Recommendations for Public Disclosure of Trading and Derivatives Activities of Banks and Securities Firms

Executive Summary

This paper, issued jointly by the Basle Committee on Banking Supervision and the IOSCO Technical Committee, presents recommendations for public disclosures of trading and derivatives activities of banks and securities firms. These recommendations complement their annual survey of trading and derivatives disclosures of large, internationally-active banks and securities firms, last published in November 1998. Both initiatives form part of a continued effort by the two Committees to encourage banks and securities firms to provide market participants with sufficient information to understand the risks inherent in their trading and derivatives activities.

The two Committees consider transparency of banks' and securities firms' activities and risks to be a key element of an effectively supervised financial system. Meaningful and accurate information reported in a timely manner provides an important foundation for the decisions of market participants. Well-informed investors, depositors, customers and creditors can impose strong market discipline on an institution to manage its activities and risk exposures in a manner that is both prudent and consistent with its stated business objectives.

The recommendations in this paper follow two main themes.

• First, institutions should provide financial statement users with a clear picture of their trading and derivatives activities. They should disclose meaningful summary information, both qualitative and quantitative, on the scope and nature of their trading and derivatives activities and illustrate how these activities contribute to their earnings profile. They should also disclose information on the major risks associated with their trading and derivatives activities and their performance in managing these risks.
• Second, institutions should disclose information produced by their internal risk measurement and management systems on their risk exposures and their actual performance in managing these exposures. Linking public disclosure to internal risk management processes helps ensure that disclosure keeps pace with innovations in risk measurement and management techniques.

The Basle Committee and the IOSCO Technical Committee recommend banks and securities firms implement the guidance on quantitative and qualitative disclosures presented in this paper. In addition, banks and securities firms should consider disclosure initiatives by other national and international bodies and the types of disclosures provided by their peers at the international level.

The disclosure recommendations may also be useful to other financial and non-financial companies with significant trading and derivatives activities. Accounting standard-setters, regulators and other bodies responsible for setting disclosure standards may also find the document helpful as they continue working on developing improved and more harmonised public disclosure standards. This paper does not intend to replace or override other reporting frameworks that may be more extensive.

The recommendations presented in this paper supersede the recommendations issued by the two Committees in 1995 in connection with their first survey report on the trading and derivatives disclosures of banks and securities firms. Since then, various developments have taken place, such as the increase in financial institutions' use of derivatives, changes in the use and design of risk management techniques, and the continued evolution and improvement of disclosure standards and practices.