Technical Topics

1
Report of US Ownership of Foreign
Securities Including Selected Money Market
Instruments
W. Griever W. Carlucci D. Kuntz R. McGee
S. Kessel T. Grob K. Aberbach M. Harris
November 12, 2003
2
U.S. Portfolio Investment Surveys
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 U.S. securities
• Congressional concern over growing foreign
  influence
• Existing data lacked detail

5
Survey History

• Liability surveys continued at 5-year intervals
• Correct amounts foreign held
• Improve geography
• Foreign ownership increasing
• Dec. 1974 - 4.8
• June 2002 - 12.2

6
Asset Surveys

• First in 1994
• Levels of U.S. foreign security holdings had been
  modest
• 9 billion per year 1980-1989
• 65 billion per year 1990-1994
• Assets were believed to be under-counted

7
Asset Survey Results

• Measured U.S. holdings of foreign securities 60
  above estimates
• 870 billion vs. 540 billion
• Showed need for future surveys

8
Asset Under-Count

• Worldwide problem
• Measured portfolio investment flows 1991-1994
• Assets 400 billion per year
• Liabilities 500 billion per year
• Countries had concentrated on measuring
  liabilities

9
First CPIS

• Organized by the IMF, at year-end 1997
• 29 countries participated
• World measured additional 750 billion
• U.S. measured an additional 300 billion

10
Problems Remain

• Worldwide, at year-end 1997
• Assets 7.7 trillion
• Liabilities 9.3 trillion
• Difference 18
• Implied more needed to be done

11
CPIS 2001

• 67 countries
• All of the major industrial countries
• Most of the major offshore financial centers
• Short-term securities included

12
Problems Remain

• Worldwide, at year-end 2001
• Assets 12.6 trillion
• Liabilities 15.0 trillion
• Difference 16
• Implies more needs to be done

13
The Future

• Internationally-coordinated annual surveys
• Annual U.S. surveys
• U.S. benchmark surveys every 5 years
• U.S. Large Reporters surveys intervening years

14
Data Uses

• Why care about these data?
• U.S. is the worlds largest net debtor
• Level of U.S. net debt is increasing
  rapidly
• A cause for concern?

15
U.S. Debt Position

16
Debt Components
17
Data Uses

• Financial industry analysts
• International organizations
• U.S. Govt policy makers, data compilers
• Academic researchers
• Correct liabilities country attribution

18
Country Attribution

• Country attribution of U.S. liabilities skewed
  towards major financial centers
• Country attribution on asset surveys accurate
• Can use counter-party asset data to improve
  geography of U.S. liabilities data

19
Country Attribution
20
Data Uses

• Asset data can be used to estimate other
  countries liabilities
• Combined CPIS asset results yield net liability
  positions by country
• Cross-check of reported country liability
  positions
• Improved geography of all countries liabilities

21
Who Must Report
William Carlucci
22
Who Must Report

• Proper classification of U.S. and foreign
• Reporting organization
• Owners of securities
• Securities
• Categories of reporters
• U.S.-resident custodians
• U.S.-resident end-investors
• Reporting panels
• Schedule 2 and Schedule 3 reporters
• Schedule 3 only reporters

23
Proper Classification of U.S. and Foreign

• Definition of United States
• The fifty states of the United States
• The District of Columbia
• The Commonwealth of Puerto Rico
• American Samoa, Baker Island, Guam, Howland
  Island, Jarvis Island, Johnston Atoll, Kingman
  Reef, Midway Island, Navassa Island, Northern
  Mariana Islands, Palmyra Atoll, U.S. Virgin
  Islands, and Wake Island

24
Proper Classification of U.S. and Foreign

• Definition of U.S. resident
• Any individual, corporation, or other
  organization located in the United States,
  including
• branches
• subsidiaries
• foreign entities located in the United States.
• Corporations incorporated in the United States
  are U.S. residents even if they have no
  physical presence in the United States.

25
Proper Classification of U.S. and Foreign

• Examples of U.S. residents
• General Motors Corporation (includes GMAC)
• BP America Inc.
• Societe Generale New York Branch
• KfW International Finance, Inc.

• Examples of foreign residents
• GMAC Canada
• BP p.l.c.
• Bank of New York Tokyo Branch
• Tyco International, Ltd.
• International Bank for Reconstruction and
  Development (IBRD World Bank)

26
Proper Classification of U.S. and Foreign

• How to determine residency
• Country where legally incorporated, otherwise
  legally organized, or licensed
• Tax forms
• W-8 forms are filed by foreign residents
• W-9 forms are filed by U.S. residents
• Mailing address

27
Proper Classification of U.S. and Foreign

• Citizenship does not determine residency
• International and regional organizations are
  foreign residents, even if located in the
  United States
• IBRD World Bank
• Inter-American Development Bank (IDC)
• International Finance Corporation (IFC)
• Appendix E of instructions provides a complete
  list

28
Proper Classification of U.S. and Foreign

• Reporting organization
• Report foreign securities held or managed by all
  U.S.-resident parts of your organization
• U.S.-resident branches
• U.S.-resident offices
• U.S.-resident subsidiaries

29
Proper Classification of U.S. and Foreign

• Owners of securities
• U.S.-resident clients
• U.S-resident parts of your organization
• Securities
• Issued by foreign organizations
• Issued by foreign parts of your organization

30
Categories of Reporters

• U.S.-resident custodians
• U.S.-resident organizations that hold foreign
  securities in custody for other U.S. residents
• Invest in foreign securities for their own account

31
Categories of Reporters

• U.S.-resident end-investors
• U.S.-resident organizations that invest in
  foreign securities on behalf of other U.S.
  residents
• Invest in foreign securities for their own account

