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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 228, 229, 239, 240, and 249
[Release Nos. 33-7386; 34-38223; IC-22487; FR-48; International
Series No. 1047; File No. S7-35-95].
RIN 3235-AG42
RIN 3235-AG77
DISCLOSURE OF ACCOUNTING POLICIES FOR DERIVATIVE FINANCIAL
INSTRUMENTS AND DERIVATIVE COMMODITY INSTRUMENTS AND DISCLOSURE
OF QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK
INHERENT IN DERIVATIVE FINANCIAL INSTRUMENTS, OTHER FINANCIAL
INSTRUMENTS, AND DERIVATIVE COMMODITY INSTRUMENTS
AGENCY: Securities and Exchange Commission
ACTION: Final rules
SUMMARY: The Securities and Exchange Commission ("Commission" or
"SEC") is amending rules and forms for domestic and foreign
issuers to clarify and expand existing disclosure requirements
for derivative financial instruments, other financial
instruments, and derivative commodity instruments, as defined
(collectively "market risk sensitive instruments"). The
amendments require enhanced disclosure of accounting policies for
derivative financial instruments and derivative commodity
instruments (collectively "derivatives") in the footnotes to the
financial statements. In addition, the amendments expand
existing disclosure requirements to include quantitative and
qualitative information about market risk inherent in market risk
sensitive instruments. The required quantitative and qualitative
information should be disclosed outside the financial statements
and related notes thereto. In addition, the quantitative and
qualitative information will be provided safe harbor protection
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under a new Commission rule. Finally, this release reminds
registrants that any disclosures about financial instruments,
commodity positions, firm commitments, and anticipated
transactions ("reported items"), should include disclosures about
derivatives that directly or indirectly affect such reported
items, to the extent such information is material and necessary
to prevent the disclosures about the reported items from being
misleading. In the aggregate, these amendments are designed to
provide additional information about market risk sensitive
instruments, which investors can use to better understand and
evaluate the market risk exposures of a registrant.
DATES: Effective Date: [Insert date 60 days after Federal
Register publication].
Compliance Dates: 210.4-08(n) of Regulation S-X and the
amendment to Item 310 of Regulation S-B shall be effective, and
disclosures under that rule shall be required, for filings with
the Commission that include financial statements for fiscal
periods ending after June 15, 1997. For bank and thrift
registrants, as defined, and non-bank and non-thrift registrants
with market capitalizations on January 28, 1997 in excess of $2.5
billion, Item 305 of Regulation S-K and Item 9A of Form 20-F
shall be effective, and disclosures under those items shall be
required, for filings with the Commission that include annual
financial statements for fiscal years ending after June 15, 1997.
For non-bank and non-thrift registrants with market
capitalizations on January 28, 1997 of $2.5 billion or less, Item
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305 of Regulation S-K and Item 9A of Form 20-F shall be
effective, and disclosures under those items shall be required,
for filings with the Commission that include annual financial
statements for fiscal years ending after June 15, 1998. Under
Item 305 of Regulation S-K and Item 9A of Form 20-F, interim
information is not required until after the first fiscal year end
in which Item 305 of Regulation S-K and Item 9A of Form 20-F are
effective. Item 10(g) of Regulation S-B shall be effective for
filings with the Commission made on or after [Insert date 60 days
after Federal Register publication].
FOR FURTHER INFORMATION CONTACT: Cathy J. Cole, Thomas J.
Linsmeier, Russell B. Mallett, III, or Stephen M. Swad, at (202)
942-4400, Office of the Chief Accountant, Securities and Exchange
Commission, 450 Fifth Street, N.W., Mail Stop 11-3, Washington,
D.C. 20549, or Kurt R. Hohl, at (202) 942-2960, Division of
Corporation Finance, Securities and Exchange Commission, 450
Fifth Street, N.W., Mail Stop 3-13, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission is amending-[1]-
Rule 4-08 of Regulation S-X-[2]- and adding a new Item 305
to Regulation S-K.-[3]- The Commission also is making
---------FOOTNOTES----------
-[1]- The amendments were proposed in Securities Act
Release No. 7250; Exchange Act Release No. 36643;
Investment Company Act Release No. 21625; File No.
S7-35-95 (December 28, 1995) [61 FR 578].
-[2]- 17 CFR 210.4-08. Item 310 of Regulation S-B, 17
CFR 228.310, also is amended to incorporate the
changes to Rule 4-08 of Regulation S-X.
-[3]- 17 CFR Part 229.
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conforming amendments to Forms S-1, S-2, S-4, S-11, and F-
4-[4]- under the Securities Act of 1933,-[5]- and Rule
14a-3,-[6]- Schedule 14A,-[7]- and Forms 10, 20-F, 10-
Q, and 10-K-[8]- under the Securities Exchange Act of
1934.-[9]-
I. EXECUTIVE SUMMARY
During the last several years, the use of derivative
financial instruments, other financial instruments, and
derivative commodity instruments-[10]- increased
---------FOOTNOTES----------
-[4]- 17 CFR 239.11, 12, 25, 18, and 34.
-[5]- 15 U.S.C. 77a et seq.
-[6]- 17 CFR 240.14a-3.
-[7]- 17 CFR 240.14a-101.
-[8]- 17 CFR 249.210, 220f, 308a, and 310.
-[9]- 15 U.S.C. 78a et seq.
-[10]- See the instructions to Item 305 of Regulation S-
K or Item 9A of Form 20-F, infra, for complete
definitions of the terms "derivative financial
instruments," "other financial instruments," and
"derivative commodity instruments." In brief, for
purposes of this release: (1) derivative financial
instruments include futures, forwards, swaps,
options, and other financial instruments with
similar characteristics, (2) other financial
instruments include, for example, investments,
loans, structured notes, mortgage-backed
securities, indexed debt instruments, interest-
only and principal-only obligations, deposits, and
other debt obligations, and (3) derivative
commodity instruments include, to the extent such
instruments are not derivative financial
instruments, commodity futures, commodity
forwards, commodity swaps, commodity options, and
other commodity instruments with similar
characteristics that are permitted to be settled
(continued...)
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substantially.-[11]- The Commission recognizes that these
instruments can be effective tools for managing exposures to
market risk.-[12]- However, in using market risk sensitive
instruments some registrants experienced significant, and
---------FOOTNOTES----------
-[10]-(...continued)
in cash or with another financial instrument by
contract or business custom. In addition, for
purposes of this release, the terms (1)
"derivatives" refer to derivative financial
instruments and derivative commodity instruments,
together, and (2) "market risk sensitive
instruments" refer to derivative financial
instruments, other financial instruments, and
derivative commodity instruments, collectively.
-[11]- The worldwide notional/contract amounts for
derivative financial instruments and derivative
commodity instruments increased from $7.1 trillion
in 1989 to $69.6 trillion in 1995. These notional
amounts, while one way to measure derivative
activities, do not represent a precise measure of
the risk associated with these instruments. In
many instances, the amount at risk is much smaller
than the notional amount. See Financial
Derivatives: Actions Needed to Protect the
Financial System, United States General Accounting
Office Report to Congressional Requesters (May
1994), and Survey of Disclosures about Trading and
Derivatives Activities of Banks and Securities
Firms, Basle Committee on Banking Supervision
("Basle Committee") and the Technical Committee of
the International Organisation of Securities
Commissions ("IOSCO") (November 1996).
-[12]- Market risk is the risk of loss arising from
adverse changes in market rates and prices, such
as interest rates, foreign currency exchange
rates, commodity prices, and other relevant market
rate or price changes (e.g., equity prices). See
Group of Thirty, "Derivatives: Practices and
Principles" (July 1993), and Financial Accounting
Standards Board ("FASB"), Statement of Financial
Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk," ("FAS 105") (March
1990), for similar definitions of market risk.
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sometimes unexpected, losses. Those losses resulted from changes
in interest rates, foreign currency exchange rates, and commodity
prices, among other things. In light of those losses and the
substantial growth in the use of market risk sensitive
instruments, the adequacy of existing disclosures about market
risk emerged as an important financial reporting issue.
During 1994 and 1995, the SEC staff reviewed annual reports
filed with the Commission by approximately 500 registrants to
better understand this emerging issue. In reviewing the annual
reports, the staff intended to (i) assess the quality of current
disclosures about market risk sensitive instruments, (ii) improve
the quality of those disclosures through the comment process, and
(iii) determine what, if any, additional disclosures are needed
to help investors better assess the market risk inherent in those
instruments. After reviewing the annual reports, the SEC staff
noted that the 1995 disclosures were more informative than the
1994 disclosures, in part because of improved FASB disclosure
guidance.-[13]- However, the staff observed three
significant disclosure deficiencies, which are described in
section II of this release. To address those deficiencies:
1. The Commission is amending Rule 4-08 of Regulation S-X
and Item 310 of Regulation S-B to require enhanced
descriptions of accounting policies for derivatives in
---------FOOTNOTES----------
-[13]- See FASB, Statement of Financial Accounting
Standards No. 119, "Disclosures about Derivative
Financial Instruments and Fair Value of Financial
Instruments," ("FAS 119") (October 1994).
