——— FINANCIAL POLICY FORUM ———

DERIVATIVES STUDY CENTER

www.financialpolicy.org 1660 L Street, NW, Suite 1200

rdodd@financialpolicy.org Washington, D.C.   20036

SPECIAL POLICY BRIEF

"Updates on BIS Triennial Survey

of Global Derivatives Markets"

Andrew Johnson and Randall Dodd

Director

Financial Policy Forum

July 30, 2003

This brief message has two related purposes: to announce recent Derivatives Study Center (DSC) research; and to notify you of an important upcoming policy decision by the Bank for International Settlements (BIS).

The DSC's Andy Johnson has taken great pains to transform the 2001 BIS Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity into a much more usable spreadsheet format. This amounts to a significant improvement over the BIS practice of presenting the data separate PDF files (other public governmental sources of data, such as the U.S. Bureau of Economic Analysis, offer HTM, CSV, XLS or other database ready formats). The purpose is to facilitate better data analysis and preparation of charts and tables. His work also serves to highlight where the BIS collection effort does, and does not, succeed. This spreadsheet and other derivatives data, as well as links to other sources of derivatives data, can be found on the Financial Policy Forum website at http://www.financialpolicy.org/dscdata.htm.  (If you have any trouble downloading the document, then please write and I can send it to you directly.)

It is an important time to highlight the shortcomings in data collection in derivatives markets. At this moment, the BIS is preparing revisions to their survey methods in anticipation of the next triennial survey of derivatives markets in 2004. The survey is important because it is the most comprehensive effort to measure the size and composition of these enormous and rapidly growing markets. (See BIS press release http://www.bis.org/press/p030703.htm.) The survey currently breaks the OTC derivatives data down by country, counterparty, currency, maturity, instrument and underlying item. It also contains some information about gross market values. There is also an attempt to measure activity on "organized exchanges." All amounts are measured by amounts of notional value or numbers of contracts.

The only announced changes to the survey are the following:

· a clarification of the dealer concept, in order to better distinguish between inter-dealer and customer transactions;

· improved definitions for so-called in-house or related party deals;

· improved definitions for the location of trades; and

· provision of illustrative examples of how to determine the location of trades.

This is neither an exact nor an exhaustive measure of derivatives markets. It will someday look as quaint as maps drawn by European explorers of the "New World." The following is a short list of some of the survey's shortcomings.

Thus far, the BIS has surveyed only financial institutions that act as dealers. This left out such important dealers such as Enron (whose derivatives book exceeded $774 billion in notional value), other energy merchant trading firms such as El Paso, Duke and Williams (whose derivatives books were measured by Swaps Monitor to be equally as large), and any other non-traditional financial institution such as hedge funds. This has left the measure of OTC derivatives, and especially commodity derivatives, far from complete.

Another problem area concerns credit derivatives, structured securities and other hybrid instruments (especially synthetic collateralized debt obligations whose economic properties are more like derivatives than securities).

Yet another important shortcoming is the scarcity about foreign exchange trading and OTC derivatives markets in developing countries. Past surveys have included a few developing countries, but they are often dropped from survey to survey so that there is not consistent time series. Apparently the BIS and its member central banks have not committed the resources to making a thorough effort. As a result, these developing and emerging markets remain less transparent.

If the BIS were to make substantial improvements in its collection efforts, it would enhance the ability of both public and private sectors to conduct market surveillance and it would provide researchers with a more complete set of data from which to better analyze and understand the properties of these large and important markets.