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         III. Enhanced reporting


Framework for Voluntary Oversight

III. Enhanced reporting

I. Overview

In developing proposed guidelines for reporting on the OTC derivatives activities of professional intermediaries, the DPG sought to establish a comprehensive reporting mechanism that is based on processes actually used by credit risk managers and that would provide the agencies with meaningful data in a rational format. The DPG identified as its primary goal the development of a series of reports designed to provide the agencies with timely and useful information in order to facilitate the monitoring of risk to individual firms and to the financial system in general. Market risk, aggregate current credit risk and aggregate potential additional credit risk information is addressed in the discussion below on the evaluation of risk in relation to capital.

The DPG's enhanced reporting initiative focused on credit risk reporting and the firms' existing processes for controlling credit risk formed the building blocks for the reporting framework. These current methodologies were analyzed with a view toward producing a normative standard for information reporting that would be useful to supervisors in monitoring credit risks. The DPG developed reports encompassing information on credit risk concentration and a profile of the credit risk of the reporting entity's OTC derivatives portfolio, as well as information regarding monthly net revenues associated with OTC derivatives and related activities. The reporting framework also includes consolidated reporting of information regarding the aggregate notional values and current net credit exposures associated with outstanding OTC derivatives transactions. A description of the major accounting policies used in reporting this information also will be provided.

II. Credit Risk Reporting

The information to be included in the credit risk reports falls into two principal categories: credit concentration and portfolio credit quality.

  1. Covered Activities

    In general, the types of transactions defined for purposes of the enhanced reporting framework as "OTC derivative products" include interest rate, currency, equity and commodity swaps; OTC options (including caps, floor and collars); and currency forwards (i.e., currency transactions of more than two days' duration, or if a firm so elects, only currency transactions of 14 days' or more duration as of the report date). Additionally, it is contemplated that reporting intermediaries would include any firm (i) that is an affiliate of an SEC-registered broker-dealer; (ii) that is not subject to supervisory oversight with respect to capital; (iii) that is primarily engaged in the business of holding itself out to unaffiliated counterparties as a professional intermediary willing to structure and enter into either side of an OTC derivative transaction as principal; and (iv) whose OTC derivatives activities are likely to have a material impact, directly or indirectly, on its SEC-registered broker-dealer affiliate. Firms, however' may elect to report on the OTC derivatives activities of reporting intermediaries individually or on a group-wide consolidated basis.

  2. Credit-Concentration Report

    The Credit-Concentration Report (Grid I, Appendix I) contemplates reporting based upon the top 20 current net exposures (after taking into account collateral and legally enforceable netting agreements) on a counterparty-by-counterparty basis, segmented by industry in accordance with ISDA guidelines. The ISDA guidelines for reporting counterparty type were selected so as to avoid confusion regarding the status of a professional intermediary in the context of a transaction in which it is an end user.

    For each of the top 20 current net exposures, reporting will also include information regarding net replacement value (taking into account legally enforceable netting agreements but excluding collateral), gross replacement value and potential additional credit exposure. For these purposes, potential additional credit exposure will be calculated in accordance with the methodology described in the discussion on evaluation of risk in relation to capital.

    The report, moreover, includes a "Comments" section where additional information judged to be important by the individual firms may be provided (e.g., details on credit enhancements, types of contract, maturity, offsetting exposures in affiliated entities, etc.). Although this report would provide counterparty exposures on a no-names basis, for reference purposes the firms would provide their own unique internal counterparty identifier so that the agencies, if warranted, could engage in further discussions regarding these counterparties and ascertain the identity of particular counterparties.

  3. Credit-Portfolio Report

    Information regarding the net exposure, the aggregate net replacement value and the gross replacement value for counterparties in the portfolio and the 10 largest geographic exposures would be provided in separate reports (Grid n and Grid II(a), Appendix 1). Counterparty exposures would be aggregated and reported by credit rating category, segmented by industry in accordance with ISDA guidelines.

    In order to provide the agencies with information that most closely resembles the basis on which the firms manage their credit exposure and because many highly creditworthy counterparties are unrated (e.g., pension funds, foreign banks), it was determined that individual firms would use internal credit ratings assigned to counterparties. This information would be reported with a supplemental document detailing the conversion of a firm's internal rating system into a Moody's or S&P equivalent (Grid III, Appendix I).

  4. Net Revenue Data

    The firms will provide monthly net revenue data (defined as trading profit/loss net of interest and dividend income/expense) for OTC derivatives and related activities in one of two ways: (i) by generic product type along the following four categories: interest rate products, currency and foreign exchange products, equity derivatives and commodity derivatives; or (ii) by business unit categories incorporating one or more of these product types, consistent with the firms' internal reporting procedures. (See Grid IV, Appendix I.)

  5. Consolidated Financial Statement Reporting

    The firms will also report consolidated information regarding the notional amount of outstanding OTC derivatives transactions and current net credit exposures in accordance with the firms' current financial statement reporting (see Grid V, Appendix I) and SFAS Interpretation No. 39, "Offsetting of Receivables and Payables".

III. Confidentiality

All information will be reported and maintained by the agencies on a confidential basis.

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Reporting grids are contained in Appendix I.

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