Year 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996

• Home
• Articles
• Reports
• Legal

• U.S. Cross-Border Derivatives Data: A User's Guide
  • Derivatives and the U.S. External-Sector Reports
  • Overview of TIC Form D
  • Results from the 2006 Form D Data
  • Using the Data to Estimate Risk Exposure
  • Summary
  • Print version
    (104 kb PDF)

U.S. Cross-Border Derivatives Data:
A User's Guide

---

Stephanie E. Curcuru, of the Board's Division of International Finance, prepared this article. Jonas J. Robison provided research assistance.

The global derivatives market has grown rapidly in the past decade. By one measure of market size--the notional value, which is used to determine the payments made on a derivatives contract--the derivatives market expanded from $87 trillion in June 1998 to $454 trillion in June 2006 (figure 1). ¹ Measured by the price at which a derivatives contract can be purchased in a current transaction, or the market value, the derivatives market grew from $3 trillion in June 1998 to $10 trillion as of June 2006.  

Available data suggest that cross-border derivatives deals--in which a resident of one country enters into a contract with a resident of another country--make up a substantial share of derivatives transactions. ² Recognizing this fact, the International Monetary Fund (IMF) has recommended that its member countries include cross-border derivatives in their reports on external-sector finances. ³ Many countries with financial services firms active in the derivatives market have included derivatives in these reports since the mid-1990s. The United States, however, has to date published very little information on cross-border derivatives because of the limited availability of data. ⁴ As a result, U.S. reports on cross-border financial flows and holdings currently exclude the bulk of transactions and positions in cross-border derivatives.

To address these gaps in data and reporting, the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the Federal Reserve Board began collecting data on U.S. cross-border transactions and positions in derivatives in March 2005. They collect the data through the Treasury International Capital (TIC) reporting system, which for many years has collected similar data for securities such as stocks and bonds. ⁵ Because existing TIC reporting forms were ill equipped to capture cross-border derivatives transactions and positions, the Treasury developed a new form specifically for this purpose--TIC form D.

This article introduces the new data collected by form D and provides helpful information for data users. The article begins with a discussion of the relevance of derivatives to the U.S. external-sector reports published by the U.S. Department of Commerce, Bureau of Economic Analysis. To date, derivatives have been largely excluded from these reports. The article explains in detail the effects of the exclusion on two such reports--the U.S. balance of payments and the U.S. international investment position. In particular, it shows how the omission of derivatives from reports on cross-border flows and holdings can lead to mistaken inferences about what is driving changes in the international investment position of the United States. The implications of the analysis extend beyond the omission of derivatives. The effect of any other systematic omission of data on the external-sector reports may be similar.

The article then summarizes the information collected by form D and shows how the data will improve external-sector reporting. It also presents the 2006 data and discusses their relation to the derivatives data reported by other countries. The article concludes with a discussion of the use of the data to estimate risk exposures. Because the terminology associated with derivatives can be somewhat daunting, detailed definitions are provided in the boxes accompanying the main text.

Derivatives and the U.S. External-Sector Reports

The purpose of TIC form D is to collect the information needed for the inclusion of cross-border derivatives transactions and holdings in U.S. external-sector reports. This section examines the effect of the inclusion of derivatives data in external-sector reports through examples of accounting entries in two such reports. The examples illustrate the current and future treatment of derivatives transactions in the U.S. balance of payments as well as the current and future treatment of derivatives holdings in the U.S. international investment position.

Types of Derivatives

A derivative is a financial contract whose value is derived from something else (such as the value of a stock or bond), referred to as the "underlying." Anything that can be measured can serve as the underlying to a derivative. The underlying can be the price of a stock, the yield on a bond, a credit rating, the value of an index, or even something more exotic, like the average temperature in a region over a given period.