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the footnotes to the financial statements.-[14]-
2. The Commission is amending Regulation S-K to add Item
305 and Form 20-F to add Item 9A. Those amendments
require disclosure of quantitative and qualitative
information about market risk for derivatives and other
financial instruments-[15]- and require that
those disclosures be presented outside the financial
---------FOOTNOTES----------
-[14]- Those disclosure requirements are applicable only
to derivatives; the requirements do not relate to
other financial instruments. Accounting policy
disclosure requirements for other financial
instruments are prescribed by existing generally
accepted accounting principles and Commission
guidance (see, e.g., American Institute of
Certified Public Accountants ("AICPA"), Accounting
Principles Board Opinion No. 22, "Disclosure of
Accounting Policies," ("APB 22") (April 1972).
-[15]- Items 305 and 9A do not pertain solely to
derivatives, but also to other financial
instruments. Thus, disclosures under those Items
are required for registrants that have material
amounts of other financial instruments, even when
they have no derivatives.
Items 305 and 9A also encourage registrants to include other
market risk sensitive instruments, positions, and
transactions (such as commodity positions, derivative
commodity instruments that are not permitted by contract or
business custom to be settled in cash or with another
financial instrument, and cash flows from anticipated
transactions) within the scope of their quantitative and
qualitative disclosures about market risk. Registrants that
select the sensitivity analysis or value at risk disclosure
alternatives and voluntarily include those other market risk
sensitive instruments, positions, and transactions within
their quantitative disclosures about market risk are
permitted to present comprehensive market risk disclosures,
which reflect the combined effect of both the required and
voluntarily selected instruments, positions, and
transactions (see section III B.1.c.(vi) for details).
Finally, if those other market risk sensitive instruments,
positions, and transactions are not voluntarily included in
the quantitative disclosures about market risk and, as a
result, the disclosures do not fully reflect the net market
risk exposures of the registrant, Items 305(a) and 9A(a)
require that registrants discuss the absence of those items
as a limitation of the disclosed market risk information.
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statements.-[16]-
a. Items 305(a) and 9A(a) require registrants to
disclose quantitative information about market
risk sensitive instruments using one or more of
the following alternatives:
i. Tabular presentation of fair value
information and contract terms relevant to
determining future cash flows, categorized by
expected maturity dates;
ii. Sensitivity analysis expressing the potential
loss in future earnings, fair values, or cash
flows from selected hypothetical changes in
market rates and prices; or
iii. Value at risk disclosures expressing the
potential loss in future earnings, fair
values, or cash flows from market movements
over a selected period of time and with a
selected likelihood of occurrence.
In preparing this quantitative information,
registrants should categorize market risk
sensitive instruments into instruments entered
into for trading purposes-[17]- and
instruments entered into for purposes other than
trading. Within both the trading and other than
trading portfolios, separate quantitative
information should be presented for each market
risk exposure category (i.e., interest rate risk,
foreign currency exchange rate risk, commodity
price risk, and other relevant market risks, such
as equity price risk), to the extent material.
Registrants may use different disclosure
alternatives for each of the separate disclosures.
---------FOOTNOTES----------
-[16]- The term "financial statements" includes the
footnotes to the financial statements. Therefore,
the disclosures should be presented outside of the
footnotes to the financial statements. See
section III B.4.b., infra, for a more complete
discussion about where these disclosures should
appear.
-[17]- For purposes of this release, the term "trading
purposes" has the same meaning as defined by
generally accepted accounting principles (see,
e.g., FAS 119 9a).
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b. Items 305(b) and 9A(b) require registrants to
disclose qualitative information about market
risk. Those items require disclosure of:
i. a registrant's primary market risk
exposures-[18]- at the end of the
current reporting period;
ii. how the registrant manages those exposures
(such as a description of the objectives,
general strategies, and instruments, if any,
used to manage those exposures); and
iii. changes in either the registrant's primary
market risk exposures or how those exposures
are managed, when compared to the most recent
reporting period and what is known or
expected in future periods.
---------FOOTNOTES----------
-[18]- See note 58, infra, for a definition specifying
how the term "primary market risk exposures" is
used in this release.
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c. Items 305 and 9A state that forward looking
disclosures made pursuant to those items are
within the statutory safe harbor under the
Securities Act of 1933 and Securities Exchange Act
of 1934.
3. The Commission reminds registrants that, when they
provide disclosures about financial instruments,
commodity positions, firm commitments, and anticipated
transactions-[19]- ("reported items"),
disclosures about derivatives that directly or
indirectly affect such reported items also are
required, to the extent the effects of such information
are material and necessary to prevent the disclosures
about the reported items from being misleading.
The amendments in Rule 4-08(n) and Item 310 relating to
accounting policy disclosures apply to registered investment
companies and small business issuers, among other registrants.
In contrast, Item 305 and Item 9A do not apply to registered
investment companies and small business issuers. However, if
market risk represents a material known risk or uncertainty,
small business issuers, like other registrants, will continue to
be required to discuss those risks and uncertainties to the
extent required by Management's Discussion & Analysis
("MD&A").-[20]-
---------FOOTNOTES----------
-[19]- For purposes of this release, "anticipated
transactions" means transactions (other than
transactions involving existing assets or
liabilities or transactions necessitated by
existing firm commitments) an enterprise expects,
but is not obligated, to carry out in the normal
course of business (see, e.g., 9 of FASB,
Statement of Financial Accounting Standards No.
80, "Accounting for Futures Contracts," ("FAS 80")
(August 1984)).
-[20]- See, e.g., Item 303 of Regulation S-B, 17 CFR
228.303, and Item 303 of Regulation S-K, 17 CFR
229.303.
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The amendments become effective over the next several months
to provide registrants with time to respond to the new disclosure
requirements. Rule 4-08(n) and the amendment to Item 310 will be
effective for filings with the Commission that include financial
statements for fiscal periods ending after June 15, 1997. For
registrants that are likely to have experience with measuring
market risk, such as banks, thrifts, and non-bank and non-thrift
registrants with market capitalizations on January 28, 1997 in
excess of $2.5 billion, Item 305 and Item 9A are effective for
filings with the Commission that include annual financial
statements for fiscal years ending after June 15, 1997. For
other registrants, Item 305 and Item 9A are effective for filings
with the Commission that include annual financial statements for
fiscal years ending after June 15, 1998. Under Item 305 and Item
9A, interim information is not required until after the first
fiscal year end in which those Items are effective.
Taken together, Rule 4-08(n), Item 310, Item 305, and Item
9A represent one step by the Commission to improve disclosures
about market risk to help investors better understand and
evaluate a registrant's market risk exposures. The Commission
recognizes the evolving nature of market risk sensitive
instruments, market risk measurement systems, and market risk
management strategies and, thus, intends to continue considering
how best to meet the information needs of investors. In this
regard, the Commission expects to monitor continuously the
effectiveness of the new rules and final disclosure items issued
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today, as well as the need for additional proposals.
Specifically, the Commission expects to reconsider these
amendments after each of the following: (i) issuance of a new
accounting standard for derivatives by the FASB;-[21]- (ii)
development in the marketplace of new generally accepted methods
for measuring market risk; and (iii) a period of three years from
the initial effective date of Item 305 and Item 9A.
II. INITIATIVES REGARDING DISCLOSURES ABOUT DERIVATIVES AND
MARKET RISK
Certain private sector organizations expressed concerns that
users of financial reports are dissatisfied with current
disclosures about market risk sensitive instruments. For
example, the Association for Investment Management and Research
("AIMR"), an organization of financial analysts, noted that users
of financial information "are confounded by the . . .
complexity of financial instruments."-[22]- In addition,
after considerable investigation into the needs of investors and
creditors, the American Institute of Certified Public
Accountants' ("AICPA") Special Committee on Financial Reporting
stated:
Users are confused. They complain that business
reporting is not answering important questions, such
as: . . . What [innovative financial] instruments has
the company entered into, and what are their terms?
---------FOOTNOTES----------
-[21]- The FASB currently is working on a project to
improve accounting recognition, measurement, and
related disclosures for derivatives.
-[22]- See AIMR, Financial Reporting in the 1990s and
Beyond, page 30, (1993).
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How has the company accounted for those instruments,
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and how has that accounting affected the financial
statements? What risks has the company transferred or taken
on?-[23]-
In addition to identifying disclosure shortcomings, other
organizations recommended improvements to disclosures about
market risk sensitive instruments. These organizations include
regulators, such as the General Accounting Office,-[24]-
Group of 10 Central Bankers,-[25]- the Federal Reserve Bank
of New York,-[26]- the Basle Committee and the Technical
Committee of IOSCO,-[27]- and private sector bodies, such
as the Group of Thirty-[28]- and a task force of the
---------FOOTNOTES----------
-[23]- See AICPA Special Committee on Financial
Reporting, Improving Business Reporting -- A
Customer Focus: Meeting the Information Needs of
Investors and Creditors, at 76 (1994).