32
Categories of Reporters

• Examples of U.S.-resident end-investors
• Managers of private and public pension funds
• Managers of mutual funds, country funds,
  unit-investment funds, exchange-traded funds,
  collective-investment trusts
• Insurance companies
• Foundations
• Institutions of higher learning (e.g., university
  endowments)
• Trusts and estates

33
Reporting Panels

• Schedule 2 and Schedule 3 reporters
• Required to file in the same manner as they did
  on the December 31, 2001 report
• Schedule 3 only reporters
• Required to file Schedule 3 in the same manner as
  they did on the December 31, 2001 report
• Data that was reported on Schedule 2 in December
  31, 2001 submission will now be reported on
  Schedule 3 for the annual reports

34
Schedule 2 and Schedule 3 ReportersExemption
Levels

• No Schedule 2 exemption level.
• Securities entrusted to U.S. resident custodians
  should be reported on Schedule 3 if the fair
  (market) value of the foreign securities
  aggregated over accounts owned and/or managed
  equals 100 million or more as of December 31.
• This exemption level applies to each
  U.S.-resident custodian used.

35
Schedule 3 Only ReportersExemption Levels

• Schedule 3 Only reporters are exempt from
  reporting Schedule 2.
• Securities entrusted to U.S. resident custodians
  should be reported on Schedule 3 if the fair
  (market) value of the foreign securities
  aggregated over accounts owned and/or managed
  equals 100 million or more as of December
  31.
• This exemption level applies to each
  U.S.-resident custodian used.

36
Schedule 3 Only ReportersExemption Levels

• Securities held directly with foreign-resident
  custodians, including
• foreign-resident offices of U.S. banks
• foreign-residents of U.S. broker/dealers
• foreign-resident central securities depositories
• should be reported on Schedule 3 if the fair
  (market) value of the foreign securities
  aggregated over accounts owned and/or managed
  equals 100 million or more as of December 31.

37
Schedule 3 Only ReportersExemption Levels

• Securities held directly, managed directly, or
  held with U.S.-resident central securities
  depositories, (for which no U.S.-resident
  custodian is used), should be reported on
  Schedule 3 if the fair (market) value of the
  foreign securities aggregated over accounts owned
  and/or managed equals 100 million or more as
  of December 31.

38
Reporting Panels

• Schedule 2 and Schedule 3 reporters
• U.S.-resident custodians
• Schedule 2, report detailed information on
  foreign securities that
• hold in custody for U.S.-resident clients
• invest in for own account
• entrust to foreign-resident custodians or central
  securities depositories
• entrust to U.S.-resident central securities
  depositories

39
Reporting PanelsSchedule 2 and Schedule 3
ReportersU.S.-Resident Custodians Schedule 2
Reporting
U.S.-resident central securities depository
U.S. resident (including the reporting
custodians own portfolio)
U.S.-resident custodian
Foreign-resident custodian or central securities
depository
The Schedule 2 and Schedule 3 reporter
submits detailed data on Schedule 2.
40
Reporting Panels

• Schedule 2 and Schedule 3 reporters
• U.S.-resident end-investors
• Schedule 2, report detailed information on
  foreign securities not entrusted to U.S.-resident
  custodians that is when the end-investor
• holds the foreign securities directly
• employs foreign-resident custodians or foreign
  central securities depositories
• employs U.S.-resident central securities
  depositories

41
Reporting PanelsSchedule 2 and Schedule 3
ReportersU.S.-Resident End-Investors Schedule 2
Reporting
U.S. resident (including the reporting
end-investors own portfolio)
U.S.-resident end-investor (including managers)
U.S.-resident central securities depository
Foreign-resident custodian or central securities
depository
The Schedule 2 and Schedule 3 reporter
submits detailed data on Schedule 2.
42
Reporting Panels

• Schedule 2 and Schedule 3 reporters
• U.S.-resident custodians and end-investors
• Schedule 3, report summary information for
  foreign securities entrusted to the safekeeping
  of a U.S.-resident custodian (excluding
  U.S.-resident central securities depositories)

43
Reporting PanelsSchedule 2 and Schedule 3
ReportersSchedule 3 Reporting
U.S. resident (including the reporting
organizations own portfolio)
U.S.-resident custodian or end-investor (including
managers)
U.S.-resident subcustodian
The Schedule 2 and Schedule 3 reporter
submits summary data on Schedule 3 for each
U.S.-resident custodian using the appropriate
custodian codes.
The Schedule 2 and Schedule 3 reporter submits
detailed data on Schedule 2.
44
Reporting Panels

• Schedule 3 only reporters
• U.S.-resident custodians and end-investors
• Schedule 3, report summary information for all
  foreign securities, regardless of where they are
  held in custody

45
Reporting Panels

• Schedule 3 only reporters
• U.S.-resident custodians and end-investors
• Separate Schedule 3 report for foreign securities
  entrusted to each U.S.-resident custodian using
  the appropriate custodian code
• Consolidated Schedule 3 report for foreign
  securities entrusted to foreign-resident
  custodians and central securities depositories
  using custodian code 77
• Consolidated Schedule 3 report for foreign
  securities held directly or those entrusted to
  U.S.-resident central securities depositories
  using custodian code 88

