THE GROUP OF THIRTY

The recent report by the Washington-based think-tank, the Group of Thirty, sought to address many of the problems associated with the risk ofover-the-counter derivative products. The Group of Thirty or G30 is a private group made up largely of the senior management of banks from all over the world and academics working in the field of economics.

The current members are:

1. Rt. Hon. Lord Richardson of Duntisbourne KG, honorary chairman
2. Paul Volcker, chairman, Group of Thirty, and chairman of James DWolfensohn Inc.
3. Dr Pedro Aspe, Secretario de Hacienda y Credito Publico Mexico
4. Geoffrey Bell, executive secretary, Group of Thirty, and president of GeoffreyBell & Company
5. Sir Roderick Carnegie, Hudson Conway Ltd, Australia
6. Richard Debs, advisory director, Morgan Stanley
7. Sr Guillermo de la Dehesa, Consejero Delegado, Banco Pastor
8. Professor Gerhard Fels, director, Institut der Deutschen Wirtschaft
9. Dr Jacob A. Frenkel, governor, The Bank of Israel
10. Dr Wilfried Guth, member of the supervisory board Deutsche Bank
11. Toyoo Gyohten, chairman, the Bank of Tokyo
12. John Heimann, treasurer, Group of Thirty, chairman of Global Financial Institutions, Merrill Lynch
13. Erik Hoffmeyer, chairman of the board of governors, Danmarks Nationalbank
14. Thomas S. Johnson, former president, Manufacturers Hanover
15. Professor Peter B. Kenen, director, International Finance Section, Department of Economics, Princeton University
16. Professor Paul Krugman, Professor of Economics, Massachusetts Institute of Technology
17. Yoh Kurosawa, president, the Industrial Bank of Japan
18. Jacques de Larosiere, Le Gouverneur, Banque de France
19. Anthony Loehnis, director, J Rothschild International Assurance Holdings
20. Shijuro Ogata, senior advisor, Yamaichi Securities Co.
21. Sylvia Ostry, chairman, Centre for International Studies, the University of Toronto
22. Tommaso Padoa-Schioppa, deputy director general, Banca d’Italia
23. Karl Otto Pal, partner, Sal Oppenheim Junior & Cie
24. William Rhodes, vice chairman, Citibank
25. Sir William Ryrie, executive vice president, International Finance Corporation
26. Jean-Claude Trichet, directeur du Tresor, France
27. Rodney B. Wagner, vice chairman of the Board, JP Morgan
28. Dr Marina v. N. Whitman, distinguished professor of Business Administration and Public Policy, University of Michigan

The production of the G30 derivatives report was prompted by the concerns of legislators that systemic risk may be growing in the OTC sector. The report followed a survey conducted by Price Waterhouse on behalf of G30 of some 72 end-users of OTC products and 80 dealers. The original report showed no evidence that derivatives increased risk but that there were some clear areas for concern. The G30 report had 20 recommendations covering a wide range of subjects. The report says: ‘These 20 recommendations are not necessarily th_eonly means to good management. What they do offer is a benchmark against which participants can measure their own practices.’

In summary, the recommendations said that each dealer and end-user of derivatives should:

1) Determine at the highest level of policy and decision making, the scope
of its involvement in derivatives activities and policies to be applied.

1. Value derivatives positions at market, at least for risk management purposes.
2. Quantify its market risk under adverse market conditions against limits, perform stress simulations, and forecast cash investing and funding needs.
3. Assess the credit risk arising from derivatives activities based on frequent measures of current and potential exposure against credit limits.
4. 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.
5. Establish market and credit risk management functions with clear authority, independent of the dealing function.
6. Authorise 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.
7. Establish management information systems sophisticated enough to measure, manage and report the risks of derivatives activities in a timely and precise manner.
8. Voluntarily adopt accounting and disclosure practices for international harmonisation, and greater transparency, pending the arrival of international standards.
9. Beyond the recommendations there were four separate proposals aimed at legislators, regulators and industry supervisors. This group of managers was called to:

Recognise close-out netting arrangements and amend the Basle Accord to reflect their benefits in bank capital regulations.

Work with market participants to remove legal and regulatory uncertainties regarding derivatives.

Amend tax regulations that disadvantage the economic use of derivatives.

Provide comprehensive and consistent guidance on accounting and reporting of derivatives and other financial instruments.

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