-[24]- See General Accounting Office, Financial
Derivatives: Actions Taken or Proposed Since May
1994 (November 1996).
-[25]- See Bank for International Settlements, A
Discussion Paper on Public Disclosure of Market
and Credit Risks by Financial Intermediaries,
prepared by working group of the Euro-currency
Standing Committee of the Central Banks of the
Group of Ten Countries (September 1994).
-[26]- See Federal Reserve Bank of New York, Public
Disclosure of Risks Related to Market Activity: A
Discussion Paper (November 1994).
-[27]- See Basle Committee and the Technical Committee of
IOSCO, Framework for Supervisory Information about
the Derivatives Activities of Banks and Securities
Firms (May 1995). See also Basle Committee and
the Technical Committee of IOSCO, Public
Disclosure of the Trading and Derivatives
Activities of Banks and Securities Firms (November
1995).
-[28]- See Group of Thirty, Derivatives: Practices and
Principles (July 1993).
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Financial Executives Institute ("FEI").-[29]-
In general, those organizations stressed the need to make
the risks inherent in market risk sensitive instruments more
understandable. To that end, many recommended additional
quantitative and qualitative disclosures about market risk. For
example, the Federal Reserve Bank of New York recommended a new
financial statement providing quantitative information about the
overall market risk of an entity.-[30]- In addition, the
FEI task force recommended that companies "disclose some type of
information which conveys overall exposure to market
risk."-[31]- The FEI task force specifically suggested two
distinct approaches. One approach is to provide a high-level
summary of relevant statistics about outstanding activity in
market risk sensitive instruments at period end. The second
approach is to communicate the potential loss that could occur
under specified conditions using either value at risk or another
comprehensive model for measuring market risk.-[32]-
In October 1994, the FASB, responding in part to calls for
---------FOOTNOTES----------
-[29]- See FEI, Derivative Financial Instruments
Accounting and Disclosure Issues, ("FEI Report")
prepared by FEI CCF/CCR Derivatives Disclosure
Task Force (August 1994).
-[30]- See note 26, supra.
-[31]- See Attachment A, page 1 of FEI Report.
-[32]- See Attachment B, pages 5 and 6 of FEI Report.
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improved disclosure, issued FAS 119 (October 1994).-[33]-
Among other things, FAS 119 prescribes disclosures in the
financial statements about the policies used to account for
derivative financial instruments and a discussion of the nature,
terms, and cash requirements of derivative financial instruments.
FAS 119 also encourages, but does not require, disclosure of
quantitative information about an entity's market risk
exposures.-[34]-
During 1994, in response, in part, to the concerns of
investors, regulators, and private sector entities, the SEC staff
reviewed the annual reports of approximately 500 registrants. In
addition, during 1995 the SEC staff reviewed more recent annual
reports to assess the effect of FAS 119 on disclosures about
market risk sensitive instruments. In comparing the 1994 and
1995 annual reports, the SEC staff observed that FAS 119 had a
positive effect on the quality of disclosures about derivative
financial instruments. However, the staff concluded that
investors still needed improved disclosures about market risk
---------FOOTNOTES----------
-[33]- Similar standards were recently adopted by the
International Accounting Standards Committee, the
Canadian Institute of Chartered Accountants, and
the Australian Accounting Standards Board. See
International Accounting Standards No. 32,
"Financial Instruments: Disclosure and
Presentation," ("IAS 32") (March 1995), Section
3860 of the Handbook of the Canadian Institute of
Chartered Accountants, and the Australian
Accounting Standards Board's accounting standard
entitled, "Presentation and Disclosure of
Financial Instruments," (December 1996),
respectively.
-[34]- See FAS 119 12.
==========================================START OF PAGE 17======
sensitive instruments. In particular, the SEC staff identified
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three primary disclosure issues:
1. Footnote disclosures of accounting policies for
derivatives often were too general to convey adequately
the diversity in accounting that exists for
derivatives. Thus, it often was difficult to determine
the impact of derivatives on registrants' statements of
financial position, cash flows, and results of
operations.
2. Disclosures about different types of market risk
sensitive instruments often were reported separately.
Thus, it was difficult to assess the aggregate market
risk exposures inherent in these instruments.
3. Disclosure about reported items in the footnotes to the
financial statements, MD&A, schedules, and selected
financial data may not have reflected adequately the
effect of derivatives on such reported items. Thus,
information about the reported items may have been
incomplete and could be misleading.
The Commission designed Rule 4-08(n), Item 310, Item 305,
and Item 9A to address these issues. In forming these
requirements, the Commission used the following guiding
principles:
ù Disclosures should make transparent the impact of
derivatives on a registrant's statements of financial
position, cash flows, and results of operations;
ù Disclosures should provide information about a registrant's
exposures to market risk;
ù Disclosures should explain how market risk sensitive
instruments are used in the context of the registrant's
business;
ù Disclosures about market risk exposures should not focus on
derivatives in isolation, but rather should reflect the risk
of loss inherent in all market risk sensitive instruments;
ù Market risk disclosure requirements should be flexible
enough to accommodate different types of registrants,
different degrees of market risk exposure, and alternative
ways of measuring market risk;
ù Disclosures about market risk should address, where
appropriate, special risks relating to leverage, option, or
==========================================START OF PAGE 19======
prepayment features; and
ù New disclosure requirements should build on existing
requirements, where possible, to minimize compliance costs.
III. DISCUSSION OF AMENDMENTS
A. Disclosure of Accounting Policies for Derivatives
1. Background
During the last several years, a significant number of
issues relating to the accounting for derivatives have been
raised. The FASB is working on a project that will address
comprehensively the accounting for derivatives. However,
currently there is little authoritative literature on the
accounting for options and complex derivatives.-[35]-
In the absence of comprehensive accounting literature,
registrants have developed accounting practices for options and
complex derivatives by analogy to the limited amount of
literature that does exist. Those analogies are complicated
because, under existing accounting literature, there are at least
three distinctly different methods of accounting for derivatives
(e.g., fair value accounting, deferral accounting, and accrual
---------FOOTNOTES----------
-[35]- The authoritative accounting literature for
options and complex derivatives generally is
limited to a few consensuses from the FASB
Emerging Issues Task Force ("EITF"), which by
their nature address the accounting for specific
transactions. See, e.g., EITF Issues 88-8,
"Mortgage Swaps," and 90-17, "Hedging Foreign
Currency Risks with Purchased Options."
==========================================START OF PAGE 20======
accounting).-[36]- Further, the underlying concepts and
criteria used in determining the applicability of those
accounting methods are not consistent.-[37]- As a result,
during its 1994 and 1995 reviews of annual reports, the SEC staff
observed that registrants with similar risk management objectives
often accounted for derivatives with similar economic
characteristics in different ways.-[38]- Thus, it was
---------FOOTNOTES----------
-[36]- Under the fair value method, derivatives are
carried on the balance sheet at fair value with
changes in that value recognized in earnings or
stockholders' equity (see, e.g., FASB, Statement
of Financial Accounting Standards No. 52, "Foreign
Currency Translation," ("FAS 52") (December 1981),
and FAS 80. Under the deferral method, gains and
losses from derivatives are deferred on the
balance sheet and recognized in earnings in
conjunction with earnings of designated items
(see, e.g., FAS 52 and FAS 80). Under the accrual
method, each net payment/receipt due or owed under
the derivative is recognized in earnings during
the period to which the payment/receipt relates;
there is no recognition on the balance sheet for
changes in the derivative's fair value (see, e.g.,
EITF Issue 84-36, "Interest Rate Swap
Transactions").
-[37]- For example, the risk reduction criterion in FAS
52 is different from the risk reduction criterion
in FAS 80. FAS 52 specifies risk reduction on a
transaction basis, while FAS 80 specifies risk
reduction on an enterprise basis. In addition,
FAS 80 permits the use of deferral accounting for
futures contracts used to hedge probable, but not
firmly committed, anticipated transactions, while
FAS 52 prohibits deferral accounting for foreign
currency forward exchange contracts used to hedge
those same types of anticipated transactions.
-[38]- The Commission does not mean to imply by this
statement that registrants may justify the use of
any method of accounting for derivatives.
Registrants must select appropriate accounting
methods that are consistent with generally
(continued...)
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difficult to ascertain and compare the financial statement
effects of derivatives among registrants.
