.1 Investment and money market funds’ shares/units

3.1.1 Money market funds AF.52 Mutual funds shares.

3.1.2 Bond funds 3)

3.1.3 Equity funds 3)

3.1.4 Mixed funds 3)

3.1.5 Real estate funds 3)

3.1.6 Hedge funds 3)

3.1.7 Other funds 3)

3.2 Derivatives on investment and money market funds’ shares/units



4 Foreign exchange and related instruments

4.1 Foreign exchange

4.1.1 First currency pair

…

4.1.n n-th currency pair

4.2 Foreign exchange derivatives



5 Commodity derivatives, credit derivatives and other financial markets instruments

5.1 Commodity derivatives



5.2 Credit derivatives

5.2.1 Forward-type derivatives


5.3 Other fi nancial markets instruments The allocation of instruments in this category to an ESA category of fi nancial assets would have to be made on a case-by-case basis.

Memo item: commodities

Gold Commodities are not fi nancial assets.

Oil

Other commodities

1) Original maturity.2) Residual maturity.3) The type of funds and their definitions will be reviewed once the ECB has established its new approach for collecting statistics from investment funds.

Other financial assets as defined in the ESA 95

AF.1 Monetary gold and special drawing rights.

AF.21 Currency.

AF.6 Insurance technical reserves.

AF.7 Other accounts payable/receivable.

9ECB c



OF FINANCIALMARKETS

INSTRUMENTS

4 This does not preclude e.g. the case of deposits which areovernight in principle but for which the interest rate increases ifthey are held for a longer period.

5 See Annex 1 on economic sectors in the ESA 95.6 NACE is the Classification of Economic Activities in the

European Community.7 Such an allocation may be somewhat artif icial if a corporation

is composed of various production establishments that areactive in different industries (e.g. manufacturing, trade andf inance).

Regulation ECB/2001/13 requires reporting ofoutstanding balance sheet items broken downby currency of denomination. This is a criticaldeterminant of the interest rate on deposits/loans and other components of “interest rateinstruments”, and therefore this breakdownshould be applied throughout this group ofinstruments.

Since interbank deposits are as a rule notnegotiable and bear a fixed interest ratethroughout their term,4 only the original (orinitial) maturity is relevant here. “Short-term”in the ESA 95 means with an original maturityof one year or less. Almost all wholesalemarket (and many retail) deposits/loans fallunder this category. More detailed breakdownswould be useful. The ECB’s annual MoneyMarket Study breaks down deposits/loans byoriginal maturity as follows: overnight,tomorrow/next up to and including one month,over one month up to and including threemonths, three months up to and including oneyear, one year up to and including two yearsand more than two years.

The ESA 95 treats repos either as collateralisedloans or as other deposits. The presentclassification treats them as loans but, giventheir special character, they are singled out,together with other collateralised loans/deposits. The further breakdowns of “depositsand loans” will thus be the following:

i. deposits versus loans;

ii. currency of denomination;

iii. type of collateralisation (e.g. repos);

iv. rating;

v. residence of counterparty;

vi. counterparty sector (according to ESA95)5; and

vii. industry (partially, according to NACE6) 7

Debt securities“Debt securities” corresponds to the ESA 95category “Securities other than shares,excluding financial derivatives” (AF.33).Securities other than shares are defined in theESA 95 as financial assets which are usuallynegotiable and traded on secondary markets.They give the holder the “unconditional right toa fixed or contractually determined variablemoney income in the form of coupon payments(interest) and/or a stated fixed sum on aspecified date or dates or starting from a datefixed at the time of issue”. They do not give theholder ownership rights in the entity whichissued them. Debt securities include, forexample, the following instruments: Treasurybills, certificates of deposit, government andcorporate bonds, and asset-backed securities.

In the context of the prices and yields ofnegotiable securities, residual maturity is themost relevant maturity concept as it is moreclosely related to the duration of the instrumentthan original maturity. Negotiable instrumentswith the same residual maturity show atendency towards the same yield and remainingdifferences may then be ascribed to the creditstanding of the borrower, the depth of themarket in the instrument concerned, etc.Therefore, the classification subdivides debtsecurities into two categories of residualmaturity, namely short-term (up to andincluding one year) and long-term (over oneyear).

