Survey of disclosures about trading and derivatives activities of banks and securities firms 1997

Executive Summary

The publication of this fourth annual survey report on the trading and derivatives disclosures of major G-10 banks and securities firms represents a continued effort by the Basle Committee on Banking Supervision and the IOSCO Technical Committee to encourage financial institutions to enhance transparency of their trading and derivatives activities. Transparency through public disclosure is crucial to effective market discipline and can reinforce supervisory efforts to promote high standards in risk management. The two Committees consider transparency of banks' and securities firms' activities and risks to be a key element of an effectively supervised financial system.

This year's survey reveals that many leading banks and securities firms have continued to expand and improve their trading and derivatives disclosures in line with the recommendations issued by the two Committees in 1995. Viewed over the period from 1993 to 1997, the amount, detail and clarity of trading and derivatives-related disclosures in annual reports of banks and securities firms have improved substantially. During the same period, the derivatives activities of banks and securities firms have expanded considerably. For instance, the notional amount in US dollars of derivatives activities of banks and securities firms included in the sample has grown 80% since the issuance of the first survey report in 1995.

The most noteworthy improvements in the 1997 annual reports were:

• expanded discussions of operational and legal risks;
• an increase in disclosures of market values and their estimation;
• more information about counterparty credit quality and concentrations; and
• enhanced disclosures of market risk information, e.g., model assumptions.

The Basle Committee and the IOSCO Technical Committee note that, for the past four years that this survey has been conducted, there have been disparities, both within and across countries, as regards the type and usefulness of the information disclosed. Moreover, certain institutions still disclose very little about key aspects of their trading and derivatives activities, including risk profile and related risk management practices. These institutions are urged to improve their disclosures of trading and derivatives activities to enhance transparency and facilitate effective market discipline.

Institutions should consider the quantitative and qualitative disclosures recommended by the two Committees in 1995, disclosure standards and recommendations issued by other national and international bodies, and the types of disclosures provided by their peers at the international level.