To provide a better understanding of the accounting for
derivative financial instruments, paragraph 8 of FAS 119 requires
disclosure of the policies used to account for those instruments,
pursuant to the requirements of APB 22.-[39]-
Specifically, FAS 119 emphasizes the disclosure of "policies for
recognizing (or not recognizing) and measuring derivative
financial instruments . . . and when recognized, where those
---------FOOTNOTES----------
-[38]-(...continued)
accepted accounting principles. In particular,
generally accepted accounting principles require
registrants using derivatives for trading,
dealing, or speculative purposes to recognize
those instruments on the balance sheet at fair
value and to recognize changes in that value
immediately in earnings (see, e.g., FAS 80 3).
-[39]- APB 22 12 states:
Disclosure of accounting policies should identify and
describe the accounting policies followed by the
reporting entity and the methods of applying those
principles that materially affect the determination of
financial position, cash flows or results of
operations. In general, the disclosure should
encompass important judgments as to the appropriateness
of principles relating to recognition of revenue and
allocation of asset costs to current and future
periods; in particular, it should encompass those
accounting principles and methods that involve ... a
selection from existing acceptable alternatives.
The Accounting Principles Board was the predecessor to the
FASB. Unless superseded by FASB Statements, APB Opinions
continue to be regarded as the highest level of generally
accepted accounting principles followed by the accounting
profession. See generally AICPA, Statements on Auditing
Standards No. 69, "The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles in
the Independent Auditor's Report," 5 (March 1992); AU
411.05.
==========================================START OF PAGE 22======
instruments and related gains and losses are reported in the
statements of financial position and income."-[40]-
Notwithstanding its helpful guidance, FAS 119 does not explicitly
indicate the type of information that should be included in the
accounting policies footnote to help investors understand the
effects of derivatives on the statements of financial position,
cash flows, and results of operations. FAS 119 also does not
address disclosure of accounting policies for derivative
commodity instruments.
2. Rule 4-08(n) of Regulation S-X and Item 310 of
Regulation S-B
To facilitate a more informed assessment of the effects of
derivatives on financial statements, Rule 4-08(n) and Item 310
explicitly require that seven items be disclosed in the
derivatives accounting policies footnote, when material. For
example, Rule 4-08(n) and Item 310 require a description of the
methods used to account for derivatives, the types of derivatives
accounted for under each method, and the criteria required to be
met for each accounting method used. See Rule 4-08(n) and Item
310 for further requirements.
When assessing materiality under Rule 4-08(n) and Item 310,
the Commission expects registrants to consider (i) the financial
statement effects of all derivatives, including those not
recognized in the statement of financial position and (ii) the
relative effects of using the accounting method selected as
---------FOOTNOTES----------
-[40]- See FAS 119 60.
==========================================START OF PAGE 23======
compared to the other methods available (e.g., accrual, deferral,
or fair value methods of accounting).
In essence, Rule 4-08(n) and Item 310 clarify how the
accounting policy disclosure requirements in FAS 119 should be
applied to derivative financial instruments. They also extend
those requirements to derivative commodity instruments. The
Commission expects to reconsider the effectiveness of and the
need for the accounting policy disclosures, prescribed under Rule
4-08(n) and Item 310, when a new accounting standard for
derivatives is issued by the FASB.
B. Disclosures of Quantitative and Qualitative Information
About Market Risk
1. Quantitative Information About Market Risk
a. Nature of Disclosures
A primary objective of the quantitative disclosure
requirements is to provide investors with forward looking
information about a registrant's potential exposures to market
risk. These quantitative disclosures are dependent on several
choices about key model characteristics and assumptions (e.g.,
hypothetical changes in future market rates or
prices).-[41]- By their nature, these forward looking
choices are only estimates and will be different from what
actually occurs in the future. As a result, actual future gains
or losses will differ from those reported in the quantitative
---------FOOTNOTES----------
-[41]- The Commission believes that the exercise of
discretion in making such choices by registrants
should not subject registrants to liability with
respect to private rights of action.
==========================================START OF PAGE 24======
disclosures. For example, differences between actual and
reported gains and losses will arise when (i) actual market rate
or price changes differ from those estimated or (ii) the
portfolio of market risk sensitive instruments held during the
year differs from the portfolio held at the prior year-end.
Notwithstanding this limitation, the Commission believes
that the reported market risk information should provide benefits
to both investors and registrants. The quantitative disclosures
should help investors better understand specific market risk
exposures of different registrants, thereby allowing them to
better manage market risks in their investment portfolios. Those
disclosures also should provide a mechanism, where applicable,
for registrants to disclose that their use of derivatives
represents risk management, rather than speculation. Those
disclosures are not precise indicators of expected future
reported losses. Instead, depending on the modeling technique
and assumptions used, they are indicators of remote or reasonably
possible losses. Nevertheless, those disclosures should provide
investors with important indicators of how a particular
registrant views and manages its market risk.
The Commission has provided flexibility in the quantitative
and qualitative disclosure requirements to accommodate different
types of registrants, different degrees of market risk exposure,
and alternative ways of measuring market risk. The Commission
believes, at this time, that such flexibility is necessary and
important to allow risk management and reporting practices to
==========================================START OF PAGE 25======
evolve, even though such flexibility is likely to reduce the
comparability of disclosures. To address this comparability
issue, registrants are required to disclose the key model
characteristics and assumptions used in preparing the
quantitative market risk disclosures. These disclosures are
designed to allow investors to evaluate the potential impact of
variations in those model characteristics and assumptions on the
reported information. In addition, as more standard risk
management practices and methods of reporting market risk are
developed, the Commission anticipates reviewing the disclosure
requirements with the view to enhancing comparability.
b. Background
Market risk is inherent in derivative and non-derivative
instruments, including:
ù derivative financial instruments - futures, forwards, swaps,
options, and other financial instruments with similar
characteristics;
ù other financial instruments - non-derivative financial
instruments, such as investments, loans, structured notes,
mortgage-backed securities, indexed debt instruments,
interest-only and principal-only obligations, deposits, and
other debt obligations;
ù derivative commodity instruments that are permitted by
contract or business custom to be settled in cash or with
another financial instrument - commodity futures, commodity
forwards, commodity swaps, commodity options, and other
commodity instruments with similar characteristics, to the
extent such instruments are not derivative financial
instruments.
Generally accepted accounting principles and prior
Commission rules already require disclosure of certain
quantitative information pertaining to some of these instruments.
==========================================START OF PAGE 26======
For example, registrants are required to disclose notional
amounts of derivative financial instruments and the nature and
terms of debt obligations.-[42]- However, this information
(i) often is abbreviated, (ii) is presented piecemeal in
different parts of the financial statements, and (iii) does not
apply to all market risk sensitive instruments. Thus, investors
often have been unable to assess the net market risk exposures
inherent in these instruments.
FAS 119 encourages, but does not require, disclosure of
quantitative information about the market risk exposures inherent
in market risk sensitive instruments.-[43]- However,
without an explicit requirement, the Commission observed that
registrants often were not making these disclosures.
c. Item 305(a) of Regulation S-K and Item 9A(a)
of Form 20-F
In essence, Items 305(a) and 9A(a)-[44]- are designed
---------FOOTNOTES----------
-[42]- See, e.g., FAS 119 8b and Rule 5-02 of
Regulation S-X, 17 CFR 210.5-02, respectively.
-[43]- In particular, FAS 119 12 lists five possible
quantitative methods of measuring and disclosing
market risk. They are: (i) details about current
positions and perhaps activity during the period,
(ii) the hypothetical effects on equity, or on
annual income, of several possible changes in
market price, (iii) a gap analysis of interest
rate repricing or maturity dates, (iv) the
duration of the financial instruments, and (v) the
entity's value at risk from derivative financial
instruments and from other positions at the end of
the reporting period and the average value at risk
during the year.
-[44]- Item 9A(a) of Form 20-F, like the other portions
of Item 9A, is substantively identical to related
sections in Item 305.
==========================================START OF PAGE 27======
to make disclosures about market risk more comprehensive by
requiring disclosures of quantitative information about market
risk, similar to those encouraged by FAS 119. Items 305(a) and
9A(a) apply to market risk sensitive instruments.
Under these Items, registrants should furnish quantitative
information about market risk using one or more of three
==========================================START OF PAGE 28======
prescribed alternative methods.-[45]- The three
alternative methods, described in detail below, are a tabular
presentation, sensitivity analysis, and value at risk.
In preparing this quantitative information, registrants
should categorize market risk sensitive instruments into
instruments entered into for trading purposes and instruments
entered into for purposes other than trading. Within both the
trading and other than trading portfolios, separate quantitative
information should be presented for each market risk exposure
category (i.e., interest rate risk, foreign currency exchange
rate risk, commodity price risk, and other relevant market risks,
such as equity price risk), when material.
A registrant may use (i) the same alternative for all market
risk disclosures, (ii) one alternative, such as value at risk,
for all disclosures related to instruments entered into for
trading purposes, and another alternative, such as sensitivity
analysis, for all disclosures related to instruments entered into
for other than trading purposes, or (iii) different or the same
alternatives for each category of market risk within the trading
and other than trading portfolios.