Common types of derivatives include options, forwards, futures, and swaps. In an options contract, the buyer pays an up-front premium for the right, but not the obligation, to purchase or sell a specified quantity of the underlying at a specified price on (or, in some contracts, until) the expiration date. The two parties to a forward or futures contract agree to exchange assets or their cash equivalent at, or until, a future date. The two parties to a swap agree to exchange assets or their cash equivalent periodically until a future date (for more information, refer to box "Overview of Derivatives").

The U.S. Balance of Payments

A country's balance of payments (BOP) is the record of the economic transactions between its residents and those of the rest of the world in a given period. The Bureau of Economic Analysis (BEA) publishes the U.S. BOP quarterly in three sections: the current account, the capital account, and the financial account. ⁶ The current account records transactions in goods and services, income, and unilateral transfers between residents of the United States and nonresidents. Items recorded in the capital account include nonproduced assets and other capital transfers, such as debt forgiveness and transfers of goods and financial assets by foreign residents as they enter or leave the United States. Transactions in the current and capital accounts give rise to financial flows, which are recorded, in turn, in the financial account. The financial account also records cross-border transactions arising from trade in financial instruments such as stocks and bonds, including transactions associated with the purchase or sale of the securities and those associated with payment for them.

Transactions in the BOP accounts are recorded as credit or debit entries (refer to box "Accounting in the U.S. Balance of Payments"). Credit entries are given a positive sign, and debit entries a negative sign. Transactions that generate a receipt of funds into the United States, such as an export, the sale of a security to a foreign resident, the withdrawal of U.S. deposits from a foreign bank, and the deposit of funds in a U.S. bank by a foreign resident, are each recorded with a credit (positive) entry. They have offsetting debit (negative) entries to reflect transactions that generate payments of funds to foreign residents. For example, an import, the purchase of a security from a foreign resident, the deposit of new or additional U.S. funds in a foreign bank, and the withdrawal of a foreigner's deposit from a U.S. bank are each recorded with a debit (negative) entry. Because of this accounting convention, the international transactions accounts should always have a zero balance, as every positive entry in the BOP should have a corresponding negative entry.

For most current account transactions, the offsetting entry is in the financial account. For example, a U.S. firm's purchase of steel from a foreigner generates a debit (negative) entry in the current account for the imported steel. The associated payment is recorded as an offsetting positive entry in the financial account and can take any of several forms, including decreased U.S. deposits in a foreign bank or increased foreign deposits in a U.S. bank.

Accounting for Financial Instruments Other Than Derivatives

Many transactions do not involve a current account payment or receipt but instead are recorded entirely in the financial account. For example, for transactions that involve the purchase or sale of financial instruments such as stocks or bonds, both the change in financial instrument holdings and the offsetting increase or decrease in deposits are reported in the financial account. For most financial account transactions, the relevant information is collected through the TIC system. ⁷

By way of illustration, suppose that in year 1 a foreign resident purchases $100 of U.S. stock through a U.S. broker using funds that had been on deposit at a U.S. bank (table 1) . The U.S. financial services firms that facilitate this cross-border transaction are responsible for reporting it on the TIC forms. The U.S. broker in the example is responsible for reporting the stock purchase in its monthly report of TIC securities transactions. The U.S. bank records the foreigner's deposit balance at the end of each month on the TIC banking report; the decline in deposits is inferred from changes in these month-end balances.

In the example, the values reported through the TIC system generate two financial account entries. The account for U.S. securities held by foreigners ("U.S. securities other than U.S. Treasury securities") increases by $100, which is the purchase price of the stock, shown as a positive amount, or credit. The account of U.S. banking liabilities to foreigners ("U.S. liabilities reported by U.S. banks, not included elsewhere") decreases by the $100 used to purchase the stock, shown as a negative amount, or debit.

