The Global Derivatives Study: Group of Thirty Best Practices

Introduction

Derivatives have fundamentally changed financial management by providing new tools to manage risk. As the use of derivatives has grown rapidly in the past 15 years, they have moved into the mainstream of finance.

Yet many, both inside and outside of the financial industry, remain uncomfortable with derivatives activity. They see it as complex and obscure, potentially subject to abuse that might lead to the failure of individual firms or even to a crisis in the financial system. This Study recognizes and addresses these concerns by explaining derivatives and their uses and by formulating and disseminating recommendations about their management.

The Global Derivatives Study

This Study consists of the Recommendations, an Overview of Derivatives Activity, and three Appendices:

The Recommendations

The Study offers 20 recommendations to help dealers and end-users manage derivatives activity and continue to benefit from its use. The Study also recommends four ways that supervisors and regulators, for their part, can help the financial infrastructure keep up with derivatives activity.

The 20 recommendations for a dealer and end-user of derivatives cover:

1. The Role of Senior Management
2. Marking to Market
3. Market Valuation Methods
4. Identifying Revenue Sources
5. Measuring Market Risk
6. Stress Simulations
7. Investing and Funding Forecasts
8. Independent Market Risk Management
9. Practices by End-Users
10. Independent Credit Risk Management
11. Measuring Credit Exposure
12. Aggregating Credit Exposures
13. Master Agreements
14. Credit Enhancement
15. Promoting Enforceability
16. Professional Expertise
17. Systems
18. Authority
19. Accounting Practices
20. Disclosures

In addition, there are four recommendations for legislators, regulators, and supervisors:

1. Recognizing Netting
2. Legal and Regulatory Uncertainties
3. Tax Treatment
4. Accounting Standards