(i) Tabular Presentation
---------FOOTNOTES----------
-[45]- At the current time, the Commission is not
prescribing standardized methods and procedures
specifying how to comply with each of these
disclosure alternatives. To facilitate comparison
across registrants, however, Item 305(a) requires
that registrants describe the model and
assumptions used to prepare quantitative market
risk disclosures.
==========================================START OF PAGE 29======
The tabular presentation alternative permits registrants to
provide quantitative information about market risk sensitive
instruments in a tabular format. The required information
includes the fair values of market risk sensitive instruments and
contract terms sufficient to determine the future cash flows from
those instruments, categorized by expected maturity dates.
These tabular disclosures should present information sufficient
to allow readers of the table to determine expected cash flows
from market risk sensitive instruments for each of the next five
years and the aggregate cash flows expected for the remaining
years thereafter.-[46]- These tabular disclosure
requirements were selected because expected cash flows are common
inputs to market risk measurement methods and, therefore, are
expected to help investors make estimates of a registrant's
market risk exposures.
To facilitate an investor's ability to make such estimates,
Items 305(a) and 9A(a) require that tabular information be
grouped based on common market risk characteristics. In
particular, those Items require separate presentation of tabular
information for instruments: (i) entered into for trading and
other than trading purposes, (ii) subject to different categories
of market risk exposure (e.g, interest rate risk, foreign
---------FOOTNOTES----------
-[46]- In some instances, the tabular presentation
alternative is similar to the gap analysis
commonly provided by financial institutions. Thus,
with minor modifications, if any, those
registrants could report a gap analysis and comply
with the tabular information requirements.
==========================================START OF PAGE 30======
currency exchange rate risk, etc.), and (iii) subject to
different market risk characteristics within a particular
exposure category (e.g., different functional
currencies,-[47]- different underlying commodity exposures,
different instrument types, and different contractual rates or
prices). See Items 305(a)(1)(i) and 9A(a)(1)(i) for further
requirements.
In particular, when preparing the tabular disclosures
registrants should consider whether differences in market risk
would be reflected better by separately presenting tabular
information for a particular instrument or group of instruments.
For example, Items 305(a)(1)(i) and 9A(a)(1)(i) require the
grouping of options with similar strike prices. This grouping is
required because option payouts can differ significantly
depending how far the option is in or out of the money. Thus,
the separate presentation of tabular information for options with
dissimilar strike prices should enhance an investor's ability to
determine the potential market risk inherent in those
instruments. Registrants should make similar evaluations when
determining which instruments should be grouped together within
the tabular disclosures.
---------FOOTNOTES----------
-[47]- For purpose of Item 305 and Item 9A, functional
currency means the currency of the primary
economic environment in which the entity operates;
normally, that is the currency of the environment
in which an entity primarily generates and expends
cash. This definition is the same as the
definition of functional currency in FAS 52,
Appendix E.
==========================================START OF PAGE 31======
Items 305(a) and 9A(a) also require disclosure of
information regarding the contents of the table and related
assumptions necessary to understand a registrant's market risk
disclosures. In this regard, registrants should describe, for
example, the different amounts reported in the table for the
various categories of the market sensitive instruments (e.g.,
principal amounts for debt, notional amounts for swaps, and the
different types of reported market rates or prices) and key
prepayment or reinvestment assumptions relating to the timing of
reported amounts. See Items 305(a)(1)(i) and 9A(a)(1)(i) for
further details.
The Appendix to each of these Items provides a sample
disclosure format.
(ii) Sensitivity Analysis
The sensitivity analysis disclosure alternative permits
registrants to express the potential loss in future earnings,
fair values, or cash flows of market risk sensitive instruments
resulting from one or more selected hypothetical changes in
interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rate or price changes (e.g.,
equity prices) over a selected time period.-[48]- Items
---------FOOTNOTES----------
-[48]- The term "sensitivity analysis," as used in Items
305(a) and 9A(a), describes a general class of
models that assesses the risk of loss in market
risk sensitive instruments based on hypothetical
changes in market rates or prices. The term
sensitivity analysis is not meant to refer to any
one model for quantifying market risk.
Sensitivity analysis models include, for example,
(continued...)
==========================================START OF PAGE 32======
305(a) and 9A(a) require that registrants select hypothetical
changes in market rates and prices that are expected to reflect
reasonably possible-[49]- near-term-[50]- changes in
those rates and prices. Absent economic justification for the
selection of a different amount, registrants should use changes
that are not less than 10 percent of end of period market rates
or prices.
Items 305(a) and 9A(a) also require a description of the
model, assumptions, and parameters underlying the registrant's
sensitivity analysis that are necessary to understand the
registrant's market risk disclosure. In this regard, registrants
are required to specify, for example, (i) how "loss" is defined
by the model (e.g., loss in earnings, fair values, or cash
flows), (ii) a general description of the modeling technique
(e.g., the change in net present values arising from selected
shifts in market rates or prices), (iii) the types of instruments
covered by the model, and (iv) other relevant information about
the model's assumptions and parameters (e.g., the magnitude and
timing of selected hypothetical changes in market rates or prices
---------FOOTNOTES----------
-[48]-(...continued)
duration analysis or other "sensitivity" measures
already required to be calculated for regulatory
purposes for thrift institutions (see Office of
Thrift Supervision, Regulatory Capital: Interest
Rate Risk Component, 12 CFR 567.5(c)(4) (August
1993)).
-[49]- See note 67, infra, for a definition of the term
"reasonably possible."
-[50]- See note 66, infra, for a definition of the term
"near-term."
==========================================START OF PAGE 33======
used). See Items 305(a)(1)(ii) and 9A(a)(1)(ii) for further
requirements.
(iii) Value at Risk
The value at risk disclosure alternative permits registrants
to express the potential loss in future earnings, fair values, or
cash flows of market risk sensitive instruments over a selected
period of time, with a selected likelihood of occurrence, from
changes in interest rates, foreign currency exchange rates,
commodity prices, and other relevant market rates or
prices.-[51]- Items 305(a) and 9A(a) state that when
preparing value at risk disclosures, registrants should select
confidence intervals that reflect reasonably possible near-term
changes in market rates and prices. In this regard, absent
economic justification for the selection of different confidence
intervals, registrants should use intervals that are 95 percent
or higher.
For each category for which value at risk disclosures are
presented, Items 305(a) and 9A(a) require registrants to provide
either (i) the average, high and low amounts, or the distribution
of value at risk amounts for the reporting period, (ii) the
---------FOOTNOTES----------
-[51]- The term "value at risk," as used in Items 305(a)
and 9A(a), describes a general class of models
that provides a probabilistic assessment of the
risk of loss in market risk sensitive instruments.
The term value at risk is not meant to refer to
any one model for quantifying market risk. Value
at risk models can be adapted to non-trading
activities as well as trading activities and to
non-financial institutions as well as financial
institutions, depending on the model and
assumptions selected by the registrant.
==========================================START OF PAGE 34======
average, high and low amounts, or the distribution of actual
changes in fair values, earnings, or cash flows from market risk
sensitive instruments occurring during the reporting period, or
(iii) the percentage or number of times the actual changes in
fair values, earnings, or cash flows from market risk sensitive
instruments exceeded the value at risk amounts during the
reporting period.
Items 305(a) and 9A(a) also require a description of the
model, assumptions, and parameters underlying the registrant's
value at risk model that are necessary to understand the
registrant's market risk disclosure. In this regard, registrants
should specify, for example, (i) how "loss" is defined by the
model (e.g., loss in earnings, fair values, or cash flows), (ii)
the type of model used (e.g., variance/covariance, historical
simulation, or Monte Carlo simulation and a description as to how
optionality is addressed by the model), (iii) the types of
instruments covered by the model, and (iv) other relevant
information about the model's assumptions and parameters (e.g.,
holding periods and confidence intervals).-[52]- See
---------FOOTNOTES----------
-[52]- The primary differences between the value at risk
and sensitivity analysis disclosure alternatives
are (i) value at risk analysis reports the
potential loss arising from equally likely market
movements across instruments, while sensitivity
analysis reports the potential loss arising from
hypothetical market movements with differing
likelihoods of occurrence across instruments and
(ii) value at risk explicitly adjusts the
potential loss to reflect correlations between
market movements, while sensitivity analysis is
not designed explicitly to make such adjustments.
==========================================START OF PAGE 35======
Items 305(a)(1)(iii) and 9A(a)(1)(iii) for further requirements.
(iv) An Alternative to Reporting Year-End
Information
Items 305(a) and 9A(a) require disclosure of quantitative
information about market risk as of the end of the latest fiscal
year. Alternatively, registrants, such as those with proprietary
concerns about reporting year-end information under the
sensitivity analysis and value at risk disclosure alternatives,
may report the average, high, and low amounts for the reporting
period. In determining those average, high, and low amounts for
the fiscal year, registrants should use sensitivity analysis or
value at risk amounts relating to at least four equal time
periods throughout the reporting period (e.g., four quarter-end
amounts, 12-month-end amounts, or 52 week-end amounts).