46
Reporting PanelsSchedule 3 Only Reporters
U.S. resident (including the reporting
organizations own portfolio)
U.S.-resident custodian or end-investor (including
managers)
Foreign-resident custodian or central securities
depository
The Schedule 3 only reporter submits summary
data on Schedule 3 using custodian code 77.
47
Reporting PanelsSchedule 3 Only Reporters
U.S.-resident subcustodian
U.S. resident (including the reporting
organizations own portfolio)
U.S.-resident custodian or end-investor (including
managers)
The Schedule 3 only reporter submits summary
data on Schedule 3 for each U.S.-resident custodia
n using the appropriate custodian codes.
The Schedule 3 only reporter submits summary
data on Schedule 3 using custodian code 88.
48
What Must be Reported on the

• Report of U.S. Ownership of Foreign Securities,
  Including Selected Money Market Instruments (SHCA)

Debra Kuntz
49
Foreign Securities

• Securities issued by foreign entities, including
• foreign-resident organizations
• foreign subsidiaries of U.S. organizations
• foreign branches of U.S. banks
• U.S. corporations that have re-incorporated,
  i.e., are now incorporated under the laws of a
  foreign country
• international and regional organizations

50
Foreign Securities

• Information that does not contribute to
  determining if a security is foreign
• place of issue or location of trades
• currency of issue
• nationality of parent organization
• guarantor

51
Foreign SecuritiesExample 1

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

52
Foreign SecuritiesExample 1 Answer

• Euro denominated 2-year note issued by a Daimler
  Chrysler affiliate incorporated in the United
  States.
• Is this security reportable?
• No. The security was issued by a
  U.S.-resident entity.

53
Foreign SecuritiesExample 2

• U.S. dollar-denominated 2-year note issued
  directly in the United States by Daimler Chrysler
  incorporated in Germany.
• Is this security reportable?

54
Foreign SecuritiesExample 2 Answer

• U.S. dollar-denominated 2-year note issued
  directly in the United States by Daimler Chrysler
  incorporated in Germany.
• Is this security reportable?
• Yes. This security was issued by a
  foreign-resident entity. The currency of
  denomination and place of issue do not factor
  into the decision of whether the security is
  foreign or not.

55
Foreign SecuritiesExample 3

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

56
Foreign SecuritiesExample 3 Answer

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

57
Type of Reportable Foreign Securities

• Equity
• Short-Term Debt
• Long-Term Debt
• Asset-Backed Securities

58
Equity

• Instruments representing an ownership interest in
  foreign-resident organizations.
• However, ownership interests representing direct
  investment are not reported.

59
EquityDirect Investment

• Direct investment is defined as ownership or
  control of 10 or more of an organizations
  voting stock.

60
Equity

• Reportable equity securities include
• common stock
• restricted stock
• preferred stock
• depositary receipts/shares
• shares/units in foreign-resident funds
• limited partner ownership in foreign-resident
  limited partnerships

61
Equity

• Security type 1 (common stock)
• all common stock, including restricted stock
• depositary receipts/shares where the underlying
  security is common stock
• Security type 2 (preferred stock)
• all preferred stock, including restricted stock
• participating preference shares
• nonparticipating preference shares
• convertible preferred stock
• depositary receipts/shares where the underlying
  security is preferred stock

62
Equity

• Security type 3 (funds)
• shares/units in foreign-resident funds
• Security type 4 (other equity)
• limited partner ownership in foreign-resident
  limited partnerships
• all other foreign equity not specified in
  security types 1, 2, and 3

63
EquityRestricted Stock

• Where possible, report the restricted shares with
  the same security ID (e.g., ISIN, CUSIP) as the
  non-restricted shares.
• If the restricted shares are valued at zero,
  report the market value for restricted stock
  using the non-restricted shares price.

64
EquityPreferred Stock

• Differentiated participating and nonparticipating
  preference shares on the December 31, 2001
  report.
• All preferred stock should now be classified as
  equity, security type 2 (equity, preferred
  stock).

65
EquityDepositary Receipts/Shares

• Reportable depositary receipts/shares are those
  where the underlying security was issued by a
  foreign resident.
• Although the depositary receipt/share is usually
  issued by a U.S.-resident organization, it
  represents an ownership interest in the
  foreign-resident company.
• ADRs, ADSs, GDRs, IDRs are considered foreign
  securities for this report.

66
EquityDepositary Receipts/Shares

• Issuers of depositary receipts/shares should not
  report the holdings of the underlying foreign
  securities.
• U.S.-resident holders of the depositary
  receipts/shares should report these holdings.

67
Equity Depositary Receipts/Shares Example

• U.S. Company A has issued 100 million of ADRs
  representing an ownership interest in a Swiss
  company. U.S. Company B purchases these ADRs.
• What should Company A and B report?

68
EquityDepositary Receipts/Shares Example Answer

• U.S. Company A has issued 100 million of ADRs
  representing an ownership interest in a Swiss
  company. U.S. Company B purchases these ADRs.
• What should Company A and B report?
• Company B should report the holdings of 100
  million of ADRs. Company A would not report
  equity ownership in the Swiss company.

69
EquityDepositary Receipts/Shares

• Report the following based on the depositary
  receipt/share
• security id
• security description
• depositary receipt/share indicator
• currency of denomination
• market value
• number of shares held

• Report the following based on the underlying
  security
• security type
• name of issuer
• country of issuer

70
EquityForeign-Resident Funds

• Report U.S. residents ownership of shares/units
  of funds legally established outside of the
  United States as equity.
• Examples of funds
• closed-end and open-end mutual funds
• money market funds
• exchange-traded funds
• index-linked funds
• investment trusts

71
EquityForeign-Resident Funds

• Classification of the fund as foreign is not
  based on the securities that the fund invests in.
• Example
• A fund organized in Bermuda that only purchases
  U.S. Treasury securities is a foreign-resident
  fund.
• A fund organized in the United States that only
  purchases Japanese Treasury securities is a
  U.S.-resident fund.

