Table 3 presents an overview of disclosures about notional amounts and market values of instruments held for trading purposes (on- and off-balance-sheet) and derivatives held for non-trading purposes. These measures are indicative of an institution's involvement in derivative instruments.

As in 1994, all of the 67 banks and 12 securities firms provided information about the notional amounts of their derivatives holdings. In 1995, there was a significant increase in the number of institutions that separated out trading from non-trading positions, with a majority of institutions now providing this information. Moreover, 44 institutions distinguished OTC from exchange-traded instruments in 1995, as compared with 25 in 1994.

As regards market value data, there was some increase in the number of institutions providing quantitative disclosures of trading account market values. For example, 68 institutions disclosed market values of cash instruments in the trading account, compared with 52 in 1994. Forty-four disclosed such information for derivatives, the same as in 1994. There was an increase in the number of institutions disclosing information on the overall market value of derivatives held outside of the trading account (for example for hedging purposes) from 21 in 1994 to 29 in 1995.

(a) Credit risk

In comparison to 1994, banks and securities firms generally expanded the quantitative information provided on credit risk (Table 4). In some cases, this information was provided separately for derivatives instruments; in other cases, cash and derivatives-related disclosures were combined. The most common type of disclosure on credit exposure was information on gross positive market values (without netting), current credit exposures (with netting), and risk-based capital credit-equivalent amounts. No institution provided data on the volatility of credit exposure of its derivatives holdings over the reporting period. Fifteen disclosed information on the potential credit exposure, a measure of how much current credit exposure could increase in the future as a result of movements in underlying rates or prices.

Survey institutions also provided more information on the credit quality of their trading and derivatives portfolios. For example, 41 institutions disclosed information on counterparty credit quality, as compared with 27 in 1994 and just 6 in 1993. Similarly, the number of institutions disclosing information on credit concentrations grew to 46 in 1995, compared with 31 in 1994 and 11 in 1993. As in 1994, few institutions provided information on collateral and other credit enhancements, actual credit losses, or on non-performing contracts for their derivatives portfolios.

(b) Market risk

Trading activities

A noteworthy development in 1995 was the continued expansion in the number of institutions disclosing quantitative information on their exposure to market risk (Table 5). Increasingly, the banks included in the survey are basing such disclosures on their internal value-at-risk methodologies. Value-at-risk is an estimate of potential trading losses over a given time horizon, measured at a certain level of statistical confidence. In 1995, 36 banks provided such value-at-risk-based disclosures, as compared with 18 in 1994 and 4 in 1993.

In addition to disclosing a point in time value-at-risk number for the end of the financial statement period, a significant number of banks also provided information on their value-at-risk exposures over the whole reporting period. For example, 20 banks disclosed the average value-at-risk number for the reporting period, as compared with 10 in 1994 and zero in 1993. Seventeen banks disclosed the high and low value-at-risk numbers in 1995, compared with 7 in 1994 and zero in 1993. Moreover, 10 banks directly related daily value-at-risk estimates to actual changes in portfolio value, one of the key recommendations of the September 1994 Fisher Report. Institutions typically used graphical means to compare daily value-at-risk estimates with actual portfolio outcomes.

There was also an increase in the number of institutions disclosing the assumptions lying behind their value-at-risk estimates, an area where the Basle Committee/IOSCO report identified the need for further improvements. In 1995 annual reports, 35 banks disclosed the confidence interval used, 33 the holding period, and 14 the method of aggregation across risk factors.

Historically, the major securities firms have not provided quantitative market risk disclosures of their trading and derivatives activities in their annual reports. As part of the Derivatives Policy Group's "Framework for Voluntary Oversight" on over-the-counter derivatives, released in March 1995, the securities firms that are major US. derivatives dealers are providing to United States supervisors on a quarterly basis measures of "capital-at-risk", defined as the maximum loss expected to be exceeded with a probability of one percent over a two-week period. In addition, these dealers provide supervisors with the results of a series of core risk factor stress tests of their over-the-counter derivatives portfolios.

Non-trading derivatives activities

As in last year's survey, the most common form of disclosure by the surveyed banking institutions that used derivatives for non-trading purposes involved schedules of notional amounts, maturities and (for swaps) contractual rates paid and received. For the 1993-1995 period, the most prevalent means of conveying how derivatives are used to manage a bank's interest rate risk was a gap position schedule (used by 26 of the banks in 1995 as compared with 25 in 1995). Many banks publishing a gap schedule for interest rate risk cautioned that it represented only a point-in-time picture of risk and did not capture options risk and other dynamic characteristics of the balance sheet.

The number of banks that furnished quantitative information on value-at-risk measures for their non-trading activities remained low. Fifteen banks provided a discussion of the effect on capital or earnings of a specified rate shock. No bank disclosed the duration of derivatives held for non-trading purposes. A few of the banks providing information on their non-trading derivatives holdings described in varying detail whether the derivatives were linked to specific components of the balance sheet or were used to manage overall risk exposures.

(c) Earnings

Trading activities

As illustrated in Table 6, 64 institutions provided information on the impact of their trading activities on earnings (whether cash, derivatives, or both), compared with 59 in 1994 and 48 in 1993. The most noteworthy development in 1995 was that almost twice as many institutions provided a breakdown of their trading income by risk exposure or type of business (34 in 1995 compared with 18 in 1994).

Non-trading derivatives activities

With regard to derivatives held for non-trading purposes, the number of institutions disclosing details about how derivatives affect accrual-based accounting income and expense (historical cost accounting) remained relatively low in 1995. Ten banks reported the effect that derivatives accounted for on an accrual basis had on revenue, compared with 11 in 1994. Eight banks and 6 securities firms reported the overall effect on net interest margins of their non-trading derivatives activities. Thirteen banks disclosed deferred gains or losses on non-trading derivatives and 5 provided information on when the deferrals would be reflected in future earnings. Twenty-one banks and 3 securities firms disclosed the unrealised gains and losses associated with non-trading derivatives positions, compared with 18 and 3, respectively, in 1994.