The ESA 95 distinguishes between short andlong-term debt securities, with a borderline atone year, in terms of original maturity. TheECB’s securities issues statistics apply thesame distinction. Original maturity is a useful


broad-brush way of classifying instruments.For instance, most money market instruments(Treasury bills, certificates of deposit,bankers’ acceptances, commercial paper, etc.)fall into the short-term category. As anapproximate way of identifying negotiablemoney market instruments and because of thedefinition of M3, the classification includesoriginal maturity as one of the furtherclassification criteria. By analogy to thecategory “deposits and loans”, theclassification suggests further breakdowns of“debt securities” by:

i. original maturity (in particular up to andincluding one year and over one year upto and including two years);

ii. currency of denomination;

iii. type of collateralisation/securitisation(e.g. covered bonds, asset-backedsecurities or mortgage-backedsecurities);

iv. rating;

v. coupon type (fixed, variable, zero);

vi. residence of issuer;

vii. issuer sector (according to ESA 95); and

viii. industry (partially, according to NACE).

Interest rate derivativesThe classification allocates financialderivatives to the same category as theunderlying instrument (i.e. the type of financialasset or liability on which they are based). Thiscategory therefore presents information onderivatives relating to deposits (and loans) anddebt securities.

Accordingly, a breakdown of interest ratederivatives into forward-type and option-typederivatives is recommended. These groupsshould then be further broken down by type ofmarket (exchange traded or OTC), by

instrument (e.g. futures, swaps) and bycounterparty sector.

2.4.2 EQUITY-RELATED INSTRUMENTS

“Equity-related instruments” corresponds to“Shares and other equity, excluding mutualfunds shares” (AF.51) in the ESA 95 whichdefines shares and other equity as financialassets that provide property rights in theissuing corporation. Holders are generallyentitled to a share in the profits and in theresidual value of the business in the event of aliquidation but are not (unlike holders of debtsecurities) entitled to a fixed or predeterminedvariable money income. Nevertheless, theESA 95 treats shares and other equity as aliability of the corporation to its shareholders.Although they are in principle alwaysnegotiable, shares may be quoted on a stockexchange or not quoted. The ESA 95 recognisesvarious forms (redeemed shares, dividendshares, preference shares), some of which maybe of minor practical importance in the euroarea.

“Other equity” comprises all forms of equitywhich are not shares, including the equity inpartnerships and in “quasi-corporations”, i.e.entities which exhibit a similar economic andfinancial behaviour as corporations and keep acomplete set of accounts, but have noindependent legal status (for examplebranches).

Stocks are further broken down by:

i. residence of the issuer;

ii. ESA sector of the issuer; and

iii. industry (partially, according to NACE).

A breakdown of equities by currency (asopposed to the location and the sector of theissuing corporation) is generally not relevant,since equities do not offer a fixed money incomeand do not have a fixed redemption value. Abreakdown by maturity is not relevant either.

11ECB c



OF FINANCIALMARKETS

INSTRUMENTS

Stock market indices are not financial marketsinstruments and are thus not contained in thiscategory as such – unless they are an integralpart of a financial markets instrument (forexample an option on a stock index).

StocksQuoted stocksThe sub-category “quoted stocks” covers allstocks – excluding shares/units of investmentand money market funds – whose prices arequoted on a stock exchange or some other formof secondary market.

Unquoted stocksThis category comprises equity stocks whoseprices are not quoted on a secondary market.

Other equityOther equity comprises all forms of equityother than those classified above.

Equity-linked derivatives“Equity-linked derivatives” covers bothderivative instruments on single equities andthose on equity indices. A breakdown ofequity-linked derivatives into forward-typeand option-type derivatives is recommended.In turn, these categories should be furtherbroken down by type of market (exchangetraded or OTC), by instrument (e.g. futures,swaps) and by counterparty sector.

2.4.3 INVESTMENT AND MONEY MARKETFUNDS’ SHARES/UNITS AND RELATEDINSTRUMENTS

Investment and money market funds’ shares/unitsShares/units issued by investment and moneymarket funds correspond to “Mutual fundsshares” (AF.52) in the ESA 95. AF.52comprises shares/units issued by entities calledeither mutual funds, unit trusts, investmenttrusts or other collective investment schemes,and refers to both open-ended and closed-ended funds. Irrespective of their structure(corporate or mutual), entities issuing these

shares/units are classified as financialcorporations (S.12) in the ESA 95. Moneymarket funds are classified as MFIs (S.122);other investment funds are classed as “other”financial intermediaries excluding insurancecorporations and pension funds (S.123). Ifinvestment funds are corporations, the sharesrepresent ownership rights. If they are mutualfunds, the shares/units represent participationsin the portfolio held by the fund.

