Abstract

Although the procedures for conducting the national survey are shaped by the national compiling agency, the concepts and principles underlying the survey content should conform to the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). From this viewpoint, practical guidance on the following key topics that are relevant for undertaking a Coordinated Portfolio Investment Survey (CPIS) are discussed in this chapter: (i) nomenclature, (ii) residence and institutional sector attribution, (iii) valuation, (iv) distinction between direct and portfolio investment, and (vi) treatment of securities where there is potential for double counting. In addition, an appendix discusses the institutional sectors.

Although the procedures for conducting the national survey are shaped by the national compiling agency, the concepts and principles underlying the survey content should conform to the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). From this viewpoint, practical guidance on the following key topics that are relevant for undertaking a Coordinated Portfolio Investment Survey (CPIS) are discussed in this chapter: (i) nomenclature, (ii) residence and institutional sector attribution, (iii) valuation, (iv) distinction between direct and portfolio investment, and (vi) treatment of securities where there is potential for double counting. In addition, an appendix discusses the institutional sectors.

3.1 The concepts and principles underlying the Coordinated Portfolio Investment Survey (CPIS) are based on the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). As national compilers apply these concepts and principles, some reporting issues may arise: these practical dimensions are addressed in Chapter 4. In addition, to guide compilers, in 2014, the International Monetary Fund (IMF) published the BPM6 Compilation Guide, which is a companion document to BPM6 and describes how the conceptual framework in BPM6 can be implemented in practice.

Nomenclature

3.2 As discussed in Chapter 2, the CPIS focuses on collecting information on equity securities and on long-term and short-term debt securities issued by nonresidents and owned by residents. BPM6 defines equity securities in paragraphs 5.21 and 5.24 and debt securities in paragraph 5.44 (see also Appendix 4 of this Guide).

3.3 As financial markets continually evolve, national compilers face challenges relating to changing classification or valuation, or other balance of payments accounting problems.

3.4 For the CPIS, national compilers should endeavor to use the methodology of BPM6 to classify financial instruments; compilers may also find valuable references for further guidance in Chapter 3 (“Financial Instruments Classifed as Securities”) of the Handbook on Securities Statistics,1 Appendix 1 (“Specific Financial Instruments and Transactions: Classification”) of the 2013 External Debt Statistics: Guide for Compilers and Users2 (2013 EDS Guide), and Appendix 4 of this Guide.

Residence and Institutional Sector Attribution

3.5 A principal requirement of participation in the CPIS is the identification of the residence and the institutional sector of the issuer and of the holder of the security so that bilateral information can be exchanged. This section addresses the issues raised by these two requirements.

3.6 The concept of residence followed in the CPIS is in line with that in BPM6 and in the System of National Accounts 2008 (2008 SNA).3 Thus, the economic territory of a country is the basis on which residence is determined. It includes the geographic territory administered by a government, territorial enclaves, and free trade zones and bonded warehouses operated by offshore enterprises under customs control. These principles have been applied to small economies with international financial centers (SEIFiCs) so that they are treated as resident in the economic territory of which they are a part, regardless of their treatment under local exchange control, tax, or employment regulations.4 Apart from being consistent with the concept of residence recommended in BPM6 and in the 2008 SNA, this treatment is critical to ensure consistency in applying a common principle of residence across economic territories.

3.7 Both BPM6 and the 2008 SNA define the residence of institutional units in terms of their center of predominant economic interest. The application of this concept to individuals and enterprises for the purposes of the CPIS is the same as in BPM6 and the 2008 SNA.5 Both BPM6 and the 2008 SNA recommend that offshore enterprises (which may be engaged in manufacture, trade, and financial services) be treated as resident in the economy in which they are located.6 BPM6 gives particular attention to the residence and classification of special purpose entities (SPEs) as direct investment enterprises.7 SPEs are commonly engaged in providing financial services.

3.8 Institutional sectors are formed by grouping the institutional units. The units in each institutional sector have similar economic objectives, functions, and behavior. The concept of institutional sector used in CPIS is consistent with BPM6 and the 2008 SNA. The institutional sector classification is mainly applied to resident units, but should also be applied when compiling the encouraged CPIS tables that require the sector of the nonresident counterpart. Annex 1 provides details on the institutional sectors classification followed in the CPIS and definitions of institutional sectors/subsectors following BPM6 and the 2008 SNA.

3.9 For the CPIS, it is necessary to provide further clarification of the treatment of so-called brass plate companies, international business companies (IBCs), shell companies, and SPEs that may have a limited physical presence in the economy in which they are located, may be offshore in the sense just defined, and yet may be significant vehicles for cross-border portfolio investment. To ensure their inclusion in the CPIS, the legal domicile of an enterprise is a preferred indicator of residence. In a typical SEIFiC, the transactors that are likely to meet the test of legal domicile may well include the following: (i) companies that are incorporated in the jurisdiction (including IBCs and “exempt” companies) even though they may be managed or administered in another jurisdiction, (ii) branches of companies incorporated abroad (including financial holding companies), and (iii) unincorporated enterprises that are deemed to be legally domiciled, can produce separate accounts, and are expected to be in business for a period of one year or more. This test of residence is consistent with that followed in BPM6 (e.g., see paragraph 4.115), the 2008 SNA (e.g., see paragraph 4.15), and the 2013 External Debt Statistics: Guide for Compilers and Users (e.g., see paragraph 2.20) which treat debt issues on the balance sheet of entities legally incorporated or domiciled in SEIFiCs as external debt of the SEIFiC. Although IBCs in SEIFiCs are resident of the countries in which they are incorporated, the collection of CPIS data on IBCs in SEIFiCs may be very challenging. Unless these units undertake financial intermediation with other residents, they may be unregulated, which makes the collection of data challenging.

3.10 The residence of individuals that hold securities is established by their center of economic interest, as described in BPM6 and the 2008 SNA. This is determined by the location of their principal residence (as a member of a household). Being present for one year or more in a territory or intending to do so is sufficient to qualify as having a principal dwelling (or residence) in that territory (see BPM6, paragraph 4.117). As explained in BPM6, there are specific guidelines for determining the residence of students, medical patients, ship’s crew, national diplomats, and other individuals, but these are likely insignificant for compiling the CPIS.

Residence and Institutional Sector Attribution of the Issuer of a Security

3.11 The issuer of a security is likely to be a government agency, a public or private corporation (including financial institutions), or a branch (although branches are unlikely to issue securities) or subsidiary of a public or private corporation (including a financial institution). Depending on their data sources, CPIS compilers may face difficulty in determining the institutional sector of nonresident issuers of securities held by their residents.8 As noted below, for some multinational companies, there may be difficulty in determining residence, either of the issuer or of the holder.

3.12 Ensuring the correct residence and institutional sector classification of the issuer and of the holder of a security is a central element of the CPIS. For mirror data to be exchanged with the right counterpart, a correct identification of the issuer’s residence is fundamental, regardless of whether the national survey is conducted on a security-by-security (SBS) basis or on an aggregated basis (see Chapter 4 for the discussion of these approaches).

3.13 The coding systems used by the securities industry to identify securities can help ensure consistency of geographic attribution of securities by compilers across economies. For example, International Securities Identification Number (ISIN) codes are now allocated to many internationally traded long-term securities9 by national numbering agencies, which have the sole right to allocate numbers within their jurisdiction. Each security has its own unique identifier. For equity securities (but not debt securities), the first two digits can be used to identify the country of the issuer (see paragraph 4.57, Chapter 4 for some exceptions). In applying this guidance, compilers should exercise caution when these securities are issued in foreign markets using depository receipts (DRs): American depository receipts (ADRs) provide one example. In such cases, use of the ISIN codes may lead to an inaccurate geographical attribution, because the country code is that of the organization that issued the receipt rather than that of the one that issued the underlying security. For debt securities, the ISIN code may identify the residence of the lead manager and not the issuer.10 Further, securities issued by international organizations (IOs) (e.g., securities of the World Bank) are assigned a code based on the currency of denomination and therefore compilers need to apply caution in using these data based on ISIN codes. Chapter 4 provides additional details. When discussing their national survey with potential survey respondents, national compilers should evaluate the use of the ISIN code system in their own economy and gauge its potential use in classifying securities in their national survey. More information on the coding system and the associated security databases is provided in Chapter 4.

3.14 Large multinational corporations (MNCs) may have more than one center of predominant economic interest; others appear to have more than one head office. However, there are usually either separate corporations that operate within the larger entity or there may be a standard allocation principle among the economies of residence of the different owners, based on their equity shares. Moreover, some companies, listed on major stock exchanges and having all the characteristics of a resident of that economy, may be incorporated in another jurisdiction altogether. In addition, some MNCs may use a shell company or an SPE,11 domiciled and registered in another country or economic territory—typically a SEIFiC—to issue securities (usually debt instruments), even though there is “no physical presence” in the economy or territory. In that instance, following the statistical principle of separate institutional unit, the securities should be attributed to the economy or territory in which the issuing entity is legally incorporated, as opposed to the economy of the parent enterprise, even though the legal entity in the SEIFiC may merely be a conduit for raising funds for the parent company.

3.15 Even where the issue is guaranteed by the parent company, either explicitly or implicitly, and the funds are for use by the parent company, the residence of the issuer should be attributed to the place of registration of the special financing vehicle. Even for economies using an SBS approach (see Chapter 4), special attention should be paid to the information stored in the securities database because the residence of the issuer, especially for such special financing vehicles, may not always be correctly attributed by commercial data providers.

3.16 Securities issued by IOs should be recorded as such, and not be attributed to the economy in which they are physically located. Other characteristics of a security—such as the currency of denomination; the market where it is issued, listed, or traded; or the residence of the guarantor or underwriter of the issue— should not be used as a substitute for identifying the residence (economy or IO) of the issuer.

Residence and Institutional Sector Attribution of the Security Holder

3.17 The holder of a security may be a government entity, a public or private corporation (including a financial institution), a quasi-corporation (including a financial institution), an enterprise as defined in BPM6, a nonprofit institution serving households (NPISH), or an individual. For the CPIS, the national compiler needs to be able to identify (and only include in their CPIS reports) resident holders of securities issued by nonresidents. The following addresses problems that may arise when the residence of the holder cannot be readily determined from the available data sources (such as reporting by investment managers, custodians, or settlement agents), problems related to the treatment of nominee accounts, issues concerning the treatment of insurance company technical reserves, pension funds, mutual funds, trust service providers, and the treatment of defeasance.

3.18 The correct determination of the holder’s residence is particularly difficult where the information is provided by custodians, nominees, or trustees. They may not be aware of whether the registered owner is also the ultimate beneficial owner or, alternatively, they may not know the residence of the beneficial owner. When investment managers or custodians are asked to report the value of securities they hold on behalf of others, it is important that they are provided with guidelines to determine the basis of residence of the asset holder(s). For the most part, they use postal addresses; however, in some instances, this will be inappropriate for the reasons noted above.

3.19 Challenges also arise as custodians may be unable to readily identify the residence of the beneficial holder. Custodians will sometimes hold securities on behalf of other custodians. Investors may place their portfolios with “global custodians,” which, in turn, use the services of “local” or “sub-” custodians. In that case, it is important, where possible, to have the sub-custodian ignore its holdings on behalf of the global custodian, which should then be asked to report the information on behalf of the securities’ ultimate owners. This is because the global custodian, in this instance, may be aware of that information, whereas the sub-custodian may not. However, this exercise may require considerable coordination and involve substantial resources, especially as cross-border dimensions are involved. Further, there is considerable risk that double or undercounting may result.12 Accordingly, it is recommended that this process of “looking through” the sub-custodian to the global custodian should be undertaken only where there is a strong likelihood of good intercompany coordination and cooperation. If this is not possible, attempting such an exercise is ill-advised. Clear instructions to both global and local or sub-custodians are necessary to ensure that attribution of economy of residence is done consistently between them.

