Segregation and Derived Aggregates: M5' and M6'

We have seen that the M5 components needed to be segregated between elements registered as tradable on regulated markets versus instruments in other marketplaces. Laws governing instruments and markets (including marketplace governance and trading rules) will provide the definitions required for segregating traders, markets and instruments. Collection and clearing, default consequences and trading volume/velocity will be disclosed factors that facilitate classification.

M5' and M6' are equivalent to the basic M5 and M6 aggregates, but also incorporate associated derivatives and guarantees, thus adding or reducing the resulting excess in value or insufficiency generated by the latter's inclusion. Guarantees will also have to be segregated between those attached to the instruments (leans; when not shown in the analysed balance sheet, those attributable to a third party, the markets where traded and finally the guarantee mechanism). The guarantees granted will also have to show separately if they are attached to an asset or generally from the balance sheet and P&L.

Data collection requirements

Applicable data must originate from yearly financial statements. This means that each country much have a financial statement collection system, a requirement that is implemented in most countries, at least through tax filing.[1]

Financial statements must conform to a predetermined scope of observation. Enterprises keep books and records as legal entities, but in doing so they may consider several entities reported as being one entity under the control of one centre of management. In such cases, multiple coupled entities may produce consolidated financial statements. Subject to the rule that the financial statements of a single enterprise cannot be counted twice by two consolidating entities, the proposed “new monetary aggregate”-supporting data collection system should be based on consolidated financials, so as to neutralize the potential effects of non-existent exposure to intra-group vendor and client balances.

Territorial and perspective scope of observation. Enterprises are often registered to operate over a nationwide territory, both on a stand-alone as well as a consolidated basis. Enterprises that are included in both a domestic and foreign territory will have to be segregated with precision, regarding the relevant monetary zones – both with respect to their balance sheets and exchange transactions. This separation will allow for the amendment of current estimates of international exposures – it should be understood that these are inaccurate when viewed from the internal context of a single monetary zone. The reason for this is that a significant percentage of banking activities are subject to balances recorded as “exposures”, when in fact such values are merely client/vendor accounts, such as is the case for an automotive manufacturer providing its vehicles to a local distribution subsidiary – in this instance, as a matter of fact there is no exposure, as the inventory shown in the export position is in fact the manufacturer's own inventory. The value added per company – a transnational approach – conducted by the WTO in its last report (2013), and all comments about where the value is located, is of course more meaningful than the data of gross exchanges that are of limited use when considering, as is necessary, who the beneficial owners of profits and resulting monetary surpluses are. With high balances due to gross in trade, monetary issuances and full exchangeability, this is the only possible approach but, like the speed measurement of M2 conducted by the Federal Bank of St. Louis, data for a comprehensive analysis requires M5 and M6.

A special remark has to be made about derivatives for which the accounting standards for reporting the off-balance sheet data are not sufficient and will have to be developed further. One of the disputed matters is the contradiction between the concept of independence between closings imposing a parallel treatment between revenues and expenses and linking them with the period of time covered by the financial statements under review and the hedging of future operational periods which are to exist; this is relevant to post-period operations. Companies' operations do not stop at year-end. Hedging of these future operations may have to be made.

The segregation of nude derivatives or of derivatives not linked to an instrument or which have a duration in excess of the instrument's is a key issue. They will either be tradable on a regulated market or not because of being traded between companies. The volume of derivatives pertaining to the first category will be known under the regulation currently implemented for derivative financial markets. The second category will not, and will have to be aggregated separately and linked to an organized category of issuers. These derivatives contribute to the stability of companies hedging their investments, assets and operations – for instance, a food company would commit deliveries of poultry to a chain of restaurants or a retail distributor at a set price, while the production is not achieved and will depend, for its cost, on the price of soya beans. Such a company has to hedge the cost of soya beans at an appropriate price. This example, where nothing is yet posted in the financials, is one of thousands. Indirectly, the derivatives are also at the same time a guarantee attached to what we have classified as monetary instruments.

However, these last assessments are only true up to certain thresholds, and lead us to again analyse the link between the microeconomy and macroeconomy. Over such a threshold, nude hedging generates a systemic risk that has to be monitored with the exchangeability of instruments' measurements and available free equity levels. It will be a concern for the surveillance modelling that we will see in Chapter 8.

Other aggregates (derived from analysis of financial statements)

■ All revenues (as defined by accounting standard setters – bills and accounts receivables should reconcile with tax fifing in some jurisdictions, but will be uncertain to some extent because of “cash-basis accounting” which is differentiated from the “accrued accounting method”).

■ The global output of an entity (production): in the aggregate, this value should recoup GNP – defined as the sum of all added values.

■ The value-added factor – that is the difference between “billed production” and in-sourced subcontracting activity.

The Utility of M5 and M6 Aggregates

The financial conditions for monetary or financial instrument holders or their delegates can vary, for instance if the quantitative measurement of consolidated contracts leads to a potential impact on the clearing of balances and particularly if analysis of such quantitative measurements is significantly modulated from either a macroeconomic or microeconomic perspective. (Example: A given contract is valid, but revenue accumulation creates a concentration factor that enables bargaining against the counterparty, such that the latter may pay less or be paid more than the instrument's nominal value.) One analytical advantage in the use of M5 and M6 aggregates would be added stability.

  • [1] In all European countries, yearly financial statements of corporations are deposited with a trade registration board or equivalent. Not for SMEs under certain thresholds. Tax filing requirements are not completely identical between countries, but nevertheless very close within Western Europe. Convergence of standards is on the table of economic government in Europe, if not about tax rates at least about determining the basis.
 
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