Clasification of F Instruments

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3. Classification of Financial

Instruments

Cl assi f i cat i on of f i nanci al i nstr ument s and i dent i f i cat i on of

t hei r nat ur e i s one of t he most i mpor t ant phases f or compi l at i on

and pr esent at i on of monet ar y st at i st i cs. Li ke ot her

cl assi f i cat i ons used i n monet ar y st at i st i cs, i t i s al so advi sabl e her e t o

f ol l ow i nt er nat i onal st andar ds t hat woul d hel p t o make st at i st i cs

compar abl e acr oss count r i es and ensur e i t s uni t y. I n car r yi ng out

cl assi f i cat i on, t her e wi l l be a need t o consi der f eat ur es of a count r y s

banki ng and f i nanci al syst em payi ng a due r egard t o t hei r devel opment

pr ospect s.

Financial instruments ar e f i nanci al cont r acts of di f f er ent nat ur e

made bet ween i nst i t ut i onal uni t s. These compr i se the f ul l r ange of

f i nanci al cl ai ms and l i abi l i t i es bet ween i nsti t ut i onal uni t s, i ncl udi ngcont i ngent l i abi l i t i es l i ke guar ant ees, commi t ment s, et c. Fi nanci al asset

i s def i ned as any cont r act f r om whi ch a f i nanci al cl ai m may der i ve f or

one par t y and a f i nanci al l i abi l i t y or par t i ci pat i on i n equi t y f or

another .

Financial instrument can exi st onl y bet ween t wo i nst i t ut i onal uni t s.

Wher e f i nanci al i nst r ument s are compounded, i . e. r epr esent a set of

sever al i nst r ument s, f or compi l at i on of st at i st i cs ther e wi l l be a need

t o di st i ngui sh t hem i nt o separ at e i nst r ument s so t hat each of t hem

i ncl udes onl y a si ngl e pai r of i nsti t ut i onal uni t s.

Financial assets ar e cont r act s t hat do not cont ai n cont i ngency,

i . e. , i r r especti ve of any condi t i ons, gener at e f i nanci al cl ai ms havi ngdemonst r abl e val ue over whi ch owner shi p r i ght s are enf or ced, i ndi vi dual l y

or col l ect i vel y, and f r om whi ch economi c benef i t s can be der i ved by usi ng

or hol di ng t hem.

The concept of financial instrument i s wi der t han t he concept of

financial asset as def i ned i n t he Syst em of National Accounts, 1993. Thus, financial instruments are cl assi f i ed i nt o financial assets and

other financial instruments.

Cl assi f i cat i on of f i nanci al asset s i s based on t hei r t wo pr i nci pal

char acteri st i cs, l i qui di t y and l egal charact er i st i cs .

Classification of financial instruments:

FI NANCI ALASSETS

SDRsMonet ary gol dCurr encyDeposi t sSecur i t i es ot her t han sharesBor r owi ngsLoansShares and other equi t yOt her accounts r ecei vabl e/ payabl eFi nanci al der i vat i ves

F

INANCIAL

INSTRUMENTS

OTHER FI NANCI AL

I NSTRUMENTS

Let t ers of guarant eeLett ers of credi tFi nanci al commi t ment sPl edged f i nanci al asset s

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3 . 1 . M o n e t a r y G o l d a n d S D R s Monet ar y gol d and SDRs, i ssued by t he I MF, are t he onl y f i nanci al

asset s f or whi ch t her e ar e no cor r espondi ng f i nanci al l i abi l i t i es.

Monetary gold- Monet ar y gol d consi st s onl y of st andar d bul l i ons of gol dhel d by the cent r al bank or gover nment as par t of of f i ci al r eser ves.Monet ar y gol d, t her ef or e, can be a f i nanci al asset onl y f or t he

cent r al bank or gover nment . Transact i ons wi t h monetary gol d areoperat i ons on pur chase and sal e of gol d by aut hor i t i es i mpl ement i ng

monet ar y pol i cy. These t r ansact i ons are car r i ed out bet ween thecent r al banks onl y or between t he cent r al banks and i nt er nat i onalf i nanci al or gani zat i ons. For commer ci al banks, st andar d bul l i ons of

gol d ar e not t r eat ed as monetary gol d. Gol d denomi nat ed deposi t s ar et r eat ed as f i nanci al asset s and cl assi f i ed as gol d. Asset s

denomi nat ed i n gol d, whi ch ar e not t r eat ed as par t of of f i ci al

r eser ves, ar e cl assi f i ed as nonf i nanci al asset s.

Gol d and gol d denomi nated deposi t s hel d by nonf i nanci al uni t s and

f i nanci al cor por at i ons ( ot her t han the cent r al bank) ar e t r eat ed asnonmonetary gol d. Operat i ons on gol d car r i ed out by ot her sectors of

economy are t r eat ed as operat i ons on acqui si t i on of val ues anddi sposal , and i t i s t r eat ed as nonf i nanci al asset .

SDRs SDRs are i nt er nat i onal r eser ve asset s7 cr eat ed by the I MF and

al l ocat ed t o member count r i es t o suppl ement exi st i ng of f i ci al

r eser ves. SDRs are not t r eat ed as t he I MF s l i abi l i t y. SDRs are hel donl y by t he I MF member count r i es and by a l i mi t ed number of

i nt er nat i onal f i nanci al or gani zat i ons. SDR hol di ngs ar e hel d

excl usi vel y by of f i ci al aut hor i t i es, whi ch ar e nor mal l y t he cent r albanks. Transact i ons i n SDRs bet ween t he I MF member s or bet ween t he

I MF and i t s members ar e t r eat ed as f i nanci al t r ansact i ons. SDRhol di ngs r epr esent uncondi t i onal r i ght s t o hol der s t o obt ai n f or ei gn

exchange or other r eser ve asset s f r omother I MF members.

3 . 2 C u r r e n c y a n d D e p o s i t s

Cur r ency and deposi t s ar e t he most l i qui d f i nanci al asset sconsi st i ng of not es and coi ns i n ci r cul at i on, al l t ypes of deposi t s i n

nat i onal cur r ency and f or ei gn cur r ency.

