Regulation (EU) No 549/2013 of the European Parliament and of the Council of 21 May 2013 on the European system of national and regional accounts in the European Union Text with EEA relevance

• (c) transfers between subsectors of general government designed to cover unexpected expenditure or accumulated deficits. Such transfers between subsectors of general government are flows within the general government sector and do not appear in a consolidated account for the sector as a whole;

• (d) non-recurrent bonus payments on savings granted by general government to households to reward them for their savings carried out over a period of several years;

• (e) legacies, large gifts between persons, and donations between units belonging to different sectors, including legacies or large gifts to non-profit institutions (NPIs). Examples of gifts to NPIs are gifts to universities to cover the costs of building new residential colleges, libraries, laboratories, etc.;

• (f) the counterpart transaction of cancellation of debts by agreement between institutional units belonging to different sectors or subsectors (for example, the cancellation by the government of a debt owed to it by a foreign country; payments in fulfilment of guarantees which free defaulting debtors from their obligations) — except the particular case of taxes and social contributions payable to the general government sector (see point (j)). Such cancellations by mutual agreement are treated as a capital transfer from the creditor to the debtor equal to the value of the outstanding debt at the time of cancellation. Likewise the counterpart transaction of debt assumption, and of other similar transactions (activation of guarantees related to non-standardised guarantee schemes, or debt rescheduling where part of debt is extinguished or transferred), is another capital transfer. However, the following are excluded:
• (1) cancellation of financial claims against and assumption of liabilities from quasi-corporations by the owner of the quasi-corporation. This case is treated as a transaction in equity and investment fund shares (F.5);
• (2) debt cancellation against and debt assumption from a public corporation by government which disappears as an institutional unit in the system. This case is recorded in the other changes in the volume of assets account (K.5);
• (3) debt cancellation against and debt assumption from a public corporation by government as a part of an ongoing process of privatisation to be achieved in a short-term perspective. This case is treated as a transaction in equity and investment fund shares (F.5). The writing-off of debt is not a transaction between institutional units and therefore is not recorded in either the capital account or the financial account. If the creditor decides such a write-off, it is recorded in the other changes in the volume of assets accounts of the creditor and the debtor. Provisions for bad debt are treated as book-keeping entries that are internal to the institutional producer unit and are not recorded except in the case of expected losses on non-performing loans, which are recorded as memorandum items in the balance sheets. The unilateral repudiation of debt by a debtor is also not a transaction and is not recorded;

• (g) that part of realised capital gains (or losses) which is redistributed to another sector, as, for example, capital gains redistributed by insurance companies to households. However, the counterpart transactions of transfers to general government of the proceeds of privatisation made indirectly (through a holding company for example) are recorded as financial transactions in equity and investment fund shares (F.5) and have no impact on the level of net lending/net borrowing of the general government;

• (h) major payments in compensation for damage or injuries not covered by insurance policies (except payments by general government or by the rest of the world described in point (a)). The payments are awarded by courts of law or settled out of court. Examples are payments of compensation for damage caused by major explosions, oil spillages, the side-effects of drugs, etc.;

• (i) extraordinary payments into social insurance funds made by employers (including government) or by government (as part of its social function), in so far as these payments are designed to increase the actuarial reserves of these funds. The accompanying adjustment from social insurance funds to households is also recorded as other capital transfers (D.99);

• (j) when taxes and social contributions payable to the general government sector are recorded on the basis of assessments and declarations, the part unlikely to be collected is neutralised in the same accounting period. This is done by recording an 'other capital transfer' (D.99), as an entry under D.995, between general government and the relevant sectors. This D.995 flow is subdivided according to the coding of the different taxes and social contributions concerned;

• (k) insurance settlements in the wake of a catastrophe: following a catastrophe, the total value of the claims related to the catastrophe, as obtained from insurance industry information, is recorded as a capital transfer from the insurance corporations to the policy holders. When information on claims related to the catastrophe cannot be provided by the insurance industry, the catastrophe-related claims are estimated as the difference between the actual claims and the adjusted claims in the period of the catastrophe;

• (l) community built assets where responsibility for maintenance is then assumed by government.

• 4.166Time of recording is determined as follows:

• (a) other capital transfers in cash are recorded when the payment is due to be made;

• (b) other capital transfers in kind are recorded when the ownership of the asset is transferred or the liability cancelled by the creditor.

• 4.167Other capital transfers are shown among changes in liabilities and net worth in the capital account of sectors and of the rest of the world.

EMPLOYEE STOCK OPTIONS (ESOs)

• 4.168A particular form of income in kind is the practice of an employer giving an employee the option to buy stocks (shares) at a specified price at some future date. An ESO is similar to a financial derivative and the employee may choose not to exercise the option, either because the share price is now lower than the price at which he can exercise the option or because he has left the employ of that employer and so forfeits his option.

• 4.169Typically an employer informs his employees of the decision to make a stock option available at a given price (the strike price or exercise price) after a certain time under certain conditions (for example, that the employee is still in the enterprise's employ, or conditional on the performance of the enterprise). The time of recording of the employee stock option in the national accounts has to be carefully specified. The 'grant date' is when the option is provided to the employee, the 'vesting date' is the earliest date when the option can be exercised, and the 'exercise date' is when the option is actually exercised (or lapses).

• 4.170The International Accounting Standards Board (IASB) accounting recommendations are that the enterprise derives a fair value for the options at grant date by taking the strike price of the shares at that time multiplied by the number of options expected to be exercisable at vesting date divided by the number of service years expected to be provided until the vesting date.

• 4.171In the ESA, if there is neither an observable market price nor an estimate made by the corporation in line with the recommendations just given, the valuation of the options may be estimated using a stock options pricing model. Such models aim to capture two effects in the value of the option. The first effect is a projection of the amount by which the market price of the shares in question will exceed the strike price at the vesting date. The second effect allows for the expectation that the price will rise further between the vesting date and exercise date.

• 4.172Before the option is exercised, the arrangement between the employer and employee has the nature of a financial derivative and is shown as such in the financial accounts of both parties.

• 4.173An estimate of the value of the ESO is to be made at grant date. This amount must be included as part of compensation of employees spread over the period between the grant date and vesting date, if possible. If this is not possible, the value of the option has to be recorded at vesting date.

• 4.174The costs of administering ESOs are borne by the employer and are treated as part of intermediate consumption just as any other administrative functions associated with compensation of employees.

• 4.175Although the value of the stock option is treated as income, there is no investment income associated with ESOs.

• 4.176In the financial account, the acquisition of ESOs by households matches the corresponding part of compensation of employees with a matching liability of the employer.