3.20 When using investment brokers or custodians as a data source for the CPIS, issues related to the treatment of nominee accounts may arise. A nominee account is a device through which an investor acquires ownership of securities without his/her/its name appearing on the security register. Nominee accounts are offered by nominees, which are often companies that are operated by lawyers, accountants, securities dealers, or other financial institutions. Nominees are a legal device for holding assets for confidentiality or convenience reasons (BPM6, paragraph 4.160). In countries that use trusts, the nominee usually holds the assets as a trustee and may have no discretion in the management of the assets. Securities acquired via a nominee are registered in the nominee’s name. Nominee accounts are sometimes used to make an initial accumulation of shares, up to the legal limit permitted before disclosure is required, pending a takeover bid. More generally, they are used by investors as a convenient means to buy and sell shares through a securities dealer (which will have its own nominee company). Holdings of securities by a nominee, although registered in the name of the nominee, should be attributed to the economy of residence of the beneficial owner. The nominee should always know this information. If the beneficial owner of the securities is a nonresident of the compiling economy, the holdings of the portfolio investment assets should not be included in the portfolio investment assets of the economy of the nominee. However, if the data are collected from custodians13 rather than directly from the nominee, it may be very difficult for the custodian to determine who the beneficial owner is because the custodian’s records may only record the legal owner (i.e., the nominee). Where the nominee is a resident of the compiling economy and the beneficial owner is a nonresident, ownership of portfolio investment assets may be incorrectly attributed to the resident economy. On the other hand, where the nominee is a nonresident and the beneficial owner is a resident, unless the resident custodian is aware of that situation, the portfolio investment asset holdings will be excluded from the CPIS by the custodian—thereby understating the compiling economy’s assets.

3.21 The treatment of pension funds in the CPIS is fully consistent with the 2008 SNA and BPM6. Pension funds to be included as respondents comprise those that are constituted as separate institutional units from the units that created them. Sometimes, the management of pension funds takes place in another jurisdiction from that in which the pension fund itself is resident. For the CPIS, pension funds that are separate institutional units (and not their owners, managers, or others) should be regarded as the owners of the underlying pension fund assets, and thus the economy attribution is based on where the pension fund is resident.

3.22 The treatment of collective investment schemes (such as mutual funds) in the CPIS is fully consistent with BPM6 and the 2008 SNA. For mutual funds, it is not uncommon, especially in SEIFiCs, for them to be registered in one jurisdiction, managed in another, and administered in a third. “Managing” means buying and selling assets and other front office activity, such as market research and economic analysis. “Administering” in this context means bookkeeping, legal, and other back office activities. For the CPIS, collective investment schemes that are legally incorporated or registered in an economy are deemed to be residents of that economy, even if their management or administration is undertaken in another economy.

3.23 Trusts are arrangements where one party (the trustee(s)) has the legal title to, and often control of, a portfolio of assets while others (the beneficiary(ies)) have the right to benefits of the portfolio or income generated by it. Trusts in this use of the term are usually found only in Anglo-American legal systems. The trustee is subject to fiduciary obligations to protect the beneficiaries’ interests (e.g., the trust property is kept separately from the personal property off the trustee). The assets are held of the trustee’s balance sheet. Because their essential aspect is the separation of different aspects of ownership, trusts give rise to questions on the attribution of their ownership and residence.

3.24 A general treatment of trusts is provided in BPM6 (paragraph 4.48). Trusts are treated in the same way as entities that undertake equivalent economic functions with different legal structures. This is based on the principle that economic function of the entity is relevant in economic analysis, rather than the type of legal structure used. The relevant aspects for identification of the economic function for statistical units are (i) the degree of separation of the unit from others that established and own it (as evidenced by its decision-making and whether it has its own accounts) and (ii) the nature of the activities it undertakes (e.g., financial intermediation, market production of goods and services, general government operations, non-profit production, or simply holding assets).

3.25 By reasons of the fiduciary duties of the trustee, the trust will have its own accounts and maintain a separate identity from both the trustee and the beneficiaries. Trusts that undertake financial intermediation (securitization, collateralized securities, and investment pools such as collective investment schemes) are often found to be separate units and resemble their corporate equivalents undertaking the same activities. For example, unit trusts, mutual funds, real estate investment trusts, and other collective investment vehicles should be treated the same way as any other corporations or quasi-corporations that perform the same economic functions. Similarly, pension funds that use trusts should be treated the same way in economic statistics as those that use corporate structures. The assets of the trust are attributed to the trust itself (as a separate institutional unit), while its equity capital is attributed to the shareholders of the trust.

3.26 Trusts are also sometimes used solely to hold assets for a small group of people and, in this case, may not be open to the public.14 Such trusts are often set up by one or more family members for their relatives (and possibly themselves). However, they can also be used as vehicles for small groups of unrelated investors. Trustees may be relatives of the beneficiaries or professional trustees, such as lawyers or licensed trustee companies established for the purpose. In some cases, the trustee has legal title without decision-making power, as the trust deed requires that the trustee follow the instructions of the beneficiary(ies). In these cases, which include nominee companies, the trust is not the effective decision-making unit. However, in other cases, the trustee has independent control of the assets.15 Trusts are often managed by professional trust service providers, who may be potential data sources. Such a collection approach is analogous to custodians, which are used as a convenient data collection point in many countries.

3.27 A distinction is made in the international statistical standards between entities who act as principals and those who act as agents or custodians. In the case where a trust is acting solely as a custodian, where feasible, the assets of the trusts should be regarded as directly owned by the beneficiaries. When the trust and beneficiaries are in the same country, this does not present practical problems. However, in practice, beneficiaries and the trust are often located in different countries, particularly for the many trusts operating in SEIFiCs. In the case where the trust is acting solely as a custodian, it is recognized that it may be very challenging to correctly attribute the underlying holdings of the trust to the country of the beneficiaries.

3.28 Defeasance merits mention. Debt defeasance is an arrangement whereby a debtor (whose debts are in the form generally of debt securities and loans) sets aside cash or other assets to match outstanding liabilities (including any amounts that may accrue, such as future interest payments). Some countries permit defeased assets and liabilities to be taken off the balance sheet of the defeasing debtor because the values are offsetting. However, under balance of payments and the CPIS concepts, both the assets and liabilities should be regarded as belonging to the defeasing party (see BPM6, paragraphs 8.30–8.31).

Residence of International Organizations and Regional Central Banks

3.29 In the balance of payments, international investment position (IIP), and the CPIS, IOs are not treated as residents of any economy. Although physically located in an economy, they are treated as nonresidents of the economy for statistical purposes because they are created by agreements between governments and are outside the authority of an individual government. Any assets or liabilities they may hold are not the assets or liabilities of the economies in which they are physically located. However, a separately constituted pension fund of an IO is considered a resident of the economy in which the pension fund is located, and if lacking a physical presence, it is considered a resident of the economy in which it is incorporated or registered.

3.30 The IMF conducts a survey of the portfolio investment assets held by IOs (the Survey of Securities Held by International Organizations) to complement the results of the CPIS. These holdings are included in the global CPIS results.16 Portfolio investment assets of IOs should not be included in national CPIS data because their inclusion would result in double counting. For economies that are hosts to IOs, the IOs’ portfolio investment assets should not be included in their national data. Similarly, any securities issued by residents that are held by an IO are liabilities of the issuing economy to a nonresident. Correct classification may be an issue if data are obtained through custodians, and IOs may be incorrectly identified as residents if the classification is based on their physical location.

3.31 Similarly, for the CPIS, holdings of securities issued by IOs should be reported as a separate category under a specific code for IOs (code “XX,” the last code in the list of countries in the model forms and in the reporting forms for the submission of the CPIS results to the IMF), rather than under the economy where an IO is physically located.

3.32 Securities held by regional central banks (RCBs) may be included in both reserve assets and portfolio investment asset holdings. For example, pension fund portfolio investment assets holdings (if not held in a separate institutional unit) or securities held for monetary policy purposes may be recorded as portfolio investment rather than as reserve assets. In some cases, RCBs may hold securities issued by member economies of the RCB. Under statistical guidelines, these latter securities are not included in the RCB’s reserve assets. In this case, these securities should be reported by the RCB as securities claims on the member economies of the RCB as part of their portfolio investment asset holdings. Holdings of securities by an RCB should not be reallocated to the member economies of the RCB and they should always be treated as having been issued by a nonresident.17

3.33 As noted above, the holder of any securities issued by RCBs should report them in its portfolio holdings in the IOs line in the economy allocation.

Valuation

3.34 Market price valuation is recommended in the CPIS because of the following:

  • the recommended basis in BPM6 and other macroeconomic statistics manuals,

  • a method in which assets and liabilities can be valued on the same basis, and

  • the basis for economic and portfolio investment theory.

For the creditor, it reflects the command it has over resources; while for the debtor, it is the measure of the amount of funds required to eliminate the liability if the securities were re-acquired by the debtor under current market conditions. This has become increasingly important as debtors are active liability managers.

3.35 Indeed, paragraph 3.84 of BPM6 recommends that positions in financial assets and liabilities be valued at current market prices18 at the appropriate reference date. It also provides advice on how to value securities:

  • Positions of financial assets and liabilities should, in general, be valued as if they were acquired in market transactions on the balance sheet reporting date. Many financial assets are traded in markets on a regular basis and therefore can be valued by directly using the price quotations from these markets. If the financial markets are closed on the balance sheet date, the market prices that should be used in the valuation are those that prevailed on the closest preceding date when the markets were open.

3.36 Consistency of valuation across economies is essential for data quality. For those securities that are traded, which should be the majority by far, prices should be commonly available from bond and stock exchanges, commercial vendors (e.g., Reuters and Bloomberg), or organizations that maintain security databases (e.g., the International Capital Market Association and SIX Financial Information). Where the bid and asking-prices are both quoted, the midpoint should be used. The market value should be that as at the close of business on the relevant date (June 30 or December 31 of the appropriate year, under the existing periodicity of the CPIS)19 in each compiling economy. This means that there may be price differences across economies in different time zones for the same securities quoted in different markets. However, given that the survey is to be used as input to an economy’s IIP, the relevant price for that economy is the market price at close of business in that economy. Accordingly, this timing difference is a valuation inconsistency that should be recognized.

3.37 BPM6 recommends that interest accrued, but not yet payable, be included in the price of the debt security (see BPM6, paragraphs 7.27 and 11.49): the so-called “dirty” price. In line with that recommendation, this survey should be conducted on the basis that debt securities are to be reported on a dirty price basis. This is particularly important for zero coupon or deep discount instruments with terms to maturity greater than one year, where the accrual of interest can be large in relation to the initial funds advanced. However, in many economies, the market price of debt securities is the so-called “clean” price (i.e., excluding interest accrued but not yet due). Wherever possible, data on debt securities, reported on a clean price basis, should be converted to a dirty price basis. This may not always be possible, especially for economies that use an aggregate approach for data collection. Compilers are asked to provide methodological notes setting out the basis of reporting, together with the methods used, if any, to adjust the data to a dirty price basis (see Appendix 3, CPIS metadata questionnaire, question 4.9).

3.38 Respondents may record their security holdings, especially debt instruments on a variety of different valuation principles, notably par value, acquisition cost, amortized value, or market price, depending on the purpose of the investment and the accounting practices of the institution or economy. As stated at the beginning of this section, compilers should endeavor to report securities holdings at market prices.

3.39 Accordingly, wherever possible, respondents should be asked to report their holdings at market price. In some cases, securities have been issued at a substantial premium, as the coupon is much higher than the market rate of interest at the time of issue. The security should be reported at market price, which should approximate the present value of the future stream of payments, discounted by an appropriate current rate of interest.