Currency - Cur r ency r epr esent s not es and coi ns i n ci r cul at i on, whi ch ar e

of f i xed nomi nal val ues and have no dates of r epayment . I ssued notesand coi ns ar e consi der ed l i abi l i t i es of t he cent r al bank. Gener al l y,

cur r ency i s used f or maki ng payment s. For st at i st i cal pur poses, i ti s al ways necessar y t o di st i ngui sh bet ween not es and coi ns i ssued byr esi dent and nonr esi dent cent r al banks, i . e. separ at e nat i onal

cur r ency f r om f or ei gn cur r ency. I f nat i onal cur r ency i s t hecount r y s ( t he cent r al bank s) l i abi l i t y, f or ei gn cur r ency i s ot her

count r i es l i abi l i t y.

Al l sect ors of economy and nonresi dents can hol d as an asset , but

onl y monet ar y aut hor i t i es or cent r al banks ar e aut hor i zed t o i ssue

7Operations with the IMF are described in more detail in Section 6 of this Manual.

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i t . I n many count r i es, onl y nat i onal cur r ency i s i ncl uded i nmonetary aggr egates, as onl y t he nat i onal curr ency can be used

di r ect l y f or ( l ocal ) t r ansact i ons bet ween r esi dent s. I n somecount r i es, however , f or ei gn cur r ency ci r cul at es al ong wi t h nat i onalcur r ency, and hence i t i s i mport ant i n t he vi ew of monetary pol i cy

t o consi der f or ei gn cur r ency i n ci r cul at i on.

Some count r i es i ssue gol d and other preci ous metal - made coi ns,whi ch t heor et i cal l y can be used as a means of payment . Normal l y,

such coi ns ar e hel d f or numi smat i c val ue. I f not i n act i veci r cul at i on, such coi ns shoul d be cl assi f i ed as nonf i nanci al asset s.

Deposits - Deposi t s i ncl ude al l cl ai ms on t he cent r al bank and ot her

deposi t ory corpor at i ons, r epr esent ed as bank deposi t s. I n somecases, ot her f i nanci al cor por at i ons may al so accept deposi t s.Deposi t s of deposi t or y cor por at i ons can f al l i nt o t wo cat egor i es:

t r ansf er abl e deposi t s and ot her deposi t s ( nont r ansf er abl e deposi t s) .Nor mal l y, separat e sub- cat egori es ar e used f or deposi t s denomi nated

i n nat i onal cur r ency and f or t hose i n f or ei gn cur r ency.

Transferable deposits - Tr ansf er abl e deposi t s ar e deposi t s ( i n nat i onaland f orei gn cur r ency) t hat are i ) subj ect t o payment on demand at

par and wi t hout penal t y or r estr i ct i on, i i ) di r ectl y usabl e f or

maki ng payment s by payment order s, checks, car ds or other payment

f aci l i t i es, or ot herwi se usabl e as a means of payment or

ci r cul at i on. Tr ansf er abl e deposi t s compr i se t r ansf er abl e deposi t s

wi t h resi dent and nonr esi dent f i nanci al cor por at i ons. Thi s cat egor y

compr i ses al so deposi t s t hat al l ow di r ect cash wi t hdr awal s but not

di r ect t r ansf er s t o t hi r d par t i es. Al l sect or s of economy and

nonr esi dent s ( t he rest of t he wor l d) can open and oper at e

t r ansf er abl e deposi t account s.

Other (nontransferable) deposits - Sub- cat egor y of ot her deposi t scompr i ses al l t ypes of deposi t s ( i n nat i onal and f or ei gn cur r ency) ,

ot her t han t he t r ansf er abl e deposi t s. Ot her deposi t s ar e f i nanci al

i nt er medi ar i es deposi t s or l i abi l i t i es r epr esent ed by evi dence of

deposi t t hat cannot be used f or maki ng payment s at any t i me. These

are not exchangeabl e wi t h cash or t r ansf er abl e deposi t wi t hout

cer t ai n r est r i cti ons or penal t y. Use of t hese deposi t s i s subj ect t o

cer t ai n rest r i ct i ons:

subj ect t o payment af t er a cer t ai n per i od of t i me or at any

moment , pr ovi ded cer t ai n cost s ar e i ncur r ed,

cannot serve as an i nst r ument f or maki ng di r ect payment s,

ot her r est r i ct i ons ( f r ozen account s, pl edged asset s, et c. ) canoccur .

Al l sector s of economy and nonr esi dent s ( t he r est of t he wor l d)

can open and operat e such account s.

Cat egor y of ot her deposi t s t ypi cal l y repr esent :

t i me deposi t s,

nont r ansf er abl e deposi t s denomi nat ed i n f or ei gn cur r ency,

r epur chase agreement s t hat are i ncl uded i n t he nat i onal measures

of br oad money.

3 . 3 . S e c u r i t i e s O t h e r T h a n S h a r e s

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Secur i t i es ot her t han shar es ar e negot i abl e i nst r ument s i n t he

f i nanci al mar ket ser vi ng as evi dence t hat uni t s i ssui ng such i nst r ument s

have assumed obl i gat i ons t o set t l e by means of pr ovi di ng cash, ot her

f i nanci al i nst r ument or some ot her i t em of economi c val ue. Secur i t i es

i ncl uded i n t hi s cat egor y ar e di f f er ent f r om shar es si nce t hese do not

vest t he secur i t y hol der wi t h the owner shi p ri ght over t he i ssuer . Common

t ypes of secur i t i es ar e gover nment t r easur y bi l l s, gover nment bonds,

cor porat e bonds and debent ur es, commer ci al paper , cer t i f i cat es of

deposi t s i ssued by deposi t or y cor por at i ons and si mi l ar ot her i nst r ument s

t hat ar e nor mal l y sol d i n f i nanci al mar ket s. Loans or l i abi l i t i es t hat

have become negot i abl e de f act o shoul d al so be cl assi f i ed under t hi s

category.