Continuing with the example, also suppose that the value of the stock falls to $50 and that in the second year the foreign resident sells the $50 worth of stock. After the sale, the cash proceeds are transferred to the U.S. bank account of the foreign resident, and so the banking deposit balance of the foreign resident increases by an amount equal to the proceeds from the sale of the stock and will be captured on the monthly TIC banking reports. As with the stock purchase, the stock sale will be included in the reports of TIC securities transactions. Accordingly, two financial account entries arise from values reported through the TIC system: a decrease (debit) of $50 in U.S. securities held by foreigners and an increase (credit) of the same amount in U.S. banking liabilities to foreigners. No entry in the financial account records the change in the stock value. ⁸

The final line in the BOP is a reconciliation line labeled "statistical discrepancy." Because the BOP is based on the double-entry accounting system, the sum of all current account, capital account, and financial account transactions should equal zero. Any remaining balance due to errors or omissions in the recorded international transactions is reported as a statistical discrepancy. In the example of the stock purchase and sale, each transaction has an exactly offsetting transaction within the financial account, the sum of all transactions recorded in each year is zero, and therefore no statistical discrepancy arises in either year.

The current presentation of the U.S. financial account includes direct investment, securities (stocks and bonds), currency, and loans and deposits (banking and brokerage). Transactions in all these instruments are recorded in the financial account as described in the example, but transactions in derivatives contracts are recorded on only a limited basis.

Accounting for Derivatives

As with transactions involving stocks or bonds, transactions involving derivatives are recorded in the financial account as increases or decreases in U.S. banking claims on, or liabilities to, foreigners. However, to date, no corresponding entry in the financial account reflects the change in the quantity of U.S. derivatives claims on, or liabilities to, foreigners. Thus, the international transactions accounts shown in the BOP capture only one side of most derivatives transactions. ⁹

The effect of the incomplete accounting for derivatives transactions in the BOP can be seen in the following example. Suppose that instead of purchasing a U.S. stock from a U.S. broker, as in the earlier example, a foreign resident purchases a derivative (such as an option) for $100 from a U.S. resident with funds on deposit in a U.S. bank (table 2) . The change in the foreigner's deposit balance, reported by the U.S. bank at the end of each month on its TIC banking report, reflects the banking transaction associated with the purchase of the derivative (in addition to banking activity arising from other transactions). The deposit balance is reported to the compilers of the financial account, and so a decrease (debit) in U.S. banking liabilities to foreigners equal to the purchase price of the derivative, or $100, is recorded in that account.

However, in the absence of TIC form D, the U.S. resident has no way of reporting a purchase or sale of a derivative, as this type of transaction is recorded on no other TIC report. As a result, the compilers of the financial account have no way of knowing that the banking transaction was for the purchase of a derivative, and thus no entry in the financial account reflects the increase in derivatives liabilities to foreigners. The failure to record a credit entry for the changes in derivatives liabilities creates an imbalance in the international transactions accounts, which results in a statistical discrepancy of $100, the purchase price of the derivative. ¹⁰

Also suppose that during year 1 the value of the derivative falls to $50 and that in year 2 the foreign resident sells the derivative. After the sale the $50 proceeds are transferred to the U.S. bank account of the foreign resident. Because banking deposits are reported on the TIC banking reports, an increase in U.S. banking liabilities of $50 is recorded in the financial account when the derivative is sold. However, nothing in the financial account reflects the decrease in derivatives liabilities to foreigners, and so a statistical discrepancy of negative $50, equal to the proceeds from the sale of the derivative, results in year 2. This example illustrates how the current BOP reporting system, in which data on cross-border derivatives transactions are incompletely recorded, gives rise to a statistical discrepancy in the BOP accounts.

The U.S. International Investment Position

Like the BOP, the U.S. international investment position (IIP) currently includes only a limited amount of derivatives claims and liabilities. The IIP reports the value of U.S.-owned assets abroad and that of foreign-owned assets in the United States. In other words, it reports the current value of the assets accumulated through the transactions recorded in the financial account of the BOP. In the IIP, the BEA decomposes each outstanding position at the end of each calendar year into three parts: the position at the end of the previous year, net transactions recorded in the BOP during the current calendar year, and valuation adjustments attributable to changes in exchange rates, prices, and other factors, such as the inclusion of data from new reporters.

