1. The Basle Committee on Banking Supervision and the Technical Committee of the International Organisation of Securities Commissions (IOSCO) have been working to enhance the prudential supervision of the derivatives operations of banks and securities firms. For example, in July 1994 the Basle Committee and IOSCO jointly released documents providing guidance on the sound risk management of derivatives activities.

2. In their joint release of the July 1994 documents, the Basle Committee and IOSCO stated that they intended further consultations in the area of derivatives and other topics of common interest. These consultations have led to an assessment of the information necessary for effective supervision of the derivatives activities of banks and securities firms. As a result of this work, the Basle Committee and IOSCO have designed and are distributing the information framework elaborated in this paper to supervisors of banks and securities firms This framework describes information which the two Committees believe should be available within regulated firms and material affiliates active in the derivatives markets and that should be accessible to supervisors to assess the risks of derivatives and their impact on institutions' financial condition, capital adequacy and performance.

3. Broadly defined, a derivative instrument is a financial contract whose value depends on the values of one or more underlying assets or indexes. While derivatives generally involve risks to which banks and securities firms have long been exposed, the rapid growth and complexity of these activities pose new challenges for firms and their supervisors. These challenges, together with the continuing growth of derivatives activities, underscore the importance of ensuring that firms maintain and supervisors have access to meaningful, timely information concerning financial institutions' derivatives activities, both exchange-traded and over-the-counter (OTC).

4. The overall supervisory information framework advanced in this paper consists of two main components: 1) a catalogue discussing data that the Committees have identified as importantfor an evaluation of derivatives risks and that supervisors may choose from as they expand their reporting systems and 2) a common minimum framework of data elements (a subset of the catalogue) to which relevant supervisory authorities should have access. The catalogue component of the framework, discussed in section II, identifies the major types of risks arising from derivatives activities and the information needed to evaluate those risks. The areas identified as of particular interest to supervisors are credit risk, market risk, liquidity risk and earnings.

5. This catalogue of data elements is intended to facilitate the development among supervisors of consistent conceptual methods for assessing the risk exposures related to derivatives. The catalogue is also intended to serve as a basis for discussion between firms and their supervisors about the type of information which the firm should be aiming to maintain as part of its overall risk management control mechanism. In this context, the paper should be seen as an elaboration on aspects of the July 1994 papers on the sound management of derivatives activities. While the catalogue has been developed for both banks and securities firms, some of the items of the catalogue may be more relevant for banking supervisors than for securities firm supervisors and vice versa.

6. The common minimum framework, which is discussed in section III, represents a baseline of information that supervisors can use in assessing the impact of derivatives on an institution's overall risk profile. The minimum framework focuses to varying degrees on information relating to credit risk, market liquidity risk and market activity. Individual supervisors can then supplement this information with other data elements drawn from the catalogue.

7. The minimum framework is also intended to provide a basis for coordinating supervisory reporting with other data collection initiatives on derivatives. In general, less information is available to supervisors on OTC derivatives than on exchange-traded derivatives, where statistics are available on the volume and value of transactions and on open interest. In the case of OTC derivatives, in most jurisdictions bank and securities supervisors do not collect information which gives an overall profile of activity in such products. Nor is such information currently available on a global basis.

8. Aggregated statistics on derivatives markets would be of significant value to supervisors. The growing use of OTC derivatives in conjunction with exchange-traded instruments reflects the financial market interrelationships between organised exchange markets, OTC derivatives activities and related underlying cash markets. This interrelationship between the markets underscores the need for supervisors to have access to timely and accurate information on OTC risk exposures of major market participants as well as the overall activity in the OTC markets.

9. In this context, a minimum level of harmonisation across G-10 countries of supervisory information about derivatives could serve as an important input to the initiative of the Euro-currency Standing Committee of G-10 central banks to collect globally on a regular basis aggregate statistics on OTC and exchange-traded derivatives markets, both for macroeconomic and for macroprudential purposes.Under the Euro-currency Standing Committee initiative, data on the OTC and exchange-traded derivatives activities of larger banks and securities firms, and other major derivatives dealers would be collected and aggregated. Coordination between supervisors and central banks on the data to be evaluated would help to reduce duplication of efforts and thus limit the reporting burden for the banking and securities industry.

