More derivatives dealers, users turn to 'stress testing', poll finds.

With new examples of derivatives losses coming to light almost daily, a computer modeling technique known as stress testing is becoming more prevalent among derivatives dealers and users.

A survey by the Group of 30 found that 37% of derivatives users and dealers now perform the tests, which measure the impact of changes in interest rates and other variables on a portfolio's value. An additional 36% said they with implement stress testing procedures within the next year.

The survey focused on privately negotiated derivatives transactions among 125 dealers and 149 end users around the world.

Among banks that deal in derivatives, 54% said they use stress tests. An additional 39% said they would implement such procedures within the next year. The survey found that 60% of the largest institutions stress-test their derivatives portfolios and 36% said they will begin stress testing within a year.

The results of the new survey, an update of the Group of 30's original report on derivatives activity 18 months ago were released Monday amid continued bad publicity about derivatives.

Bankers Trust New York Corp. said that it had agreed with regulators to make changes in the way it manages its leveraged derivatives business. The changes were prompted by two recent lawsuits against the bank by clients that lost money on derivatives contracts.

Robert Mackay, director of the Center for the Study of Financial Futures at Virginia Tech, who served as project adviser for the Group of 30 report, said there has been a significant improvement in the area of stress testing.

There's a been a subtle, but dramatic change in what people think of as stress testing," Mr. Mackay said. "We now have a much stiffer definition of stress testing." He noted that stress testing is no longer merely adjusting for predictable shifts in interest rates, but has become a sophisticated simulation of virtually any shift in the yield curve.

But while stress testing is increasing, Mr. Mackay agrees that more needs to be done. "On stress testing we'd like to see the numbers higher."

Another area that needs improvement, he said, is disclosure.

The survey found that of the dealers, 56% provide "qualitative discussions regarding the scope of their derivatives activities." About 37% disclose the credit exposure of their outstanding transactions.

"Disclosure is still a problem:, said Charles Taylor, executive director of the Group of 30. "It's far from a universal practice."

The Group of 30 is a think thank that includes regulators, bankers, economists, and other experts in financial markets.

The group's first report on derivatives, issued in July 1993 sponse to the rampant growth in the derivatives market, made 20 recommendations mostly in the area of greater disclosure.

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