• 4.177In principle, any change in value between the grant date and vesting date is to be treated as part of compensation of employees while any change in value between vesting date and exercise date is not treated as compensation of employees but as a holding gain or loss. In practice, it is most unlikely that estimates of the costs of ESOs to the employers are revised between grant date and exercise date. For pragmatic reasons, therefore, the whole of the increase between grant date and exercise date is treated as a holding gain or loss. An increase in value of the share price above the strike price is a holding gain for the employee and a holding loss for the employer and vice versa.

• 4.178When an ESO is exercised, the entry in the balance sheet disappears and is replaced by the value of the stocks (shares) acquired. This change in classification takes place via transactions in the financial account and not via the other changes in the volume of assets account.

CHAPTER 5

FINANCIAL TRANSACTIONS

• 5.01 Definition: financial transactions (F) are transactions in financial assets (AF) and liabilities between resident institutional units, and between them and non-resident institutional units.

• 5.02A financial transaction between institutional units is a simultaneous creation or liquidation of a financial asset and the counterpart liability, or a change in ownership of a financial asset, or an assumption of a liability.

GENERAL FEATURES OF FINANCIAL TRANSACTIONS

Financial assets, financial claims, and liabilities

• 5.03 Definition: financial assets consist of all financial claims, equity and the gold bullion component of monetary gold.

• 5.04Financial assets are stores of value representing a benefit or series of benefits accruing to an economic owner by holding or using the assets over a period of time. They are a means of carrying forward values from one accounting period to another. Benefits are settled through payments, which are typically currency (AF.21) and transferable deposits (AF.22).

• 5.05 Definition: a financial claim is the right of a creditor to receive a payment or series of payments from a debtor.

• Financial claims are financial assets that have corresponding liabilities. Equity and investment fund shares or units (AF.5) are treated as a financial asset with a corresponding liability even though the claim of the holder on the corporation is not a fixed amount.

• 5.06 Definition: liabilities are established when a debtor is obliged to provide a payment or a series of payments to a creditor.

• 5.07The gold bullion component of monetary gold, held by monetary authorities as a reserve asset, is treated as a financial asset even if a holder does not have claims on other designated units. There is no matching liability for gold bullion.

Contingent assets and contingent liabilities

• 5.08 Definition: contingent assets and contingent liabilities are agreements whereby one party is obliged to provide a payment or series of payments to another unit only where certain specific conditions prevail.

• As they do not give rise to unconditional obligations, contingent assets and contingent liabilities are not considered as financial assets and liabilities.

• 5.09Contingent assets and contingent liabilities include:

• (a) one-off guarantees of payment by third parties since payment is only required if the debtor defaults;

• (b) loan commitments providing a guarantee that funds will be made available but no financial asset exists until funds are actually advanced;

• (c) letters of credit which constitute promises to make a payment conditional upon the presentation of certain documents specified by a contract;

• (d) lines of credit which are promises to make loans to a specified customer up to a specified limit;

• (e) underwritten note issuance facilities (NIFs) providing a guarantee that a potential debtor will be able to sell short-term debt securities known as notes, and that the bank issuing the facility will take up any notes not sold on the market or will provide equivalent advances; and

• (f) pension entitlements under unfunded government defined benefit employer pension schemes or social security pension funds. Such pension entitlements are recorded in the supplementary table on accrued-to-date pension entitlements in social insurance, and not in the core accounts.

• 5.10Contingent assets and contingent liabilities do not include:

• (a) reserves of insurance, pension and standardised guarantee schemes (AF.6);

• (b) financial derivatives (AF.7) where the arrangements themselves have a market value because they are tradable or can be offset on the market.

• 5.11Although contingent assets and contingent liabilities are not recorded in the accounts, they are important for policy and analysis, and information on them needs to be collected and presented as supplementary data. Even though no payments may turn out to be due for contingent assets and contingent liabilities, a high level of contingencies may indicate an undesirable level of risk on the part of those units offering them.

Box 5.1 —   Treatment of guarantees in the system

• B5.1.1. Definition: guarantees are arrangements whereby the guarantor undertakes to a lender that if a borrower defaults, the guarantor will make good the loss the lender would otherwise suffer.

• Often a fee is payable for the provision of a guarantee.

• B5.1.2.Three different types of guarantees are distinguished. These apply only to guarantees provided in the case of financial assets. No special treatment is proposed for guarantees in the form of manufacturers' warrantees or other forms of guarantee. The three types of guarantee are:

• (a) guarantees provided by means of a financial derivative, such as a credit default swap. Such derivatives are based on the risk of default of reference financial assets and are not linked to individual loans or debt securities;

• (b) standardised guarantees are issued in large numbers, usually for fairly small amounts. Examples are export credit guarantees or student loan guarantees. Even though the degree of probability of any one standardised guarantee being called is uncertain, the fact that there are many similar guarantees means that a reliable estimate of the number of calls under the guarantee can be made. Standardised guarantees are treated as giving rise to financial assets and not contingent assets;

• (c) one-off guarantees, where the associated risk cannot be calculated with any degree of accuracy, due to a lack of comparable cases. The granting of a one-off guarantee is considered a contingent asset or a contingent liability and is not recorded as a financial asset or a liability.

Categories of financial assets and liabilities

• 5.12Eight categories of financial assets are distinguished:

• AF.1 Monetary gold and special drawing rights;

• AF.2 Currency and deposits;

• AF.3 Debt securities;

• AF.4 Loans;

• AF.5 Equity and investment fund shares or units;

• AF.6 Insurance, pension and standardised guarantee schemes;

• AF.7 Financial derivatives and employee stock options;

• AF.8 Other accounts receivable/payable.

• 5.13Each financial asset has a counterpart liability, with the exception of the gold bullion component of monetary gold held by monetary authorities as a reserve asset classified in the category monetary gold and special drawing rights (F.1). With this exception, eight categories of liabilities are distinguished corresponding to the categories of the counterpart financial assets.

• 5.14The classification of financial transactions corresponds to the classification of financial assets and liabilities. Eight categories of financial transactions are distinguished relating to:

• F.1 monetary gold and special drawing rights;

• F.2 currency and deposits;

• F.3 debt securities;

• F.4 loans;

• F.5 equity and investment fund shares or units;

• F.6 insurance, pension and standardised guarantee schemes;

• F.7 financial derivatives and employee stock options;

• F.8 other accounts receivable/payable.

• 5.15Given the symmetry of financial claims and liabilities, the term 'instrument' is used to relate to both the asset and the liability aspect of financial transactions. Its use does not imply an extension of the coverage of financial assets and liabilities by including off-balance sheet items which are sometimes described as financial instruments in monetary and financial statistics.