72
Foreign-Resident Funds

• Report U.S.-resident funds ownership of foreign
  securities.
• Ownership of shares of U.S.-resident funds is
  excluded, however, the foreign securities owned
  by these funds are reportable.

73
Equity Exclusions

• Exclude from equity
• convertible debt
• convertible debt is reported, but should be
  classified as debt on this report.

74
Equity Exclusions

• Exclude from equity
• general partner ownership of foreign-resident
  limited partnerships
• all other direct investment

75
Short-Term and Long-Term Debt (excluding
asset-backed securities)

• Instruments that usually give the holder the
  unconditional right to financial assets.

76
Term

• Determine term, (short-term or long-term), based
  on the original maturity of the security.
• Original maturities of one year or less are
  short-term.
• Original maturities of greater than one year are
  long-term.

77
Term

• Debt with multiple call options (multiple
  maturity dates) is long-term if any of the
  maturity dates is greater than one year from the
  date of issue.
• Perpetual debt is long-term.

78
Term Examples

• A Japanese Treasury bill issued on November 15,
  2003 and matures on February 15, 2004 is
  short-term.
• A German 30-year bond that matures on March
  26, 2004 is long-term.

79
Short-Term Debt

• Reportable short-term debt includes the following
  instruments where the original maturity is one
  year or less
• commercial paper
• negotiable certificates of deposit, bank notes
  and deposit notes
• foreign government securities (e.g., Japanese
  Treasury bills)
• bankers and trade acceptances

80
Short-Term Debt

• Security type 5 (short-term commercial paper)
• short-term commercial paper
• short-term financial paper
• short-term asset-backed commercial paper
• Security type 6 (short-term negotiable CDs)
• short-term negotiable certificates of deposit
• short-term bank notes
• short-term deposit notes

81
Short-Term Debt

• Security type 8 (other short-term debt)
• short-term foreign government securities
• short-term bankers and trade acceptances
• short-term notes
• all other foreign short-term debt not specified
  in security types 5, 6, and 7

82
Long-Term Debt

• Reportable long-term debt includes the following
  instruments where the original maturity is
  greater than one year
• bonds
• notes
• debentures
• stripped and zero coupon securities
• convertible debt
• negotiable certificates of deposit

83
Long-Term Debt

• Security type 9 (stripped and zero coupon
  long-term debt)
• long-term zero coupon bonds and notes
• long-term stripped securities where the host
  security is not an asset-backed security (both
  the IO and PO components)
• Security type 10 (convertible long-term debt)
• long-term convertible debt
• long-term zero coupon convertible debt

84
Long-Term Debt

• Security type 12 (other long-term debt)
• long-term CDs, bank notes and deposit notes
• Brady bonds
• covered bonds (e.g., Pfandbrief)
• debt securities backed by a sinking fund
• all other foreign long-term debt not specified in
  security types 9, 10, and 11

85
Long-Term DebtStripped Securities

• Reportable stripped securities are those where
  the issuer of the stripped security is a
  foreign-resident entity.
• Residency of the stripped security is not
  determined by the issuer of the underlying
  security.

86
Long-Term DebtStripped Securities

• Foreign securities that are the underlying
  securities for stripped securities, should be
  reported by the U.S. holder.
• Stripped securities issued by a U.S.-resident
  entity should not be reported, even if the
  underlying security is foreign.

87
Long-Term DebtStripped Securities Example

• U.S. Company A owns 100 million of German bonds.
  U.S. Company A issues stripped securities where
  these German bonds are the underlying securities.
  U.S. Company B purchases these stripped
  securities.
• What should Company A and B report?

88
Long-Term DebtStripped Securities Example Answer

• U.S. Company A owns 100 million of German bonds.
  U.S. Company A issues stripped securities where
  these German bonds are the underlying securities.
  U.S. Company B purchases these stripped
  securities.
• What should Company A and B report?
• Company A reports the ownership of 100 million
  of German bonds. The stripped securities are not
  reported by either company.

89
Debt Exclusions

• Exclude from short-term and long-term debt
• shares/units in foreign-resident funds, even if
  the foreign fund invests in debt.
• investments in foreign-resident funds are
  reported, but should be classified as equity on
  this report.

90
Debt Exclusions

• Exclude from short-term and long-term debt
• loans
• trade credits
• accounts receivable
• derivatives
• non-negotiable certificates of deposit

91
Debt Exclusions

• Exclude from short-term and long-term debt
• asset-backed securities
• these securities are reported, but should be
  classified as asset-backed securities on this
  report.

92
Asset-Backed Securities

• Securitized interest in a pool of assets, which
  give the purchaser a claim against the cash flows
  generated by the underlying assets.

93
Asset-Backed Securities

• Reportable asset-backed securities are those
  where the issuer securitizing the assets is a
  foreign resident.
• The underlying asset is not a factor in
  determining whether the ABS is a foreign security.

94
Asset-Backed Securities

• Reportable asset-backed securities include
• collateralized mortgage obligations (CMOs)
• collateralized bond obligations (CBOs)
• collateralized loan obligations (CLOs)
• collateralized debt obligations (CDOs)

95
Asset-Backed Securities

• Reportable asset-backed securities include
• other securities backed by
• mortgages
• credit card receivables
• automobile loans
• consumer and personal loans
• commercial and industrial loans
• other assets

96
Asset-Backed Securities

• Security type 7 (short-term asset-backed
  securities)
• short-term asset-backed securities
• Security type 11 (long-term asset-backed
  securities)
• long-term asset-backed securities
• long-term stripped securities where the host
  security is an asset-backed security (including
  the IO and PO components and the tranches)

97
Asset-Backed Securities Exclusions

• Exclude from asset-backed securities
• asset-backed commercial paper
• Brady bonds
• securities backed by a sinking fund
• covered bonds (e.g., Pfandbrief)
• These securities are reported but should be
  classified as short-term or long-term debt on
  this report.