3.40 Survey respondents may face the same problems that compilers face in obtaining good information on market valuation (Box 3.1). Therefore, when compilers rely on respondents to provide information on the market value of securities, it is important that some method of quality control be introduced. When survey respondents report on an SBS basis, compilers are advised to request additional information: for example, the number of equity shares held by individual issuer or the face value of the debt instrument and the price used to value it. With this information, compilers could confirm that the reported price is appropriate, either by using their own knowledge or by comparing prices quoted for comparable or the same securities by other respondents. Infrequently traded securities pose challenges.20 The compiler could use a price index to provide a means for revaluation to market prices if nominal values are provided by the respondent. The index could vary in complexity between that based on similar maturities in the same currency and that which identifies individual issues that mirror the characteristics of the unpriced security. If national compilers intend to create their own price index from information already available, they need to carefully consider technical complexities. See Box 3.2 for some of the problems associated with valuation of a particular type of instrument: asset-backed securities.

Approaches to Approximating Market Prices

Where market prices are not available for securities (e.g., in private placements and in organized exchanges where they are not actively traded), valuing securities may create difficulties for national compilers.

In some economies that have a security-by-security approach, in the absence of a readily observable price, custodians reporting security holdings of clients are instructed to value listed securities at the price chosen for the valuation of the respondent’s portfolio for unlisted securities. In some economies that have an aggregated approach, respondents are given a range of possibilities with which to value both equities and debt. Six alternative methods of approximating market value of shareholders’ equity are given in BPM6 (paragraphs 7.16–7.17). A standard ranking of the alternative methods is not proposed for valuing instruments when current market prices are not directly observable (BPM6, paragraph 7.18). Positions in unlisted equity securities may be valued using the same methods (BPM6, paragraph 7.29).

Some listed debt securities also may have no quoted prices: for example, if the market is illiquid or the security ceases trading due to suspension, default, or bankruptcy. A market price can be estimated for such debt securities by discounting future cash flows using a discount rate that takes into account the risk of default (present value approach; see BPM6, paragraph 7.29).

Choosing the market price of a comparable company (in the same industry, of similar size, with a comparable number of shares on issue) is not a recommended option since there are too many other factors (not least, the management) that are uncertain and could produce a considerable distortion in the valuation. At the same time, illiquidity itself tends to depress the price of a security.

3.41 Regarding those respondents who report on an aggregate basis, the compilers’ scope for independently verifying that securities have been correctly valued is more restricted. If the data are being collected within an integrated system, the compiler could request that the reporters reconcile transactions and position data on the same survey form; alternatively, the compilers themselves could reconcile transactions and position data (see Chapters 5 and 6 for more information on quality controls). Independent information, such as an entity’s published balance sheet or statement of assets under management or under custody, could also be used. However, it is important to bear in mind when making these comparisons that like be compared with like: accordingly, if the published balance sheet is for the consolidated group’s global activities, it would not be appropriate for this survey (or for balance of payments or the IIP) since securities held by nonresident affiliates will be included, while intragroup positions will be consolidated and thus not be reflected in the consolidated balance sheet. In addition, for assets under management (or held in custody), it is important that the data adequately reflect what is managed or held on behalf of residents and what is managed or held on behalf of nonresidents. If this distinction cannot be made, the comparison for verification purposes is limited. In all cases, where comparisons are made, it is necessary that the alternative sources of data provide the basis for valuation in notes to the balance sheet or statement of assets under management to ensure that comparisons with the CPIS are on the same valuation basis.

Valuation of Asset-Backed Securities

Asset-backed securities are securities collateralized or backed by pools of assets (e.g., residential mortgages).

These securities have a special feature given that there can be partial repayments1 of principal at any time. Because the market price is a function of market interest rates and perceived creditworthiness, not just the amount of principal outstanding, simply revaluing the original face value to end-period market prices will cause an overvaluation of position data if there has been a partial repayment. The compiler need only to revalue the face value of the remaining amount outstanding—the so-called factor value. For example, if the original face value of a security is $1,000,000 and $700,000 of the principal has been repaid, the factor value is 0.300.

There is a need to apply caution if custodians who report data to compilers have different approaches. For example, some custodians may keep track of only the original face value amount of principal outstanding on the security, whereas other custodians may keep track of only the remaining principal outstanding. Thus, when collecting data on a security-by-security basis from custodians, compilers are advised to ask for both the original and the remaining principal outstanding. If only one is available, the compiler should at least be clear as to which has been reported so that the appropriate adjustments can be made. If data are collected on an aggregate basis, prior consultation with major respondents is recommended to decide upon the appropriate course of action.

1 For example, in the United States, the mortgage-backed securities (MBS) issued by Ginnie Mae (GNMA) have this feature. If a homeowner pays off his mortgage early, a corresponding portion of any related GNMA MBSs are retired early and investors may receive prepayment of their investments.

3.42 Economies that intend to conduct an aggregate survey, particularly a first-time survey targeted at custodians, are advised to gain some idea of the reported value of securities not revalued to end-period market prices. One approach is to ask respondents to report this information (such as holdings at acquisition price or nominal value) on the survey form. This information could be requested as supplementary to the main data for the CPIS. For example, in the model survey forms in Appendix 1C, this information could be collected at the end of the forms on equities, long-term debt securities, and short-term debt securities as items “of which value of total securities issued by nonresidents held on respondent’s books or on behalf of residents that is not recorded at market price.” Alternatively, the total value of all equity and long-and short-term debt securities could be recorded separately from the information for individual economies’ issues. These figures might provide only a rather rough indication of the size of the problem in value terms, but they may serve as a useful basis for the CPIS because they would help compilers identify, contact, and, perhaps, directly assist those survey respondents who have the most difficulty revaluing securities.

Distinguishing Between Direct and Portfolio Investment in Securities

3.43 The objective of the CPIS is to collect data on residents’ investment in securities issued by nonresidents for use in the compilation of portfolio investment data. If the securities held are issued by an enterprise that is in a direct investment relationship with the holder, they should be excluded from portfolio investment. Hence, not all holdings of securities issued by a nonresident come under the scope of the CPIS.

3.44 Direct investment is defined in paragraph 6.8 of BPM6 and in the OECD Benchmark Definition of Foreign Direct Investment (fourth edition, Paris: OECD, 2008). Paragraph 6.8 of BPM6 describes direct investment as follows:

  • Direct investment is a category of cross-border investment associated with a resident in one economy having control or a significant degree of influence on the management of an enterprise that is resident in another economy. As well as the equity that gives rise to control or influence, direct investment also includes investment associated with that relationship, including investment in indirectly influenced or controlled enterprises (BPM6, paragraph 6.12), investment in fellow enterprises (see BPM6, paragraph 6.17), debt (except selected debt set out in BPM6, paragraph 6.28), and reverse investment (see BPM6, paragraph 6.40). The Framework for Direct Investment Relationships (FDIR) provides criteria for determining whether cross-border ownership results in a direct investment relationship, based on control and influence. The definition of direct investment is the same as in the fourth edition of the OECD Benchmark Definition of Foreign Direct Investment, which provides additional details on the FDIR and the collection of direct investment data.

3.45 Therefore, both the equity held that establishes the direct investment relationship and any other holdings of equity or debt21 that are issued by the direct investment enterprise or the direct investor or its affiliates and owned by them should be excluded from the CPIS. The one exception is transactions between affiliated financial intermediaries. Securities (and other debt positions) between selected affiliated financial corporations are not classified as direct investment because such positions are not considered to be strongly connected to the direct investment relationship. Paragraph 6.28 of BPM6 states this as follows:

Debt between selected affiliated financial corporations is not classified as direct investment because it is not considered to be so strongly connected to the direct investment relationship. The financial corporations covered by this case are:

  • (a) deposit-taking corporations (both central banks and deposit-taking corporations other than the central bank);

  • (b) investment funds; and

  • (c) other financial intermediaries except insurance corporations and pension funds.

3.46 In other words, the usual direct investment definitions apply for captive financial institutions and money lenders, insurance corporations, pension funds, and financial auxiliaries. All debt positions between the selected types of affiliated financial corporations are excluded from direct investment and are included under portfolio or other investment. Both affiliated parties must be one of the selected types of financial corporations, but they need not be the same type. In practice, the method by which they are excluded may well depend on the general collection method adopted.

3.47 In an end-investor survey, the reporting instructions should be clear on what should be included and what should be excluded. Because end-investors are best informed about the composition of their investments, they should be able to distinguish portfolio from direct investment assets. Indeed, as direct investment statistics are commonly collected through a survey of investors, the reporting instructions can make clear to respondents that securities reported as direct investment should not be reported as portfolio investments. Countries usually require separate reporting of direct and portfolio investment data. The compiler can also compare the direct and portfolio investment returns for each respondent as an additional check.

3.48 In a custodial survey, the instructions should also clearly state that securities that have been issued by an enterprise that is in a direct investment relationship with the holder should be excluded; however, the applicability of these instructions might well vary among countries. The experience among compilers is that, in some markets, investors tend to hold all portfolio investment securities with custodians, whereas securities issued by an enterprise in a direct investment relationship are frequently held separately from their portfolio investments and away from custodians. It is recommended that national compilers conducting a custodian survey evaluate market practice in their own country and ensure that custodians understand the direct investment relationship and that any holdings of securities between the direct investment enterprise and the direct investor are to be excluded from the survey. In markets where investors tend to hold all securities with custodians, compilers collecting data for the CPIS from custodians will need to be particularly vigilant in ensuring that securities that should be classified as direct investments are excluded.22 (Alternatively, as a quality check, such securities could be identified separately as a memorandum item.) This could take the form of monitoring particularly large holdings of securities and comparing data from direct investment survey returns with those from the CPIS. Box 3.3 illustrates how Austria ensures that direct equity investment securities are excluded from its survey of portfolio investment.

Austria’s Experience in Separately Identifying Direct Investment and Portfolio Investment Holdings of Securities

In Austria, custodians provide the Oesterreichische Nationalbank with information on individual securities at par value (and market value), for their own and customer’s holdings which are grouped by institutional sector. Custodians are not able to distinguish between portfolio investment holdings and securities held for direct investment purposes. Hence, all securities are included in the report by custodians and are automatically classified as portfolio investment (PI). Direct investment (DI) holdings are afterward manually adjusted on a security-by-security basis to avoid double counting, as follows:

  • (1) In the case of securities issued by residents, the classification as DI liabilities is mostly based on media information and consultation of the reporting unit.

  • (2) In the case of securities issued by nonresidents and for a few securities issued by residents, DI positions are identified by high transaction data, especially in sectors which are well-known for DI transactions (e.g. nonfinancial corporations, insurance companies, and other financial institutions). For every suspected case, the domestic reporting unit will be consulted.

If there is no information about changes in DI, the asset and liability positions are perpetuated. When changes occur, data are accordingly adjusted.

Additionally, debt securities that are issued and held exclusively within multinational enterprises are marked and compiled as DI positions and therefore excluded from PI. The number of these cases in Austria is rather small. Therefore, the needed information to separately identify PI and DI holdings is mostly based on research and information by the reporting unit (but not automatically collected).

Finally, national compilers—whether they approach end-investors or custodians—need to be careful when classifying securities issued by entities based in offshore centers. If held by the parent enterprise or associated affiliate, these securities should be classified under DI. As noted in earlier, an exception is made for some holdings by financial intermediaries when the nonresident entity that issued the debt security and the resident owner of the debt security are affiliated financial intermediaries.

Treatment of Securities Where There Is Potential for Double Counting

3.49 In this section, four types of transactions of growing importance, which could lead to potentially significant double or undercounting of securities holdings between countries, are identified. These types of transactions are (i) repurchase agreements, (ii) securities lending agreements, (iii) DRs, and (iv) stripped securities.

3.50 Repurchase agreements and securities lending fall under the broad category of reverse transactions (see BPM6, paragraphs 7.58–7.61). Reverse transactions are arrangements that involve a change of legal ownership of securities or gold with a commitment to repurchase the same or similar securities or gold either on a specified date or with open maturity. They include securities repurchase agreements, gold swaps, securities lending, and gold loans. The commitment to reverse the change in legal ownership in the future at a fixed price means that the original owner retains the risks and rewards of changes in the price of the asset. Accordingly, there is no change of economic ownership of the security or gold, so no transaction in that security or gold is recorded, and ownership of the asset as shown in the IIP is unchanged.