Balance sheets, financial account, and other flows

• 5.16The financial assets held and the liabilities outstanding at a particular point in time are recorded in the balance sheet. Financial transactions result in changes between opening and closing balance sheets. However, changes between the opening balance sheet and the closing balance sheet are also due to other flows, which are not interactions between institutional units by mutual agreement. Other flows related to financial assets and liabilities are broken down into revaluations in financial assets and liabilities, and changes in the volume of financial assets and liabilities not due to financial transactions. Revaluations are recorded in the revaluation account and changes in volume in the other changes in the volume of assets account.

• 5.17The financial account is the final account in the sequence of accounts that record transactions. The financial account does not have a balancing item that is carried forward to another account. The balancing item of the financial account, the net acquisitions of financial assets less net incurrence of liabilities, is net lending (+) or net borrowing (-) (B.9F).

• 5.18The balancing item of the financial account is conceptually identical to the balancing item of the capital account. In practice, a discrepancy is usually found between them because they are calculated on the basis of different statistical data.

Valuation

• 5.19Financial transactions are recorded at transaction values, that is, the values in national currency at which the financial assets and/or liabilities involved are created, liquidated, exchanged or assumed between institutional units, on the basis of commercial considerations.

• 5.20Financial transactions and their financial or non-financial counterpart transactions are recorded at the same transaction value. There are three possibilities:

• (a) the financial transaction gives rise to a payment in national currency: the transaction value is equal to the amount exchanged;

• (b) the financial transaction is a transaction in foreign currency and the counterpart transaction is not a transaction in national currency: the transaction value is equal to the amount in national currency at the market rate prevailing when the payment takes place; and

• (c) neither the financial transaction nor its counterpart transaction is a transaction in cash or via other means of payment: the transaction value is the current market value of the financial assets and/or liabilities involved.

• 5.21The transaction value refers to a specific financial transaction and its counterpart transaction. In concept, the transaction value is to be distinguished from a value based on a price quoted on the market, a fair market price, or any price that is intended to express the generality of prices for a class of similar financial assets and/or liabilities. However, in cases where the counterpart transaction of a financial transaction is, for example, a transfer and therefore the financial transaction may be undertaken other than for purely commercial considerations, the transaction value is identified with the current market value of the financial assets and/or liabilities involved.

• 5.22The transaction value does not include service charges, fees, commissions, or similar payments for services provided in carrying out the transactions; such items are to be recorded as payments for services. Taxes on financial transactions are also excluded and are treated as taxes on services within taxes on products. When a financial transaction involves a new issue of liabilities, the transaction value is equal to the amount of the liability incurred, excluding any prepaid interest. Similarly, when a liability is extinguished, the transaction value for both creditor and debtor must correspond to the reduction of the liability.

Net and gross recording

• 5.23 Definition: net recording of financial transactions means that acquisitions of financial assets are shown net of disposals of financial assets, and that incurrences of liabilities are shown net of repayments of liabilities.

• Financial transactions may be represented net across financial assets with different characteristics and with different debtors or creditors, provided they are within the same category or subcategory.

• 5.24 Definition: gross recording of financial transactions means that acquisitions and disposals of financial assets are shown separately, as are incurrences and repayments of liabilities.

• Gross recording of financial transactions shows the same amount of net lending and net borrowing as if financial transactions were recorded net.

• Financial transactions are to be recorded gross in cases of detailed financial market analyses.

Consolidation

• 5.25 Definition: consolidation in the financial account refers to the process of offsetting transactions in financial assets for a given group of institutional units against the counterpart transactions in liabilities for the same group of institutional units.

• Consolidation can be performed at the level of the total economy, of institutional sectors, and of subsectors. The financial account of the rest of the world is consolidated by definition since only transactions of the non-resident institutional units with resident institutional units are recorded.

• 5.26Different levels of consolidation are appropriate for different types of analysis. For example, consolidation of the financial account for the total economy emphasises the economy's financial transactions with non-resident institutional units since all financial transactions between resident institutional units are netted on consolidation. Consolidation for sectors permits the tracing of overall financial transactions between sectors with net lending and those with net borrowing. Consolidation at the subsector level for financial corporations can provide much more detail on financial intermediation and allow, for example, the identification of monetary financial institutions' transactions with other financial corporations as well as with other resident sectors and with non-resident institutional units. Another area where consolidation can be instructive at the subsector level is within the general government sector, since transactions between the various subsectors of government are not eliminated.

• 5.27As a rule, the accounting entries in the ESA 2010 are not consolidated, as a consolidated financial account requires information on the counterpart grouping of institutional units. This requires financial transaction data on a from-whom-to-whom basis. For example, the compilation of consolidated general government liabilities requires a distinction to be made, among the holders of general government liabilities, between general government and other institutional units.

Netting

• 5.28 Definition: netting is the consolidation at the level of a single institutional unit whereby accounting entries on both sides of the account for the same transaction item are offset against one another. Netting is to be avoided unless source data are lacking.

• 5.29Various degrees of netting can be distinguished as transactions in liabilities are subtracted from transactions in financial assets for the same financial asset category or subcategory.

• 5.30When a department of an institutional unit purchases bonds issued by another department of the same institutional unit, the financial account of the unit does not record the transaction as the acquisition of a claim by one department on another. The transaction is recorded as a redemption of liabilities rather than an acquisition of consolidating assets. Such financial instruments are viewed as netted. Netting is to be avoided if it is necessary to keep the financial instrument on both the asset side and the liability side to follow the legal presentation.

• 5.31Netting may be unavoidable for transactions of an institutional unit in financial derivatives, where separate data on transactions in assets and liabilities are usually not available. It is appropriate to net these transactions because the value of a position in financial derivatives may switch sign, i.e. to change from an asset to a liability position, as the value of the instrument 'underlying' the derivative contract changes in relation to the price in the contract.

Accounting rules for financial transactions

• 5.32Quadruple-entry is an accounting practice in which each transaction involving two institutional units is recorded twice by each unit. For example businesses exchanging goods for cash will result in entries in both the production account and the financial account for each unit. Quadruple-entry accounting ensures symmetry of reporting by the institutional units involved, and so consistency in the accounts.

• 5.33A financial transaction always has a counterpart transaction. This counterpart may be another financial transaction or a non-financial transaction.

• 5.34Where a transaction and its counterpart are both financial transactions, they change the portfolio of financial assets and liabilities and they may change the totals of both financial assets and liabilities of the institutional units, but they do not change net lending/net borrowing or net worth.