98
Repurchase AgreementsSecurity Lending
Arrangements

• Repurchase agreements/securities lending
  arrangements and reverse repurchase
  agreements/securities borrowing arrangements
  involve the temporary transfer of a security for
  cash or another security.

99
Repurchase AgreementsSecurity Lending
Arrangements

• The security lender should report the foreign
  security as if no repo or security lending
  arrangement occurred.
• The security borrower should exclude the foreign
  security.

100
BREAK
101
Review of Schedules
Richard McGee
102
Review of Schedules Schedule 1

• Schedule 1 Reporter Contact Identification and
  Summary Financial Information
• Required to be filed by all organizations who
  received the report
• Contains basic information about the institution
• Contains summary financial information reported
  on Schedule 2 and 3

103
Review of SchedulesSchedule 1

• Reporter Identification Number (Line 1)
• 10 digit number, including leading zeros, issued
  by FRBNY.
• Contact FRBNY staff at 212-720-6300 if you do not
  know your identification number.
• Do not report tax ID in this field

104
Review of SchedulesSchedule 1

• Reporting Status (Line 3)
• Only Schedule 2(s).
• Only Schedule 3(s).
• Schedule 2(s) and Schedule 3(s).

105
Review of SchedulesSchedule 1

• Industrial Classification Code (Line 4)
• 9 categories.
• Choose classification code that best describes
  your organization.
• If two or more codes are appropriate choose the
  one that represents the largest portion of your
  organizations day-to-day operations.

106
Review of SchedulesSchedule 1

• Name of Service Provider or Vendor Used (Line 10)
• The institution that provided your data or
  prepared the electronic files.
• Technical Contact (Line 11 - 14)
• Provide the name of the person who can answer
  questions regarding the electronic submission of
  your data.
• This person should be familiar with the file
  format(s) used and how the data was extracted
  from your databases or applications.

107
Review of SchedulesSchedule 1

• Valuation Techniques (Line 15)
• Describe the valuation techniques used by each
  reporting unit.
• Did your organization report securities with a
  zero market value. If so, why?
• How are inactively traded securities valued?
• How are securities with internally generated IDs
  valued?

108
Review of SchedulesSchedule 1

• Schedule 2 Schedule 3 Summary Information
• Total number of Schedule 2 Schedule 3 records.
• Total US fair market value of all equity.
• Total US fair market value of all short-term
  debt.
• Total US fair market value of all long-term
  debt.
• Total US fair market value of all ABS.

109
Review of SchedulesSchedule 1

• Certifier Information and Signature
• Someone from within your organization must sign
  the Schedule 1 certifying its accuracy.
• If the data was prepared by a third party vendor
  someone from within your organization is
  responsible for certifying your data submission.

110
Review of SchedulesSchedule 2

• Schedule 2 Details of Securities
• Filed by U.S.-resident custodians and
  U.S.-resident end-investors
• Provides details of each foreign security
• Total of all Schedule 2 US market values should
  equal the summary financial information reported
  on Schedule 1

111
Review of SchedulesSchedule 2

• Sequence Number (Line 2)
• Sequence numbers should be sequential (i.e.,
  1,2,3) for each Schedule 2 record submitted.
• If multiple divisions of an organization are
  preparing Schedule 2 records and it is burdensome
  to create sequential sequence numbers for the
  consolidated report, then each reporting unit
  should have unique sequence numbers.

112
Review of Schedules Schedule 2

• Reporting Unit Fields (Lines 3a 3b)
• Reporting Unit Code - If data is being collected
  from multiple databases or reporting systems,
  report the internal code used in your
  organization to identify the database or system.
• Name of Reporting Unit - Enter a description or
  name of the reporting unit or division that is
  reporting the information.

113
Review of Schedules Schedule 2

• Security ID Fields (Lines 4 6)
• Security ID - The security ID code used to
  identify the reported security. ISIN codes and
  CUSIPs are strongly preferred.
• Security ID System - Enter the appropriate code
  from appendix C in this field. For example, if
  the security ID is an ISIN a 4 should be entered
  in this field.

114
Review of Schedules Schedule 2

• Text Descriptions (Lines 5 9)
• Security Description - A brief description of the
  security reported. (Line 5)
• Name of Issuer - The full legal name of the
  organization that issued the security. (Line 9)

115
Review of SchedulesSchedule 2

• Security Type (Line 7)
• Equity securities have the following categories
• common stock (1)
• preferred stock (2)
• funds (including shares or unit trusts) (3)
• other any other type of equity security not
  listed above (4)

116
Review of Schedules Schedule 2

• Security Type (Line 7)
• Short-term debt has four categories
• short-term commercial paper (5)
• short-term negotiable CDs (6)
• short-term asset-backed securities (7)
• all other short-term debt or selected money
  market instruments (8)
• Examples are foreign treasury bills, short-term
  notes, and stripped securities with a maturity of
  one year or less.

117
Review of SchedulesSchedule 2

• Security Type (Line 7)
• Long-term debt has four categories
• stripped and zero coupon long-term debt (9)
• convertible long-term debt (10)
• long-term asset-backed securities (11)
• all other long-term debt (12)
• Examples are long-term negotiable cds, Brady
  bonds.