A secur i t y pr ovi des evi dence of f i nanci al cl ai m on i t s i ssuer , and

speci f i es t he schedul e f or i nt er est payment s and pr i nci pal r epayment s. I n

t he monet ar y st at i st i cs, secur i t i es ar e cl assi f i ed as f ol l ows:

coupon basis securities, whose i nterest or coupon payment s ar e

made dur i ng t he l i f e of t he i nst r ument , and t he pr i nci pal i s

r epai d at mat ur i t y;

amortized basis securities, whose i nt erest and pr i nci pal payment s

ar e made i n i nst al l ment s dur i ng t he l i f e of t he i nst r ument ;

discount, or zero coupon, basis securities, t hat ar e i ssued and

al l ocated at a pr i ce bel ow t he f ace val ue and r epai d at matur i t y

on f ace val ue;

deep discount basis securities, t hat ar e i ssued and al l ocat ed at a

pr i ce bel ow f ace val ue, and t he pr i nci pal and a subst ant i al par t

of t he i nt er est i s pai d at mat ur i t y;

indexed basis securities, whi ch t i e t he amount of i nt erest and/ or

pr i nci pal payment t o a r ef er ence i ndex such as a pr i ce i ndex or an

exchange r ate i ndex.

Pref err ed shares t hat pay a f i xed i ncome but do not pr ovi de

owner shi p r i ght over t he i ssuer ar e cl assi f i ed as secur i t i es ot her t han

shar es. Bonds t hat ar e conver t i bl e i nt o shar es shoul d al so be cl assi f i ed

under t hi s cat egor y.

Secur i t i zat i on of f i nanci al asset i s somet i mes used i n t he creat i on

of secur i t i es ot her t han shar es. Secur i t i zat i on r epr esent s t he i ssuance

of secur i t i es t hat ar e backed by f i nanci al asset s such as mor t gage l oans,

cl ai ms on cr edi t car d hol der s and ot her t ypes of l oans. Such f i nanci al

asset s cont i nue to be shown i n t he bal ance sheet as asset s of t he

acqui r er s, whi l e t he i ssuer s recor d t hei r r especti ve l i abi l i t i es as

secur i t i es. Banker s accept ance i s t r eat ed as a f i nanci al asset even though no

f unds may have been exchanged or moved. A banker s acceptance i nvol ves

t he accept ance by a f i nanci al cor por at i on of a bi l l of exchange to pay a

speci f i c amount at a speci f i ed date. The banker s accept ance r epr esent s

an uncondi t i onal cl ai m on t he par t of t he hol der and an uncondi t i onal

l i abi l i t y on t he par t of t he accept i ng bank.

An al t er nat i ve cl assi f i cat i on of shor t - , medi um- and l ong- t er m

secur i t i es other t han shar es i s al so i mpl ement ed as f ol l ows:

Short-term securities - t hi s sub- cat egor y compr i ses secur i t i es wi t h

mat ur i t y of one- year or l ess.

Medium-term securities cr i t er i a f or cl assi f yi ng secur i t i es under t hi s

sub- cat egor y depend on pr act i ces appl i ed i n f i nanci al mar ket s of t he

gi ven count r y. Nor mal l y, t hi s sub- cat egor y i ncl udes secur i t i es wi t h

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mat ur i t y f r om 1 t o 5 year s.

Long-term securities - t hi s sub- cat egor y compr i ses secur i t i es wi t h

mat ur i t y l onger t han those of shor t - and medi um- t er m secur i t i es.

3 . 4 . B o r r o w i n g s

Nor mal l y, bor r owi ngs are not consi der ed as a separ at e f i nanci al

i nst r ument . Bor r owi ng i s car r i ed out t hr ough ot her f i nanci al i nst r ument s,

f or exampl e, t hr ough l oans, deposi t s, et c. Never t hel ess, because of

pecul i ar i t i es of Ar meni an Law, borr owi ngs i n Ar meni a can be t r eat ed as a

separ at e f i ni cal i nst r ument , as t hese ar e sour ce of f unds f or credi t

i nst i t ut i ons. Accor di ng t o Ar meni an Ci vi l Code, t he l ender gi ves t he

bor r ower money under t he l oan agreement , and t he bor r ower under t akes t o

r eturn the r ecei ved amount t o t he l ender as and when speci f i ed by t he

agr eement . I f t he mat ur i t y dat e i s not speci f i ed or i t i s speci f i ed as

demand, t he amount of t he l oan shal l be r eturned wi t hi n t hi r t y days upon

t he l ender' s r equest , unl ess ot her wi se pr ovi ded by t he agr eement . Thus,

t he bor r owi ngs as wel l as deposi t s can be both demand and t i me.

Opposed t o t i me deposi t s, bor r owi ngs ar e l ess l i qui d, because

l ender ' s cl ai m on col l ecti on of l oan i s due t o some r est r i cti ons, unl ess

otherwi se pr ovi ded by t he agr eement . I n a borr owi ng t r ansact i on, t he

l ender wi l l ear n i nt er est agai nst t he amount pr ovi ded.

3 . 5 . L o a n s 3.5.1. Loans

Loans ar e f i nanci al asset s t hat ar e creat ed when a cr edi t or l ends f unds di r ect l y t o a debt or

( bor r ower ) ,

evi denced by non- negot i abl e document s.

Thi s sub- cat egory of f i nanci al asset s compr i ses al l l oans and

advances ( except account s r ecei vabl e/ payabl e, whi ch ar e t r eat ed as a

separ at e sub- cat egor y of f i nanci al assets ) extended t o var i ous sect or s of

t he economy by f i nanci al corporat i ons, gover nment s, and, i n some

count r i es, by ot her sect or s.

Short-term loans shor t - t er m l oans nor mal l y i nvol ve l oans wi t h mat ur i t y

of one year or l ess. However , f or r econci l i at i on of di f f er ent

pr act i ces bet ween the count r i es, shor t - t er m l oans can be def i nedi ncl udi ng l oans wi t h mat ur i t y of up t o two year s. Al l l oans t hat

wi l l mat ur e upon r equest ar e cl assi f i ed as shor t - t er m, even i f i t i s

expect ed t hat t hese l oans wi l l not be r epai d wi t hi n one year .

Medium-term loans - dependi ng on pr act i ces appl i ed i n count r i es, l oans

wi t h mat ur i t y f r om 1 t o 5 year s ar e cl assi f i ed as medi um- t er m l oans.