(v) Other Disclosure Requirements
Items 305(a) and 9A(a) require registrants to provide
summarized quantitative information about market risk for the
preceding fiscal year. In addition, registrants should discuss
the reasons for material quantitative changes in market risk
exposures between the current and preceding fiscal
years.-[53]- In determining the amount and type of
---------FOOTNOTES----------
-[53]- For transition purposes, quantitative disclosures
about market risk provided in the initial year in
which a registrant must present information under
Item 305 is not required to contain comparable
summarized information for the preceding year.
Similarly, in the first fiscal year in which a
registrant must present information under Item
(continued...)
==========================================START OF PAGE 36======
summarized information to be provided for the preceding fiscal
year, registrants should evaluate whether sufficient information
is disclosed to enable investors to assess material trends in
quantitative market risk information. This summary should
include information relating to each market risk exposure
category disclosed in the preceding or latest fiscal year.
In addition, Items 305(a) and 9A(a) permit registrants to
change disclosure alternatives or key model characteristics,
assumptions, and parameters used in providing quantitative
information about market risk (e.g., changing from tabular
presentation to value at risk, changing the scope of instruments
included in the model, changing the definition of loss from fair
values to earnings). However, if the effects of such a change
are material,-[54]- registrants should (i) explain the
reasons for the change and (ii) either provide summarized
comparable information, under the new disclosure method, for the
year preceding the current reporting period or, in addition to
providing disclosure for the current year under the new method,
provide disclosure for the current year and preceding fiscal year
under the method used in the preceding year.
---------FOOTNOTES----------
-[53]-(...continued)
305, a discussion of the reasons for material
changes in reported amounts as compared to the
preceding year is not necessary.
-[54]- In this regard, the Commission believes that all
changes from one disclosure alternative to another
are material; however, other changes discussed in
this section require judgment as to whether the
effects of such changes are material.
==========================================START OF PAGE 37======
(vi) Encouraged Disclosures
The Commission recognizes that market risk exposures may
exist in instruments, positions, and transactions other than in
the market risk sensitive instruments specifically covered by
Items 305 and 9A. In particular, market risk, in its broadest
view, also may be inherent in the following items:
ù derivative commodity instruments that are not permitted by
contract or business custom to be settled in cash or with
another financial instrument - such as a commodity forward
contract that must be settled in the commodity;
ù commodity positions - such as investments in corn, wheat,
oil, gas, lumber, silver, gold, and other commodity
inventory positions;
ù cash flows from anticipated transactions-[55]- - such
as cash flows from anticipated purchases and sales of
inventory, and operating cash flows from non-financial and
non-commodity instruments (e.g., cash flows generated by
manufacturing activities); and
ù certain financial instruments not included among the
required disclosure items - such as insurance contracts,
lease contracts, and employers' and plans' obligations for
pension and other post-retirement benefits.
The Commission also recognizes, however, that the amount and
timing of the cash flows inherent in such instruments, positions,
and transactions sometimes may be difficult to estimate. In
addition, it has been represented to the staff that many risk
measurement systems currently do not include such instruments,
positions, and transactions in their quantitative assessments of
market risk. For these practical reasons, the Commission is not
requiring, at this time, that these items be included in the
quantitative disclosures about market risk. Registrants,
---------FOOTNOTES----------
-[55]- See note 19, supra.
==========================================START OF PAGE 38======
however, are encouraged to include such items within their
quantitative market risk disclosures.
Registrants that choose the tabular presentation disclosure
alternative should present voluntarily selected instruments,
positions, or transactions in a manner consistent with the
requirements in Items 305 and 9A for market risk sensitive
instruments. Registrants selecting the sensitivity analysis or
value at risk disclosure alternatives are not required to provide
separate market risk disclosures for any voluntarily selected
instruments, positions, or transactions. Instead, registrants
selecting those disclosure alternatives are permitted to present
comprehensive market risk disclosures, which reflect the combined
market risk exposures inherent in both the required and any
voluntarily selected instruments, position, or transactions.
If a registrant elects to include voluntarily a particular
type of instrument, position, or transaction in their
quantitative disclosures about market risk, that registrant
should include all, rather than some, of those instruments,
positions, or transactions within their disclosures. For
example, if a registrant holds in inventory a particular type of
commodity position and elects to include that commodity position
within their market risk disclosures, the registrant should
include the entire commodity position, rather than only a portion
thereof, in their quantitative disclosures about market risk.
Finally, if instruments, positions, or transactions are not
included voluntarily in the market risk disclosures and, as a
==========================================START OF PAGE 39======
result, the disclosures do not fully reflect the net market risk
exposures of the registrant, the registrant should discuss the
absence of those items as a limitation of the quantitative
information, as discussed below.-[56]-
(vii) Limitations
Items 305(a) and 9A(a) require registrants to discuss
limitations that cause the quantitative information about market
risk not to reflect fully the net market risk exposures of the
entity. This discussion is to include a description of
instruments, positions, and transactions omitted from the
quantitative market risk disclosure information, or the features
of instruments, positions, and transactions that are included,
but not reflected fully in the quantitative information
disclosed.
Two illustrative examples are provided. First, as just
stated, certain instruments, positions, and transactions are
excluded from the required quantitative disclosures about market
risk, but may be included on a voluntary basis. The failure of a
registrant to include voluntarily those instruments, positions,
or transactions in the quantitative disclosures is a limitation
of the quantitative information provided. This limitation should
be discussed, if material, and a summarized description of the
instruments, positions, or transactions not reflected fully
---------FOOTNOTES----------
-[56]- In addition, registrants should review the
requirements of Item 303 of Regulation S-K, 17 CFR
229.303, to ensure their disclosures are
sufficient to inform readers of material risks to
which a registrant is exposed.
==========================================START OF PAGE 40======
within the quantitative market risk disclosures should be
disclosed.
Second, the prescribed quantitative disclosures may not
inform investors of the degree of market risk inherent in
instruments with leverage, option, or prepayment features (e.g.,
options, including written options, structured notes,
collateralized mortgage obligations, leveraged swaps, and options
embedded in swaps). Tabular information on fair values and
contract terms may not necessarily indicate that instruments have
such features. Similarly, if leverage, option, or prepayment
features are triggered by changes in market rates or prices
outside those reflected in the value at risk and sensitivity
analysis disclosures, the potential loss from such market rate or
price changes may be significantly larger than would be implied
by a simple linear extrapolation of the reported numbers. Thus,
to make investors fully aware of the market risk inherent in
instruments with such features, Item 305(a) and Item 9A(a)
require a discussion of this limitation, including a summarized
description of the features of the instruments causing the
limitation.
2. Qualitative Information about Market Risk
a. Background
The Commission believes that quantitative information about
market risk is more meaningful when accompanied by qualitative
disclosures about a registrant's market risk exposures and how
those exposures are managed. Such qualitative disclosures help
==========================================START OF PAGE 41======
investors understand a registrant's market risk management
activities and help place those activities in the context of the
business.
FAS 119 requires qualitative disclosures about market risk
management activities associated with certain derivative
financial instruments. In particular, FAS 119 requires
disclosure of "the entity's objectives for holding or issuing the
derivative financial instruments, the context needed to
understand those objectives, and its general strategies for
==========================================START OF PAGE 42======
achieving those objectives."-[57]- However, the
qualitative disclosure requirements of FAS 119 only apply to
derivative financial instruments held or issued for purposes
other than trading.
b. Item 305(b) and Item 9A(b)
Items 305(b) and 9A(b) expand the qualitative market risk
disclosure requirements of FAS 119 to (i) encompass derivative
commodity instruments, other financial instruments, and
derivative financial instruments entered into for trading
purposes and (ii) require registrants to evaluate and describe
material changes in their primary risk exposures and in how those
exposures are managed. In particular, Items 305(b) and 9A(b)
require a description of (i) a registrant's primary market risk
---------FOOTNOTES----------
-[57]- See FAS 119 11a. Footnote 4 of FAS 119
illustrates the qualitative disclosures required
by 11a. That footnote states:
If an entity's objective for a derivative position
is to keep a risk from the entity's non-derivative
assets below a specified level, the context would
be a description of those assets and their risks,
and a strategy might be purchasing put options in
a specified proportion to the assets at risk.
==========================================START OF PAGE 43======
exposures-[58]- as of the end of the latest fiscal year,
(ii) how those exposures are managed (such descriptions should
include, but not be limited to, a discussion of the objectives,
general strategies, and instruments, if any, used to manage those
exposures), and (iii) changes in either the registrant's primary
market risk exposures or in how those exposures are managed, when
compared to what was in effect during the most recently completed
fiscal year and what is known or expected to be in effect in
future reporting periods.