118
Review of SchedulesSchedule 2

• Depositary Receipt Share - Indicates whether or
  not an equity security is a depositary receipt.
  (Line 8)
• Intentionally Left Blank - This field corresponds
  to a previous data item no longer collected.
  Leave this field blank or enter a null value.
  (Line 10)

119
Review of SchedulesSchedule 2

• Country Currency Fields (Lines 11 12)
• Country of Issuer - Enter the country code found
  in Appendix D that corresponds to the country of
  residence of the entity that issued the security.
• Currency of Denomination - Enter the ISO code
  from Appendix F that corresponds to the currency
  in which the security being reported is
  denominated.

120
Review of SchedulesSchedule 2

• Ownership Code (Line 13)
• An ownership code must be supplied for each
  security.
• A single security ID can have different ownership
  codes.
• Security IDs with like information but differing
  ownership codes must be reported on individual
  Schedule 2 reports and cannot be aggregated.

121
Fair (Market) Value

• Report the fair (market) value of securities as
  of close of business December 31.
• The fair (market) value follows the definition of
  FAS 115.
• Fair value is the amount at which an asset could
  be bought or sold in a current transaction
  between willing parties, other than in a forced
  or liquidation sale.
• If a quoted market price is available for an
  instrument, the fair (market) value is the
  product of the number of trading units times that
  market price.

122
Fair (Market) Value

• For Securities that do not regularly trade, the
  estimate of fair value should be based on the
  best information available in the circumstances.
• The estimate of fair value should consider prices
  for similar assets and the results of valuation
  techniques to the extent available in the
  circumstances.
• Examples of valuation techniques include
  discounted cash flow, matrix pricing,
  option-adjusted spread models and fundamental
  analysis.

123
Fair (Market) Value

• US Fair (Market) Value of Security Held (Line
  14a)
• Enter the US fair (market) value.
• Fair (Market) Value of Security Held Denominated
  in Currency of Issue (Line 14b)
• Enter the fair (market) value of the security in
  the currency of original issue.
• If the currency is denominated in US then enter
  the US fair (market) value. In these cases line
  items 14a and 14b will be equal.

124
Fair (Market) Value

• If the fair (market) value is determined to be
  zero list the reason why on line 15 of Schedule
  2.
• Examples of zero fair (market) value are
• Securities that are thinly or never traded.
• Stock is impaired or security in default.
• Organization that issued the security is in
  receivership.

125
Fair (Market) Value

• Fair (market) value is calculated as
• Equity
• Number of Shares Price
• Short and long-term debt
• Face Value Price
• Asset-backed securities
• Remaining Principal Outstanding Price

126
Foreign Exchange Conversion

• Converting foreign currency to U.S. dollar
• If the exchange rate is stated as foreign
  currency per U.S. dollar then you must divide to
  get the U.S. dollar equivalent.
• If the exchange rate is stated as U.S. dollar per
  foreign currency then you must multiply to get
  the U.S. dollar equivalent.

127
Foreign Exchange Conversion Example 1

• Exchange rate quoted in units of foreign currency
  per US.
• The exchange rate as of 12/31/03 should be used
  when reporting.
• Japanese denominated security with a fair
  (market) value of 300,000.
• If the closing exchange rate were 105.75/US.
• Divide the foreign currency value by the foreign
  exchange rate and round to the US value.
• 300,000/105.75 US2,836.879 (US2,837).

128
Foreign Exchange Conversion Example 2

• Exchange rate quoted in units of US per foreign
  currency.
• The exchange rate as of 12/31/03 should be used
  when reporting.
• British pound denominated security with a fair
  (market) value of 2,000.
• If the closing exchange rate were 1.45/UK.
• Multiply the foreign currency value by the
  foreign exchange rate and round to the US value.
• 2,000 1.45 2,900.

129
Reporting an Equity Security

• Security type must be either 1, 2, 3 or 4.
• Depositary share indicator, line item 8, must be
  completed.
• Number of Shares Held, line item 16, must be
  provided.
• Line items 17 through 23 pertain to debt
  securities and should be left blank or null.

130
Reporting a Debt Security Other Than Asset-Backed

• Security type must be either 5, 6, 8, 9, 10 or
  12.
• The face value in the currency of denomination
  must be reported. Face value should be the same
  currency reported in line items 12 and 14b.
• Face value should be rounded to the nearest whole
  currency unit.
• If the security is traded in units, report the
  face value by multiplying each unit by the number
  of units held.
• An issue date (Line 18) and a maturity date (Line
  19) must be reported.

131
Reporting an Asset-Backed Security

• Security type should be either 7 or 11.
• The original face value in the currency of
  denomination must be reported. Original face
  value should be the same currency reported in
  line items 12, 14b and 21.
• Original face value is the amount that would
  still be outstanding if no principal had been
  repaid.

132
Reporting an Asset-Backed Security

• Remaining principal outstanding in currency of
  denomination must be reported. Same currency as
  12, 14b and 20.
• The remaining principal outstanding will only
  equal the original face value if no principal has
  been repaid.

133
Reporting an Asset-Backed Security

• Original face value and remaining principal
  outstanding should be rounded to the nearest
  whole currency unit.
• If the security is traded in units, report the
  original face value and remaining principal
  outstanding by multiplying each unit by the
  number of units held.
• An issue date and a maturity date must be
  reported.

134
Review of Schedules Schedule 3 for Schedule 2
and Schedule 3 Reporters

• Multiple Schedule 3 records can be reported.
• A custodian code from Appendix G must be reported
  in line 3.
• If your organizations U.S.-resident custodian
  does not appear in Appendix G, lines 9 through 14
  of the Schedule 3 must be completed.