Long-term loans l ong- t er m l oans i ncl ude t he l oans wi t h mat ur i t y t hat

exceeds t hose of shor t - and medi um- t erm l oans.

Accor di ng t o st at i st i cal cl assi f i cat i on, r epo agr eement s, f i nanci al

l easi ng, f act or i ng oper at i ons and ot her si mi l ar agr eement s are cl assi f i ed

under t he cat egory of l oans.

3.5.2 Repurchase Agreements

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A repurchase agreement ( r epo) i s an ar r angement i nvol vi ng t he sal e

of secur i t i es by one part y t o anot her wi t h a commi t ment t o repur chase the

same or si mi l ar secur i t i es of t he same vol ume on a speci f i ed f ut ur e date.

The part y t hat buys secur i t i es r et ai ns t he r i ght of car r yi ng out

t r ansact i ons wi t h r epo- secur i t i es unt i l t he r epur chase ( r esal e) dat e, and

shoul d r esel l si mi l ar secur i t i es t o t he ot her par t y at expi r y of t he

agr eement . I n thi s agr eement , t he condi t i on of r epur chase makes t he repo

agr eement si mi l ar t o col l at er al i zed l oans r at her t han t o pur chase and

sal e of secur i t i es. Ther ef or e, t he sel l er of secur i t i es shoul d cont i nue

t o r ef l ect t he sol d secur i t i es i n i t s bal ance sheet . However , as r epo

agr eement s cont ai n a component of pur chase and sal e of secur i t i es, i n

some cases, t hey are recor ded as bot h l endi ng and pur chase and sal e of

secur i t i es. Thi s pr acti ce i s appl i ed al so i n t he banki ng syst em of t he

Republ i c of Ar meni a.

3.5.3. Swap agreements8

Though swap agreements ar e t r eat ed as f i nanci al der i vat i ves, t heycan i n some cases be cl oser t o repurchase agr eement s, dependi ng on t he

way t hese ar e i mpl ement ed and the t erms of t he gi ven t r ansact i on.

The f or ms of swap agreements ar e:

Gold swaps are f orms of r epurchase agr eement s. They occur when gol d

i s exchanged f or f orei gn exchange at a cert ai n pr i ce, wi t h a commi t ment

t o r epur chase t he gol d at a f i xed pr i ce on a speci f i ed f ut ur e dat e. Gol d

swaps shoul d be r ecor ded as col l at er al i zed l oans. The col l at er al i zed gol d

shoul d r emai n on t he bal ance sheet of t he or i gi nal owner ( monetary gol d -

i n case of t he Cent r al Bank) .

The Cent r al Bank operat es currency swaps when t he par t i es agree t o

exchange Ar meni an dr am f or f orei gn curr ency on spot t erms provi ded t hat

t he f or war d exchange r at e i s not speci f i ed but t he i ni t i al cost of

t r ansact i on i n Ar meni an dr ams i s speci f i ed i nst ead, i ncl udi ng swap

i nt erest r ate as pr ovi ded by t he agr eement . Thus, curr ency swap st ands

ver y cl ose to the l oan pl edged by f or ei gn cur r ency or t o the f or ei gn

cur r ency r epurchase agr eement s.

3.5.4. Leasing operationsLeasi ng i nvol ves an agr eement wher eby a part y ( l essor ) conveys t o

t he ot her par t y (l essee) t he r i ght t o use cer t ai n i nvent or y (bui l di ng,

pr emi ses, equi pment , etc) f or a speci f i ed per i od and on agr eed t er ms.

Normal l y such an ar r angement presumes per i odi c payment s f or t he equi pment

under use i n the dur at i on of i t s usage. Obj ect s of l easi ng oper at i ons may

i ncl ude f i xed asset s such as vehi cl es, equi pment , t echnol ogi cal

f aci l i t i es, means of t r anspor t , i nf or mat i on syst ems and ot her si mi l ar

f aci l i t i es.

Pr esent economi c pr act i ce pr ovi des f or di f f er ent t ypes of l easi ng,

each of whi ch has i t s pecul i ari t y. However, t he common f orms of l easi ng

ar e oper at i ng l ease and f i nanci al l ease. Onl y f i nanci al l ease, whi ch i s

8 The description of swap as derivative instrument is given in paragraph 3.8.6 of

"Contingent and Derivative Instruments".

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cl ose by i t s nat ur e t o l oan, i s cl assi f i ed under t he sub- cat egor y of

l oans. Operat i ng l ease i s an agr eement on cur r ent l easi ng. Nor mal l y, t he

per i od of t hi s agr eement i s shor t er t han t he peri od of usage( amor t i zat i on) of t he l eased asset . Thus, t he f ee st i pul at ed i n t heagr eement does not cover f ul l val ue of t he asset, t her ef or e, t he asset

can be l eased f or sever al t i mes. Speci f i ci t y of oper at i ng l ease l i es i npremature t ermi nat i on of t he agr eement by t he l essee. Common obj ect s of

t he oper at i ng l ease i ncl ude non- dur abl e i t ems ( comput er s, copi er s,var i ous or gani zer s, et c. ) and equi pment r equi r i ng const ant t echni cal

mai nt enance (car s, ai r pl anes, r ai l r oad and sea t r anspor t ) .

Basi cal l y, f i nanci al l ease r epr esent s an al t er nat i ve met hod off i nanci ng acqui si t i on of f i xed asset s ( basi cal l y vehi cl es and equi pment ) .

