KARACHI: The State Bank announced on Monday to keep a tight control over the “derivative transactions” as these were behind the global financial crisis that began in 2007-08.
Futures contracts, forward contracts, options and swaps are the most common types of derivatives but had taken highly complicated shapes when the financial crisis began in 2007-08.
“The State Bank has developed a Derivative Transaction Reporting System (DTRS) to capture all the derivative transactions executed in Pakistan,” said a circular issued by the central bank.
The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset.
The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterised by high leverage. (A firm with significantly more debt than equity is considered to be highly leveraged).
“All authorised derivatives dealers (ADDs), non-market maker financial institutions (NMIs) and the banks (involved in financial derivative transactions) are advised to report all derivative transactions, including forward rate agreements (FRAs), cross-currency swaps (CCS), interest rate swaps (IRS) and foreign currency options (FXO), in DTRS on a weekly basis,” said the SBP circular.
The derivatives which shocked the global financial system were termed as “weapons of mass destruction.” Even in the US there was no law to regulate the highly speculative financial instruments which has largely imaginary value.
Pakistan remained largely unhurt during 2007-08 crisis because derivatives had very small space in its financial system.
However, derivatives which are considered essentials for development of financial systems are being controlled through various tools, like laws and regulations. The State Bank’s latest move indicated the needs of DTRS introduced by the Bank.
The State Bank said that the data of all derivative transactions, including new deals and changes in existing deals maturity, structure, terms and conditions, etc, during a week will be reported on the first working day of the following week.
All reporting institutions are required to start reporting data in DTRS through e-mail at email@example.com from the week ending April, 3, 2015, with reporting date on April 6, 2015.
“With the increase in volumes of derivative transactions, the SBP may increase the frequency of data reporting,” said the circular.
In addition to reporting in DTRS, reporting institutions will continue to submit data related to derivative transactions as per instructions provided earlier by the SBP, said the circular.
Bankers said the development of DTRS would help reduce risk involved in the derivative transactions. They said the risks remain high in derivative transactions and it may become highly sensitive when derivative products are made complicated.