10. For the purpose of this overall information framework, the mechanism for supervisory data analysis is not specified, allowing for the assessment of information obtained through various channels. Specifically, information may be obtained and assessed through on­site examinations, discussions with institutions, special surveys or standard reports routinely submitted to supervisors and audited financial statements and other reports submitted by external auditors. The appropriate method for gathering information depends upon the nature of the data, the institutions under review and the relevant supervisory authority. Certain information may be appropriate for all institutions whereas other types of data may be meaningful only for larger dealers.

(b) Basic principles

11. In developing an overall supervisory information framework for banks' and securities firms' derivatives activities, the two Committees have been guided by a number of basic principles. In particular, the data should be comprehensive. It should cover all types of derivative instruments and their major related risks and facilitate the supervisor's analysis of how derivatives contribute to an institution's overall business and risk profile. The two Committees recognise that derivatives activities constitute only a part of the overall activities of banks and securities firms. Consequently, derivatives should not be evaluated in isolation from the overall risks of an institution. This implies, for example, that for purposes of assessing an institution's market risk and earnings profile, a portfolio approach incorporating related cash and derivatives positions - and, thereby, also the impact of hedging and other risk management transactions - is required for meaningful interpretation. Moreover, quantitative information on derivatives activities needs to be seen in the context of qualitative information on an institution's overall risk profile and its ability to manage this risk.

12Comprehensive evaluation of the risks of derivatives generally implies the aggregation, consolidation and assessment of information across a number of activities and legal entities. Where institutions undertake business activities which fall under the jurisdiction of different supervisors, or where certain affiliates are not supervised, supervisors should discuss with regulated firms how best to assess information that provides a comprehensive, timely picture of the risks associated with their overall derivatives and related activities. Bank supervisors should attempt to obtain information about these activities on a consolidated basis, while recognising the legal distinctions among subsidiaries.

13. Data on derivatives should be assessed with sufficient frequency and timeliness to give a meaningful picture of an institution's risk profile. Derivatives activities may change dramatically due to changes in the types of derivatives products involved and whether institutions are end-users of such products to manage their risks or are acting as dealers. Changes in derivatives products and the role of an institution as an end-user or dealer can affect the impact of derivatives on an institution's risk profile and profitability. Therefore, it is important for supervisors to be aware of new derivative instruments in a timely manner (particularly about higher risk and more complex instruments), how they are being used by institutions and how institutions' risk management systems are being enhanced to address these new developments. Moreover, it is important for supervisors to be aware in a timely manner of significant increases in the derivatives exposures of banks and securities firms.

14. The two Committees are aware of the potential costs associated with requests for additional information on institutions' derivatives activities and recognise that additional information requirements should only arise where there is a clear supervisory need. To limit the regulatory burden, supervisors are encouraged to draw on information that banks and securities firms generate for internal purposes, where appropriate, for assessing the impact of derivatives on financial condition and performance. Moreover, there should be as much consistency as is possible between information obtained for reporting purposes and data that institutions must already compile to comply with other supervisory requirements. The overall information framework should be sufficiently flexible to permit the incorporation of new market innovations without requiring frequent updating of the framework itself. The two Committees recognise that different institutional, accounting and public policy approaches to supervision require that each supervisory authority have flexibility to implement the common minimum framework in a manner best suited to its regulatory environment. Each supervisor would apply the common minimum framework to internationally active institutions with significant derivatives operations, with flexibility also to extend the framework to other institutions with significant involvement in derivatives.

15. The common minimum information framework has been constructed with the aim of achieving the assessment of understandable and meaningful information about the derivatives activities of banks and securities firmsthat could facilitate comparisons across institutions and, where possible, across countries. In this regard, it is intended that the overall information framework contribute to simplifying the regulatory reporting environment for banks and securities firms operating internationally. To the extent that the information is used for aggregation purposes, the Committees recognise the importance of ensuring that the process of aggregation not prejudice the confidentiality of information obtained on individual institutions by their supervisory authorities.