Derivatives: Principles of good management

The Group of Thirty Recommendations

In 1993 the Group of 30 developed a number of recommendations to help dealers and end-users manage derivatives activity and continue to benefit from its use. These recommendations have become best practice benchmarks for most financial institutions.

Dealers and end–users

• Determine at the highest level of policy and decision making the scope of its involvement in derivatives activities and policies to be applied.
•Value derivatives positions at market, at least for risk management purposes. Quantify its market risk under adverse market conditions against limits, perform stress simulations, and forecast cash investing and funding needs.
•Assess the credit risk arising from derivatives activities based on frequent measures of current and potential exposure against credit limits.
•Reduce credit risk by broadening the use of multi-product master agreements with close-out netting provisions, and by working with other participants to ensure legal enforceability of derivatives transactions within and across jurisdictions.
•Establish market and credit risk management functions with clear authority independent of the dealing function.
•Authorize only professionals with the requisite skills and experience to transact and manage the risks, as well as to process, report, control, and audit derivatives activities.
•Establish management information systems sophisticated enough to measure, manage, and report the risks of derivatives activities in a timely and precise manner.
•Voluntarily adopt accounting and disclosure practices for international harmonization and greater transparency, pending the arrival of international standards.