The classification breaks down investment andmoney market funds by their purpose (which isclosely related to the type of assetpredominantly held by the fund). Thesecategories are: money market funds; bondfunds; equity funds; mixed (bond and equity)funds; real estate funds; hedge funds; and otherfunds. These categories and their definitionswill be finalised on the basis of the forthcomingECB Regulation on other financialintermediaries, of which investment funds arean integral part. Without prejudice to thisRegulation, each investment fund categorymay be further broken down by location of thefund and, if possible, by rating. There is nobreakdown by maturity (though it is clear thatmoney market funds are likely to hold mainlyshort-term assets).

Derivatives on investment and money marketfunds’ shares/unitsA breakdown of derivatives on investment andmoney market fund shares/units into forward-type and option-type derivatives isrecommended. In turn, these groups are furtherbroken down by type of market (exchangetraded or OTC), by instrument (e.g. futures,swaps) and by counterparty sector.

2.4.4 FOREIGN EXCHANGE AND RELATEDINSTRUMENTS

Foreign exchangeThis category covers foreign exchangetransactions. While they are not financialmarkets instruments as such, this categoryplays a crucial role for financial market


participants. Indeed, the market for exchangingcurrencies is the most liquid of all financialmarkets.

Foreign exchange derivativesThe derivatives included in this category arethus all foreign exchange derivatives to theextent that they have a market value or may beoffset in the market. Consistent with existingBIS statistics, a breakdown of foreignexchange derivatives into forward-type andoption-type derivatives is recommended. Inturn, these groups are further broken down bytype of market (exchange traded or OTC), byinstrument (e.g. futures, swaps) and bycounterparty sector.

2.4.5 COMMODITY DERIVATIVES, CREDITDERIVATIVES AND OTHER FINANCIALMARKETS INSTRUMENTS

The ESA 95 (§5.67) makes clear that options tobuy or sell non-financial assets and commodityfutures contracts are financial marketsinstruments, irrespective of whether they aredesigned to be settled physically or in cash. Abreakdown of commodity derivatives intoforward-type derivatives and option-typederivatives is recommended here.

In addition to commodity derivatives, creditderivatives are included. These have grown inimportance over recent years and protect theholder against credit events, e.g. adowngrading or a default. Finally, thiscategory consists of any other financialmarkets instrument that is not covered in theaforementioned categories. They would have tobe allocated to existing ESA financial assetcategories on a case-by-case basis.

3 CHANGE MANAGEMENT POLICY

To keep this classification up to date, minorupgrades may be introduced every year, ifappropriate. Long-term reviews, which mayresult in major changes to the classification,will be conducted every three to five years,according to need.

13ECB c



OF FINANCIALMARKETS

INSTRUMENTS

ANNEXES

1 ECONOMIC SECTORS IN THE ESA 95

The ESA 95 groups together into sectorsinstitutional units which display similareconomic behaviour. Some sectors are dividedinto sub-sectors. The aim is to add togethertransactions or balance sheets of similarentities to form coherent aggregates for thepurpose of economic analysis.

Non-financial corporations (S.11) have as theirprincipal activity the provision of goods andnon-financial services through the market.Their activities are distinct from those of theirowners (who may be households or part of thegovernment sector).

Financial corporations (S.12) have as theirprincipal activity the provision of financialintermediation or ancillary services throughthe market. Their activities are distinct fromthose of their owners.

S.12 has five sub-sectors. Monetary financialinstitutions (MFIs) are financial intermediarieswhich take deposits or close substitutes fordeposits. These make up two of the five sub-sectors: the central bank (S.121) and otherMFIs (S.122), the latter comprising creditinstitutions, money market funds, and a fewother institutions. “Other” (non-monetary)financial intermediaries excluding insurancecorporations and pension funds (S.123) form aheterogeneous group sharing the features thatthey do not take deposits or the like and are notinsurance corporations or pension funds. Theyinclude in particular investment funds,financial vehicle corporations, financialcorporations engaged in lending, securities andderivatives dealers and financial holdingcorportions. Investment funds (other thanmoney market funds) account for about 75% ofthe total balance sheet of S.123 institutions inthe euro area. Financial auxiliaries (S.124) donot themselves engage in financialintermediation but provide associated services,e.g. brokerage. Financial supervisory

authorities and mutual and pension fundmanagers are also included in S.124. Insurancecorporations and pension funds (S.125)comprise insurance corporations (life, fire,accident, etc., insurers) and autonomouspension funds. “Autonomous” means that thepension funds make their own decisions andkeep a complete set of accounts. Non-autonomous funds are part of the institutionalunit which set them up, and thus of theconcomitant sector.