3.51 A reverse transaction may be with or without the supply of cash. If cash is supplied, as in a repurchase agreement (repo or securities lending with cash collateral), and in return the other party supplies securities, the arrangement is regarded as giving rise to a loan or deposit. (The classification of the cash supplied is discussed in paragraphs 5.52–5.54 of BPM6.) Analogously to repos, a gold swap for cash is treated as being a loan with the gold as collateral, and there is no change in the economic ownership of the gold.

3.52 If a party that receives securities under a reverse transaction on-sells the securities to a third party, then it has a short position. The treatment of short positions is discussed in paragraph 7.28 of BPM6. Repurchase agreements and securities lending are discussed in detail below.

Repurchase Agreements

3.53 A repurchase agreement is an arrangement involving the provision of securities in exchange for cash with a commitment to repurchase the same or similar securities at a fixed price. The commitment to repurchase may be either on a specified future date (often one or a few days hence, but also further in the future) or an “open” maturity. Repos, securities lending with cash collateral, and sale-buybacks are different terms for arrangements with the same economic effect as a repurchase agreement—all involve the provision of securities as collateral for a loan or deposit. The term “repo” is used from the perspective of the securities provider, while the term “reverse repo” is used from the perspective of the securities taker (see BPM6, paragraph 5.52), both referring to the same type of transaction. Repos sometimes require that the value of the securities be greater than the cash provided, to provide (initial) margin against the possible default on the part of the repo party. If the value of the security falls, additional securities (variation margin) may be required; on the other hand, if the value of the securities rises, part of the original margin may be returned to the repo party (depending on country practice). In other cases, substitution of the security provided is permitted (which may arise if the security goes “special” 23 or if the repo party needs the security to make delivery on another contract).

3.54 There is more than one type of repo. In some repo transactions, ownership of the underlying security remains with the seller; in others, the underlying security is held by a third party for safekeeping (the so-called tri-party repos); and in others, the ownership of the underlying security changes hands. Some repos are “cash driven”: that is, the primary purpose of the transaction is for the repo party to acquire cash. In other instances, the transaction may be “security driven”: that is, where the reverse-repo party has need for a particular security, if the security has gone “special” or the reverse-repo party needs to make delivery on a contract. The supply and receipt of funds under a securities repurchase agreement, regardless of whether the transaction is “cash driven” or “securities driven” (the economic nature is the same), is treated as a loan or deposit (see ahead). It is generally a loan, but it is classified as a deposit if it involves liabilities of a deposit-taking corporation and is included in national measures of broad money. Regardless of the type of repo transaction, the market risks of owning the security and all significant benefits remain with the “seller.” If a repurchase agreement does not involve the supply of cash (i.e., there is an exchange of one type of securities for another or one party supplies securities without collateral), there is no loan or deposit. Margin calls in cash under a repo are also classified as loans (see BPM6, paragraph 5.53).

Potential for double counting

3.55 Repurchase agreements were developed primarily as a method of financing securities positions. Hence, they have been used as a means of leverage,24 but they also have become a method by which investors can borrow securities to cover “short positions.” Short positions occur when an institutional unit sells securities for which it is not the economic owner. For example, a security subject to a repurchase agreement may be on-sold by the securities-receiving party (see BPM6, paragraph 7.28). Accounting practice in many countries is to regard the securities involved in repo transactions as remaining on the books of the seller and to record the cash received as a collateralized loan. On the other hand, some countries (for institutional, legal, or other reasons) treat repos, where ownership changes hands, as transactions in the underlying security: that is, as an outright sale of the security for cash. The subsequent repurchase is regarded as a separate and independent security transaction. Under BPM6, the 2008 SNA, and related statistical methodologies, a repo is treated as a collateralized loan or deposit, reflecting the economic nature of the transaction.

3.56 In practice, national compilers in some countries find that they have no realistic choice other than to require data on security holdings (and transactions) to be reported in line with the accounting or regulatory conventions prevailing in their countries. It appears that the vast majority of countries prefer that repos be treated as collateralized loans or deposits (so that the “seller,” not the “buyer,” reports the holding).25 Only a few countries record repos as a transaction in securities; however, it is also probable that in many countries, the recording practices are not universally applied, so compilers should be very careful in their preparation for the survey to be sure that the respondents know what is required to be reported. This concern applies particularly to countries that obtain the data for the CPIS from custodians (see the following discussion on “Treatment of repos in the CPIS”). Compilers are encouraged to discuss with custodians the recording practices applied to these transactions and to see to what extent such transactions can be identified and reported on the basis required for the CPIS. It is important that reporting of repos (and securities lending) is consistent within an economy.

Treatment of repos in the CPIS

3.57 Because of the mixed nature of these transactions, differences in the statistical recording of repos can lead to miscounting of cross-border holdings of the securities involved. Accordingly, a practical and consistent approach must be adopted regarding the reporting of securities holdings underlying repos. It is recommended for the purposes of this survey, and in line with the statistical methodologies, that repos be recorded as collateralized loans or deposits. However, implementing this proposal is not always straightforward, particularly in countries where accounting and statistical practices are not in line with this proposal, or where there is asymmetry in the recording of repos versus the recording of reverse repos. There is an added problem in countries where custodians are a primary source of information as securities on repo are not necessarily identified or identifiable by the custodian (for either the repo party or the reverse-repo party). In that case, the custodian may only be able to report what is held in custody at any one time—therefore, a security on repo may not be identifiable and will be excluded from the custodian’s (and, consequently, the repo party’s) holdings. Similarly, a security acquired under reverse repo may not be identifiable as such on the books of the custodian and may, therefore, be recorded inappropriately as part of the custodian’s holdings on behalf of clients (and hence the reverse-repo party’s holdings).

3.58 There are several elements to this exercise. As a first step, national compilers are encouraged to obtain some idea of the importance of the repo market in their own economy. If it is significant, then they should gain an understanding on the modalities of the market.

3.59 Second, compilers should ascertain the recording practices of respondents and attempt to ensure internal consistency within the economy. If the treatment of repo holdings is not consistently applied among all respondents within a creditor country, claims on the debtor country will be inaccurately measured. Box 3.4 explains the reasoning behind these conclusions. However, ensuring internally consistent instructions is not necessarily straightforward, particularly for those countries that conduct a custodian survey. They will, for instance, need to capture “short positions”; otherwise, the security holdings could be double-counted (see Box 3.4). Boxes 3.5 and 3.6 provide examples of some of the problems that can result from the measurement of repos (and securities lending).

3.60 For those countries that collect data through an end-investor survey, the respondents should be asked to report repos and reverse repos as collateralized loans or deposits—in other words, as if the security has not changed hands. If the reverse-repo party then repos again the security to a third party, the transaction should be treated in the same manner—as a collateralized loan or deposit. However, if a security acquired under reverse repo is on-sold outright, the reverse-repo party should record a short position (as described in Box 3.4). Where, due to accounting and legal requirements, the practice in the country is to record repos as transactions in securities, end-investor respondents should be asked to make every effort to report them as collateralized loans or deposits. It is especially important that there be consistency within an economy on the treatment of repos of nonresident-issued securities to ensure that the overall position of that economy vis-à-vis the issuing economy is correctly stated. If some respondents report on one basis (as collateralized loans or deposits) and others on another basis (as transactions in securities), the result could be a substantial over-or underestimate of the claims on the issuing economy.

Statistical Treatment of Repurchase Agreements

Explaining the possible statistical entries arising from repurchase agreements (repos) can soon become immensely complicated, not least because there are frequently three variables to consider: the two counterparties to the repo transaction and the issuer of the underlying security (and in a tri-party repo, the custodian holding the security).

If both counterparties are resident in the same country and if their statistical treatment of repos is identical (i.e., national compilers ensure that all respondents have the same instructions), then only one party should have claims vis-à-vis the country of issuance of the underlying security, thus not leading to possible double counting. For example, in the example in Box 3.5, if Resident X of Country A repos 100 security liabilities of Country B to Resident Y of Country A, then regardless of whether X maintains this holding on its books and Y does not, or vice versa, Country A has a claim of 100 on Country B: that is, only one entity in Country A has a reported claim on Country B.

If, however, Resident X treats repos as a collateralized loan and Resident Y treats repos as a purchase of securities, then Country A’s claim on B will be incorrectly measured at 200: that is, both X and Y report a claim on Country B. Similarly, if Resident X treats repos as a sale of securities and Resident Y treats repos as a collateralized loan, then Country A’s claim on B will be incorrectly measured at zero: that is, neither X nor Y reports a claim on Country B.

Additional complexity arises if repoed securities are on-sold. Assume that X and Y both treat repos as collateralized loans, but Y on-sells the securities outright, not as a repo, to fellow Resident Z. Y’s sale of the security may be accurately reported in the transactions data, but given that Y has sold a security that was not on its balance sheet, then Y should record a “short” or negative position. In this case, two parties (X and Z) would register a claim on Country B, while Y would register a negative position vis-à-vis the same country, thus leading to an overall balanced position of Country A versus Country B without any double counting.

The potential reporting possibilities become more complex if one of the counterparties is a nonresident (see Box 3.5). From the viewpoint of the CPIS, the residence of the counterparty to the repo transaction is not directly relevant. It is rather the residence of the issuer of the security used for the repo that is relevant, because the CPIS is measuring security claims on nonresidents. However, the residence of the counterparty is of relevance to the extent that the treatment of the securities underlying repos differs between countries. To the extent that national compilers adopt different treatments, there is potential for under-or over-recording at the global level for the same reasons as explained above in the domestic context.

The same considerations that apply to repos also apply to securities lending.

Repurchase Agreements: Examples of International Position Data-Reporting Possibilities of Portfolio Investment

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Example of a Reverse Repo Followed by Outright Sale

Treating a repo as a collateralized loan may result in an incorrect statement of a country’s external securities liability.

If a resident acquires temporarily under a repo agreement a domestic security from a nonresident and then sells it out-right to another nonresident, an overstatement of the country’s securities liabilities will result: two nonresident holders (the original owner and the ultimate acquirer) will claim to be in possession of the same domestic security. While this is usually offset by a short position (liability) of the intermediating party, in this case such short position is purely domestic and thus doesn’t appear in the international investment position.

Let us consider a resident in Country B who acquires a domestic (i.e., issued by the government of Country B) security worth 100 from a nonresident (resident of Country A). In turn, the security acquired under this repo is sold outright to a resident of Country C. Country B’s external securities liabilities positions would be recorded as follows:

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While in other circumstances, the two claims would be offset by a negative asset (short) position by the party in between (i.e. by the resident in B who acquired the security via a repo with A and on-sold it to C), in this case the negative position will remain purely domestic, so the nonresidents’ claims in the form of securities will be overstated by 100.

In the IIP statement of Country B, the overstatement of resident liabilities in securities (i.e., nonresidents’ claims) by 100 is balanced by the recording of other investment loan assets following the acquisition of securities by the resident of Country B from Country A under a repo transaction.

The availability of additional information on resident-issued debt securities acquired under reverse security transactions would help interpret the overstating of liabilities in the form of securities of Country B. For details on the presentation of resident-issued debt securities involved in reverse security transactions, see paragraphs 4.18–4.19 and Table 4.6 of the 2013 EDS Guide. Further, Appendix 2 of the 2013 EDS Guide sets out examples of how different types of reverse security transactions should be recorded in the gross external debt position and in the memorandum table (Table 4.6), when debt securities are involved (see Table A2.1 Appendix 2 of the 2013 EDS Guide). Specifically, example 2(e) of this Table A2.1 presents the case of a resident selling the security outright to a nonresident following the resident buying the security under a repo from a nonresident. In this case, the acquisition of the security by the resident is presented with a negative sign in the above-mentioned memorandum Table 4.6 (i.e., debt securities issued by residents and acquired by residents from nonresidents) to properly track liabilities in the form of debt securities.

