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Coordinated Portfolio Investment Survey
Survey of Direct Investment Methodologies
Financial Derivatives

Background

The Coordinated Portfolio Investment Survey (CPIS) was conducted in response to global asymmetries in reported balance of payments data, especially those in portfolio investment flows. These asymmetries were originally identified and analyzed in the IMF Report on the Measurement of International Capital Flows (Godeaux Report, 1992). The Godeaux Report recommended that steps be taken by countries to ensure: (1) an improved coverage and better implementation of international standards for balance of payments financial account statistics; (2) that statistical activities be endowed with appropriate resources and legal powers; (3) stock data be collected on a regular basis; and (4) an effort be made to undertake a coordinated benchmark survey of international portfolio assets and liabilities broken down by partner country.

The IMF Committee on Balance of Payments Statistics established in October 1994 a Task Force under the auspices of the IMF to develop a survey of portfolio investment to be coordinated among countries. (While some countries already conducted some form of survey to measure portfolio investment, there had not been a coordinated international approach in timing and design.)

The major goal of the 1997 CPIS was to ensure that: (1) all the main investing countries undertook a benchmark portfolio asset survey at the same time; (2) participating countries followed definitions and classifications that were mutually consistent (by following BPM5); (3) all participating countries provided a breakdown of their stock of portfolio investment assets by the country of residency of the nonresident issuer; and (4) best practices in survey design and implementation were drawn on to the maximum extent possible. The geographical requirement was intended to permit the construction of a partner country source for portfolio investment liabilities, with due regard being given to respecting confidentiality constraints (to facilitate which the Fund would act as a clearing house). These goals were fully consistent with plans by national compilers to implement the recommendations of the fifth edition of the Balance of Payments Manual (BPM5) for the financial account and international investment position. The 1997 CPIS was timely in ensuring a coordinated response that was intended to maximize the benefits of efforts under way at the national level.¹

CPIS Guide

The Survey Guide was provided to assist national compilers in preparing for the 1997 CPIS. It was a valuable source of information for compilers of any country embarking upon the Coordinated Survey. It was prepared by the IMF's Task Force on the Coordinated Portfolio Investment Survey. Established by the IMF Committee on Balance of Payments Statistics to prepare for the Coordinated Survey, the Task Force was composed of experts on the collection of portfolio investment data.

The Survey Guide has two main purposes: (a) to set out the objectives of the Coordinated Survey; and (b) to provide practical advice on how to prepare, organize, and conduct the national survey. Composed of four chapters plus eight appendices, the Survey Guide is arranged as follows.

• The first chapter presents the purpose, scope, and modalities of the CPIS.
• The second chapter covers collection methods, the potential units to be surveyed, and the degree of detail required. Practical experience clearly indicates that there is no one best method of compiling portfolio investment data; each country must take account of its own financial structure and particular circumstances.
• The third chapter covers a variety of technical issues that a country must address when conducting a survey. These include the treatment of different types of securities, the method of geographic attribution, the valuation of securities, the difference between direct and portfolio investment, and the treatment of particular types of transactions that could cause double counting. This Survey Guide strongly emphasizes the practical approach to these issues.
• The fourth chapter covers the practical issues associated with preparing for a national survey. These include setting a timetable, taking account of the legal and confidentiality issues raised, developing a mailing list, choosing from types of software packages that can be used, and maintaining quality control checks.
• Finally, the appendices provide three model survey forms—one for a survey of custodians and end-investors on a security-by-security basis, the second, for an aggregate survey of custodians and end-investors, and the third, for an aggregate survey of end-investors. The appendices also include a short summary of the Coordinated Survey's objectives that can be presented to potential respondents, a glossary of security terms, flowcharts on client/custodial relationships, a listing of the major security databases that national compilers may find useful in their work, and a method for reconciling portfolio investment position and transactions data.

Results of the 1997 Survey

The Results of the 1997 Coordinated Portfolio Investment Survey have been included in a special publication, released in January 2000. The publication contains: (1) general tables that show how the 29 participating countries allocated their portfolio investment assets among major partner countries; (2) country tables containing all CPIS data collected at the national level and geographical details on additional portfolio investments made by some entities not originally covered in the survey; and (3) descriptions of the essential features of CPIS implementation in each country.

