William Griever Sarit Kessel Debra Kuntz William Carlucci William Hunter

1. Reporting of Foreign-Residents' Holding of U.S. Securities, Including Selected Money Market Instruments (SHLA) Training Seminar William Griever Sarit Kessel Debra Kuntz William Carlucci William Hunter May 1, 2002

2. Surveys of Foreign Portfolio Investment in the United States William Griever

3. Survey Perspective • Part of an integrated system • Used in conjunction with monthly flow data • Surveys are detailed, accurate, but not timely • Monthly data very timely, but less accurate • Used together to create ongoing estimates

4. Survey History • First survey in 1974 • Measured foreign investment in US securities • Congressional concern over growing foreign influence • Existing data lacked detail

5. Survey History • Liability surveys continued at 5-year intervals • Last survey as of March 31, 2000 • This will be the 7th liabilities survey • Have been large, benchmark surveys with hundreds of reporters • Also 3 asset surveys starting in 1994

6. Survey Uses • Correct geography • Monthly reports measure versus location of purchase/sale • Results in heavy bias towards financialcenters such as UK

7. Survey Uses • Correct amounts foreign held • Security-level collection allows for greater data editing • Last survey decreased estimated level of foreign holdings by $300 billion • Shows investment by Industry

8. Data Users • Financial industry analysts • International organizations • USG • Academic research

9. Data Uses • USG - BoP, IIP, country exposure • Reduced net debtor position • Current account sustainability • Help to explain $US strength?

10. IncreasinglyImportant • Foreign ownership increasing • 1974 - 4.8% • 2000 - 10.2% • Securities flows now much greater than bank lending

11. Increasingly Important • Crisis of 1997-1998 caught most by surprise • Lack of key data helped mask the problem • Led to recognition that greater financial transparency was required • Implies better/faster data needed

12. Changes Required • Lack of detailed, timely data on Reserve Assets and External Debt positions identified as major gaps • Improved Reserve Asset reporting operational • External Debt reporting starts in 2003

13. Result • IMF’s External Debt Reporting System (EDRS) • Countries will expand collection and accelerate publication of external debt data • USG strongly supports the system • Greater transparency required in an integrated world financial system

14. EDRS • Hopefully an Early Warning system • Requires many changes to the US reporting system • Annual portfolio liabilities surveys with shorter submission periods part of the changes • Most surveys will include large reporters only

15. EDRS • Quarterly reporting of external debt with a one quarter lag by sector (gov’t, bank, other) and type debt (bond, loan, etc.) required • Forward debt repayment schedules strongly encouraged • Currency composition of debt also encouraged

16. EDRS • US will combine estimates with measurements • Measurement would require quarterly surveys • Survey results will be combined with monthly transactions data • Result = credible estimates

17. IIF Recommendations • IIF strongly urged changes • IIF recommended a more rigorous system than will be implemented • “…private sector participants in these markets bear a responsibility for full and timely disclosure of information on their activities.”

18. Summary • Changes will increase the burden on both reporters and compilers • By combining estimates with measurement we’re attempting to minimize the work load • Timely, accurate data from reporters is the key

19. Who Must Report? Sarit Kessel

20. Who Must Report • Large U.S.- Resident Custodians • Large U.S.- Resident Issuers

21. U.S. Residency • U.S. Resident • Any individual, corporation or other organization located in the United States. • This includes: branches, subsidiaries and affiliates of foreign entities located in the United States. • Corporations located in the United States • Exclude: International and regional organizations even if they are located in the United States.

22. U.S. Residency • How to determine residency • Tax forms • W-9 forms are filed by U.S. residents • W-8 forms are filed by non-U.S. residents • Ifnot available use the mailing address

23. U.S. Residency • Examples of U.S. residents • Bayerische Landesbank NY Branch • BP America Inc • Examples of non-U.S. residents • Bank of New York Tokyo Branch • GMAC Canada • International Bank for Reconstruction and Development (IBRD)

24. U.S.- Resident Custodian Organizations that manage the safekeeping of U.S. securities for: • The account of other entities located outside the United States

25. U.S.- Resident Custodians • Each U.S. resident custodian should file one consolidated report for: • The custody accounts for which safekeeping services are provided • Their own securities held directly by foreigners

26. U.S.- Resident Custodians • U.S.-resident custodians should exclude custody accounts held by their foreign affiliates or subsidiaries. • U.S. affiliates or subsidiaries of foreign custodians should exclude custody accounts held by their foreign parents.