Items 305(b) and 9A(b) apply to market risk sensitive
instruments. In addition, the qualitative disclosures required
by these items should be presented separately for market risk
sensitive instruments entered into for trading purposes and those
entered into for purposes other than trading.
Finally, to help make disclosures about market risk more
comprehensive, the Commission encourages registrants to include
within their qualitative disclosures about market risk, certain
---------FOOTNOTES----------
-[58]- For purposes of Items 305(b) and 9A(b), primary
market risk exposures mean (i) the following
categories of market risk: interest rate risk,
foreign currency exchange rate risk, commodity
price risk, and other relevant market rate or
price risks (e.g., equity price risk) and (ii)
within each of these categories, the particular
markets that present the primary risks of loss to
the registrant. For example, if a registrant (i)
has a material exposure to foreign currency
exchange rate risk and, within this category of
market risk, (ii) is most vulnerable to changes in
dollar/yen, dollar/pound, and dollar/peso exchange
rates, the registrant should disclose those
exposures.
==========================================START OF PAGE 44======
instruments, positions, and transactions not required under Items
305(b) and 9A(b). Those instruments, positions, and transactions
include derivative commodity instruments not permitted by
contract or business custom to be settled in cash or with another
financial instrument, commodity positions, cash flows from
anticipated transactions, and certain financial instruments not
included among the required disclosure items. See Items 305(b)
and 9A(b) for further requirements.-[59]-
If a registrant elects not to include those instruments,
positions, and transactions in its qualitative disclosures about
market risk, the Commission reminds registrants to consider
whether qualitative disclosures about the market risk inherent in
those items would be required under (i) Items 101 or 303 of
Regulation S-K-[60]- or (ii) Rules 12b-20 under the
Securities Exchange Act of 1934 ("Exchange Act") or 408 under the
Securities Act of 1933 ("Securities Act").-[61]- Item 101
of Regulation S-K requires disclosures relating to a "Description
of the Business." Item 303 requires discussion of known risks
and uncertainties within "Management's Discussion and Analysis."
Rule 12b-20 under the Exchange Act and Rule 408 under the
---------FOOTNOTES----------
-[59]- See section III B.1.c.(vi), supra, for a
discussion as to why these instruments are
encouraged, but not required, to be included in
disclosures about market risk.
-[60]- See 17 CFR 228.101 and 17 CFR 228.303,
respectively.
-[61]- See 17 CFR 240.12b-20 and 17 CFR 230.408,
respectively.
==========================================START OF PAGE 45======
Securities Act state that registrants should include in any
filings or reports any material information necessary to make
statements made, in light of the circumstances, not misleading.
==========================================START OF PAGE 46======
3. Safe Harbor for Forward Looking Information
In the release proposing Item 305 and Item 9A, the
Commission noted its intention to consider the application of an
appropriate safe harbor to the forward looking aspects of the
disclosures. Such a safe harbor subsequently was proposed for
public comment,-[62]- and the Commission is adopting that
provision substantially as proposed.
As adopted, the safe harbors for forward looking statements
provided in Section 27A of the Securities Act and Section 21E of
the Exchange Act apply to quantitative information about market
risk provided outside the financial statements and related notes
thereto, all of which, as described further below, is deemed to
be a forward looking statement for purposes of the safe harbor,
pursuant to Item 305(a) or Item 9A(a); qualitative information
about market risk provided outside the financial statements and
related notes thereto, pursuant to Item 305(b) or Item 9A(b); and
interim information provided pursuant to Item 305(c) and Item
9A(c).
As proposed, the safe harbor would have applied to
information disclosed pursuant to Items 305 and 9A regardless of
whether the information was set forth in the notes to the
financial statements or elsewhere in a registrant's required
---------FOOTNOTES----------
-[62]- Securities Act Release No. 7280; Exchange Act
Release No. 37086; File No. S7-10-96 (April 9,
1996) [61 FR 16672].
==========================================START OF PAGE 47======
filings. As discussed below,-[63]- the Commission has
determined that information required by Items 305 and 9A should
be disclosed outside of the financial statements and related
notes thereto. Similarly, as adopted, the safe harbor applies
only to information located in accordance with the revised rule.
The safe harbors are available with respect to the specified
information, regardless of whether the issuer providing it or the
type of transaction otherwise is excluded from the statutory safe
harbors. For example, first-time Commission registrants and
those making initial public offerings are covered by the safe
harbors with respect to this specific information if all other
conditions are satisfied.
As is the case with the statutory safe harbors, however, the
safe harbors adopted pursuant to this release apply only to a
forward looking statement made by: (i) an issuer, (ii) a person
acting on behalf of the issuer, (iii) an outside reviewer
retained by the issuer making a statement on behalf of the
issuer, or (iv) an underwriter, with respect to information
provided by the issuer or information derived from information
provided by the issuer.
The Commission recognizes that, due to the difficult nature
of the disclosures, some registrants may require assistance in
preparing the information required by Items 305 and 9A. For
---------FOOTNOTES----------
-[63]- See section III B.4.b., infra, for a discussion
about where these disclosures should appear.
==========================================START OF PAGE 48======
example, registrants may need assistance from third parties with
respect to compiling the required information, assessing the
reasonableness of management's assumptions, or testing the
mathematical computations that translate the assumptions into the
required disclosures. Moreover, some registrants may wish to
have outside third parties review the information prior to its
disclosure. The Commission considers such assistance and reviews
relating to forward looking disclosure required by Items 305 and
9A to be "made by an outside reviewer retained by the issuer
making a statement on behalf of the issuer" under the safe harbor
rule.
The rule now clarifies two additional points about the
application of the new safe harbor rules. First, the Commission
deems all information required by paragraphs (a), (b)(1)(i),
(b)(1)(iii) and (c) of Items 305 and 9A to be "forward looking
statements" for purposes of the new safe harbor rules, except for
historical facts such as the terms of particular contracts and
number of market risk sensitive instruments held during or at the
end of the reporting period. To the extent that information
provided pursuant to paragraph (b)(1)(ii) of Items 305 and 9A
includes forward looking statements, those statements would be
eligible for safe harbor protection.
Second, the "meaningful cautionary statements" prong of the
safe harbors will be satisfied with respect to the Items 305(a)
and 9A(a) disclosures if a registrant satisfies the requirements
of those Items. In this regard, the Commission notes that Items
==========================================START OF PAGE 49======
305(a) and 9A(a) require disclosure of both the assumptions
underlying, and the limitations of, the disclosure provided. For
the remainder of the information required by the new items,
registrants desiring to qualify for the "meaningful cautionary
statements" prong of the safe harbor will need to consider what
information should be given to alert investors to important
factors that could cause actual results to differ materially from
the information given in the forward looking
statements.-[64]-
Finally, although Item 305 and Item 9A information is not
required of small business issuers (as defined by Commission
rule),-[65]- the safe harbors are available to those small
issuers that voluntarily choose to disclose such information.
Similarly, the safe harbors are available to non-small business
issuers who voluntarily disclose information under Item 305(a)
and Item 9A(a) prior to the June 15, 1997 and June 15, 1998
effective dates.
4. Implementation Issues Relating to Quantitative and
Qualitative Disclosures about Market Risk
a. Disclosure Threshold
Under Items 305 and 9A, quantitative and qualitative
disclosures about market risk are required, when material, for
each market risk exposure category within the trading and other
---------FOOTNOTES----------
-[64]- Registrants are reminded that the safe harbor
requires that forward looking statements be
identified as such.
-[65]- 17 CFR 228, et seq.
==========================================START OF PAGE 50======
than trading portfolios. For purposes of assessing materiality,
registrants should evaluate both (i) the materiality of the fair
values of market risk sensitive instruments outstanding as of the
end of the latest fiscal year and (ii) the materiality of
==========================================START OF PAGE 51======
potential near-term-[66]- losses in future earnings, fair
values, and cash flows from reasonably possible-[67]- near-
term changes in market rates or prices.
If either (i) or (ii) in the previous paragraph are
material, the registrant should disclose quantitative and
qualitative information about market risk, if such market risk
for the particular market risk exposure category is material.
However, the choice of methods, model characteristics,
assumptions, and parameters used to comply with the quantitative
market risk disclosures remain at the election of the registrant,
provided disclosure is made regarding a material risk of loss in
either earnings, fair values, or cash flows.
For example, if a registrant expects a material near-term
loss in fair values only, that registrant should not report
quantitative market risk information in terms of earnings or cash
flows, rather than fair values. In these circumstances, the
registrant could, of course, make additional quantitative
---------FOOTNOTES----------
-[66]- For the purposes of Item 305 and Item 9A, the term
"near-term" means a period of time going forward
up to one year from the date of the financial
statements. See generally AICPA, Statement of
Position 94-6, Disclosure of Certain Significant
Risks and Uncertainties, at paragraph 7 (December
30, 1994).