• 5.35The counterpart of a financial transaction may be a non-financial transaction such as a transaction in products, a distributive transaction, or a transaction in non-financial non-produced assets. Where the counterpart transaction of a financial transaction is not a financial transaction, net lending/net borrowing of the institutional units will change.

A financial transaction with a current or a capital transfer as counterpart

• 5.36The counterpart transaction of a financial transaction may be a transfer. In this case, the financial transaction involves a change in ownership of a financial asset, or an assumption of a liability as debtor, known as debt assumption, or the simultaneous liquidation of a financial asset and the counterpart liability, known as debt cancellation or debt forgiveness. Debt assumption and debt cancellation are capital transfers (D.9) and recorded in the capital account.

• 5.37If the owner of a quasi-corporation assumes liabilities from or cancels financial claims against the quasi-corporation, the counterpart transaction of debt assumption or debt cancellation is a transaction in equity (F.51). However, if the operation is intended to cover accumulated losses or an exceptionally large loss, or is made in the context of persistent losses, then the operation is classified as a non-financial transaction — a capital transfer or a current transfer.

• 5.38If government cancels or assumes debt from a public corporation which disappears as an institutional unit in the system, no transaction is recorded in the capital account or the financial account. In this case a flow is recorded in the other changes in the volume of assets account.

• 5.39If government cancels or assumes debt from a public corporation as part of a process of privatisation to be achieved in the short term, the counterpart transaction is a transaction in equity (F.51) up to the total of privatisation receipts. In other words, the government, by cancelling or assuming debt of the public corporation, is considered to be temporarily increasing its equity in the corporation. Privatisation means the giving up of control over that public corporation by the disposal of equity. Such a cancellation of debt or debt assumption leads to an increase of the own funds of the public corporation, even in the absence of an issue of equity.

• 5.40The writing-off or writing-down of bad debts by creditors and the unilateral cancellation of a liability by a debtor, known as debt repudiation, are not transactions because they do not involve interactions between institutional units by mutual agreement. The writing-off or writing-down of bad debts by creditors is recorded in the other changes in the volume of assets account.

A financial transaction with property income as counterpart

• 5.41The counterpart transaction of a financial transaction may be property income.

• 5.42Interest (D.41) is receivable by creditors and payable by debtors of certain kinds of financial claims classified in the monetary gold and special drawing rights (AF.1), currency and deposits (AF.2), debt securities (AF.3), loans (AF.4) and other accounts receivable/payable (AF.8) categories.

• 5.43Interest is recorded as accruing continuously over time to the creditor on the amount of principal outstanding. The counterpart transaction of an entry in interest (D.41) is a financial transaction creating a financial claim of the creditor against the debtor. The accumulation of interest is recorded in the financial account with the financial instrument to which it relates. The effect of this financial transaction is that interest is reinvested. The actual payment of interest is not recorded as interest (D.41), but as a transaction in currency and deposits (F.2) matched by an equivalent repayment of the relevant asset reducing the net financial claim of the creditor against the debtor.

• 5.44When accrued interest is not paid when due, it gives rise to interest arrears. As it is the accrued interest which is recorded, interest arrears do not change the total of financial assets or liabilities.

• 5.45Income of corporations comprises dividends (D.421), withdrawals of income from quasi-corporations (D.422), reinvested earnings on foreign direct investment, (D.43) and retained earnings of domestic enterprises. The effect of the counterpart financial transaction in the case of reinvested earnings is that the property income is reinvested in the direct investment enterprise.

• 5.46Dividends are recorded as investment income at the time the shares start to be quoted ex-dividend. This also applies to withdrawals of income from quasi-corporations. A different recording is made for extraordinarily large dividends or withdrawals that are out of line with recent experience of the amount of income available for distribution to the owners of the corporation. Such excess distribution is recorded as a withdrawal of equity in the financial account and not as investment income.

• 5.47Property income receivable by investment funds, net of a part of management costs, and assigned to shareholders, even though it is not distributed, is recorded in property income with a counterpart entry in the financial account under investment fund shares or units. The effect is that the income assigned to shareholders but not distributed is treated as reinvested in the fund.

• 5.48Investment income is attributed to insurance policy holders (D.44), holders of pension entitlements, and holders of investment fund shares. Regardless of the amount actually distributed by the insurance corporation, pension fund or investment fund, the full amount of investment income received by the insurance corporation or fund is recorded as distributed to the policy holders or holders of shares. The amount not actually distributed is recorded in the financial account as reinvestment.

Time of recording

• 5.49Financial transactions and their counterpart transactions are recorded at the same point in time.

• 5.50When the counterpart of a financial transaction is a non-financial transaction, both are recorded at the time the non-financial transaction takes place. For example, when sales of goods or services give rise to a trade credit, this financial transaction is to be recorded when the entries are made in the relevant non-financial account, when the ownership of the goods is transferred or when the service is provided.

• 5.51When the counterpart of a financial transaction is a financial transaction, there are three possibilities:

• (a) both financial transactions are transactions in cash or other means of payment: they are recorded at the time the first payment is made;

• (b) only one of the two financial transactions is a transaction in cash or other means of payment: they are recorded at the time payment is made; and

• (c) neither of the two financial transactions is a transaction in cash or other means of payment: they are recorded at the time the first financial transaction takes place.

A from-whom-to-whom financial account

• 5.52The from-whom-to-whom financial account or the financial account by debtor/creditor is an extension of the non-consolidated financial account. It is a three dimensional presentation of financial transactions where both parties to a transaction are shown, as well as the nature of the financial instrument being transacted.

• This presentation provides information on debtor/creditor relationships and is consistent with a from-whom-to-whom financial balance sheet. No information is provided on the institutional units to whom financial assets were sold or from whom financial assets were bought. This also applies to corresponding transactions in liabilities. The from-whom-to-whom financial account is also known as the flow of funds matrix.

• 5.53Based on the principle of quadruple-entry accounting a from-whom-to-whom financial account has three dimensions: the financial instrument category, the sector of the debtor, and the sector of the creditor. A from-whom-to-whom financial account requires three-dimensional tables covering the breakdowns by financial instrument, debtor and creditor. Such tables show the financial transactions cross-classified by debtor sector and creditor sector as shown in Table 5.1.

• 5.54The table for the financial instrument debt securities category shows that, as a result of transactions in the reference period, the debt securities acquired, net of disposals, by households and by non-profit institutions serving households (275) represent claims on non-financial corporations (65), financial corporations (43), general government (124), and the rest of the world (43). The table shows that, as a result of transactions in the reference period, non-financial corporations incurred, net of redemptions, liabilities in the form of debt securities of 147: their liabilities in this form to other non-financial corporations increased by 30, to financial corporations by 23, to general government by 5, to households and non-profit institutions serving households by 65 and to the rest of the world by 24. No debt securities were issued by households and non-profit institutions serving households. Because of the consolidated presentation of the rest of the world, no transactions are shown between non-resident institutional units. Similar tables can be compiled for all financial instrument categories.