I t i s a l ong- t er m agr eement bet ween a l essor and a l essee wher eby t hel essor acqui r es t he vehi cl es and equi pment and suppl i es t hem t o the

l essee. The l essee obl i ges t o pay per i odi cal payment s dur i ng t he cour seof t he agr eement t o cover al l expenses of t he l essor , i ncl udi ng f ul l

val ue of equi pment , addi t i onal expendi t ur es and i nt er est s ( i ncome) .Speci f i c i t y of f i nanci al l ease l i es i n t hi rd- par t y par t i ci pat i on,r el at i vel y l onger per i od of t he agr eement , whi ch i s equal t o t he l i f e of

t he equi pment . There i s anot her pecul i ar i t y of f i nanci al l ease whereby al l r i sks

and rewar ds r el at ed t o owner shi p r i ght s over t he speci f i c asset ar eactual l y t r ansf er r ed f r om t he l essor - t he l egal owner of t he goods - t ot he l essee, t he user of t he goods. Thi s i mpl i es t hat change of ownershi p

has de f act o occur r ed, and t he l essor has acqui r ed a f i nanci al cl ai m,i nst ead of i t s pr oper t y, on t he l essee. Ther ef or e, f i nanci al l easi ng

stat i s t i cal l y i s cl assi f i ed as a l oan. As was not ed, f i nanci al l easi ng i s an al t er nat i ve f i nanci ng f or

acqui si t i on of f i xed asset s. But , unl i ke t he t r adi t i onal ways ofacqui r i ng f unds ( bank l oan, i ssuance of secur i t i es, et c. ) , l easi ngoper at i ons ar e not shown i n t he l essee s bal ance sheet , si nce f r om al egal poi nt of vi ew, t he owner of t he asset r emai ns t he l easi ng companyt hat cal cul ates depr eci at i on and pays respect i ve ownershi p t axes. Anent er pr i se t hat t akes l oan bear s an obl i gat i on ( i . e. r epayment of t hel oan) si mi l ar t o an ent er pr i se t hat acqui r es equi pment does ( i . e. l easef ee) .

3.5.5. FactoringFact or i ng i s obt ai ni ng of cr edi t or s r i ght s f or payment document s by

a bank ( a f act or ) creat ed on pr ovi si ons of t r ade credi t f or sel l i ng goodsand ser vi ces between economi c uni t s. Thi s i s al so accompani ed byaccount i ng, i nf or mat i on, i nsur ance and ot her ser vi ces. Par t i es i n

f act or i ng oper at i ons i ncl ude the f act or - bank, cust omer of t he f act or -bank, i . e. t he suppl i er ( or i gi nal l ender ) and t he payer ( debt or ) . Thesuppl i er conveys l egal cl ai m on i t s cust omer t o t he f act or - bank t o

r ecei ve payment s by way of t r ansf er of such cl ai m.

Obj ect s of f act or i ng may i ncl ude i ) f i nanci al cl ai ms t hat ar e

over due ( exi st i ng cl ai m) , and i i ) f i nanci al cl ai ms t o be gener at ed at a

f ut ur e dat e ( f ut ur e cl ai m) .

Banks, ot her cr edi t i nst i t ut i ons and l i censed commer ci al

organi zat i ons can be i nvol ved i n f act or i ng agr eement s.

Fact ori ng oper at i ons may cont ai n t he f ol l owi ng t er ms: f ul l or par t i al advance payment s agai nst l i abi l i t i es i n t he f or m

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of f actori ng l oan by the f actor- bank, wi t h t he r i ght t o r ecl ai m

t he l oan f r om t he suppl i er ;

accept ance of t he suppl i er s cr edi t r i sk wi t hout t he r i ght t o

r ecl ai m t he amount , t he f actor - bank makes advance payment f or

l i abi l i t i es t hat shoul d be r ei mbur sed by the debt or agai nst

payment document s;

accept ance of t he suppl i er s credi t r i sk when t he f act or - bank

makes no advance payment but guar antees f ul l payment s on a

speci f i c dat e;

management of f actori ng l oan, by col l ecti ng l i abi l i t i es;

book- keepi ng of t he suppl i er s al l t r ansact i ons or a par t of t hem,

dur i ng the cour se of t he f act or i ng agr eement .

Essent i al l y, f act or i ng i s a t ype of l oan, wher eby t he r el evantor gani zat i ons acqui r e the suppl i er s r ecei vabl es and col l ect t hem f r omt he debt or.

3 . 6 . S h a r e s a n d O t h e r E q u i t y Shar es are f i nanci al i nst r ument s t hat r epr esent or pr ovi de evi dence

on owner shi p r i ght s of t he hol der s over ent er pr i ses or or gani zat i ons,i ncl udi ng f i nanci al i nst i t ut i ons. Shar es and ot her equi t y compr i se al li nst r ument s and r ecor ds acknowl edgi ng, af t er t he cl ai ms of al l cr edi t or shave been met , cl ai ms on t he resi dual val ue of a cor porat i on ( compani es,cor por at i ons) . Nor mal l y, t hese i nst r ument s ent i t l e the hol der s bot h ofdi st r i but ed pr of i t s of ent er pr i ses or or gani zat i ons, and t he r esi dualval ue of t he asset s i n t he event of l i qui dat i on. Owner shi p of equi t y i susual l y evi denced by shar es, st ocks, par t i ci pat i on' s and si mi l ardocument s. Thi s categor y al so i ncl udes pref er r ed shar es t hat pr ovi de f orpar t i ci pat i on i n t he r esi dual val ue on di ssol ut i on of an ent er pr i se.

Di vi dends are a f orm of propert y i ncome to whi ch sharehol ders become

ent i t l ed. Shares do not pr ovi de pr edet er mi ned pr oper t y i ncome.Nonet hel ess, di vi dends on pr ef er r ed shar es ar e det er mi ned i n advance.Types of equi t y ar e:

or di nar y shar es t hat pr ovi de f or owner shi p r i ght i n an ent er pr i seor cor por at i on;

pr ef er r ed shar es t hat pr ovi de r i ght f or cl ai m over r esi dual val ueof an ent er pr i se,

equi t y par t i ci pat i on i n l i mi t ed l i abi l i t y compani es.

I n t he cont ext of t he monet ar y st at i st i cs, f i nanci al cor por at i onscapi t al i n t he f or m of shar es and ot her equi t y i s di vi ded i nt o separ at egr oups as f ol l ows:

Funds cont r i but ed by owner s i ncl ude t ot al amount f r om t he i ni t i aland any subsequent i ssuance of shar es or other f orms of owner shi pof cor por at i ons ( st at ut or y f und) .

Ret ai ned ear ni ngs const i t ut e al l af t er - t ax pr of i t s t hat have notbeen di st r i but ed t o shar ehol der s or appr opr i at ed as gener al orspeci al r eser ves.

Gener al or speci al r eser ves ar e appr opr i at i ons of r et ai nedear ni ngs f or speci al pur poses.