Accounting for Financial Instruments Other Than Derivatives

The categories in the IIP are similar to those in the financial account of the BOP, and the transactions reported in the IIP come directly from the BOP. As previously mentioned, U.S. banking deposit claims on, and liabilities to, foreigners are collected on the monthly TIC banking reports; these data are used in the IIP. For the U.S. stock and bond holdings of foreign residents and the foreign stock and bond holdings of U.S. residents, the custodial firms holding the securities report them on periodic TIC surveys of claims and liabilities, and the BEA uses the holdings information to construct the IIP.

The presentation of holdings on the IIP can be illustrated with a variation on the previous example of the purchase and eventual sale of U.S. stock by a foreign resident. Besides the details already mentioned, we suppose that the foreign resident has $200 on deposit at a U.S. bank at the end of year 0 and that the deposit balance is reported as the year-end position on the IIP for that year (table 3) . Using the BOP transactions data from the earlier example, the IIP for year 1 reports an increase in U.S. securities held by foreigners and a decrease in U.S. banking liabilities to foreigners, both of which correspond to the purchase price of the stock ($100). As before, we suppose that the value of the stock decreases by $50 between the purchase date and the end of year 1. The year-end market value of the stock, as reported on the TIC holdings survey, is recorded in the IIP as the ending balance for year 1 ($50). The IIP reports this $50 decline in value as a valuation adjustment due to price changes. For year 1, the value of the total position decreases by the amount of the valuation adjustment, to $150. If the stock is sold before the end of year 2 and there are no further price changes, the total value of the position is unchanged. At the end of year 2, no stock claims by foreigners remain--only a banking deposit balance.

The IIP captures only the banking deposit transactions and positions associated with purchases and sales of cross-border derivatives. Just as cross-border derivatives transactions go largely unrecorded in the BOP, so cross-border derivatives positions are also mostly missing from the IIP.

Accounting for Derivatives

The current treatment of derivatives in the BEA's presentation of the IIP is illustrated by the next example, in which a foreign resident purchases a derivative instead of a stock from a U.S. resident ( table 4 ). A recorded transaction will reflect the decrease in U.S. bank liabilities to foreigners corresponding to the purchase price of the derivative, and the remaining balance of $100 in U.S. bank liabilities to foreigners will be correctly reported at the end of year 1. As in the BOP, no transaction corresponding to the purchase of the derivative will be reported. Although the value of the derivative decreases to $50 before the end of year 1, the IIP will not report the valuation adjustment. The total foreign liability position of $100 at the end of year 1 will include the correct value of the banking deposits but not the value of the derivative. When the derivative is sold in year 2, the increase in U.S. banking liabilities to foreigners equal to the total sale proceeds ($50) will be recorded correctly, but no transaction will reflect the decreased derivatives liabilities to foreigners resulting from the sale of the derivative.

The positions at the end of years 0 and 2 on the IIP are both correct, as derivatives were held at the end of neither of those years--only at the end of year 1. However, total transactions and total valuation adjustments over the two-year period are both incorrect. The IIP attributes the $50 change in the position over the period--from $200 to $150--to a net outflow of $50, when in fact the $50 change in the position is due to a price change.

As shown in this analysis, the current omission of derivatives positions from the IIP adversely affects external-sector reporting and can lead to incorrect inferences about the cause of position changes in the IIP. In the IIP presented in the example, the failure to account for transactions in, and holdings of, derivatives contracts created two problems. First, it misrepresented the cross-border positions. At the end of year 1, the true foreign position of $150 ($100 plus the correct value of the derivative--$50) was recorded as $100. Second, the valuation adjustments in derivatives positions incorrectly appear as net foreign outflows of $50. These problems can be resolved through the inclusion of specific information about cross-border derivatives transactions and positions in the IIP--the information collected on TIC form D.