Table 5.1 —  A from-whom-to-whom financial account for debt securities

Debtor sector Creditor sector	Debtor sector Creditor sector	Net incurrence of debt securities by	Net incurrence of debt securities by	Net incurrence of debt securities by	Net incurrence of debt securities by	Net incurrence of debt securities by	Net incurrence of debt securities by	Net incurrence of debt securities by
Debtor sector Creditor sector	Debtor sector Creditor sector	Non-financial corporations	Financial corporations	General government	Households and non-profit institutions serving households	National economy	Rest of the world	Total
Net acquisition of debt securities by	Non-financial corporations	30	11	67		108	34	142
Net acquisition of debt securities by	Financial corporations	23	22	25		70	12	82
Net acquisition of debt securities by	General government	5	2	6		13	19	32
Net acquisition of debt securities by	Households and non-profit institutions serving households	65	43	124		232	43	275
Net acquisition of debt securities by	National economy	123	78	222		423	108	531
Net acquisition of debt securities by	Rest of the world	24	28	54		106		106
Net acquisition of debt securities by	Total	147	106	276		529	108	637

• 5.55The from-whom-to-whom financial account allows analysis of who is financing whom, to what amount and by which financial asset. It provides the answers to questions such as:

• (a) What are the counterpart sectors for the financial assets acquired net, or for the liabilities incurred net by an institutional sector?

• (b) Which are the corporations with which the general government sector participates?

• (c) What amounts of debt securities do resident sectors and the rest of the world acquire (net of disposals), which have been issued (net of redemptions) by general government, financial or non-financial corporations, and the rest of the world?

CLASSIFICATION OF FINANCIAL TRANSACTIONS BY CATEGORIES IN DETAIL

The following definitions and descriptions are of financial instruments. When a transaction is being recorded, the code used is F. When the underlying stock level or position of an asset or liability is being recorded, then the coding is AF.

Monetary gold and special drawing rights (F.1)

• 5.56The monetary gold and special drawing rights (SDRs) (F.1) category consists of two subcategories:

• (a) monetary gold (F.11); and

• (b) special drawing rights (SDRs) (F.12).

Monetary gold (F.11)

• 5.57 Definition: monetary gold is gold to which monetary authorities have title and which is held in reserve assets.

• It includes gold bullion, and unallocated gold accounts with non-residents that give title to claim the delivery of gold.

• 5.58Monetary authorities include the central bank and central government institutions which carry out operations usually attributed to the central bank. Such operations include the issue of currency, maintenance and management of reserve assets and the operation of exchange stabilisation funds.

• 5.59Being subject to the effective control of monetary authorities means that:

• (a) the resident unit can transact in these claims on non-residents only on the terms specified by the monetary authorities or with their express approval;

• (b) the monetary authorities have access on demand to these claims on non-residents to meet balance of payments financing needs and other related purposes; and

• (c) there is a prior law or other binding arrangement confirming points (a) and (b) above.

• 5.60All monetary gold is included in reserve assets or is held by international financial organisations. Its components are:

• (a) gold bullion (including monetary gold held in allocated gold accounts); and

• (b) unallocated gold accounts with non-residents.

• 5.61Gold bullion included in monetary gold is the only financial asset for which there is no counterpart liability. It takes the form of coins, ingots, or bars with a purity of at least 995 parts per 1 000 . Gold bullion not held as reserve assets is a non-financial asset and is included in non-monetary gold.

• 5.62Allocated gold accounts provide ownership of a specific piece of gold. The ownership of the gold remains with the entity placing it for safe custody. These accounts typically offer purchasing, storing, and selling facilities. When held as reserve assets, allocated gold accounts are classified as monetary gold, and so as a financial asset. When not held as reserve assets, allocated gold accounts represent ownership of a commodity, namely non-monetary gold.

• 5.63In contrast to allocated gold accounts, unallocated gold accounts represent a claim against the account operator to deliver gold. When held as reserve assets, unallocated gold accounts are classified as monetary gold, and so as a financial asset. Unallocated gold accounts not held as reserve assets are classified as deposits.

• 5.64Transactions in monetary gold consist predominantly of purchases and sales of monetary gold among monetary authorities or certain international financial organisations. There cannot be any transactions in monetary gold involving institutional units other than those. Purchases of monetary gold are recorded in the financial accounts of monetary authorities as an increase in financial assets and sales are recorded as a decrease in financial assets. The counterpart entries are recorded respectively as a decrease in financial assets or an increase in financial assets of the rest of the world.

• 5.65If monetary authorities add non-monetary gold to their holdings of monetary gold (for example, by purchasing gold on the market), or release monetary gold from their holdings for non-monetary purposes (for example, by selling it on the market), they are deemed to have monetised or demonetised gold, respectively. Monetisation or demonetisation of gold does not give rise to entries in the financial account, but to entries in the other changes in the volume of assets account as a change in classification of assets and liabilities, i.e. the reclassification of gold from a valuable (AN.13) to monetary gold (AF.11) (paragraphs 6.22-6.24). Demonetisation of gold is reclassification of monetary gold to a valuable.

• 5.66Deposits, loans, and securities denominated in gold are treated as financial assets other than monetary gold and are classified along with similar financial assets in foreign currency in the appropriate category. Gold swaps are forms of securities repurchase agreements (repos) involving either monetary gold or non-monetary gold. They imply the exchange of gold for a deposit with an agreement that the transaction will be reversed at an agreed future date at an agreed gold price. Following the general practice for the recording of reverse transactions, the gold taker will not record the gold on its balance sheet, while the gold provider will not remove the gold from its balance sheet. Gold swaps are recorded as collateralised loans by both parties, where the collateral is gold. Monetary gold swaps are undertaken between monetary authorities or between monetary authorities and other parties, while non-monetary gold swaps are similar transactions without the involvement of monetary authorities.

• 5.67Gold loans consist of the delivery of gold for a given time period. As for other reverse transactions, legal ownership of the gold is transferred, but the risks and benefits of changes in the gold price remain with the lender. Gold borrowers often use these transactions to cover their sales to third parties in periods of gold shortage. A fee, determined by the value of the underlying asset and the duration of the reverse transaction, is paid to the original owner for the use of the gold.