The same situation applies with a securities loan of a resident-issued security by a nonresident “lender” to a resident “borrower,” who followed the loan with an outright sale to another nonresident.

Other circumstances may produce a similar overstatement of a country’s debt securities liabilities.

3.61 Countries that collect data from custodians will need to discover whether their custodians can separately identify securities held under repo agreements when reporting clients’ holdings. This should not be an issue though regarding their own holdings, where securities on repo or acquired under reverse repo should be clearly identifiable. In some countries, the custodian of the repo party will know that the security is on repo because the records are set up to identify securities on repo to ensure that they are not sold twice. However, in these countries, even the custodian for the reverse-repo party frequently will not be aware that the security has been acquired under reverse repo. There is no need for the custodian to know this information in many instances: if the security can be on-sold, to all intents and purposes as far as the custodian is concerned, the security acquired is no different from any other transaction in a security and can be sold in the same way. Moreover, in many countries, the custodian will not know whether a security is on repo. Accordingly, in all instances where custodians are principal sources of information, compilers should explain to custodians the importance of being able to identify securities on repo or reverse repo, and ways should be sought to ensure that they can meet the survey’s needs.

3.62 An additional avenue to ensure consistency across borders in the recording of repos is for national compilers to consult directly their counterparts in the appropriate foreign country(ies)—where the issuer(s) of the securities is (are) resident—to discover whether both countries are treating repos in a consistent manner. Different approaches can lead to asymmetric reporting of securities holdings; given the size and growth of the repo market, this could cause problems when the results are aggregated and when data are exchanged. Bilateral exchanges of additional information might be required to meet both countries’ needs.

3.63 Finally, information on how countries are intending to treat repo holdings could be reported to the IMF26 (along with other documentation regarding the conduct of the survey at the national level) so that inconsistencies in approach between countries can be monitored and, if need be, brought to the attention of the relevant national compilers.27

3.64 However, as noted in Box 3.6, a country’s debt security liabilities may be overstated when a reverse repo is followed by an outright sale if there are difficulties to record negative positions. If both the original holder and the final purchaser are nonresidents and the security has been issued by a resident, the security holders will both record ownership. The balancing entry should be the negative position that the on-selling party should record, having sold the security without owning it. This issue is one that requires continuing work to resolve.28

Securities Lending Agreements

3.65 Securities lending is an arrangement whereby the ownership of a security is transferred usually in return for collateral,29 typically another security, under the condition that similar securities are returned to the original owner on a specified future date or on demand.30 If cash exchanges hands, the transaction has the same economic nature as a repo and should be treated as a repo.

Potential for double counting

3.66 Securities lending is an activity usually associated with securities dealers needing to meet commitments to deliver securities that they have sold but do not own, such as covering a “short” position or meeting their obligation to deliver a security to a nonresident purchaser before that same security has been delivered to it by a resident seller (possibly due to differences in security delivery requirements in different jurisdictions). Basically, a securities loan, in the absence of cash collateral,31 involves swapping the borrowed securities for other acceptable securities (or other acceptable collateral). Depending on the nature of the transaction and the relative credit risks of the parties involved, the value of securities received as collateral may be the same or greater than the value of the securities “lent.” As with repos, the market risks of owning the securities involved in a securities loan (and all significant benefits) remain with the original owners. In all cases, the ownership of the securities “lent” changes hands. Securities lending (along with repos and similar arrangements) are discussed in paragraphs 7.58–7.61 of BPM6.

3.67 In most countries, the statistical practice is to regard the securities (both those lent and those provided in return as collateral) as remaining on the books of the original owner. If a borrowed security is on-sold (which is usually the case), then both the original owner and the third party will each regard itself as owning the security, while the “borrower” will regard itself as having a negative holding (a “short” position). As far as the initial “borrowing” is concerned, no transaction is recorded (i.e., the nature of the initial “borrowing” is similar to that of a repo, without cash being exchanged). Because it is only the cash portion of a repo that is recorded—the exchange of ownership of the securities is ignored—for securities lending, the same applies. Therefore, since no cash is involved in securities lending, to be consistent with the treatment of repos, under BPM6, no transaction is recorded for the exchange of securities under securities lending. If a “borrowed” security is on-sold outright, then the “borrower” (the reverse-repoing party) should record a “short” position. From the above, it can be readily seen that, as with repos, there is the possibility of asymmetric reporting within and among countries, if some countries record securities lending as a transaction in its own right.

Treatment of securities lending in the CPIS

3.68 The preferred treatment for the purposes of the CPIS is to treat securities lending/borrowing without exchange of cash as if no transaction had taken place so that the original owners continue to report that they still hold the security. If the security is on-sold by the temporary “borrower” of the security, a “short” position should be recorded.

3.69 As can be seen, the recording issues for securities lending are similar to those for repos, and the importance of both internal and external consistency of approach is equally valid. Therefore, the recommendations regarding repos apply equally to securities lending: the importance that the market be assessed, internally consistent reporting instructions developed after consultation with potential survey respondents, investigation of the scope for the lending to nonresidents of securities issued by nonresidents, bilateral contacts established with national compilers in the appropriate countries, and information on the intended treatment sent to the IMF. The problems of collecting information from custodians are similar for both repos and security lending: custodians, especially for the “borrower,” may be unaware that a security has only been “lent/borrowed” and may have no means of identifying that the security is to be returned, or that a “short” position should be recorded, in the event of an on-sale. It is strongly recommended that compilers make every effort to ensure that the custodian understands the requirements and can provide the information on the bases recommended. It is suggested that contacts with all respondents regarding securities lending and repos, but especially for custodians, be undertaken simultaneously.

Depository Receipts

3.70 DRs are securities that represent ownership of securities in other economies. DRs listed on one exchange represent ownership of securities listed on another exchange, and ownership of the DRs is treated as if it represents direct ownership of the underlying securities.32 They facilitate transactions in securities in economies other than their home listing. The underlying securities may be equity or debt securities (BPM6, paragraph 5.23).

3.71 ADRs and global depository receipts (GDRs) are most common types of DRs. They are normally denominated in U.S. dollars and euros. ADRs are mostly traded on U.S. exchanges and GDRs on European stock exchanges. In general, each DR represents a single or more than one share of an underlying equity.

Potential for double counting

3.72 The issuance of DRs is becoming increasingly prevalent: issuers and intermediaries are finding that investors frequently prefer to acquire securities in the financial markets where payment and settlement systems, registration procedures, and so on are familiar, rather than in the home market of the issuer where systems and procedures may not be as familiar or as efficient. The potential for double counting lies in the existence of both the underlying security, held by the depository, and the DRs: that is, two securities could be reported as held, but only one liability exists. Clear guidance to survey respondents is required to avoid double counting.

Treatment of depository receipts in the CPIS

3.73 The way in which DRs should be recorded is that the financial institution “issuing” the receipts should be “looked through”: that is, the holder of the receipts should be taken to have a claim on the unit that underlies the receipts.

3.74 The reporting should follow the guidelines below:

  • DRs are securities that represent ownership of securities held by a depository. The economy of issue of the underlying securities is different from the economy in which the DRs are issued. They allow investors to acquire an interest in companies in other economies, while still using the payment and settlement systems and registration procedures of another economy. They are treated as being a claim on the issuer of the underlying security, not that of the issuer of the DR (BPM6, paragraph 4.161). In other words, ADRs are liabilities of the non-U.S. enterprise whose securities underlie the ADR issue and not of the U.S. financial institution that issued the ADRs.

  • Consequently, the economy attribution of the issuer of DRs should be based on the economy of issue of the underlying security. Similarly, the classification by sector of nonresident issuer of DRs should be based on the sector of the issuer of the underlying security. However, the currency classification of DRs (and similar “repackaged” debt securities) presents challenges. For instance, many equity securities owned by U.S. investors are held in the form of ADRs, which while technically denominated in U.S. dollars, more properly reflect exposure to the currency of the underlying equity security. Thus, while a security-level database may correctly classify ADRs as U.S. dollar–denominated foreign equity, it understates the true foreign currency exposure of U.S. investors. Therefore, in line with the guidelines for classifying DRs by type of instrument (equity or debt securities), economy of residence of the issuer, and sector of nonresident issuer (i.e., the classification is based on the underlying security), this Guide recommends that the currency classification of DRs be based on the currency of denomination of the underlying security.33

  • Financial intermediaries should not report holdings of any securities issued by nonresidents against which DRs have been issued and sold. If a DR has been issued before the financial institution arranging the issue has acquired the original (or underlying) securities, then that financial institution should report a negative holding in the original (or underlying) securities.

Stripped Securities

3.75 Stripped securities are securities that have been transformed from a principal amount with coupon payments into a series of zero-coupon bonds, with a range of maturities matching the coupon payment date(s) and the redemption date of the principal amount(s). They are also called strips. The function of stripping is that investor preferences for particular cash flows can be met in ways that are different from the mix of cash flows of the original security. Stripped securities may have a different issuer from the original issuer, in which case new liabilities are created. The following are two cases of stripped securities:

  • When a third party acquires the original securities and uses them to back the issue of the stripped securities, then new funds have been raised and a new financial instrument is created.

  • When no new funds are raised and the payments on the original securities are stripped and separately marketed by the issuer or through agents (such as strip dealers) acting with the issuer’s consent (BPM6, paragraph 5.50).

3.76 In the first case, financial corporations purchase bonds or similar instruments, strip the coupon payments, and sell the future cash flows to separate investors (i.e., the principal-only claim is sold separately from the coupon-only claims). The principal-only-and coupon-only-strip investors receive the cash flows from the bonds on a pass-through basis. The financial corporation that is the issuer of the strip records liabilities (classified under debt securities) for the cash flows that were stripped and sold. Financial corporations are purchasers, as well as originators, of principal-only and coupon-only strips.

3.77 When the issuer of the original security creates principal-only and coupon-only strips, the original security issuer retires the original securities or leaves them in a repository (e.g., a settlement or clearing facility) on a “dormant basis” until such time when the securities are reissued or redeemed. The strip-like securities replace the original securities to avoid double counting of the issuer’s liabilities (see paragraphs 4.230–4.233 of the Monetary and Financial Statistics Manual and Compilation Guide34).

Potential for double counting

3.78 The issuance of stripped securities is becoming more prevalent. The creation through strips of zero-coupon bonds eliminates the reinvestment risk inherent in a bond with a coupon and allows investors greater leverage: that is, less money needs to be invested to gain the same market exposure as with an equivalent bond with a coupon. When the entity issuing the strips is creating new liabilities, double counting does not arise. The potential for double counting arises when the strips have replaced the original security, even though the latter has not been redeemed. Effectively, the original security is “dormant” in the settlement or clearing house, until it is reconstituted or redeemed.

Treatment of stripped securities in the CPIS

3.79 The reporting instructions should follow the guidelines below:

  • If strips have been issued by an entity in its own name, then the residence of the issuer is that of the entity that issued the strips, and the issuing entity should report its holdings of the existing securities issued by nonresidents.

  • If strips have been created from a nonresident security and remain the direct obligation of the original issuer, then the residence of the issuer remains the same as for the original security.

  • Dealers who request that a settlement or clearing house creates strips from an existing nonresident security should not report their holdings of the underlying nonresident security after the strips have been created.

  • Strips with an original maturity of less than one year are short-term debt securities. If identifiable, they should be reported as such.