135
Review of Schedules Schedule 3 for Schedule 2
and Schedule 3 Reporters

• The aggregate fair market value of the securities
  entrusted to the custodian indicated in line 3
  must be provided on lines 4 through 7.
• Your organization must indicate whether it is
  reporting as an end investor or a U.S.-resident
  custodian (Line 8).
• Schedule 3 Only reporters are required to submit
  up to two additional Schedule 3 reports using
  custodian code 77 or 88 (Line 3).

136
Review of Schedules Schedule 3 for Schedule 3
Only Reporters

• Reporting custodian code 77
• Submit a separate Schedule 3 containing summary
  data on foreign securities held directly with
  foreign-resident custodians.
• This includes
• foreign-resident offices of U.S. banks
• foreign-resident offices of U.S. broker/dealers
• foreign-resident central securities depositories

137
Review of Schedules Schedule 3 for Schedule 3
Only Reporters

• Reporting custodian code 88
• Submit a separate Schedule 3 containing summary
  data on foreign securities
• held directly by the reporting organization
• entrusted to U.S.-resident central securities
  depositories

138
Key Issues for Reporters

• Sarit Kessel

139
Reporting Criteria

• Custodians should report foreign securities held
  in custody for other U.S. residents.
• Custodians should report their own foreign
  securities.

140
Securities to be Included

• Report all securities issued by foreign-resident
  entities, including international and regional
  organizations, held by U.S. residents.
• Report all American Depositary Receipts (ADRs)
  that represent ownership of foreign corporations
  that are held by U.S. residents.

141
Securities to be Included

• Report all foreign securities, even if the
  security is restricted.
• Report all U.S. held foreign securities that have
  been entrusted to a foreign-resident custodian.

142
Securities to be Included

• Report all U.S. held foreign securities that have
  been entrusted to a U.S.-resident central
  securities depository (such as the Depository
  Trust Company) or foreign-resident central
  securities depository (such as Euroclear).

143
Security IDs

• Whenever possible, report securities using the
  ISIN or CUSIP Code.
• If unavailable, use appropriate SEDOL, CINS,
  Common, or other exchange-assigned code.
• Use internal codes only if no other code exists
  for the security.

144
FRBNY Calculations

• FRBNY calculates implicit prices, factor values,
  and exchange rates based on market values and
  quantity fields submitted by reporters.
• Helps FRBNY determine the quality of market
  values and quantities.

145
How FRBNY Calculates Prices

• An implicit price for equity is calculated by
  dividing the US fair (market) value (line 14a)
  by the number of shares (line 16).

146
How FRBNY Calculates Prices Example 1

• If the US fair (market) value is 10,000,000 and
  the number of shares is 100,000, what is the
  implicit price?

147
How FRBNY Calculates Prices Example 1 Answer

• If the US fair (market) value is 10,000,000 and
  the number of shares is 100,000, what is the
  implicit price?
• Implicit Price US fair (market) value/ Number
  of shares
• 100 10,000,000 / 100,000

148
How FRBNY Calculates Prices

• An implicit price for non-ABS debt is calculated
  by dividing the fair (market) value in currency
  of denomination (line 14b) by the face
  value in currency of denomination (line 17).

149
How FRBNY Calculates Prices Example 2

• If the fair (market) value in currency of
  denomination is 1,000,000 and the face value in
  currency of denomination is 900,000, what is the
  implicit price?

150
How FRBNY Calculates Prices Example 2 Answer

• If the fair (market) value in currency of
  denomination is 1,000,000 and the face value in
  currency of denomination is 900,000, what is the
  implicit price?
• Implicit Price Fair (market) value in currency
  of denomination / Face value in currency of
  denomination
• 1.11 1,000,000 / 900,000

151
How FRBNY Calculates Prices

• An implicit price for asset-backed securities is
  calculated by dividing the fair (market) value in
  currency of denomination (line 14b) by the
  remaining principal outstanding in currency of
  denomination (line 21).

152
How FRBNY Calculates Prices Example 3

• If the fair (market) value in currency of
  denomination is 100,000 and the remaining
  principal outstanding in currency of denomination
  is 110,000, what is the implicit price?

153
How FRBNY Calculates Prices Example 3 Answer

• If the fair (market) value in currency of
  denomination is 100,000 and the remaining
  principal outstanding in currency of denomination
  is 110,000, what is the implicit price?
• Implicit Price Fair (market) value in currency
  of denomination / Remaining principal outstanding
  in currency of denomination.
• 0.909 100,000 / 110,000

154
How FRBNY Calculates Factor Values

• The factor value for asset-backed securities is
  calculated by dividing the remaining principal
  outstanding in currency of denomination (line 21)
  by the original face value in currency of
  denomination (line 20).

155
Calculation of Factor ValuesExample

• If the original face value in currency of
  denomination is 900,000 and the remaining
  principal outstanding in currency of denomination
  is 700,000, what is the factor value?

156
Calculation of Factor ValuesExample Answer

• If the original face value outstanding in
  currency of denomination is 900,000 and the
  remaining principal outstanding in currency of
  denomination is 700,000, what is the factor
  value?
• Factor Value Remaining principal outstanding in
  currency of denomination / Original face value in
  currency of denomination.
• .78 700,000 / 900,000

157
How FRBNY Calculates Exchange Rates

• The implicit exchange rate is calculated by
  dividing the US Fair (Market) Value (line 14a)
  by the Fair (Market) Value in Currency of
  Denomination (line 14b).

158
Calculation of Exchange Rates Example

• If the US Fair (Market) Value is 100,000 and
  the Fair (Market) Value in Currency of
  Denomination is 80,000, what is the exchange
  rate?