Return to menu

Overview of TIC Form D

U.S. regulatory agencies have collected some information on derivatives holdings for many years in reports outside of the TIC system. However, the reports do not collect most of the information needed to include derivatives in the international transactions accounts. For example, the reported data have excluded cross-border transactions and have either excluded some cross-border positions--such as those between a parent firm and its cross-border affiliates--or collected positions on an ultimate-risk basis rather than a locational basis. ¹¹ As noted earlier, to address the gaps in data collection, the Treasury Department introduced TIC form D in 2005 to gather information on cross-border derivatives transactions and positions. ¹²

Information Collected

TIC form D collects information on U.S. residents' derivatives contracts with foreign entities, including all foreign affiliates of U.S. multinational firms. It focuses on two values: (1) the amount for which a derivatives contract can be exchanged in a transaction as of the end of the quarter, referred to as the fair value, and (2) the sum of all derivatives transactions that occur within the reporting quarter, including the proceeds from the purchases and sales of derivatives and all contractual flows, referred to as net settlements. ¹³

As is the case on other regulatory reports, fair values on form D are aggregated according to whether, from the reporter's perspective, the value on the last day of the quarter is positive or negative. The gross positive (or negative) fair value is the sum of all positions with positive (or negative) balances from the perspective of the reporter. ¹⁴

Along with fair values as of the end of the quarter, the net payments, or settlements, between the reporter and foreign residents in each quarter are reported on form D. All transactions occurring during each quarter, including those that arise from the purchases and sales of derivatives as well as from periodic contractual payments, are aggregated and reported as net settlements.

In part 1 of form D, reporters provide totals by type of contract and type of underlying ( table 5 ). Contracts that trade in the over-the-counter (OTC) market are reported separately from those that trade on exchanges. OTC contracts are categorized by the predominant type of underlying (that is, single-currency interest rate, foreign exchange, or other). ¹⁵ Data on exchange-traded contracts are reported separately for U.S. reporting firms' own contracts on foreign exchanges, the contracts of their U.S. customers on foreign exchanges, and foreign counterparties' contracts on U.S. exchanges. The fair values of OTC derivatives are reported separately for common contract types (that is, forwards, swaps, or options), while only the aggregate fair values of all types of exchange-traded contracts (such as futures and options) are reported. Aggregate fair values are also reported for three memoranda items: contracts with the reporting firms' own foreign offices, contracts with foreign official institutions, and contracts of U.S. depository institutions with foreigners. In part 2 of form D, fair values and net settlements are reported in aggregate by the counterparty's country of residence.

For many OTC contracts, cash flows are few or even nonexistent during a quarter, while fair values are significant. For those exchange-traded products (such as futures) that settle daily, the fair value is at most the change in value on the last day of the quarter, and so it will generally be quite small. The difference between net settlements and fair values for exchange-traded products will generally be smaller than the corresponding difference for OTC contracts, as net settlements for exchange-traded products include the sum of all the daily changes in the value of a contract over the quarter.

Reporting Threshold and Requirements

The reporting threshold used to determine who must file TIC form D is based on a common measure of the size of total derivatives positions, the notional value, defined earlier in the article as an amount used to determine contractual payments. All U.S. banks, securities dealers, and other firms with worldwide holdings of derivatives exceeding $100 billion in notional value (in their own and their customers' accounts) are required to fill out form D on a quarterly basis. The reporting threshold was intentionally set at a high level because, according to results obtained by other forms that collect global derivatives information, derivatives activity is concentrated in a small number of firms; fifty companies met the threshold in 2006. Forms are filed with, and validated by, the Federal Reserve Bank of New York. After further evaluation by the Federal Reserve Board, results are forwarded to the Treasury Department for release to the public.