Countries participating in the CPIS collected information on portfolio investment assets (specifically cross-border claims mainly in the form of equity and long-term debt securities) as at end-December 1997. The data were disaggregated by type of instrument (equity and debt securities), with full geographical detail by country of issuer. The CPIS represented, for the majority of the participating countries, the first time that such data were collected in accordance with standardized definitions and methodologies and this approach enhanced data quality and comparability. Only two third of these countries already compiled an international investment position statement, mostly without any geographic details. In order to meet the requirements, major changes and refinements were introduced by most compilers, even those who already collected stock data attributed geographically. Overall, the 1997 CPIS covered portfolio investments made by more than 4,000 banks, 8,000 non-bank financial institutions, and 13,000 non-financial enterprises.

CPIS reported holdings of portfolio investment assets in the form of equity and long-term debt securities amounted to nearly US$ 5.2 trillion at the end of 1997 (Table 1). The United States, United Kingdom, and Japan were the largest investing countries, accounting for almost 68 per cent of such holdings. The shares of the Netherlands, Italy, and France were each within a range of 4-6 per cent of the total, and those of Sweden, Ireland, Canada, Bermuda, and Belgium were each within a range of 1-3 per cent of the total. On average, portfolio investment assets were almost equally allocated between equity and long-term debt securities. About 60 percent of investors' holdings of foreign long-term securities were related to issuers resident in advanced economies. A significant fraction of such holdings, amounting to some 12 percent, related to securities issued by emerging market countries (mainly Argentina, Mexico, Brazil, Ghana, Korea, China, and Hong Kong SAR). About 4 percent were allocated to offshore centers (Cayman Islands, British Virgin Islands, Netherlands Antilles, and Jersey), and international organizations accounted for about 3 percent. The remaining countries accounted for only 0.2 percent of total reported portfolio investment holdings.

These data will be analyzed in a separate forthcoming paper intended to complement the publication of the results of the 1997 CPIS. In particular, they have been used to investigate two issues. First, global imbalances in portfolio investment assets and liabilities have been reviewed in the light of the evidence made available by the 1997 CPIS and some additional sources of information.² Second, the data provided by the eight countries that collected geographical details on their portfolio investment liabilities have been compared with the corresponding assets reported by their 1997 CPIS partners.

Regarding the first issue, the CPIS permitted the identification of additional portfolio investment holdings of US$750 billion. The newly identified assets were largely attributable to investors resident in European and North American countries, reflecting new surveys conducted in some countries for the 1997 CPIS (e.g., Canada, Ireland, Italy, and Spain), and a new benchmark survey in the United States. Bermuda, the only offshore financial center participating in the CPIS, accounted for US$133 billion. The CPIS also permitted the identification of new liabilities of some US$500 billion, mostly related to offshore centers (45 percent) and emerging market countries (36 percent). As a result of these adjustment, it could be estimated that outstanding portfolio investment liabilities in both equity and long-term debt securities were $9.4 trillion at the end of 1997, and outstanding portfolio investment asset positions were $7.7 trillion. The difference of $1.7 trillion represented about 18 percent of total liabilities.

An analysis of bilateral asymmetries (that could only be addressed with reference to the eight countries that collected geographically detailed data on their own portfolio investment liabilities: Australia, Indonesia, Israel, Japan, Malaysia, Netherlands, Portugal, and Spain) indicated that a substantial part of external liabilities was attributed to intermediary countries with large international financial markets. These results confirmed the view that a reliable country breakdown of external liabilities could not be calculated from the liability side.

As noted, the size of the global discrepancy between portfolio investment assets and liabilities remained substantial. This could be attributed to a lack of coverage of holdings of portfolio investment assets by households (which some participating countries in the 1997 CPIS considered to be a critical weakness), and the lack of data sources for offshore financial centers and some countries, for which no estimate could be made. These considerations underscore the need for a more complete participation of major investing countries in future surveys, including offshore financial centers, that would address the remaining sources of under-reporting of global portfolio investment assets, and provide an indication of the reliability of the global data for portfolio investment liabilities.