The general government sector (S.13) isdivided into four sub-sectors: centralgovernment (S.1311), state government(S.1312), local government (S.1313) and socialsecurity funds (S.1314). The common featureof the first three sub-sectors is that they provideservices for collective or individual use(administration, defence, health and education,etc.) through the budget mechanism.

Finally, there are the sectors households (S.14)and non-profit institutions serving households(S.15).

The rest of the world sector (S.2) comprises allentities which are not resident in the economicterritory concerned. Broadly, “not resident in”means “not having a centre of economicinterest in”.


2 STATISTICAL TREATMENT OF FINANCIALDERIVATIVES

The key to the statistical treatment ofderivatives is that the derivative should alwaysbe regarded as a separate financial marketsinstrument from the underlying instrument.

Financial derivatives may be based on anindex, a commodity or a financial marketsinstrument. They may relate to market risk(arising from movements in prices, interestrates or exchange rates) or to credit risk(arising from changes in the credit standing of aborrower or category of borrowers, or evendefault). All that is necessary for them to berecorded in the statistical system is that theyhave a market value or may be offset in themarket (meaning that a party to the contract canin effect reverse it by taking out anothercontract with an opposite effect).

The current market price of a derivative equalsthe value of the claim of one party to thecontract on the other party. This price can bezero, as it is at the start of a swap and where avariable margin is continuously adjusted.Measuring the current market value of claims/liabilities implicit in derivatives contracts iswhat the ESA 95 and other statistical standardsare concerned with. Some other points may bemade on the statistical treatment of derivatives:

– If derivatives contracts are closed beforematurity, or cash payments are made duringthe life of the contract (e.g. under interestrate swaps, or where a non-repayable marginis adjusted), the exchange of cash is treatedin the accounts as a financial transactionrepaying a liability.

– Delivery of the underlying financial marketsinstrument or commodity on maturity of thecontract is treated as a separate transaction.Since this case illustrates nicely the pointthat the derivative is treated separately fromthe underlying instrument, an example maybe helpful.

Example: A contracts to buy a barrel of oilfrom B at EUR 32. The spot price when thecontract matures and A takes delivery isEUR 35. The purchase and sale of oil isrecorded in the accounts at EUR 35. B isregarded as simultaneously paying A theamount of EUR 3 to extinguish his liability(A’s asset) recorded under financialderivatives (AF.34). On balance, A pays BEUR 32, as agreed in the derivativescontract.

– The premium paid at the start of an option isrecorded as a financial transaction (purchaseof a financial asset in the form of the option)in AF.34. The seller of the option records afinancial liability of the same amount also inAF.34. The treatment of a premium is to bedistinguished from the payment of a fee orcommission to a broker, which is recorded inthe current account as a payment forservices.

– As noted above, a non-repayable margin is asettlement under a derivatives contract and isrecorded in the financial account (AF.34).By contrast, a repayable margin is treatedstatistically as a placement of collateralwhich remains the property of the depositor,and is recorded in “other deposits” (AF.29).

– If a derivative is embedded in the underlyingfinancial markets instrument and cannot beseparately identified, it is in effect ignoredfor statistical purposes. Thus, the IMF’ssupplement to its Balance of PaymentsManual reads: “An embedded derivative(a derivative feature that is inserted in astandard financial instrument and isinseparable from the instrument) is notconsidered a financial derivative […]. If aprimary instrument such as a security or loancontains an embedded derivative, theinstrument is valued and classifiedaccording to its primary characteristics, eventhough the value of that security or loan maywell differ from the values of comparablesecurities and loans because of the embedded

15ECB c



OF FINANCIALMARKETS

INSTRUMENTS

derivative. Examples are bonds that areconvertible into shares and securities withoptions for repayment of principal incurrencies that differ from those in which thesecurities were issued.”

Counterparties to forward-type derivativescontracts have an unconditional obligation todeliver or receive cash or the underlyinginstrument of the contract, while in the case ofoption-type instruments the buyer has the right,but not the obligation, to deliver or receive cashor the underlying instruments. If derivativesentail both types of obligations, i.e. forwardand option features, they should be classifiedas an option-type derivative instrument.

Documents

Statistical classification of financial markets instruments, July … · 2005-07-12 · 3 ECBc Statistical classification of financial markets instruments July 2005 CONTENTS 1 INTRODUCTION