To ease the burden on reporters, reporting requirements for form D were phased in over the first three quarters of 2005. In the first quarter, reporters were required to provide all categories of gross positive and gross negative fair values, net settlements of OTC foreign exchange contracts, and net settlements with foreign official institutions. In the second quarter, net settlements of exchange-traded contracts were added to the requirements. Finally, in the third quarter, all remaining information was required.

TIC Form D and Reporting on the U.S. External Sector

Starting in mid-2007, the compilers of the financial account at the BEA will have access to information from TIC form D on transactions and positions in cross-border derivatives. Unlike other financial instruments, derivatives do not fit easily into the standard BOP and IIP frameworks. For example, some derivatives contracts are difficult to classify strictly as claims or liabilities (refer to box "Derivatives in the International Transactions Accounts"). Because of this difficulty, in the international transactions accounts, the gross positive fair value will be recorded as the claims position, the gross negative fair value as the liabilities position, and net settlements as the net of claims and liabilities transactions.

To show how the information collected on form D will be used in the BOP and IIP, we return to the second example, in which a foreign resident purchases a derivative from a U.S. resident for $100 in year 1. Recall that the value decreases to $50, and the foreign resident sells the derivative for $50 in year 2. As shown previously, without the information collected on form D, at the end of year 1 the banking transaction corresponding to the payment of $100 for the derivatives contract is included in the BOP as a decrease in U.S. bank liabilities to foreigners, but the offsetting transaction corresponding to the increased U.S. derivatives liabilities to foreigners is not recorded in the accounts; rather, it appears as a statistical discrepancy. When the derivative is sold, there is an increase of $50 in U.S. bank liabilities to foreigners but no offsetting decrease in U.S. derivatives liabilities to foreigners, and so another statistical discrepancy is recorded.

That situation will change once the net settlements data collected on form D are incorporated into the BOP. Because the purchase price of the derivative ($100) and the sale proceeds ($50) will be included in net settlements on the U.S. resident's form D reports, the compilers of the financial account will have the information needed to include derivatives transactions in that account ( table 6 ). The transactions will be correctly recorded in years 1 and 2, and no statistical discrepancy will be reported in either year.

The fair values and transaction information collected on form D will also enable the compilers of the IIP to include derivatives contracts. The purchase price of the derivative ($100) and the year-end fair value ($50) will be included in the IIP for year 1, and the decrease in the total value of foreign assets from $200 to $150 will be correctly attributed to the price change of the derivative ( table 7 ). The position at the start of year 2 will be correctly reported, as will the transactions in that year. As shown in this example, the information collected on form D substantially improves the reporting of both the BOP and the IIP.

Return to menu

Results from the 2006 Form D Data

The Treasury Department recently released aggregate values of the data reported on TIC form D in 2006. In December 2006, the gross positive fair value of derivatives totaled $1.238 trillion, and the gross negative fair value $1.179 trillion (table 5, row labeled "Total"). Data for December 2006 are representative of broader trends for the year as a whole in terms of the relative magnitudes of the fair values reported in each category of form D. The largest fair values are for OTC derivatives, primarily single-currency interest rate swaps. The fair values reported for exchange-traded derivatives are much smaller. As discussed previously, this result is expected because exchange-traded futures that settle daily account for the bulk of exchange-traded derivatives; for these products, the fair values generally consist entirely of one-day market moves. For most types of derivatives, the reported gross positive fair value exceeds the reported gross negative fair value. Therefore, residents of the United States have net derivatives claims on foreign residents.

Unlike fair values, reported net settlements vary widely between quarters, and the flows associated with both OTC and exchange-traded derivatives are significant. During the fourth quarter of 2006, total net settlements represented a $1.783 billion outflow from the United States, primarily associated with single-currency interest rate products (table 5, row labeled "Total"). However, the result over the previous three quarters was quite different: a net inflow to residents of the United States, also primarily from single-currency interest rate products. So for all of 2006, net settlements represented a $28.8 billion inflow to the United States. The amount was evenly split between inflows associated with OTC contracts and those associated with exchange-traded contracts.