In addition to shedding some new light on the size of global discrepancies in portfolio investment positions, the 1997 CPIS also provided a number of benefits. The main ones are that it has: (1) proved that a coordinated effort could be successfully organized across a large number of countries with respect to the scope, coverage, timing, definitions and concepts used in the compilation of data; (2) provided an effective and efficient vehicle for establishing and spreading good methodological standards world-wide; (3) facilitated a greater understanding of country practices with respect to survey design and alternative approaches to data collection and the exchange of experience in this regard; (5) allowed countries to gain confidence in the data; and (6) facilitated data exchange. In all of this, it has served to spread awareness of BPM5 and promote and facilitate its implementation. As more countries take steps to compile an annual international investment position, the likely outcome is the improved reporting of stocks and flows of portfolio investment and a reduction in global discrepancies.

1/ As reported by the twenty nine participating countries
2/ Including adjustments for non-reporting countries and international organizations

Sources: 1997 CPIS, BIS, IMF, other international organizations, and Fund staff estimates

Way Forward

A special task force was established in 1999 to consider issues relating to the repeat of the 1997 CPIS. The task force reported its recommendations to the IMF Committee on Balance of Payments Statistics at the Santiago meeting of October 1999. As recommended by the task force, a decision has been made by the IMF Committee to repeat the survey at the reference date of end-December 2001.

Some changes have been agreed on the scope of the next survey: in particular, that holdings of nonresident short-term debt securities be included as a mandatory item, and countries should make an effort to collect-on a voluntary basis-data on third party holdings of nonresident households. Financial derivatives have been excluded from the scope of the next survey, while data on portfolio investment liabilities have been maintained as non-mandatory requirements. The Committee endorsed the recommendation that survey participation be extended to include all major investing countries and offshore banking centers. The Committee also noted the usefulness of a global securities database as a means to improve the quality of the data, and agreed that a working group be established to explore what would be involved in the development of such a database.

To assist national compilers in preparing for the 2001 CPIS, a revised version of the Survey Guide is being prepared and is expected to be made available in an electronic format to the likely broader audience of national compilers that may wish to participate in the next survey. The revised Guide is likely to focus on major issues encountered by national compilers in conducting the 1997 CPIS. In particular, it should contain substantially revised or new sections on the following: (a) the development of centralized and regional securities databases, (b) means to achieve a more comprehensive coverage of the household sectors, (c) a more thorough examination of the custodial business, and (d) special reporting forms for offshore financial centers.

In May 1997, the IMF and OECD launched the Survey of Implementation of International Methodological Standards for Direct Investment (SIMSDI), after consulting with the IMF Committee on Balance of Payments Statistics (the Committee) and the OECD Working Party on Financial Statistics (WFS). The survey is a comprehensive study of data sources, collection methods, and dissemination and methodological practices for foreign direct investment (FDI) statistics. Similar surveys were conducted in 1983 by the OECD concerning OECD member countries, and in 1991 by the IMF’s Working Party on Measurement of International Capital Flows (Godeaux Report).

114 countries replied to the 1997 survey, a very encouraging response indicating the importance that national compilers attach to these data. The metadata (information on data) collected from the survey were processed and a report on the extent to which participating countries have adopted the international standards for compiling and reporting FDI statistics was presented at the October 1998 meeting of the Committee for its review and a final version has now been released. The IMF and OECD have developed two metadatabases on the survey results. The metadatabases provide an analytical tool for disseminating the survey results with a view to facilitating the exchange of bilateral FDI information among balance of payments compilers.

The website on the SIMSDI is divided in four sections. A copy of the final version of the report on the 1997 survey results is included in the first section; the second section contains a copy of the survey form used for collecting the data; the thirs section provides information on how to access the website that contains the metadatabases on the 1997 survey results; and the fourth section provides a copy of an IMF Staistics Department paper offering definitions of the international recommendations for the treatment of direct investmetn statistics.

