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Dissemination Standards Bulletin Board (DSBB): metadata on SDDS and GDDS data categories

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Financial derivatives are financial instruments that are linked to a specific financial instrument or indicator or commodity, and through which specific financial risks can be traded in financial markets in their own right. Transactions in financial derivatives should be treated as separate transactions rather than as integral parts of the value of underlying transactions to which they may be linked. The value of a financial derivative derives from the price of an underlying item, such as an asset or index. Unlike debt instruments, no principal amount is advanced to be repaid and no investment income accrues. Financial derivatives are used for a number of purposes including risk management, hedging, arbitrage between markets, and speculation.

Financial derivatives enable parties to trade specific financial risks (such as interest rate risk, currency, equity and commodity price risk, and credit risk, etc.) to other entities who are more willing, or better suited, to take or manage these risks—typically, but not always, without trading in a primary asset or commodity. The risk embodied in a derivatives contract can be traded either by trading the contract itself, such as with options, or by creating a new contract which embodies risk characteristics that match, in a countervailing manner, those of the existing contract owned. This latter is termed offsetability, and occurs in forward markets. Offsetability means that it will often be possible to eliminate the risk associated with the derivative by creating a new, but "reverse", contract that has characteristics that countervail the risk of the first derivative. Buying the new derivative is the functional equivalent of selling the first derivative, as the result is the elimination of risk. The ability to replace the risk on the market is therefore considered the equivalent of tradability in demonstrating value. The outlay that would be required to replace the existing derivative contract represents its value—actual offsetting is not required to demonstrate value.

Financial derivatives contracts are usually settled by net payments of cash. This often occurs before maturity for exchange traded contracts such as commodity futures. Cash settlement is a logical consequence of the use of financial derivatives to trade risk independently of ownership of an underlying item. However, some financial derivative contracts, particularly involving foreign currency, are associated with transactions in the underlying item.

Since the fifth edition of the IMF’s Balance of Payments Manual (BPM5) and the 1993 edition of the System of National Accounts (SNA) were published, knowledge and understanding of financial derivatives market have deepened, and prompted the need for a review of the appropriate statistical treatment. In 1997, the Fund produced a discussion paper, The Statistical Measurement of Financial Derivatives, which was adopted by the IMF Committee on Balance of Payments Statistics (and the Inter-Secretariat Working Group on National Accounts). In many respects, the paper reaffirmed the nature of financial derivatives but proposed that over-the-counter financial derivatives be treated as financial assets, and, as a result, a change be made to the treatment of interest rate swaps and forward rate agreements (FRAs) so that instead of being recorded in the income account as property income they be recorded as financial assets and be recorded in the financial account (and the outstanding positions be recorded in the international investment position). A separate functional category has been created for financial derivatives in the balance of payments and a separate instrument in the national accounts.

Financial Derivatives: A Supplement to the Fifth Edition of the Balance of Payments Manual on financial derivatives was released in 2000. This document included a provisional decision regarding the classification of financial derivatives involving affiliated enterprises.

The final decision on the classification of these financial derivatives was promulgated in 2002. See Classification of Financial Derivatives Involving Affiliated Enterprises in the Balance of Payments Statistics and the International Investment Position (IIP) Statement (231 kb PDF file).