WASHINGTON -- Derivatives dealers and their customers are using more and more tools to minimize risk, an industry group's surveys show.
According to a dealer survey conducted by the Group of Thirty, 58% of the respondents said they have applied recommendations to their own risk management practices that the group released in July 1993.
An additional 30% of the dealers surveyed said they plan to use the recommendations within the next year.
The Group of Thirty's 1993 report contained 20 recommendations for dealers and end-users for managing risks associated with derivatives.
The group's efforts come as many state and local governments are reporting losses from making investments in derivatives. However, most of the losses have been from investments in government security derivatives, including structured notes.
The recent surveys conducted by the Group of Thirty focused on privately negotiated derivatives transactions, including interest rate swaps.
Responses to the questions came from 125 dealers and 149 end-users of derivatives worldwide.
The industry group said the survey results show that end-users, as well, are improving their risk management techniques.
Among the derivatives end-users surveyed, 33% have already used the Group of Thirty's recommendations for benchmarking and another 16% plan to do so over the next year.
The surveys revealed substantial improvements in risk management practices in 1993 and 1994, and plans for further improvement are in place, the industry group said.
For example, before the Group of Thirty's risk management recommendations were released, 19% of the dealers recently surveyed applied stress tests to their portfolios.
After the release of the July 1993 report, 35% of the dealers surveyed began applying stress tests, according to the survey results.
In addition, 39% of the survey respondents said they plan to start applying stress tests in the next year.
The survey was sponsored by the Group of Thirty, which formed a small task force whose advisers include the International Swaps and Derivative Association, Arthur Andersen, and Price Waterhouse.
The Group of Thirty comprises industry leaders, bankers, central bankers, and academics from around the world. The group is chaired by Paul Volcker, chairman of James D. Wolfensohn Inc. and former chairman of the Federal Reserve's Board of Governors.
Gay Evans, chairman of the International Swaps and Derivatives Association, said the survey results are a good sign.
"Both the results of and the global participation in the Group of Thirty's survey show the importance that derivatives dealers and end-users attach to good risk management practices," Evans said.
"The practices appear to be spreading rapidly as derivatives become more widely used by corporations, government, and financial institutions to manage the risks that are part of their day-to-day operations," Evans said.
In addition to chairing the swaps and derivatives association, Evans is a London-based managing director of Bankers Trust International Ltd.
While the Group of Thirty has developed risk management policies for the industry, the Securities and Exchange Commission and other industry representatives are working on ways to handle the risks involved in over-the-counter derivatives.
SEC chairman Arthur Levitt, along with representatives from six of the largest firms involved in derivatives, are working on voluntary guidelines for affiliated derivatives firms.
The guidelines are expected to contain a number of recommendations, including capital standards requirements and sales practice guidelines.