As with other TIC data on securities and banking, the bulk of fair values and net settlements is vis-à-vis the United Kingdom, but large balances are also recorded against other European countries, the Caribbean financial center countries (such as the Cayman Islands), and Japan. ¹⁶ In December 2006, the gross positive fair value of derivatives vis-à-vis residents of the United Kingdom totaled $697 billion, while the gross negative fair value totaled $668 billion, each of which represented more than half of the total reported gross fair values (table 5, row labeled "United Kingdom"). Net settlements vis-à-vis U.K. residents totaled $4.4 billion during the fourth quarter of 2006 and $6.6 billion for all of 2006, the largest flows (in absolute magnitude) into or out of any single country.

The 2006 Data in the BOP and IIP

The important role played by cross-border derivatives in U.S. financial markets becomes apparent when the TIC form D aggregates are compared with the transactions and positions in other financial instruments recorded in the international transactions accounts in 2006. Derivatives transactions reported on form D varied substantially throughout 2006, ranging from a $15 billion inflow in the third quarter to a $2 billion outflow in the fourth quarter ( table 8 , row labeled "Derivatives"). This variability is typical of cross-border flows in securities such as stocks and bonds. For 2006, derivatives net settlements amounted to inflows of $29 billion, or 4 percent of the $719 billion in total financial inflows reported in the BOP.

Derivatives net settlements appear more significant when they are compared with the magnitude of the statistical discrepancy. As shown in previous examples, if the international transactions accounts contained no errors or omissions except the omission of derivatives, the inclusion of derivatives data would reduce the BOP statistical discrepancy to zero. Although including the 2006 data on total form D net settlements in the BOP would not erase the statistical discrepancy, it would reduce it in that year. ¹⁷ For 2006, the statistical discrepancy totaled $141 billion (table 8, scenario A) ; the inclusion of derivatives net settlements in the BOP would have lowered the discrepancy roughly 20 percent (table 8, scenario B) . ¹⁸ As the quarterly data show, the effect of derivatives on the statistical discrepancy may vary from quarter to quarter and year to year, as errors and omissions elsewhere in the international transactions accounts may outweigh the effect of derivatives.

The U.S. gross positions in derivatives are comparable in magnitude with the U.S. positions in other financial instruments ( table 9 ). The gross positive fair value of derivatives totaled $1,190 billion at the end of 2005, slightly more than U.S. residents' holdings of foreign bonds, which totaled $988 billion. The gross negative fair value of derivatives totaled $1,132 billion, about half of foreign holdings of U.S. bonds or stocks. On net, however, the inclusion of derivatives has little effect on the net international investment position of the United States. Adding the net position in derivatives of $58 billion (aggregate gross positive fair value minus aggregate gross negative fair value) only slightly improves the U.S. net international investment position, from negative $2,694 billion to negative $2,636 billion.

Comparison of U.S. and Foreign Aggregate Totals

From a global perspective, a relationship exists between the cross-border transactions into and out of the United States and those into and out of other countries. Many other countries currently report derivatives transactions and positions separately on their balance of payments and international investment position. If all countries were to report cross-border transactions accurately and on the same basis, then the summation of all cross-border flows in each asset class into and out of all countries would equal zero. That is, the derivatives outflows from one country should be recorded as derivatives inflows to other countries. The same relationship holds for positions: The sum across countries of net cross-border positions in each asset class should equal zero. Such comparisons of international flows and positions represent two checks at the macro level on the reasonableness of the information reported on form D, and they complement the cross-checks performed at the micro level by the Federal Reserve Bank of New York (refer to box "Other Derivatives Reports"). ¹⁹

A comparison of aggregate form D net settlements with the cross-border transactions and positions repo