Treatment in the CPIS of Financial Transactions That May Lead to Double or Undercounting

Portugal: Reporting instructions on these issues were drawn up according to this Guide (note, however, that stripped securities were not covered in the Portuguese survey). Any question could be clarified with the Banco de Portugal and contacts with major reporters were made, so the reported data provided guarantees that double counting was excluded. Double counting is also avoided because the resident custodians report to the Banco de Portugal the number of the opened dossiers of foreign securities (this is attributed by the Banco de Portugal according to its technical instructions); that number is also used in the direct report by final investors. Each dossier number of the foreign securities is given an enterprise register number that allows the Banco de Portugal to identify the underlying client. In addition, since 2014, there is a monthly direct report to Banco de Portugal from incorporated entities with external relations by an amount of exceeding €100,000 per year, where direct investment relations are identified. Therefore, the split between portfolio investment and direct investment is reinforced. This feature allows the implementation of a quality control and data capture system. Furthermore, these aspects are in accordance with the collection and statistical production of the balance of payments system, which assures better reconciliation of flows and stocks. One of the main concerns is to ensure that an integrated approach is followed with the balance of payments current, capital and financial accounts, and IIP compiled jointly and consistently.

United States: Respondents were instructed to report as if repo and securities lending activities do not exist. That is, if a custodian has securities that are temporarily involved in a repo agreement, they are to report these securities as if they are continuously held. Further, the counterparty is instructed not to report these securities that they have temporarily acquired. Collateral received as part of the repo agreement is not to be reported, and collateral given is to be reported as continuously held. Likewise, securities lent are to be reported as continuously held, securities borrowed are not to be reported, and any collateral involved is to be reported as if held by the original owner (in the same manner as for repos).

3.80 Box 3.7 indicates the experience in two countries in the CPIS in attempting to avoid double or undercounting of holdings that may result from repo, securities lending, DRs, and stripped securities.

Instruments

3.81 Appendix 4 to this Guide describes in detail many of the instruments that are available to investors. The information may assist both compilers and respondents to classify these instruments as equity or long-or short-term debt.

Annex 1: Institutional Sectors

For purposes of financial surveillance and analysis, it is useful to have data on the sector of the holder and the sector of the issuer of the specific securities. The CPIS Table 335 collects data on portfolio investment assets by sector of resident holder and Table 5 collects data on portfolio investment assets by sector of nonresident issuer of securities. In CPIS Table 6, data by sector of resident holder cross-classified by economy and sector of the nonresident issuer for specified economies are collected.36 As discussed in Chapter 2, CPIS Tables 3, 5, and 6 are encouraged and not part of the core dataset, but such reporting is strongly encouraged. The resident sectors identified in the CPIS are central bank, deposit-taking corporations excluding the central bank, other financial corporations (total) as well as by subsector (i.e., insurance corporations and pension funds (ICPFs), money market funds (MMFs), and “other”), general government; and the sum of nonfinancial corporations (NFCs), households, and NPISHs as well as provision for reporting these sectors separately. Descriptions of these sectors as they appear in BPM6 are repeated below.

Central Bank

Paragraphs 4.67–4.70 of BPM6 describes the central bank subsector as follows:

The central bank is the financial institution (or institutions) that exercises control over key aspects of the financial system. It carries out such activities as issuing currency,37 managing international reserves, transacting with the IMF, and providing credit to deposit-taking corporations. The central bank of a currency union is classified as a central bank in the data for the currency union as a whole; in the data of individual member states, it is part of the rest of the world sector. Central banks in some economies also accept deposits from or provide credit to entities in other sectors.

The central bank subsector includes the following:

  • (a) central banks, which in most economies are separately identifiable institutions that are subject to varying degrees of government control, engage in differing sets of activities, and are designated by various names (e.g., central bank, reserve bank, national bank, or state bank);

  • (b) currency boards or independent currency authorities that issue national currency that is fully backed by foreign exchange reserves; and

  • (c) government-affiliated agencies that are separate institutional units and primarily perform central bank activities.

If an institutional unit is mainly engaged in central banking activities, the entire unit is classified in the central bank subsector. Many central banks regulate or supervise other deposit-taking corporations and other financial corporations, and these central bank activities also are included in the central bank subsector. However, units that are affiliated with the government or with other sectors and are mainly engaged in regulating or supervising financial units are classified as financial auxiliaries rather than as units in the central bank subsector. Private units that perform activities such as check-clearing operations are assigned to other financial corporations subsectors depending on their activities, rather than to the central bank.

A few economies do not have central banks. Typical central banking activities that are performed by general government and cannot be separated into specific institutional units are treated as part of general government and are not allocated to the central bank subsector. In economies in which some central banking functions are performed wholly or partly outside the central bank, particularly holding reserve assets, consideration should be given to compiling supplementary data for the monetary authorities sector. The concept of monetary authorities underlies reserves assets.

Monetary Authorities

Although the reserves component of data for the monetary authorities sector (i.e., securities held as reserve assets) are not captured by the CPIS itself,38 they are captured by Securities Held as Foreign Exchange Reserves, which is a companion survey to the CPIS. Paragraph 6.66 of BPM6 describes monetary authorities as follows:

  • The functional concept of monetary authorities is essential for defining reserve assets. Monetary authorities encompass the central bank (which subsumes other institutional units included in the central bank subsector, such as the currency board) and certain operations usually attributed to the central bank but sometimes carried out by other government institutions or commercial banks, such as government-owned commercial banks. Such operations include the issuance of currency; maintenance and management of reserve assets, including those resulting from transactions with the IMF; and operation of exchange stabilization funds. In economies in which extensive reserve assets are held outside of the central bank, supplementary information should be provided on the institutional sector of holdings of those reserve assets.

Deposit-Taking Corporations except the Central Bank

Paragraphs 4.71–4.72 of BPM6 define the deposit-taking corporations except the central bank subsector as follows:

  • Deposit-taking corporations, except the central bank have financial intermediation as their principal activity. To this end, they have liabilities in the form of deposits or financial instruments (such as short-term certificates of deposit) that are close substitutes for deposits. In general, the following financial intermediaries are classified in this subsector:

  • (a) commercial banks, “universal” banks, and “all-purpose” banks;

  • (b) savings banks (including trustee savings banks and savings and loan associations);

  • (c) post office giro institutions, post banks, and giro banks;

  • (d) rural credit banks and agricultural credit banks;

  • (e) cooperative credit banks and credit unions;

  • (f) traveler’s check companies that mainly engage in financial activities; and

  • (g) specialized banks or other financial institutions if they take deposits or issue close substitutes for deposits.

The liabilities of deposit-taking corporations to residents are typically included in measures of broad money. The money-issuing sector may be identified on a supplementary basis to assist in reconciliation with monetary data. It consists of the central bank plus deposit-taking corporations plus other institutions included in the definition of broad money (e.g., MMFs in some cases).39 Deposit-taking corporations that engage exclusively (or almost exclusively) with nonresidents, often called offshore banks or offshore banking units, are included in deposit-taking corporations, but they may be excluded from the money-issuing sector because their liabilities are not included in broad money.

Other Financial Corporations

In the CPIS, “other financial corporations” consists of ICPFs, MMFs, and “other.” The “other” category, in turn, consists of non-MMFs, other financial intermediaries except ICPFs, financial auxiliaries, and captive financial institutions and money lenders.

Insurance Corporations and Pension Funds

Paragraphs 4.88–4.90 of BPM6 define and describe ICPFs as follows:

  • Insurance corporations consist of incorporated, mutual, and other entities whose principal function is to provide life, accident, health, fire, or other forms of insurance to individual institutional units or groups of units or reinsurance services to other insurance corporations. Captive insurance is included, that is, an insurance company that serves only its owners. Deposit insurers, issuers of deposit guarantees, deposit protection schemes, and other issuers of standardized guarantees that are separate entities and act like insurers by charging premiums and have reserves are classified as insurance corporations.

  • Pension liabilities arise when members of households participate in a social insurance scheme that will provide income in retirement (and often benefits for death or disability). Such schemes may be organized by employers or by government; they also may be organized by insurance corporations on behalf of employees; or separate institutional units may be established to hold and manage the assets to be used to meet the pension obligations and to distribute the pensions. Pension schemes may be operated by a separately constituted pension fund or a fund that is part of the employer, or they may be unfunded. The pension fund subsector consists of only those social insurance pension funds that are institutional units separate from the units that create them.

  • Social security schemes are not included in pension funds, although they sometimes may have pension entitlement liabilities if they provide pensions to public sector employees. In the case of unfunded pension schemes, general government and corporations other than pension funds may have pension entitlement liabilities. Nonautonomous pension funds are not separated from the entity of which they are part.

Money Market Funds

  • Paragraph 4.73 of BPM6 defines MMFs as follows:

  • MMFs are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested primarily in money market instruments, MMF shares and units, transferable debt instruments with a residual maturity of less than one year, bank deposits, and instruments that pursue a rate of return that approaches the interest rates of money market instruments. MMF shares can be transferred by check or other means of direct third-party payment. Because of the nature of the instruments that MMFs invest in, their shares or units may be regarded as close substitutes for deposits. When MMFs are included in monetary aggregates, showing MMFs as an extra subsector will assist comparability.

Other Financial Corporations—Other

As noted above, the “other financial corporations— other” category, in turn, consists of non-MMFs, other financial intermediaries except ICPFs, financial auxiliaries, and captive financial institutions and money lenders. Each of these is described in BPM6 as shown below.

Non-Money Market Investment Funds (non-MMFs)

In paragraph 4.74 of BPM6, non-MMFs are described as follows:

  • Non-MMF investment funds are collective investment schemes that raise funds by issuing shares or units to the public. The proceeds are invested predominantly in long-term financial assets and nonfinancial assets (usually real estate). Investment fund shares or units are generally not close substitutes for deposits. They are not transferable by means of check or third-party payments. Some funds may be limited to certain investors only, whereas others are available to the public generally. Investment funds can be open or closed ended. Open-ended funds or open funds are those whose shares or units are, at the request of the holders, repurchased or redeemed directly or indirectly out of the undertaking’s assets. Closed-ended, closed, or exchange-traded funds are those with a fixed share capital, where investors entering or leaving the fund must buy or sell existing shares. Investment funds may be constituted as follows: (a) under the law of contract (as common funds managed by management companies), (b) under trust law (as unit trusts), (c) under a statute (as investment companies), or (d) otherwise with similar effect. Some investment funds invest in other funds (“funds of funds”). Pension funds are excluded; they are part of the insurance companies and pension funds subsector. Real estate investment trusts are included. Fund managers of investment funds are financial auxiliaries.

Other Financial Intermediaries except Insurance Corporations and Pension Funds

In paragraphs 4.76–4.78 of BPM6, other financial intermediaries except ICPFs are described as follows:

  • Other financial intermediaries, except ICPFs, consist of financial corporations and quasi-corporations that are engaged in providing financial services by incurring liabilities, in forms other than currency, deposits, or close substitutes for deposits, on their own account for the purpose of acquiring financial assets by engaging in financial transactions on the market, and that are not included in another subsector. It is a feature of a financial intermediary that operations for both sides of the balance sheet are carried out in open markets.

  • In general, the following financial intermediaries are classified in this subsector:

  • (a) financial corporations engaged in the securitization of assets;

  • (b) underwriters, and securities and derivative dealers (on own account). In contrast, security brokers and other units that arrange trades between buyers and sellers but do not purchase and hold securities on their own account are classified as financial auxiliaries;

  • (c) financial corporations engaged in lending, including financial leasing, as well as personal or commercial finance;

  • (d) central clearing counterparties, which provide clearing and settlement of market transactions in securities and derivatives. Clearing refers to the process of offsetting obligations and entitlements vis-à-vis counterparties to transactions so that settlement—which involves the actual exchange of securities, derivatives, and funds—can occur more efficiently on a net basis. The central clearing counterparties involve themselves in the transaction and mitigate counterparty risk;

  • (e) specialized financial corporations that assist other corporations in raising funds in equity and debt markets and provide strategic advisory services for mergers, acquisitions, and other types of financial transactions. (These corporations are sometimes called “investment banks.”) In addition to assisting with the raising of funds for their corporate clients, such corporations invest their own funds, including in private equity, in hedge funds dedicated to venture capital, and in collateralized lending. However, if such corporations take deposits or close substitutes for deposits, they are classified as deposit-taking corporations; and

  • (f) any other specialized financial corporations that provide short-term financing for corporate mergers and takeovers; export and import finance; factoring companies; and venture capital and development capital firms.