• 5.68Monetary gold is a financial asset; the fees for gold loans are accordingly payments for putting a financial asset at the disposal of another institutional unit. Fees associated with loans of monetary gold are treated as interest. This also applies as a simplifying convention to fees paid on loans of non-monetary gold.

SDRs (F.12)

• 5.69 Definition: SDRs are international reserve assets created by the International Monetary Fund (IMF) and which are allocated to its members to supplement existing reserve assets.

• 5.70The SDR Department of the IMF manages reserve assets by allocating SDRs among member countries of the IMF and certain international agencies, collectively known as the participants.

• 5.71The creation of SDRs through their allocation, and extinguishing them through their cancellations, are transactions. Allocations of SDRs are recorded gross as acquisition of an asset in the financial accounts of the monetary authorities of the individual participant, and as an incurrence of a liability by the rest of the world.

• 5.72SDRs are held exclusively by official holders, which are central banks and certain international agencies, and are transferable among participants and other official holders. SDR holdings represent each holder's assured and unconditional right to obtain other reserve assets, especially foreign exchange, from other IMF members.

• 5.73SDRs are assets with matching liabilities but the assets represent claims on the participants collectively and not on the IMF. A participant may sell some or all of its SDR holdings to another participant and receive other reserve assets, particularly foreign exchange, in return.

Currency and deposits (F.2)

• 5.74 Definition: currency and deposits are currency in circulation and deposits, both in national currency and in foreign currencies.

• 5.75There are three sub-categories of financial transaction in relation to currency and deposits:

• (a) currency (F.21);

• (b) transferable deposits (F.22); and

• (c) other deposits (F.29).

Currency (F.21)

• 5.76 Definition: currency is notes and coins that are issued or authorised by monetary authorities.

• 5.77Currency includes:

• (a) notes and coins issued by resident monetary authorities as national currency in circulation held by residents and non-residents; and

• (b) notes and coins issued by non-resident monetary authorities as foreign currencies in circulation and held by residents.

• 5.78Currency does not include:

• (a) notes and coins that are not in circulation, for example, a central bank's stock of its own notes or emergency stockpiles of notes; and

• (b) commemorative coins that are not commonly used to make payments. They are classified as valuables.

Box 5.2 —   Currency issued by the Eurosystem

• B5.2.1.Euro banknotes and coins issued by the Eurosystem are the domestic currency of the Member States in the euro area. Although treated as domestic currency, holdings of euro currency by residents of each participating Member State are liabilities of the resident national central bank only to the extent of its notional share in the total issue, based on its share in the capital of the ECB. A consequence is that, in the euro area, from a national perspective, part of residents' holdings of domestic currency may be a financial claim on non-residents.

• B5.2.2.Currency issued by the Eurosystem includes notes and coins. Notes are issued by the Eurosystem; coins are issued by central governments in the euro area, although, by convention, they are treated as liabilities of the national central banks which as a counterpart hold a notional claim on general government. Euro banknotes and coins may be held by euro area residents or by non-residents of the euro area.

Deposits (F.22 and F.29)

• 5.79 Definition: deposits are standardised, non-negotiable contracts with the public at large, offered by deposit-taking corporations and, in some cases, by central government as debtors, and allowing the placement and the later withdrawal of the principal amount by the creditor. Deposits usually involve the debtor giving back the full principal amount to the investor.

Transferable deposits (F.22)

• 5.80 Definition: transferable deposits are deposits exchangeable for currency on demand, at par, and which are directly usable for making payments by cheque, draft, giro order, direct debit/credit, or other direct payment facilities, without penalty or restriction.

• 5.81Transferable deposits predominantly represent liabilities of resident deposit-taking corporations, in some cases of central government, and of non-resident institutional units. Transferable deposits include any of the following:

• (a) inter-bank positions between monetary financial institutions;

• (b) deposits held with the central bank by deposit-taking corporations in excess of the amount of reserves that they are obliged to hold, and which they are able to use without notice or restriction;

• (c) deposits which other monetary financial institutions incur vis-à-vis the central bank in the form of unallocated gold accounts which are not monetary gold, and also corresponding deposits in the form of precious metal accounts;

• (d) foreign currency deposits under swap arrangements;

• (e) the reserve position with the IMF forming the 'reserve tranche', i.e. the SDR or foreign currency amounts that a member country may draw from the IMF at short notice, and other claims on the IMF that are readily available to the member country, including the reporting country's lending to the IMF under the general arrangements to borrow (GAB) and the new arrangements to borrow (NAB).

• 5.82Transferable deposit accounts may have overdraft facilities. If the account is overdrawn, the withdrawal to zero is the withdrawal of a deposit, and the amount of the overdraft is the granting of a loan.

• 5.83All resident sectors and the rest of the world may hold transferable deposits.

• 5.84Transferable deposits may be divided by currency into transferable deposits denominated in domestic currency and in foreign currencies.

Other deposits (F.29)

• 5.85 Definition: other deposits are deposits other than transferable deposits. Other deposits cannot be used to make payments except on maturity or after an agreed period of notice, and they are not exchangeable for currency or for transferable deposits without some significant restriction or penalty.

• 5.86Other deposits include:

• (a) time deposits, which are deposits not immediately disposable, but disposable with an agreed maturity. Their availability is subject to a fixed term or they are redeemable at notice of withdrawal. They also include deposits with the central bank held by deposit-taking corporations as compulsory reserves to the extent that the depositors cannot use them without notice or restriction;

• (b) savings deposits, savings books, non-negotiable savings certificates or non-negotiable certificates of deposit;

• (c) deposits resulting from a savings scheme or contract. These deposits often involve an obligation on the part of the depositor to make regular payments over a given period, and the capital paid and interest accrued do not become available until a fixed term has elapsed. These deposits are sometimes combined with the issue, at the end of the savings period, of loans which are proportionate to the accumulated savings, for the purpose of buying or building a dwelling;

• (d) evidence of deposits issued by savings and loan associations, building societies, credit unions etc., sometimes called shares, which are redeemable on demand or at relatively short notice, but which are not transferable;

• (e) repayable margin payments related to financial derivatives which are liabilities of monetary financial institutions;

• (f) short-term repurchase agreements (repos) which are liabilities of monetary financial institutions; and

• (g) liabilities to the IMF that are components of international reserves and are not evidenced by loans; they consist of use of Fund credit within the IMF's General Resources Account. This item measures the amount of a member's currency with the IMF that the member is obligated to repurchase.

• 5.87Other deposits do not include negotiable certificates of deposit and negotiable savings certificates. They are classified under debt securities (AF.3).

• 5.88Other deposits may be divided by currency into other deposits denominated in domestic currency and other deposits denominated in foreign currencies.