Reval uat i on r eser ves ar e t he bank s unr eal i zed pr of i t / l oss due t ochange i n mar ket val ue of f i xed assets , f or ei gn cur r ency,secur i t i es, and pr eci ous met al s.

SDR al l ocat i on r epr esent s t he SDRs al l ocated t o cent r al banks by

t he I MF.

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3 . 7 O t h e r A c c o u n t s R e c e i v a b l e / P a y a b l e

Account s r ecei vabl e/ payabl e i ncl ude t r ade cr edi t s, advances andot her r ecei vabl es or payabl es. Tr ade credi t s compr i se t r ade cr edi textended di r ect l y to buyer s of goods and ser vi ces ( ent er pr i ses,

gover nment , NPI SHs, househol ds, and nonr esi dent s) . Advances areprepayment s made f or work t hat i s i n pr ogr ess or f or purchase of goodsand ser vi ces. Any agreement , whi ch does not assume di r ect payment by cashor ot her f i nanci al i nst r ument t o pur chase goods or ser vi ces, wi l l creat ea t r ade cr edi t extended by the sel l er t o t he buyer . Her e, i t does noti nvol ve l oans acqui r ed t o f i nance t he tr ade credi t si nce t hese credi t sar e cl assi f i ed under t he cat egor y of l oans. Thi s cat egor y i ncl udes onl ydi r ect t r ade credi t s and advances.

Thi s cat egory i ncl udes al so i t ems such as debt or s and cr edi t or s, t axl i abi l i t i es and ot her account s r ecei vabl e/ payabl e.

3 . 8 . C o n t i n g e n t a n d D e r i v a t i v e I n s t r u m e n t s

3.8.1. Contingent Instruments

There ar e f or ms of cont r act ual f i nanci al ar r angements i n whi ch af i nanci al cl ai m depends on a cer t ai n condi t i on or condi t i ons. Sucht r ansact i ons nor mal l y do not have a t r ansf er abl e val ue.

Al t hough cont i ngent i nst r ument s ar e not di r ect l y i ncl uded i n t he

monetary st at i st i cs, t he compi l at i on of summary i nf or mat i on on such

i nst r ument s may be of i mpor t ance i n anal yzi ng a count r y s or a sect or s

f i nanci al posi t i on and r el at i ons, si nce such i nst r ument s coul d i n f ut ur e

gi ve r i se t o acqui si t i on of var i ous asset s or cr eat i on of l i abi l i t i es

t hat mi ght not abl y af f ect f i nanci al f l ows and over al l condi t i on of t hegi ven ent i t y. I n some cases, a need f or st at i st i cal i nf or mat i on on t he

pot ent i al l i abi l i t i es of ent i t i es, ref l ected i n cont i ngent i nstr ument s,

may ar i se f or count r y s pol i cymaki ng anal ysi s. Thi s ki nd of st at i st i cs i s

mor e appr opr i at e t o col l ect and cl assi f y by guar ant ee pr ovi der s, unl i ke

t he ot her cases, when col l ect i on and compi l at i on are made by t ypes of

i nst r ument s.

Cont i ngent f i nanci al i nst r ument s i ncl ude guar ant ees, f i nanci al

commi t ment s, l et t er s of credi t , f i nanci al col l at er al , l i nes of credi t ,

et c. Cl ai ms or l i abi l i t i es on al l t hese i nstr ument s wi l l ar i se onl y i f

cer t ai n condi t i ons ar e met . For i nst ance, t he bank wi l l make a payment on

a guar ant ee onl y i f t he par t y, whi ch i s r eci pi ent of t he guar ant ee, f ai l st o meet i t s l i abi l i t i es. Payment s on t he l et t er of credi t wi l l be made i n

t he event when the respect i ve document s are pr esent ed. Col l ateral i zed

f i nanci al asset s may become t he bank s propert y i f t he part y that hassol d t hem i s unabl e t o r epur chase t hem. Li ne of cr edi t wi l l become a

f i nanci al asset s or l i abi l i t y onl y i f t he f unds ar e actual l y advanced.

Cl assi f i cat i on of cont i ngent i nst r ument s depends on t he nat ur e of a

speci f i c i nst r ument and pecul i ar i t i es of i t s usage i n t he gi ven count r y.

3.8.2 Guarantees

Guarant ee i nvol ves an obl i gat i on by t he economi c ent i t y t o assume

t he ot her ent i t y s f i nanci al obl i gat i on i f t hat ot her par t y def aul t s. Toi ssuer , a guar ant ee i s not t r eat ed as a f i nanci al l i abi l i t y as f ar as t he

par t y, t o whom t he guar ant ee has been i ssued, has not shown i t s i nabi l i t y

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t o meet such a l i abi l i t y. Ther ef or e, unt i l avai l abi l i t y of t hi s

condi t i on, l et t er s of guar ant ee wi l l be r ecor ded as of f - bal ance sheet

i t ems ( Appendi x 7. 1) .

Guar ant ees can be pr ovi ded by cent r al banks, gover nment s, f i nanci al

cor porat i ons and, i n some cases, ot her or gani zat i ons. These can be of

cer t ai n i mpor t ance al so i n t he cont ext of cl assi f i cat i on of ot her

f i nanci al i nst r ument s. For i nst ance, secur i t i es backed by t he gover nmentguarant ee may be cl assi f i ed i n a way ot her t han common secur i t i es.

I n t he cont ext of t he monet ar y st at i st i cs, l i abi l i t i es ar e al ways

cl assi f i ed as t he l i abi l i t y of t he sector t hat has assumed such, and not

t he l i abi l i t y of t he i ssuer of guar ant ee, unl ess t he i ssuer de f acto

acqui r es a l i abi l i t y to make payment .

For a cor r ect r ef l ect i on of gover nment s r el at i onshi ps wi t h ot her

sectors , i t i s somet i mes advi sabl e t o vi ew guarant ees i ssued by thegover nment as a l i abi l i t y.

3.8.3. Letters of Credit

A l et t er of cr edi t i s an obl i gat i on t o make payment agai nstdocument s r ecei ved. The amounts t o be pai d upon recei pt of t he document s

become l i abi l i t i es of t he bank. Let t er s of credi t ar e used t o f i nance

i nt er nat i onal t r ade oper at i ons.