Securitization involves raising funds by selling a security backed by specific assets or income streams. For example, an originating mortgage lender could sell a portfolio of loans to a special purpose vehicle that issues units sold to investors. The originator may continue to provide administrative services, but the vehicle is the legal owner of the portfolio. Such vehicles are included in “other financial intermediaries, except ICPFs” if the entity is the legal owner of a portfolio of assets, sells a new financial asset that represents an interest in the portfolio, and has or potentially has a full set of accounts. However, in cases in which the originator issues asset-backed securities on its own books, then securitization may take place without the creation of a separate entity. When the portfolio is not transformed, or the vehicle does not bear market or credit risks, then it can be combined with its parent (if resident in the same economy) or treated as a captive intermediary (if in a different economy to that of its parent).

Financial Auxiliaries

In paragraphs 4.79–4.81 of BPM6, financial auxiliaries are defined as follows:

  • Financial auxiliaries consist of all financial corporations that are principally engaged in activities associated with transactions in financial assets and liabilities or with providing the regulatory context for these transactions but in circumstances that do not involve the auxiliary taking ownership of the financial assets and liabilities being transacted.

  • In general, the following financial corporations are classified in the financial auxiliaries subsector:

  • (a) insurance brokers, salvage administrators, and insurance and pension consultants;

  • (b) loan brokers, securities brokers that arrange trades between security buyers and sellers but that do not purchase and hold securities on their own account, investment advisers, and so on (securities dealers that trade in securities on their own account are other financial intermediaries);

  • (c) flotation corporations that manage the issue of securities;

  • (d) corporations whose principal function is to guarantee, by endorsement, bills and similar instruments;

  • (e) corporations that arrange derivative and hedging instruments, such as swaps, options, and futures (without issuing them);

  • (f) stock exchanges, insurance exchanges, and commodity and derivative exchanges;

  • (g) other corporations providing infrastructure for financial markets, such as securities depository companies, custodians, clearing offices, and nominee companies;

  • (h) fund managers of pension funds, mutual funds, and so on (but not the funds they manage);

  • (i) nonprofit institutions recognized as independent legal entities serving financial corporations, but that are not themselves providing financial services, for example, bankers’ associations;

  • (j) holding companies that exercise some aspects of managerial control over their subsidiaries (see paragraph 4.85 of BPM6);

  • (k) foreign exchange bureaus and money transfer operators;

  • (l) resident offices of foreign banks that do not accept deposits or extend credit on their own account;

  • (m) corporations primarily involved in operation of electronic payment mechanisms that do not incur liabilities against the instruments (if they do incur liabilities against the instruments, then they are other financial intermediaries except ICPFs); and

  • (n) central supervisory authorities of financial intermediaries and financial markets when they are separate institutional units.

Corporations facilitating financial transactions, such as central clearing counterparties, stock exchanges, derivative exchanges, and repurchase agreement settlement institutions are financial intermediaries, if they generally act as principals to the counterparties to the underlying transactions; otherwise they are financial auxiliaries.

Captive Financial Institutions and Money Lenders

In paragraphs 4.82–4.83 of BPM6, captive financial institutions and money lenders are described as follows:

  • Captive financial institutions and money lenders consist of institutional units providing financial services other than insurance, where most of either their assets or liabilities are not transacted on open financial markets. It includes entities transacting only within a limited group of units, such as with subsidiaries or subsidiaries of the same holding corporation, or entities that provide loans from own funds provided by only one sponsor. Other financial intermediaries, except ICPFs are distinguished from captive financial institutions and money lenders in that the latter serve a limited group only for at least one side of their balance sheet.

  • In general, the following financial corporations are classified in this subsector:

  • (a) institutional units with the function of simply holding assets, such as trusts, estates, agencies accounts, and some “brassplate” companies;

  • (b) institutional units that provide financial services exclusively with own funds, or funds provided by a sponsor to a range of clients and incur the financial risk of the debtor defaulting. Examples are money lenders and corporations engaged in lending (e.g., student loans, import and export loans) from funds received from a sponsor such as a government unit or nonprofit institution;

  • (c) pawnshops that predominantly engage in lending;

  • (d) financial corporations, such as SPEs, that raise funds in open markets to be used by affiliated corporations (in contrast to securitization vehicles); and

  • (e) conduits, intragroup financiers, and treasury functions when these functions are undertaken by a separate institutional unit.

Captive insurance companies and pension funds are not included in this subsector.

Holding Companies

In paragraphs 4.84–4.85 of BPM6, holding companies are described as follows:

  • Holding companies are included in this subsector, financial auxiliaries, or nonfinancial corporations, according to which functions they undertake. One type of holding company is a unit that holds equity in one or more subsidiaries but does not undertake any management activities. These companies are described in the International Standard Industrial Classification of All Economic Activities (ISIC), Rev. 4, in section K class 6420 as follows:

    • This class includes the activities of holding companies, i.e., units that hold the assets (owning controlling-levels of equity) of a group of subsidiary corporations and whose principal activity is owning the group. The holding companies in this class do not provide any other service to the businesses in which the equity is held, i.e., they do not administer or manage other units.

  • Such units are captive financial institutions and are included in the financial corporations sector even if all the subsidiaries are nonfinancial corporations. The subsidiaries may be resident in the same economy or in other economies.

  • Another type of unit referred to as a holding company is the head office that exercises some aspects of managerial control over its subsidiaries. The head office sometimes may have noticeably fewer employees, and at a more senior level, than its subsidiaries, but it is actively engaged in production. These types of activities are described in ISIC, Rev. 4, in section M class 7010 as follows:

    • This class includes the overseeing and managing of other units of the company or enterprise; undertaking the strategic or organizational planning and decision making role of the company or enterprise; exercising operational control and managing the day-to-day operations of their related units.

  • Such units are allocated to the nonfinancial corporations sector unless all or most of their subsidiaries are financial corporations, in which case they are treated by convention as financial auxiliaries. The subsidiaries may be resident in the same economy or in other economies. Other entities that hold and manage subsidiaries may have substantial operations in their own right, in which case the holding company functions may be secondary, so they would be classified according to their predominant operations.

Conduits

In paragraphs 4.86 of BPM6, conduits are described as follows:

  • A conduit is an entity that raises funds on open financial markets for passing on to other affiliated enterprises. Often, the conduit’s liabilities are guaranteed by a parent company. If a conduit issues new financial instruments, which could be debt securities, shares, or partnership interests, that represent a claim on the conduit, it is acting as a captive financial institution.

Wealth-holding Entities

In paragraphs 4.87 of BPM6, wealth-holding entities are described as follows:

  • Institutional units that solely hold assets and liabilities, along with the associated property income, for their owners are classified as captive financial institutions. Some SPEs and trusts perform these functions. . . . Although there is no internationally standard definition of SPEs, in economies in which they are important they may be identified separately, according to either a national company law definition, or in terms of a functional description, possibly referring to their limited physical presence and ownership by nonresidents. In economies with large direct investment flows through resident SPEs, it is recommended that these flows be shown as a supplementary item, so that they can be identified separately.

General Government

Paragraphs 4.91–4.92 of BPM6 define the general government sector as follows:

  • Government units are unique kinds of legal entities established by political processes and have legislative, judicial, or executive authority over other institutional units within a given area. Viewed as institutional units, the principal functions of government are to assume responsibility for the provision of goods and services to the community or individual households and to finance their provision out of taxation or other incomes; to redistribute income and wealth by means of transfers; and to engage in nonmarket production. In general terms:

    • (a) A government usually has the authority to raise funds by collecting taxes or compulsory transfers from other institutional units.

    • (b) Government units typically make three different kinds of outlays. The first group consists of actual or imputed expenditures on the free provision to the community of collective services, such as public administration, defense, law enforcement, public health, and so on. The second group consists of expenditures on the provision of goods and services for free or at prices that are not economically significant. The third group consists of transfers to other institutional units that are made to redistribute income or wealth.

Within a single territory, many separate government units may exist when there are different levels of government, specifically central, state, or local government. In addition, social security funds also constitute government units. The general government sector consists of departments, branches, agencies, foundations, institutes, nonmarket nonprofit institutions controlled by government, and other publicly controlled organizations engaging in nonmarket activities. The operations of a government that are located abroad and that are largely exempt from the laws of the territory in which they are located, such as embassies, consulates, and military bases, are a part of the home government. Government units are mainly involved in the production of goods and services that may be provided free of charge or sold at prices that are not economically significant. Government-controlled enterprises that (a) produce market output (i.e., charge prices that are economically significant), and (b) have complete sets of accounts are excluded from general government and are included as public enterprises in the appropriate nonfinancial or financial corporations sector. The requirement that prices be economically significant means that prices must be high enough to have an impact on the demand for, and supply of, a good or service.40

Nonfinancial Corporations

NFCs are defined and described in paragraph 4.62 of BPM6 as follows:

  • Nonfinancial corporations are corporations whose principal activity is the production of market goods or nonfinancial services. These include legally constituted corporations, branches of nonresident enterprises, quasi-corporations, notional resident units owning land, and resident nonprofit institutions that are market producers of goods or non-financial services.

Some NFCs or quasi-corporations may have secondary financial activities: for example, producers or retailers of goods may provide consumer credit directly to their own customers. Such corporations or quasi-corporations are nevertheless classified as belonging in their entirety to the NFC sector provided their principal activity is nonfinancial. Sectors are groups of institutional units, and the whole of each institutional unit must be classified to one or other sector of the SNA even though that unit may be engaged in more than one type of economic activity (2008 SNA, paragraph 4.95).

That having been said, however, if a financing arm of an NFC or quasi-corporation maintains a separate set of books from its parent and can acquire financial and nonfinancial assets and liabilities in its own name, then it should be treated as a separate institutional unit and be classified to financial corporations.

Households

Households are defined and described in paragraphs 4.96–4.99 of BPM6 as follows:

  • A household is defined as a group of persons who share the same living accommodation, who pool some or all of their income and wealth, and who consume certain types of goods and services collectively, mainly housing and food. Households often coincide with families. However, members of a family are not always members of the same household, if they live separately. Equally, members of the same household do not necessarily have to belong to the same family if they share resources and consumption.

    • Households may be of any size and take a wide variety of different forms in different societies or cultures depending on tradition, religion, education, climate, geography, history, and other socioeconomic factors. Institutional households include persons in retirement homes, jails, hospitals, and religious orders.

    • Although each member of a household is a legal entity, the household is an appropriate unit for statistical purposes because many economic decisions are made at the household level and transactions within the household are outside the scope of economic statistics. The members of a household are all residents in the same economic territory. A person who pools income with the household in one economic territory, but is resident of another economic territory, is not classified as a member of that household. A single person can constitute a household.

    • The household sector includes enterprises owned by household members that do not satisfy the definition of a quasi-corporation. For example, if the business affairs of a household are not separable from the personal consumption of household members, then the business would not satisfy the requirements for a quasi-corporation of having the ability to produce accounts.

Members of the household who have resided abroad for more than one year are considered as nonresidents and do not form part of the resident household, unless the member of the household is studying abroad or is a medical patient abroad.

Nonprofit Institutions Serving Households

NPISHs are discussed in paragraphs 4.100–4.101 of BPM6 as follows:

  • NPISHs are entities mainly engaged in providing goods and services to households or the community at large free of charge or at prices that are not economically significant (and thus are classified as nonmarket producers), except those that are controlled and mainly financed by government units. Examples include charities, relief and aid organizations financed by voluntary transfers, as well as trade unions, professional or learned societies, consumers’ associations, religious institutions, and social, cultural, and recreational clubs that do not charge economically significant prices. They may be corporations, foundations, trusts, or other unincorporated entities.