Debt securities (F.3)

• 5.89 Definition: debt securities are negotiable financial instruments serving as evidence of debt.

Main features of debt securities

• 5.90Debt securities have the following characteristics:

• (a) an issue date on which the debt security is issued;

• (b) an issue price at which investors buy the debt securities when first issued;

• (c) a redemption date or maturity date on which the final contractually scheduled repayment of the principal is due;

• (d) a redemption price or face value, which is the amount to be paid by the issuer to the holder at maturity;

• (e) an original maturity, which is the period from the issue date until the final contractually scheduled payment;

• (f) a remaining or residual maturity, which is the period from the reference date until the final contractually scheduled payment;

• (g) a coupon rate that the issuer pays to holders of the debt securities; the coupon may be fixed throughout the life of the debt security or vary with inflation, interest rates, or asset prices. Bills and zero-coupon debt securities offer no coupon interest;

• (h) coupon dates, on which the issuer pays the coupon to the securities' holders;

• (i) the issue price, redemption price, and coupon rate may be denominated (or settled) in either national currency or foreign currencies; and

• (j) the credit rating of debt securities, which assesses the credit worthiness of individual debt securities issues. Rating categories are assigned by recognised agencies.

• With regard to point (c) in the first subparagraph, the maturity date may coincide with the conversion of a debt security into a share. In this context, convertibility means that the holder may exchange a debt security for the issuer's common equity. Exchangeability means that the holder may exchange the debt security for shares of a corporation other than the issuer. Perpetual securities, which have no stated maturity date, are classified as debt securities.

• 5.91Debt securities include financial assets and liabilities which may be described according to different classifications — by maturity, holding and issuing sector and subsector, currency, and type of interest rate.

Classification by original maturity and currency

• 5.92Transactions in debt securities are divided by original maturity into two subcategories:

• (a) short-term debt securities (F.31); and

• (b) long-term debt securities (F.32).

• 5.93Debt securities may be denominated in national currency or in foreign currencies. A further breakdown of debt securities denominated in various foreign currencies may be appropriate and will vary depending on the relative importance of the individual foreign currencies for an economy.

• 5.94Debt securities with both principal and coupon linked to a foreign currency are classified as denominated in that foreign currency.

Classification by type of interest rate

• 5.95Debt securities may be classified by type of interest rate. Three groups of debt securities are distinguished:

• (a) fixed interest rate debt securities;

• (b) variable interest rate debt securities; and

• (c) mixed interest rate debt securities.

Fixed interest rate debt securities

• 5.96Fixed interest rate debt securities cover:

• (a) plain debt securities, which are issued and redeemed at par value;

• (b) debt securities issued at discount or at premium to their par value. Examples are treasury bills, commercial paper, promissory notes, bill acceptances, bill endorsements, and certificates of deposit;

• (c) deep-discounted bonds having small interest payments and issued at a considerable discount to par value;

• (d) zero-coupon bonds, which are single-payment debt securities with no coupon payments. The bond is sold at a discount from par value, and the principal is repaid at maturity or sometimes redeemed in tranches. Zero-coupon bonds may be created from fixed rate debt securities by 'stripping off' the coupons, that is, by separating the coupons from the final principal payment of the security and trading them independently;

• (e) Separate Trading of Registered Interest and Principal Securities (STRIPS), or stripped debt securities, which are securities whose interest and principal payment portions have been separated, or 'stripped', and may then be sold separately;

• (f) perpetual, callable, and puttable debt securities, and debt securities with sinking fund provision;

• (g) convertible bonds, which may, at the option of the holder, be converted into the equity of the issuer, at which point they are classified as shares; and

• (h) exchangeable bonds, with an embedded option to exchange the security for a share in a corporation other than the issuer, usually a subsidiary or company in which the issuer owns a stake, at some future date and under agreed conditions.

• 5.97Fixed interest rate debt securities also include other debt securities like equity warrant bonds, subordinated bonds, non-participating preference shares that pay a fixed income but do not provide for participation in the distribution of the residual value of a corporation on dissolution, and stapled instruments.

Variable interest rate debt securities

• 5.98Variable interest rate debt securities have their interest and/or principal payments linked to:

• (a) a general price index for goods and services (such as the consumer price index);

• (b) an interest rate; or

• (c) an asset price.

• 5.99Variable interest rate debt securities are usually classified as long-term debt securities, unless they have an original maturity of one year or less.

• 5.100Inflation-linked and asset price-linked debt securities include those debt securities issued as inflation-linked bonds and as commodity-linked bonds. The coupons and/or the redemption value of a commodity-linked bond are linked to the price of a commodity. Debt securities, interest on which is linked to the credit rating of another borrower, are classified as index-linked debt securities, as credit ratings do not change in a continuous manner in response to market conditions.

• 5.101For interest rate-linked debt securities, the contractual nominal interest and/or the redemption value are variable in terms of national currency. At the date of issue, the issuer cannot know the value of interest and principal repayments.

Mixed interest rate debt securities

• 5.102Mixed interest rate debt securities have both a fixed and a variable coupon rate over their life and are classified as variable interest rate debt securities. They cover debt securities that have:

• (a) a fixed coupon and a variable coupon at the same time;

• (b) a fixed or a variable coupon until a reference point and then a variable or a fixed coupon from that reference point to the maturity date; or

• (c) coupon payments that are pre-fixed over the life of the debt securities, but are not constant over time. They are called stepped debt securities.

Private placements

• 5.103Debt securities also include private placements. Private placements involve an issuer selling debt securities directly to a small number of investors. The credit worthiness of the issuers of these debt securities are typically not assessed by credit rating agencies, and the securities are generally not resold or repriced, so the secondary market is shallow. However, most private placements meet the criterion of negotiability and are classified as debt securities.

Securitisation

• 5.104 Definition: securitisation is the issuance of debt securities for which coupon or principal payments are backed by specified assets or by future income streams. A variety of assets or future income streams may be securitised including, among others, residential and commercial mortgage loans; consumer loans; corporate loans, government loans; insurance contracts; credit derivatives; and future revenue.

• 5.105Securitisation of assets or of future income streams is an important financial innovation that has led to the creation and extensive use of new financial corporations to facilitate the creation, marketing, and issuance of debt securities. Securitisation has been driven by different considerations. For corporations, these include: cheaper funding than is available through banking facilities; the reduction in regulatory capital requirements; the transfer of various types of risk like credit risk or insurance risk; and the diversification of funding sources.