1- March 2000 Report on the 1997 SIMSDI Survey
2- 1997 Survey Form
3- Metadatabase on the 1997 survey results
4- Clarification of the International Recommendations for Direct Investment Statistics (32k pdf file)

Survey of Implementation of Methodological Standards for Direct Investment

Report to the IMF Committee on Balance of Payments Statistics

At its October 1997 meeting, the IMF Committee on Balance of Payments Statistics (Committee) endorsed the idea that the IMF and OECD produce a joint final report on the results of the SIMSDI. This report summarizes the SIMSDI findings regarding the extent to which IMF member countries have adopted the international standards on foreign direct investment (FDI) statistics. In doing so, it identifies the major improvements that have taken place since a survey of this type was last conducted in 1991 for the IMF Report on the Measurement of International Capital Flows. The report draws attention to particular aspects of the statistical methodology followed by countries that participated in the survey and provides information on FDI dissemination practices, data sources, and availability of geographical and industrial breakdowns of the data.

Following discussions at its October 1998 meeting, the Committee suggested revisions to the report that had been submitted for its review. These suggestions have been incorporated into the report, a final version of which was released in March 2000.

1997 SIMSDI Survey Form

The Committee supported, at its October 1996 meeting, a joint Fund/OECD survey of Fund and OECD member countries to determine the extent of adoption by countries of the international standards for foreign direct investment (FDI) statistics. Following consultation with the members of the Committee and the OECD’s WFS over the design of the survey form, the IMF and OECD launched the survey in May 1997.

The survey form was designed as a multiple choice questionnaire. This design was intended to reduce, as much as possible, the time required by compilers to complete the form, while covering all the major issues regarding data sources, collection methods, and dissemination and methodological practices for FDI statistics. It was understood that the multiple choice design meant that uncommon practices might not always be explicitly reported. Therefore, room was provided for comments throughout the survey form.

The survey form was sent to 171 IMF member countries (of which 29 were also OECD member countries) and contained 130 questions. The form was made available in English, French, Spanish and Russian to ensure a higher response rate and facilitate the comprehension of the questions, thus improving the quality of response.

1997 Survey Form Use the free Adobe Acrobat Reader to view this pdf file.

Metadatabases on the Survey Results

The SIMSDI was designed to provide standardized information on data sources, collection methods, dissemination, and methodological practices for IMF member countries. Such a complete set of information on the data, or metadata, seems essential for conducting efficient bilateral comparisons of FDI data. In support of such data comparisons, the IMF and OECD jointly developed two metadatabases on the survey results that are posted on the Internet.

At its October 1998 meeting, the Committee recommended that these metadata should be made available to all users of direct investment statistics, as they would facilitate the analysis of the data. At present, access to the Internet sites that contain the metadata is limited to balance of payments compilers of national agencies and international organizations. At the request of the Committee, the IMF and OECD are seeking permission from participating countries to disseminate this information to all users of direct investment statistics.

The first metadatabase provides FDI metadata for each country individually. This database is referred to as the "Survey database" on the Internet site. It provides complete survey information on a country by country basis. Users are able to scroll down an actual completed survey form by country and view the country’s responses.

The second metadatabase, the "Analytical database", contains a series of user friendly FDI metadata tables that are posted on the Internet. Users of these tables are able to select the metadata for various country groupings from a list of economic and development organizations or UN Geographical regions, or from custom selections. The tables cover all the subjects covered in the SIMSDI survey and are grouped under two sections corresponding to the two major sections of the SIMSDI survey form. The first section provides information on data availability and sources under three headings: periodicity and timeliness of FDI data, geographical and industrial allocation, and data sources. The second section provides information on the status of implementation of FDI methodological standards subclassified as follows: definition of direct investment enterprise and investor, direct investment capital, direct investment income, direct investment position data, and special cases.

The Fund and the OECD are offering the possibility of subscribing to these Internet databases and accessing the survey information of each responding countries. In order to subscribe to the databases, national balance of payments compilers should send an e-mail to STABPM5@imf.org providing their name, position and organization.

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 5th 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 promted 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 outstandingpositions be recorded in the international investment position). A separate functional category is to be created for financial derivatives in the balance of payments and a separate instrument in the national accounts.

The BPM5 rewrite on financial derivatives was released in May 2000; to access a draft version of this document, click on BOPCOM99/11. BOPCOM98/1/14 and BOPCOM98/1/22 describe the processes of implementation of the measurement of financial derivatives in the United Kingdom and Australia, respectively.