  • NPISHs are mainly financed from contributions, subscriptions from members, or earnings on holdings of real or financial assets. The NPISH sector is a subset of nonprofit institutions. Those that charge economically significant prices are included in the financial or nonfinancial corporations or households sectors, as relevant. Additionally, nonprofit institutions serving businesses, such as chambers of commerce and trade associations, are included in the corporations sectors.

While NPISHs are separate institutional units, they are sometimes included with households in some statistical systems because of difficulties in collecting separate information.

Rest of the World

Paragraph 4.102 of BPM6 discusses the rest of the world as follows:

  • The rest of the world consists of all nonresident institutional units that enter into transactions with resident units or that have other economic links with resident units. The rest of the world sector is identified in the national accounts, while it is the counterparty in all international accounts items.

International Organizations

Paragraphs 4.103–4.107 of BPM6 states the following:

International organizations have the following characteristics:

  • (a) The members of an international organizations are either national states or other international organizations whose members are national states; they thus derive their authority either directly from the national states that are their members or indirectly from them through other international organizations.

  • (b) They are entities established by formal political agreements between their members that have the status of international treaties; their existence is recognized by law in their member countries.

  • (c) International organizations are created for various purposes:

    • International financial organizations—these entities conduct financial intermediation at an international level (i.e., channeling funds between lenders and borrowers in different economies). A central bank to a group of economies (including currency union central banks) is an example of an international financial organization. Other examples are the IMF, World Bank Group, BIS, and regional development banks;

    • Other international organizations—these entities provide nonmarket services of a collective nature for the benefit of their member states, such as peacekeeping, education, science, policy issues, and other research.

  • International organizations may be global or regional. An international agency responsible for functions normally undertaken by general government, such as administration and policing, is classified as an international organizations, but it may be useful to identify such agencies separately in statistics.

  • International organizations are treated as not being resident of the territories in which they are located. This treatment is because they are generally exempted from, or are only partially subject to, national laws or regulations, and so they are not considered to be part of the national economy of the territory, or territories, in which they are located.

  • International organizations may be presented as an institutional sector in some cases. First, they may appear in data for a currency union or economic union, in which case, international organizations of the union are residents of the whole union. Second, they may be of relevance when data by sector of counterparty are prepared, for example, for sources of current transfers. Such data are of interest in economies in which international organizations have a substantial presence.

  • In contrast to international organizations, enterprises owned jointly by two or more governments are not treated as international organizations but like other enterprises. The distinction is based on whether the organization produces for the market and is important because of the different treatments for the residence of international organizations and enterprises. Separate pension funds for the staff of international organizations are treated as pension funds, rather than as international organizations.

Offshore Financial “Sector”

There is no offshore financial sector in either the 2008 SNA or BPM6. However, in economies that have

  • (a) a financial services industry that is primarily engaged in business with nonresidents,

  • (b) where the institutional units in this industry have assets and liabilities out of proportion to the domestic financial intermediation designed to finance domestic economies, and

  • (c) where many or most of these institutional units are direct investment enterprises,

these institutional units are considered residents, and should be covered in the CPIS. For analytical purposes, national authorities may wish to distinguish between an “onshore” and an “offshore” financial sector. However, for reporting national CPIS results to the IMF, such a split is not required.

1

Bank for International Settlements, European Central Bank, and International Monetary Fund, Handbook on Securities Statistics (Washington, D.C., 2015).

2

Bank for International Settlements, Commonwealth Secretariat, European Central Bank, Eurostat, International Monetary Fund, Organisation for Economic Cooperation and Development, Paris Club Secretariat, United Nations Conference on Tarde and Development, and World Bank, 2013 External Debt Statistics: Guide for Compilers and Users (Washington, D.C., 2014).

3

Commission of the European Communities, International Monetary Fund, Organisation for Economic Co-operation and Development, United Nations, and World Bank, System of National Accounts 2008 (New York, 2009).

4

Being subject to the income tax system is an indicator that may help to determine the residence of an entity. This is so regardless of the rate of tax. The important consideration is whether the entity is subject to the laws and taxes of the jurisdiction in which it is located even if it may have a tax-exempt status (BPM6, paragraph 4.27(c)).

5

For the purposes of balance of payments statistics, “an enterprise is defined as an institutional unit engaged in production. Investment funds and other corporations that hold assets and liabilities on behalf of groups of owners are also enterprises, even if they are engaged in little or no production. . . . An enterprise may be a corporation (including a quasi-corporation), a nonprofit institution, or an unincorporated enterprise” (BPM6, paragraph 4.23).

6

According to paragraph 4.72 of BPM6, an offshore bank is a deposit-taking corporation that engages exclusively, or almost exclusively, with nonresidents. They are included in the deposit-taking corporations, but they may be excluded from the money-issuing sector because their liabilities are not included in broad money. Enterprises other than banks may also be called offshore enterprises. See Annex I at the end of this chapter for additional details.

7

The securities held by an SPE should also be covered in the CPIS if they fulfill the criteria for being regarded as portfolio investment assets. See paragraphs 3.43–3.48 of this chapter for further discussion of the distinction between portfolio investment and direct investment.

8

As noted in Chapter 1, the IMF is currently considering the possibility to organize a centralized exchange of information across economies aimed at enhancing the sectorization of nonresident issuers of securities held by domestic investors.

9

Securities from more than 120 countries are identified by ISINs.

10

ISIN consists of a total of 12 characters as follows: the first two characters are taken up by the alpha-2 country code as issued in accordance with the international standard ISO 3166 of the country where the issuer of securities, other than debt securities, is legally registered or in which it has legal domicile. For debt securities, the relevant country is the one of the ISIN allocating national numbering agency. In the case of depository receipts, such as ADRs, the country code is that of the organization who issued the receipt instead of the one who issued the underlying security. The next nine characters are taken up by the local number of the security concerned. Where the national number consists of fewer than nine characters, zeros are inserted in front of the number so that the full nine spaces are used. The final character is a check digit. See http://www.anna-web.org/standards/isin-iso-6166/.

11

See paragraphs 4.50–4.52 of BPM6 for discussion of “shell companies,” “brass plate companies,” “international business corporations,” and SPEs.

12

For example, if the sub-custodian does not remove its holdings on behalf of the global custodian and the latter reports the holdings as well, overcounting will result; while undercounting will result if both the sub-custodian and the global custodian make the adjustment.

13

Custodians hold securities on behalf of investors. These securities may be held in physical form, although nowadays they are overwhelmingly “dematerialized”: that is, in electronic form. Custodians do not actively trade securities, though they may perform that function separately as investment managers or brokers.

14

Similarly, shelf companies are often used only to hold financial assets.

15

Indeed, the objective of many trusts is to take advantage of the trustee’s asset management skills or to protect the beneficiaries from their lack of management skills (e.g., infants or the not-yet born).

16

The data are reported on a confidential basis to the IMF and are published as global aggregates, so that confidentiality is maintained.

17

Methodological guidance on the recording of reserve assets in the context of regional arrangements are provided in Appendix 3 of BPM6. See also Appendix 6 of IMF’s International Reserves and Foreign Currency Liquidity: Guidelines for a Data Template (Washington, D.C., 2013), http://0-www-imf-org.library.svsu.edu/external/np/sta/ir/IRProcessWeb/pdf/guide2013.pdf.

18

Market prices are defined in paragraph 3.68 of BPM6 as “. . . amounts of money that willing buyers pay to acquire something from willing sellers.”

19

For quarterly CPIS, market value should be considered at the close of business of the relevant quarter (March 31, June 30, September 30, or December 31).

20

The boundary between securities and loans may, in certain circumstances, be difficult to draw. In principle, one of the defining features of securities is that they are negotiable, whereas other instruments are not. However, there are instances where loans have been sold to third parties, usually at a discount to their nominal value. Unless there is evidence that these transactions are likely to prompt similar types of transactions, the loans should not be reclassified to securities.

21

Already held when the threshold of 10 percent is reached or other securities acquired subsequent to the reaching of that threshold.

22

Surveys that give the number of securities held can provide a useful check against the total number of shares on issue to determine whether any one investor holds more than 10 percent.

23

A special is an asset that is subject to exceptional specific demand in the repo and cash markets compared with very similar assets. For additional details, refer to the website of International Capital Market Association at www.icmagroup.org.

24

Repo is a common means for mutual funds to leverage investors’ funds. Consequently, an investment of $100 million in securities may generate additional returns if (some of) the securities are repoed, to increase the value of the fund several times over the initial investment. The survey should collect data on the total portfolio investment holdings by resident investors, including repoed securities.

25

If the “buyer” on-sells the security acquired under a repo to a third party, then a negative or “short position” in the security should be reported; otherwise, the holding of the security will be double-counted (see Box 3.6 in this chapter).

26

As there is no specific question on repos in the CPIS metadata questionnaire, such information could be reported under question 4.2 (see Appendix 3, CPIS metadata questionnaire, question 4.2).

27

Cross-border transactions in repos have been so large in recent years that it may be valuable for countries to collect this information for balance of payments purposes given the importance of repos as a financing and leveraging tool.

28

For additional details, see the Committee paper (BOPCOM 04/7, https://0-www-imf-org.library.svsu.edu/external/pubs/f/bop/2004/04–7.pdf) “Progress Report of the Technical Group on Reverse Transaction” and Annual Report 2004 (https://0-www-imf-org.library.svsu.edu/external/pubs/f/bop/2004/ar/index.htm). This issue was retained on the research agenda (see Committee paper BOPCOM 05/44, https://0-www-imf-org.library.svsu.edu/external/pubs/f/bop/2005/05–44.pdf).

29

In some instances, no collateral is provided.

30

Often, the collateral provided to the securities “lender” cannot be on-sold except on default by the “borrower.”

31

If cash is given as collateral, the transaction should be treated as a repo.

32

A depository is an entity to whom securities are entrusted for safekeeping.

33

This treatment is analogous to the treatment of securities indexed to foreign currency (see BPM6, paragraph 3.101).

34

International Monetary Fund, Monetary and Financial Statistics Manual and Compilation Guide (Washington, D.C., 2015).

35

See Appendix 3, CPIS Data Template, for Tables 1–7 of CPIS.

36

Starting with the June 2013 CPIS data collection, the specified economies were economies for which the IMF Executive Board endorsed mandatory financial stability assessments under the Financial Sector Assessment Program, to be conducted every five years. These were Australia, Austria, Belgium, Brazil, Canada, China (Mainland), Hong Kong (Province of China), France, Germany, India, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, Russian Federation, Singapore, South Korea, Spain, Sweden, Switzerland, Turkey, United Kingdom, and the United States. Data for all other economies combined also are to be reported, but without sector detail.

37

There could be exceptions. In some economies, for example, in Hong Kong, three commercial banks (namely, The Hong Kong and Shanghai Banking Corporation Limited, the Bank of China (Hong Kong) Limited and the Standard Chartered Bank (Hong Kong) Limited) are authorized to issue the Hong Kong dollars. See the website of the Hong Kong Monetary for details (http://www.hkma.gov.hk/eng/key-functions/monetary-stability/notes-coins-hong-kong/notes.shtml).

38

However, securities held by central banks which are not part of reserve assets (i.e., securities classified as portfolio investment in the IIP) are to be included in the CPIS.

39

MMFs are separate from deposit-taking corporations. Paragraph 4.73 of BPM6 notes that when MMFs are included in monetary aggregates, showing MMFs as an extra subsector will assist comparability.

40

The classification of a “special purpose government fund” controlled by government in the general government or financial corporations sectors is determined according to the criteria set out in paragraph 4.92 of BPM6, such as whether they charge economically significant prices for their services. If the fund is an entity incorporated abroad or quasi-corporation located abroad, it is classified as a separate institutional unit in the financial corporations sector resident in its economy of incorporation. See also paragraphs 6.93–6.98 of BPM6 for more information on “special purpose government funds.”

Author: Venkat Josyula