• 5.106Securitisation schemes vary within and across debt securities markets. These schemes can be grouped into two broad types:

• (a) a financial corporation engaging in the securitisation of assets and a transfer of the assets providing collateral from the original holder, known as a true-sale; and

• (b) securitisation schemes involving a financial corporation engaged in the securitisation of assets and a transfer of credit risk only, using credit default swaps (CDS) — the original owner retains the assets, but passes on the credit risk. This is known as synthetic securitisation.

• 5.107With regard to the scheme referred to in point (a) of paragraph 5.106 a securitisation corporation is created to hold securitised assets or other assets that have been securitised by the original holder, and issue debt securities collateralised by those assets.

• 5.108It is essential to establish, in particular, whether the financial corporation engaged in the securitisation of assets actively manages its portfolio by issuing debt securities, rather than simply acting as a trust that passively manages assets or holds debt securities. Where the financial corporation is the legal owner of a portfolio of assets, issues debt securities that present an interest in the portfolio, has a full set of accounts, it is acting as a financial intermediary classified in other financial intermediaries. Financial corporations engaged in the securitisation of assets are distinguished from entities that are created solely to hold specific portfolios of financial assets and liabilities. These entities are combined with their parent corporation, if resident in the same country as the parent. However, as non-resident entities they are treated as separate institutional units and are classified as captive financial institutions.

• 5.109In the case of the securitisation scheme referred to in point (b) of paragraph 5.106, the original owner of the assets, or protection buyer, by means of credit default swaps (CDS), transfers the credit risk related to a pool of diversified reference assets to a securitisation corporation but retains the assets themselves. The proceeds from the issue of debt securities are placed in a deposit or in another safe investment such as AAA bonds, and the interest accrued on the deposit, together with the premium from the CDS, finances the interest on the debt securities issued. If a default occurs, the principal owed to the holders of the ABS is reduced — with junior tranches getting the first 'hit' etc. Coupon and principal payments may also be redirected to the original collateral owner from investors in the debt securities to cover default losses.

• 5.110An asset-backed security (ABS) is a debt security whose principal and/or interest is solely payable from the cash flows produced by a specified pool of financial or non-financial assets.

Covered bonds

• 5.111 Definition: covered bonds are debt securities issued by a financial corporation, or fully guaranteed by a financial corporation. In case of default of the issuing or guarantor financial corporation, bond holders have a priority claim on the cover pool, in addition to their ordinary claim on the financial corporation.

Loans (F.4)

• 5.112 Definition: loans are created when creditors lend funds to debtors.

Main features of loans

• 5.113Loans are characterised by the following features:

• (a) the conditions governing a loan are either fixed by the financial corporation granting the loan or agreed by the lender and the borrower directly or through a broker;

• (b) the initiative to take out a loan normally lies with the borrower; and

• (c) a loan is an unconditional debt to the creditor which has to be repaid at maturity and which is interest-bearing.

• 5.114Loans can be financial assets or liabilities of all resident sectors and the rest of the world. Deposit taking corporations normally record short-term liabilities as deposits, not as loans.

Classification of loans by original maturity, currency, and purpose of lending

• 5.115Transactions in loans can be categorised into two types of original maturity:

• (a) short-term loans (F.41) with a short-term original maturity, including loans repayable on demand; and

• (b) long-term loans (F.42) with a long-term original maturity.

• 5.116For analytical purposes, loans may be subcategorised further as follows:

• (a) loans denominated in national currency; and

• (b) loans denominated in foreign currencies.

• For households, a useful sub-categorisation is as follows:

• (a) loans for consumption;

• (b) loans for house purchases; and

• (c) other loans.

Distinction between transactions in loans and transactions in deposits

• 5.117The distinction between transactions in loans (F.4) and transactions in deposits (F.22) is that a debtor offers a standardised non-negotiable contract in the case of a loan, but not in the case of a deposit.

• 5.118Short-term loans granted to deposit taking corporations are classified as transferable deposits or as other deposits, and short-term loans accepted by institutional units other than deposit-taking corporations are classified as short-term loans.

• 5.119Placements of funds between deposit-taking corporations are always recorded as deposits.

Distinction between transactions in loans and transactions in debt securities

• 5.120The distinction between transactions in loans (F.4) and transactions in debt securities (F.3) is that loans are non-negotiable financial instruments while debt securities are negotiable financial instruments.

• 5.121In most cases, loans are evidenced by a single document and transactions in loans are carried out between one creditor and one debtor. By contrast, debt security issues consist of a large number of identical documents, each evidencing a round sum, which together form the total amount borrowed.

• 5.122A secondary market in loans exists. In cases where loans become negotiable on an organised market, they are to be reclassified from loans to debt securities, provided that there is evidence of secondary market trading, including the existence of market makers, and frequent quotation of the financial asset, such as provided by bid-offer spreads. An explicit conversion of the original loan is normally involved.

• 5.123Standardised loans are offered in most cases by financial corporations and they are often granted to households. Financial corporations determine the conditions and households may only choose either to accept or refuse. The conditions of non-standardised loans however are usually the result of negotiations between the creditor and the debtor. This is an important criterion which facilitates a distinction between non-standardised loans and debt securities. In the case of public security issues, the issue conditions are determined by the borrower, possibly after consulting the bank/lead-manager-bank. In the case of private security issues, however, the creditor and the debtor negotiate the issue conditions.

Distinction between transactions in loans, trade credit and trade bills

• 5.124Trade credit is credit extended directly by the suppliers of goods and services to their customers. Trade credit arises when payment for goods and services is not made at the same time as the change in ownership of a good or the provision of a service.

• 5.125Trade credit is distinguished from loans to finance trade, which are classified as loans. Trade bills drawn on a customer by the supplier of goods and services, which are subsequently discounted by the supplier with a financial corporation, become a claim by a third party on the customer.

Securities lending and repurchase agreements

• 5.126 Definition: securities lending is the temporary transfer of securities by the lender to the borrower. The securities borrower may be required to provide assets as collateral to the securities lender in the form of cash or securities. Legal title passes on both sides of the transaction so that borrowed securities and collateral can be sold or 'on-lent'.

• 5.127 Definition: a securities repurchase agreement is an arrangement involving the provision of securities like debt securities or shares in exchange for cash or other means of payment, with a commitment to repurchase the same or similar securities at a fixed price. The commitment to repurchase may be either on a specified future date or an 'open' maturity.

• 5.128Securities lending with cash collateral and repurchase agreements (repos) are different terms for financial arrangements with the same economic effects, namely those of a secured loan, as both involve the provision of securities as collateral for a loan or a deposit, where a deposit-taking corporation sells the securities under such a financial arrangement. The different features of the two arrangements are shown in Table 5.2.

Table 5.2 —  Main features of securities lending and repurchase agreements