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Home > Statistics > Explanatory Notes - Financial derivative positions of banks at market values
 

Explanatory Notes - Financial derivative positions of banks at market values

Overview


Financial derivatives are financial instruments linked to the price performance of an underlying asset or index, which involve the trading of financial risk. Examples of underlying assets include financial instruments, commodities, bilateral foreign exchange rates, stock exchange indices, or interest rates. This dataset represents the market value of the derivatives business undertaken by the main UK-resident banks involved in this market.

Availability


Positions are reported as at end-calendar quarters (March, June, September and December).  Publication of data will occur as soon as possible after data validation and no more than three months after the end-quarter.  The dataset is available back to Q2 1998.

Sources


These statistics are derived from data reported by banks in the UK to the Bank of England on a specialised derivatives survey - Form DQ. Data cover positions in both exchange-traded and 'over-the-counter' markets.

The data cover the business of the main banks involved in the derivatives market operating within the United Kingdom - for example a US owned bank in London would be included within these statistics but the business of a US based branch of a UK bank would be excluded. Thus these data are not consistent with the semi-annual statistics published by the Bank for International Settlements (BIS) as their data are on a world-wide consolidated basis. Separate data (such as the gross notional amounts traded) on the UK derivatives market within their triennial survey of foreign exchange and derivatives market can be be viewed via the BIS.

The DQ reporting population covers approximately 97% to 98% of gross liabilities in derivatives of UK resident banks. This is benchmarked against gross liability positions data reported on the balance sheet return (Form BT). Any bank which reports over £10bn of gross liability positions in derivatives for two successive calendar quarters will be requested to join the panel for form DQ.

Aggregate data on derivatives are no longer grossed up, commencing with those published for end-June 2002. The rationale for this decision was primarily the increase in actual coverage of reported data (to 98%) but a key supporting factor was the elimination of any possible distortions in instrument and counterparty sector breakdowns which may have been generated in the grossing method for past data. It is recognised that the banks in the reporting panel with major derivatives volumes would have a broader exposure in terms of product and counterparty risk than those members of the UK banking sector which did not contribute directly to the specialised derivatives survey.

Revisions


All data are subject to revision if and when new data become available. For more information on revisions practices see the Explanatory Note on revisions.

Definitions


Financial derivatives include options, futures/forwards, swaps, FRAs, caps, floors, collars, warrants and certain credit derivatives; they do not include spot foreign exchange trades.

They are recorded at market value or where this is not available fair value. Fair value is defined as the value at which the contract could be exchanged in an arms length transaction between informed and willing parties. Market value may differ from fair value as it will encompass bid/offer spreads, commissions and the effects of supply and demand upon the price of the derivative.

Changes in the gross marked to market value of derivatives contracts will be influenced by three main factors:  

  • Revaluations due to changes in the underlying instrument: When derivatives contracts are traded, their marked to market value will typically be zero, except for options. Changes in the expectations of underlying variables of contracts at the time of valuation, away from expectations of those variables at the time of trading will generally cause the marked to market value of a derivative to tend away from zero.
  • Transactions in financial derivatives: Because the marked to market value of a derivative is equal to the net present value of future payment streams, whenever a payment is made with respect to a contract the marked to market valuation will be affected.
  • Changes in the number of contracts held: The more contracts that are traded, the higher we would expect gross marked to market positions to be.

The relative importance of these factors varies depending upon market conditions

Foreign currency positions are converted to sterling using end-period exchange rates.

These data include any positions the reporting bank has with the Bank of England.

Positions are reported gross, separating assets from liabilities, except for complex or structured trades, where, if the Bank of England agrees, they can be reported net if this improves the overall accuracy of the data.
If derivative contracts comprise more than one risk category they are allocated according to the risk category which primarily determines the price of the contract.

Embedded derivatives within an underlying instrument (e.g. convertible bonds) are excluded from these data if the two are inseparable.

Until 2007 Q3 certain types of Credit Derivative were excluded from this dataset. For National Accounts statistics banks were asked to exclude credit default products, which are defined here as products which only transfer the credit default risk, rather than the whole market risk. These products were treated as being analogous to traditional banking instruments such as letters of credit or guarantees and which covered within other returns.

However, from 2007 Q4, the definition has been revised to recognise changes in the market and in international statistical standards.  These standards regard instruments as credit derivatives rather than, say, insurance products or guarantees, if they are recognisable as derivatives, tradable or capable of being offset in the market, and capable of being given an arms-length value.   Therefore, a much wider range of credit derivative instruments are now included within this dataset.

The "Other" risk category comprises credit derivatives, commodity derivatives and equity derivatives.

FRAs are Forward Rate Agreements.

Key Resources

 

For further information on the Bank of England's collection of derivatives data, refer to the article below. More general information on financial derivatives is contained within the Centre for Central Banking Studies handbook 17, called "Financial Derivatives."

 

New data on financial derivatives for the UK National Accounts and Balance of Payments (384KB) Grice, A. Bank of England Bankstats (Monetary and Financial Statistics)

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