Whi l e i mpor t i ng/ expor t i ng goods, r esi dent ent er pr i ses wi l l open

l et t er s of credi t wi t h Ar meni an resi dent banks t hat ser vi ce t hem. These

banks are obl i ged t o pay amount s of t he t r ade cont r act s ( or pr esent a

demand f or payment ) t o thei r f orei gn count erpar t i n the event t he

del i ver y and ot her document s ar e r ecei ved as st i pul at ed i n t he l et t er of

credi t . The recei pt of t he del i ver y and ot her document s i s a st i pul at i on

under whi ch t he r esi dent bank acqui r es an obl i gat i on or cl ai m over t he

f or ei gn bank ( Appendi x 7. 2) .

3.8.4. Financial Commitments

Fi nanci al commi t ment s i nvol ve cont r act s bet ween i nst i t ut i onal uni t s

by whi ch t he ent i t i es make arr angement s on speci f i c f i nanci al

t r ansact i ons t o be car r i ed out i n some f ut ur e t i me. The par t y assumi ng

l i abi l i t i es usual l y i s obl i ged t o pr ovi de f i nanci al asset s to the ot her

par t y i f speci f i c condi t i ons ar e met . Unl i ke t he l et t er s of guar ant ee

wher eby the i ssuer of guar ant ee assumes l i abi l i t y of an ent i t y, t he

i ssuer of commi t ment wi l l be responsi bl e f or f ul f i l l ment of t he terms of

t he cont r act , i n case of t he commi t ment s. Nonf i nanci al commi t ment s wi l l

not be t r eat ed as f i nanci al i nst r ument s.

Commi t ment s can be of var i ous f or m and nat ur e, t her ef or e, i t i s ver y

har d to set up a common approach of assessi ng t he r i ghts and obl i gat i ons

def i ned wi t hi n t hese commi t ment s. Al t hough not t r eat ed as f i nanci al

asset s, assessment of common t ypes of commi t ment s can be i mpor t ant f or

anal ysi s and eval uat i on of pot ent i al asset s and l i abi l i t i es. Li nes of

cr edi t and over draf t s ar e the most common f i nanci al commi t ment s.

A l i ne of credi t and/ or over dr af t pr ovi de t he bor r ower wi t h a

st andby guar ant ee f or t he f unds wi t hi n a speci f i c l i mi t and f or a

pr edetermi ned peri od. Nonethel ess, such f unds wi l l not be t r eat ed as

f i nanci al asset s unt i l t he de f act o ext ensi on of l oans ( Appendi x 7. 3) .

3.8.5. Pledged Financial Assets

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There i s a common pract i ce t o provi de l oans agai nst a cer t ai n

f i nanci al asset t aken as col l at er al . The r esi dual mat ur i t y of t he pl edged

asset shoul d be l onger t han t he dur at i on of t he l oan. Secur i t i es,

deposi t s, cur r ency, shar es, and si mi l ar assets can qual i f y as pl edged

f i nanci al asset s agai nst l oans. Fi nanci al asset s ar e r et ur ned t o t he

or i gi nal owner as t he l oan i s r epai d. Thus, t he r i sks associ at ed wi t hchange i n mar ket val ue of pl edged f i nanci al asset wi l l st ay wi t h t he

or i gi nal owner t her eof ( t he bor r ower ) t hr oughout t he per i od of t he

col l at er al i zed l oan agr eement .

Consi der i ng t hat t he l ender bank i s not deemed t he owner of t he

pl edged f i nanci al asset as f ar as t he bor r ower has not acknowl edged hi s

i nabi l i t y t o repay t he l oan, such assets cannot be post ed i n t he bal ance

sheet of t he bank. I nst ead ext ended l oans are account ed as f i nanci al

asset s.

Loans, accrued i nt er est s and r ecei vabl es wr i t t en of f t he bal ance

sheet ar e ver y si mi l ar t o cont i ngent i nst r ument s. Al t hough t hese cl ai ms

are not t r eated as bank s asset s, t hey can gener at e i ncome i f t he

bor r ower r epays t he l i abi l i t i es, whi ch have been r egar ded as bad.

3.8.6. Financial DerivativesFi nanci al der i vat i ves make an i nt egr al par t of i nt er nat i onal

f i nanci al mar ket s. The der i vat i ves mar ket s began t o devel op rapi dl y

si nce t he ear l y 1980s, and had a subst ant i al i nf l uence on behavi or of

f i nanci al market s. A number of quest i ons on how t he monetary and

macroeconomi c i ssues ar e af f ect ed by der i vat i ves remai n unanswered due t o

r api d gr owt h of f i nanci al mar ket s, l ack of t he r el evant st at i st i cs, and

t he absence of wel l - st r uct ur ed theor i es. Pol i cymaker s shoul d have a cl ear

under st andi ng of t r ansact i ons wi t h der i vat i ves, as wel l as r eal i ze andeval uat e the l i nks bet ween der i vat i ves and or di nar y f i nanci al mar ket s.

Fi nanci al der i vat i ves ar e f i nanci al i nst r ument s t hat ar e l i nked t o

speci f i c asset s ( ot her f i nanci al i nst r ument s, goods) . By nat ur e, t hese

i nst r ument s ar e si mi l ar t o cont i ngent i nst r ument s. Cl ai ms and l i abi l i t i es

r el at ed t o f i nanci al i nstr ument s wi l l ar i se af t er a speci f i c per i od of

t i me. I n t hi s case, cont i ngency of an i nst r ument r el at es onl y t o t he t i me

r egar dl ess of occur r ence of any ot her event or condi t i on. Der i vat i ve

i nstr ument s ar e not consi der ed a f i nanci al cl ai m or l i abi l i t y f or t he

hol der t her eof at t he gi ven moment . However, f i nanci al deri vat i ves can be

t r aded i n t he mar ket and t hus t hey wi l l obt ai n a mar ket val ue, whi ch wi l l

depend on t he mar ket pr i ce of t he under l yi ng f i nanci al or nonf i nanci al

asset . Thus, t he pr i ce of a der i vat i ve i nst r ument der i ves f r om t hepr i ce of t he under l yi ng asset . I n t he event when t he cont r act pr i ce of

t he under l yi ng f i nanci al asset i s pr ef er abl e t o t he cur r ent mar ket pr i ce,

t he der i vat i ve woul d have a posi t i ve mar ket val ue. I f a f i nanci al

der i vat i ve i nst r ument has a market val ue i t must be recor ded i n the

bal ance sheet as a f i nanci al asset ( r espect i ve exampl es ar e pr esent ed i n

Appendi x 7. 4) .