159
Calculation of Exchange Rates Example Answer

• If the US Fair (Market) Value is 100,000 and
  the Fair (Market) Value in Currency of
  Denomination is 80,000, what is the exchange
  rate?
• Exchange Rate US Fair (Market) Value / Fair
  (Market) Value in Currency of Denomination.
• 1.25 100,000 / 80,000

160
Common Reporting Errors

• Securities reported with an amount held equal to
  zero.
• Securities reported with inaccurate security
  types (zero-coupon bonds reported as all other
  long-term debt).

161
Common Reporting Errors

• Failure to report remaining principal outstanding
  for asset-backed securities.
• Incorrectly reporting preferred stock as debt.
  (All preferred stock should be reported as
  equity).
• Failure to report foreign securities owned by
  U.S.-resident funds.

162
U.S.-Resident Funds Example 1

• If a U.S.-resident fund owns foreign securities,
  are these securities reportable?

163
U.S.-Resident Funds Example 1 Answer

• If a U.S.-resident fund owns foreign securities,
  are these securities reportable?
• Yes. The foreign securities are reportable
  because the fund is incorporated in the U.S.

164
U.S.-Resident Funds Example 2

• If shares of a Caribbean fund, which is
  incorporated in the U.S., are purchased by a
  U.S.-resident are they reportable?

165
U.S. Resident Funds Example 2 Answer

• If shares of a Caribbean fund, which is
  incorporated in the U.S., are purchased by a
  U.S.-resident are they reportable?
• No. Since the fund is incorporated in the U.S.,
  the shares held by U.S. residents are not
  reportable.

166
Common Reporting Errors

• Incorrectly calculated foreign currency market
  values.
• Defaulting currency to match country of issuer.
• Identifying securities as U.S. or foreign based
  on the first two letters in ISIN or first letter
  in CINS ID.

167
Identify Securities Examples
Question Is ISIN US902118AU26 reportable?
168
Identify Securities Examples
Question Is ISIN US902118AU26 reportable?
Answer Yes, because it is issued by Tyco
International which is incorporated in Bermuda.
169
Identify Securities Examples
Answer Yes, because it is issued by Tyco
International which is incorporated in Bermuda.
Question Is ISIN US902118AU26 reportable?
Is ISIN US01F0626485 reportable?
170
Identify Securities Examples
Answer Yes, because it is issued by Tyco
International which is incorporated in Bermuda.
Question Is ISIN US902118AU26 reportable?
Is ISIN US01F0626485 reportable?
No, because it is issued by the Federal National
Mortgage Association (Fannie Mae).
171
Identify Securities Examples
Question Is ISIN XS0077101433 reportable?
172
Identify Securities Examples
Question Is ISIN XS0077101433 reportable?
Answer No, because it is issued by the Federal
Home Loan Mortgage Corporation
173
Identify Securities Examples
Question Is ISIN XS0077101433 reportable?
Answer No, because it is issued by the Federal
Home Loan Mortgage Corporation.
Is ISIN XS001087137 reportable?
174
Identify Securities Examples
Question Is ISIN XS0077101433 reportable?
Answer No, because it is issued by the Federal
Home Loan Mortgage Corporation.
Yes, because it is issued by the Inter-American
Development bank.
Is ISIN XS001087137 reportable?
175
Common Reporting Errors

• Failure to report securities issued by
  reincorporates, such as Tyco, Transocean, and
  Ingersoll-Rand.
• Failure to report securities issued by companies
  that are thought to be domestic, but are foreign
  incorporated, such as Schlumberger and Carnival
  Corp.

176
How We Review Your Data

• Report of U.S. Ownership of Foreign Securities,
  Including Money Market Instruments (SHCA)

Tim Grob
177
Four Levels of Review

• Reporter level
• Analyzing your data for reasonability
• Trend analysis
• Security level
• Comparing attributes of reported securities to
  one another, and to commercial data sources.
• Macro level
• Additional comparisons on a broader level
• Schedule 2/3 Comparison
• Comparing schedule 3 data to schedule 2 data

178
Reporter Level Review

• Reasonability Comparisons
• Schedule 1 -vs- schedule 2 comparison
• Schedules 1, 2 3 comparison to prior year
  (reporting trends)
• Ownership code
• Market values
• Face values
• Number of shares

179
Reporter Level Review

• Reasonability Analysis
• Ensuring all schedule 2 data was reported, to
  include
• Security IDs
• Ownership code
• Number of shares held
• Face Value held
• Remaining principal (ABS)

180
Reporter Level Review

• Reasonability
• Currency/Exchange Rate Analysis
• Currency is US but US market value (item 14a)
  does not equal the market value in the currency
  of denomination (item 14b).
• Currency is not US and the exchange rate is not
  1, but the US market value equals the market
  value in the currency of denomination.
• For each security, an implicit exchange rate is
  calculated, which should be the December 31, 2003
  exchange rate for the currency.

181
Reporter Level Review

• Reasonability
• Country of Issuer
• Country of Issuer is U.S.
• Are these coded incorrectly or should these have
  been excluded from your report?
• Are securities issued by international and
  regional organizations miscoded, and reported
  with the U.S. as the country of issuer?
• Are securities issued by a U.S. protectorate
  (Puerto Rico, etc.)? If so, exclude from report.

182
Reporter Level Review

• Reasonability
• Country of Issuer
• Country of Issuer is Canada
• Has the amount of securities issued by Canadian
  entities changed substantially since the last
  reporting cycle?
• Were Canadian securities coded as US securities
  on your system and so were incorrectly excluded
  from your report?

183
Reporter Level Review

• Reasonability
• American Depositary Receipts (ADRs)
• Comparison o