27. U.S.-Resident Custodians • Schedule 2 Reporting: • U.S.-resident custodians should report all U.S. securities held in custody for foreign-residents. • U.S.-resident custodians, that use foreign subcustodians to directly manage their foreign clients’ U.S. securities should report these U.S. securities. • U.S.-resident custodians should report all U.S. securities that are settled and cleared through foreign securities depositories (e.g., Euroclear)

28. U.S.-Resident Issuers • Organizations whose securities are held directly by foreign residents, with no U.S. - resident custodian involved.

29. U.S.-Resident Issuers • Each U.S.-resident issuer should file one consolidated report for: • Their custody holdings for foreign-residents • Securities issued by the reporters subsidiaries, branches, and affiliates in the United States

30. U.S.-Resident Issuers • U.S.-resident issuers should exclude securities issued by foreign affiliates or subsidiaries. • U.S. affiliates or subsidiaries of foreign investors should exclude any direct investment with their foreign parent.

31. U.S.-Resident Issuers • Schedule 2 reporting: • Report securities held directly by foreign residents • Report securities settled and cleared through a foreign central securities depository (Euroclear)

32. Who Must Report A U.S.-resident issuer clears and settles through foreign depository Foreign Depository U.S.-resident issuer Does not report Files Schedules 1 and 2

33. Who Must Report A foreign investor employs a foreign custodian U.S.-Resident Issuer Foreign Custodian Does not report Files Schedules 1 and 2

34. Who Must Report A U.S.-resident custodian holding securities for foreigner U.S.-resident custodian Foreigner Files Schedules 1 and 2

35. Who Must Report Flow Chart for Bearer Bonds Foreigner 1 2 U.S.-resident custodian U.S. resident Issuer Files Schedules 1 and 2 Files Schedules 1 and 2 FRBNY will eliminate double reporting.

36. What Must Be Reported on the Annual Report of Foreign Holdings of U.S. Securities, Including Selected Money Market Instruments (SHLA) Debra Kuntz

37. U.S. Securities • Securities issued by U.S. entities, including: • U.S.-resident organizations • U.S. subsidiaries of foreign organizations • U.S. branches of foreign banks • Exclude securities issued by International and Regional Organizations. • Although located in the United States, these organizations are considered foreign entities.

38. U.S. Securities • Information that does not contribute to determining if a U.S. security: • nationality of parent organization • nationality of guarantor • place of issue or trading • currency of issue

39. U.S. SecurityExample 1 • Euro denominated 2-year note issued by a Daimler Chrysler affiliate incorporated in the United States. • Is this security reportable?

40. U.S. SecuritiesExample 1 Answer • Euro denominated 2-year note issued by a Daimler Chrysler affiliate incorporated in the United States. • Is this security reportable? • Yes. The security was issued by a U.S.-resident entity.

41. U.S. SecuritiesExample 2 • U.S. dollar-denominated 30-year Yankee note issued by the Inter-American Development Bank. • Is this security reportable?

42. U.S. SecuritiesExample 2 Answer • U.S. dollar-denominated 30-year Yankee note issued by the Inter-American Development Bank. • Is this security reportable? • No. This security was issued by a Regional Organization. This entity is classified as foreign, even though it is located in the United States.

43. U.S. SecuritiesExample 3 • U.S. dollar-denominated asset-backed security issued by Company B incorporated in the United States and guaranteed by the parent, Company A, incorporated in Hong Kong. • Is this security reportable?

44. Foreign SecuritiesExample 3 Answer • U.S. dollar-denominated asset-backed security issued by Company B incorporated in the United States and guaranteed by the parent, Company A, incorporated in Hong Kong. • Is this security reportable? • Yes. This security was issued by a U.S.-resident entity. The location of the guarantor does not factor into the decision of whether the security is U.S. or not.

45. Type of Reportable U.S. Securities • Equity • Short-Term Debt • Long-Term Debt • Asset-Backed Securities

46. Equity • All instruments representing an ownership interest in U.S.-resident organizations. • However, ownership interests representing direct investment are not reported.

47. EquityDirect Investment • Direct investment is defined as ownership or control of 10% or more of an organization’s voting stock. • Direct investment positions should be reported to the Commerce Department and excluded from this report.

48. EquityDirect Investment • If one of the companies is a bank or bank holding company, direct investment is limited to “permanent” debt or equity. • Positions with foreign affiliates that arise out of normal banking business are not direct investment and should be reported.

49. Equity • Reportable equity securities include: • common stock • restricted stock • preferred stock • shares/units in U.S. mutual funds • shares/units in unincorporated business enterprises, such as limited partnerships

50. Equity • Exclude from equity: • convertible debt • nonparticipating preference shares • depositary receipts where the underlying security is foreign • Convertible debt and nonparticipating preference shares are reported, but should be classified as debt on this report.