I n t he cont ext of t he monet ar y and f i nanci al st at i st i cs of Ar meni a,

account i ng of deri vat i ves i n banks bal ance sheet s depends on t he l evel

of deepness of t he f i nanci al mar ket . The der i vat i ve i nst r ument s are not

yet wi del y used i n t he count r y, as t he f i nanci al market and t he

der i vat i ves mar ket , i n par t i cul ar , ar e under devel oped. The shar e off i nanci al der i vat i ves i n t he f i nanci al mar ket of Ar meni a i s negl i gi bl e.

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Mor eover , because of no ci r cul at i on i n t he mar ket , t he der i vat i ve

i nst r ument s do not have market val ue. Nevert hel ess, t he recor di ng of

t hese t r ansact i ons i s made i n t he bal ance sheet s of f i nanci al

cor por at i ons. Bal ance sheet r ef l ect s t he r eal val ue of t he der i vat i ve

i nst r ument , t hat i s t he di f f er ence between t he cont r act and mar ket pr i ces

of t he under l yi ng asset ( f i nanci al or r eal ) t i mes cont r act vol ume.

Dependi ng on t he di f f erence bet ween cont r act and market pr i ces (ei t her

posi t i ve or negat i ve) t he cor r espondi ng posi t i ons on der i vat i ve

i nst r ument s can be ref l ect ed i n bot h asset and l i abi l i t y account s. Fi nanci al der i vat i ves f al l i nt o t he f ol l owi ng gr oups: f or war ds,

opt i ons and swaps.

Forward - I n a f or war d cont r act , t he count er par t i es agr ee to exchange, ona speci f i ed dat e, a speci f i ed quant i t y of an under l yi ng i t em( f i nanci al or r eal asset ) at an agr eed- upon cont r act pr i ce.Execut i on of a f orwar d cont r act i s mandat or y but onl y i n t he case ofexpi r y of t he per i od speci f i ed i n t he cont r act . Each of t hecount er par t i es has bot h cl ai m and l i abi l i t y upon execut i on. The net

val ue of t he i nst r ument ( di f f er ence bet ween cl ai ms and l i abi l i t i es)i s zer o.

Option - The buyer of an opt i on acqui r es t he r i ght but not t he obl i gat i on

t o pur chase or sel l a speci f i c asset . Opt i ons t oo, cont ai ncont i ngency: t he acqui r er of an opt i on may not wi sh t o exer ci se i t .The buyer pays a cer t ai n amount t o t he sel l er of t he opt i on and t husacqui r es t he r i ght but not t he obl i gat i on t o sel l or pur chase aspeci f i ed i t em at an agr eed- upon pr i ce i n a speci f i ed per i od. Thebuyer of an opt i on can sel l t he opt i on cont r act, i . e. t he r i ght t oexer ci se t he opt i on, wher eby t he opt i on obt ai ns a market val ue. Thest at i st i cal r ecor di ng of opt i ons shoul d be car r i ed out i n t he same

way as f or t he f orwards.

Swap - A swap r epr esent s a spot pur chase ( sal e) of a f i nanci al asset wi t ha condi t i on of f orwar d sal e (pur chase) . The swap oper at i on pr esent edi n t hi s secti on def i ni t el y di f f er s f r om t he one pr esent ed i npar agr aph 3. 5. 3, whi ch i s oper ated mai nl y by t he CBA. Swap agr eementi s a t ype of a f or ward, i n whi ch t he part i es agr ee to exchangedi f f er ent cur r enci es, t hat i s t o buy (sel l ) any cur r ency f or anot hercur r ency i n spot market and concl udi ng at t he same t i me a r epurchaseagr eement on sal e ( purchase) of t hese curr enci es i n f orward marketat pr i ces det er mi ned bef or ehand, pur suant t o the rul es speci f i ed.

Der i vat i ves can be l i nked up not onl y t o f i nanci al assets but al so

t o cer t ai n goods. The l i qui di t y of nonf i nanci al der i vat i ves vi s- - vi sf i nanci al der i vat i ves i s l ower . Thi s however does not r ul e out t hepossi bi l i t y of pur chase and sal e of t he nonf i nanci al der i vat i ves. Thest at i st i cal r ecor di ng of nonf i nanci al der i vat i ve i nst r ument s ar e car r i edout i n t he same way as f or t he f i nanci al der i vat i ves.

I r r espect i ve of t he degr ee of devel opment of t he deri vat i ves mar kett he st at i st i cal r ecor di ng t her eof i s of gr eat i mpor t ance i n t he cont extof assessi ng i mpact of potent i al r i sks on banks and on t he monetarypol i cy. Bot h cont i ngent and der i vat i ve i nst r ument s i ndi cat e the pot ent i alcl ai ms or l i abi l i t i es of t he bank that mi ght change i t s f i nanci alcondi t i on dr amat i cal l y. Ther ef or e, i t i s necessar y t o dr aw a due

at t ent i on to i ssues concer ni ng devel opment , cl assi f i cat i on, account i ngand st at i st i cal r ef l ecti on of such i nst r ument s.

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References1. Monetar y and Fi nanci al St ati st i cs Manual , I MF, Washi ngt on D. C. , 2000.

2. Bal ance of Payment s Manual , f i f t h edi t i on, I MF, Washi ngton D. C. , 1993.

3. Fi nanci al Der i vat i ves, A Suppl ement t o the f i f t h edi t i on of t he Bal ance of

Payment s Manual , I MF, Washi ngt on D. C. , 2000.

4. Macroeconomi c Account i ng and Anal ysi s i n Transi t i on Economi es, Abdessatar Ouanesand Subhash Thakur , I MF, Washi ngt on D. C. , 1997.

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Clasification of F Instruments