Group of 30 Report

Explained:

Founded in 1978, the Group of 30 is a non-profit organization of senior executives, regulators and academics. Through meetings and publications, it seeks to deepen understanding of international economic and financial issues. In 1993, it published a groundbreaking study called Derivatives: Practices and Principles. The work helped shape the emerging field of financial risk management. It has come to be known as the G-30 Report.

In the early 1990s, there was an active debate in the United States and other countries about risks posed by the rapidly growing—and largely unregulated—OTC derivatives market. In the Summer of 1992, Paul Volker, chairman of the Group of 30, approached Dennis Weatherstone, chairman of JP Morgan, and asked him to lead a study of derivatives industry practices.

Weatherstone formed an international steering committee and a working group of senior managers from derivatives dealers, end users and related legal, accounting and academic disciplined. They produced a 68-page report, which the Group of 30 published in July 1993. It describes then-current derivatives use by dealers and end-users. The heart of the study is a set of 20 recommendations to help dealers and end-users manage their derivatives activities. Topics included:

the role of boards and senior management,

the implementation of independent risk management functions,

the various risks that derivatives transactions entail.

With regard to the market risk faced by derivatives dealers, the report recommends that portfolios be marked-to-market daily, and that risk be assessed with both VaR and stress testing. It recommends that end-users of derivatives adopt similar practices as appropriate for their own needs.

While the G-30 Report focuses on derivatives, most of its recommendations are applicable to the risks associated with other traded instruments. For this reason, the report largely came to define the emerging field of financial risk management in the 1990s. The report is also interesting, as it appears to be the first published document to use the word “value-at-risk.”