The tabulation of disclosures is in part a subjective exercise and this review required criteria and judgements to determine whether or not an institution had made a particular disclosure. For example, one bank or securities firm might explicitly provide certain quantitative information, whereas in another bank's or securities firm's annual report, similar information might only be inferred from other complementary data. For purposes of this analysis, indirect communication of information was generally not included in the tables.

For a group of institutions as diverse as those reviewed in the survey, it is not unusual to observe large differences in the scope and nature of their trading and derivatives activities. In addition, it should be noted that the scope of an institution's disclosure is not necessarily indicative of the extent or quality of that institution's risk management and other functions. Moreover, the disclosure survey results (and subsequent recommendations) are not intended to prescribe specific kinds of information for disclosure purposes, but instead are intended to encourage voluntary efforts to improve disclosures by providing a picture of the types of disclosures provided the previous year by internationally active institutions. Thus, while the information on trading and derivatives disclosures included in the tables is extensive, it is not intended to imply recommendations for "best practice" disclosures. Indeed, what is sought is not inordinate detail, but succinct, illuminating disclosures about the major risks managed by an institution and the potential earnings impact of these risk management activities.

Substantial enhancements were made in the 1994 annual reports of many of the 67 internationally active banks reviewed, as compared to their 1993 reports. Trading and derivatives disclosures in 1994 annual reports of the major international securities firms improved as well compared to their 1993 reports. In particular, for the first time, a number of leading global financial intermediaries provided quantitative information on market risk exposures drawn from their internal risk management systems. More information was also provided on credit risk exposures and management discussions of trading and derivatives activities were expanded in comparison to 1993. It appears that the initiatives undertaken since 1993 by national and international financial accounting standard setters, industry groups, central banks and national supervisors have made important contributions that helped to enhance the overall quality of trading and derivatives disclosures.

Despite these encouraging improvements, there remain significant disparities across large, internationally active banks and securities firms with respect to the type and usefulness of information disclosed about their trading and derivatives activities. Indeed, some institutions continued to disclose very little about these activities. Differences in the detail and information content of public disclosures can be attributed to a number of factors, including statutory provisions and other national standards and requirements for accounting and disclosure; the information needs communicated by investors, creditors and other financial statement users; and differences in tradition concerning, for example, the mix between public disclosure and reporting to supervisors. In addition, as one might expect, in many cases the extent of a bank's or securities firm's trading and derivatives disclosures depends on the importance of these activities in the institution's overall business activity.

However, the types of institutions covered in this analysis have in common that they generally employ risk measurement and management systems that generate periodic information for internal use by management, as well as for the use of boards of directors. In addition, these banks and securities firms provide supervisors with extensive information, often on a confidential basis, about their trading and derivatives activities through channels such as periodic reports, on-site examinations or external audits and discussions with senior management. For example, as part of the Derivatives Policy Group's "Framework for Voluntary Oversight," the major United States securities firms that are derivatives dealers are providing to US. supervisors detailed credit risk and market risk information on the over-the-counter derivatives activities conducted in their unregulated entities. As argued in the Fisher Report, the challenge for banks and securities firms is to draw on information already produced for internal risk management purposes and to communicate it in summary form to the public in a manner that provides a clear and meaningful picture of how trading and derivatives activities contribute to the overall risk profile and profitability of the institution and how well the institution manages this risk.

For the vast majority of the institutions reviewed, disclosure about trading and derivatives activities is provided on a consolidated basis and appears in two main places in the annual report:

Management's discussion and analysis. This is an analysis of the firm's financial condition and performance (including financial data) that typically includes a narrative of the firm's risk exposures and techniques for managing risk. This part of the annual report is not typically audited by independent accountants. In some countries, this portion of the annual report may be referred to as the financial review or management report.

Annual financial statements. These financial statements generally include the statements of financial position (balance sheet), income, changes in stockholders' equity and changes in financial position or cash flow. Footnotes, which present information on financial statement line items in narrative and tabular form, are also considered to be a part of the financial statements. The annual financial statements and their footnotes are audited by independent accountants.

Footnote:

5. The internationally active banks and securities firms included for each country were those headquartered in the country and not subsidiaries of foreign banks or securities firms. Luxembourg banks were not included in this analysis, since the large dealers and end-users of derivatives located in Luxembourg are subsidiaries of banks centred in other G-10 countries. Large, internationally active banks for which Luxembourg authorities carry out consolidated supervision tend to be moderate end-users of derivatives instruments.

In a number of jurisdictions, the largest institutions involved in securities activities are either universal banks or majority-owned subsidiaries of internationally active banks. Thus, in order to avoid double counting, the securities firm portion of this analysis focuses on the stand-alone securities firms of the United States and Japan. Securities firms in France, Italy, the Netherlands, Spain, and one major United States broker-dealer, CS First Boston, Inc., were excluded. Firms in these countries and CS First Boston, Inc. are subsidiaries of bank holding companies and, accordingly, are included as applicable in the disclosure analysis for the large, internationally active banks, as are the securities activities of the major universal banks in the G-10 countries.

In the case of Japan - where the close of the annual reporting cycle is March 31, 1995 - the choice of institutions included in Table 1 also depended on the availability of financial statements at the time of the writing of this report. For Canadian banks, the close of the annual reporting cycle is October 31, 1994.

In some cases, there were differences in the scope of disclosure provided in domestic as compared to foreign language annual reports.