-[67]- For purposes of Item 305 and Item 9A, the term
"reasonably possible" is defined by 3 of FASB,
Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies" ("FAS 5") (March
1975), which states that "reasonably possible"
means the chance of a future transaction or event
occurring is more than remote but less than
likely.
==========================================START OF PAGE 52======
disclosures about the loss in earnings or cash flows, but should
disclose the risk of loss in fair values. In contrast, if a
registrant is required to disclose market risk information
because near-term losses in future earnings, fair values, and
cash flows all are material, it may report quantitative
information in terms of either earnings, fair values, or cash
flows.
In assessing the materiality of the fair values of market
risk sensitive instruments, those fair values generally should
not be netted, except to the extent allowed under FASB
Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts" ("Interpretation 39") (March 1992).-[68]- For
example, the fair value of assets generally should not be netted
with the fair value of liabilities. Instead, the fair values of
such instruments should be aggregated, without netting, for
purposes of assessing materiality.
In assessing the materiality of potential near-term losses
in future earnings, fair values, or cash flows from reasonably
possible near-term changes in market rates or prices, registrants
---------FOOTNOTES----------
-[68]- Interpretation 39 states that it is a general
principle of accounting that the offsetting of
assets and liabilities in the balance sheet is
improper except where a right of set off exists.
Interpretation 39 defines right of set off and
specifies what conditions must be met to have that
right. FAS 119 15(d) in disclosing the fair
values of instruments also prohibits the netting
of fair values, except to the extent that the
offsetting of carrying amounts in the statement of
financial position is permitted under
Interpretation 39.
==========================================START OF PAGE 53======
should consider (i) the magnitude of past market movements, (ii)
the magnitude of reasonably possible, near-term market movements,
and (iii) potential losses that may arise from leverage, option,
and multiplier features.
b. Location of Quantitative and Qualitative
Disclosures
As adopted, Items 305 and 9A require that the quantitative
and qualitative market risk disclosures be placed outside the
financial statements and related notes thereto. As proposed,
registrants would have been permitted to disclose such
information in the notes to the financial statements. Because of
the evolving nature of the disclosures and the FASB's pending
project on accounting for derivatives, which also will address
disclosures about derivatives within the financial statements,
the Commission has determined that the better course, at this
time, is to require that the disclosures mandated by Items 305
and 9A be located outside of the financial statements and related
notes.
The Commission believes that the information required by
Items 305 and 9A should be included in the annual report
delivered to shareholders; consequently Rule 14a-3 of the proxy
rules has been amended to include this requirement. For other
documents delivered to investors, the information should be
included or incorporated by reference from other Commission
filings.
c. Cross-Referencing of Disclosures
The Commission believes it is most meaningful to disclose
==========================================START OF PAGE 54======
together, in one location, quantitative and qualitative
information relating to the same market risk exposure category.
However, because market risk sensitive instruments often are used
to manage known risks and uncertainties in market rates and
prices, the disclosures provided under Items 305 and 9A may
overlap with disclosures provided under Item 303 of Regulation S-
K. To the extent that the disclosures in a registrant's MD&A
satisfy the requirements of Items 305 or 9A, registrants need not
repeat this information elsewhere in their filings. If this
information is disclosed in more than one location, however,
registrants should ensure that the resulting disclosures are
meaningful to investors and provide cross-references to the
locations of the related disclosures.
d. Application to Registrants
Items 305 and 9A are required to be followed by many
different types of registrants, including, for example,
commercial and industrial companies, financial institutions,
broker-dealers, service companies, business development
companies, and companies registering insurance contracts, such as
market-value adjusted annuities and real estate funds underlying
annuity contracts. Items 305 and 9A do not apply to registered
investment companies and, as described further in Section IV,
small business issuers.
e. Reporting Frequency
Items 305 and 9A apply to all registration statements filed
under the Securities Act and all reports, proxy statements, and
==========================================START OF PAGE 55======
information statements filed under the Exchange Act that are
required to include or incorporate financial statements.
However, for reports that include only interim financial
statements (e.g., Form 10-Qs), registrants need only present
market risk information if there have been material changes in
reported market risks faced by the registrant since the end of
the most recent fiscal year. In these circumstances, registrants
should provide a discussion and analysis that enables investors
to assess the sources and effects of those material changes in
market risks.
IV. APPLICABILITY OF AMENDMENTS
A. Application to Small Business Issuers
The Commission believes that because of (i) the evolving
nature of these disclosures and (ii) the relative costs of
complying with these disclosures for small business
issuers,-[69]- it is appropriate, at this time, to exempt
small business issuers from disclosing quantitative and
qualitative information about market risk.-[70]-
---------FOOTNOTES----------
-[69]- "Small business issuer" is defined to mean any
entity that (1) has revenues of less than
$25,000,000, (2) is a United States or Canadian
issuer, (3) is not an investment company, and (4)
if a majority owned subsidiary, the parent
corporation is also a small business issuer. An
entity is not a small business issuer, however, if
it has a public float (the aggregate market value
of the outstanding securities held by non-
affiliates) of $25,000,000 or more. See 17 CFR
230.405.
-[70]- Small business issuers will not be required to
provide these market risk disclosures whether or
(continued...)
==========================================START OF PAGE 56======
Accordingly, at this time, the Commission is not adopting
amendments to Regulation S-B to incorporate an item similar to
Item 305. Small business issuers, however, are required (i) to
comply with the amendment regarding accounting policies
disclosures for derivatives, (ii) to comply with Rule 12b-20
under the Exchange Act and Rule 408 under the Securities Act,
which require registrants to provide additional information about
the material effects of derivatives on other information
expressly required to be filed with the Commission, and (iii) to
the extent market risk represents a known trend, event, or
uncertainty, to discuss the impact of market risk on past and
future financial condition and results of operations, pursuant to
Item 303 of Regulation S-B.
B. Application to Foreign Private Issuers
Item 9A of Form 20-F requires disclosure by all foreign
private issuers of quantitative and qualitative information about
market risk. In addition, foreign private issuers that prepare
financial statements in accordance with Item 18 of Form 20-F are
required to provide all information required by U.S. generally
accepted accounting principles and Regulation S-X, including
descriptions in the footnotes to the financial statements of the
---------FOOTNOTES----------
-[70]-(...continued)
not they file on specially designated small
business forms.
In addition, as noted elsewhere in this release, the
Commission has extended the safe harbor for forward looking
information to Item 305 disclosures that are made
voluntarily by small business issuers.
==========================================START OF PAGE 57======
policies used to account for derivatives. Foreign private
issuers that prepare financial statements in accordance with Item
17 of Form 20-F are not required to provide financial statement
disclosures required by U.S. generally accepted accounting
principles and Regulation S-X. The amendments requiring
disclosures of accounting policies in Rule 4-08(n) of Regulation
S-X do not apply to foreign private issuers filing under Item 17
of Form 20-F. However, foreign private issuers filing under Item
17 of Form 20-F should consider the guidance presented in Staff
Accounting Bulletin Topic 1:D ("SAB Topic 1:D") to determine if
information regarding accounting policies for derivatives should
be provided in MD&A.-[71]-
C. Scope and Definition of Instruments
The instructions to Rule 4-08(n), Item 305, and Item 9A
define financial instruments, derivative financial instruments,
other financial instruments, and derivative commodity instruments
as follows. "Financial instruments" have the same meaning as
defined by generally accepted accounting principles (see, e.g.,
FASB, Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," ("FAS
107") paragraphs 3 and 8 (December 1991)). "Derivative financial
---------FOOTNOTES----------
-[71]- SAB Topic 1:D provides several examples of
disclosures in MD&A that might be necessary to
enable readers to understand the financial
statements as a whole. One of those example
disclosures includes significant accounting
policies and measurement assumptions which may
bear upon an understanding of operating trends or
financial condition.
==========================================START OF PAGE 58======
instruments" are a subset of financial instruments and include
futures, forwards, swaps, options, and other financial
instruments with similar characteristics, as defined by generally
accepted accounting principles (see, e.g., FAS 119 paragraphs 5 -
7 (October 1994)). See, the General Instructions to Paragraphs
305(a) and 305(b) of Item 305 or the General Instructions to
Paragraphs 9A(a) and 9A(b) of Item 9A for further details.
Other financial instruments include all financial
instruments that must be disclosed at fair value under FAS 107,
except for derivative financial instruments, as defined above.
For example, other financial instruments include trade accounts
receivable, investments, loans, structured notes, mortgage-backed
securities, trade accounts payable, indexed debt instruments,
interest-only and principal-only obligations, deposits, and other
debt obligations. However, for purposes of this release, trade
accounts receivable and trade accounts payable need not be
considered other financial instruments when their carrying
amounts approximate fair value. Other financial instruments
exclude employers' and plans' obligations for pension and other
post-retirement benefits, substantively extinguished debt,
insurance contracts, lease contracts, warranty obligations and
rights, unconditional purchase obligations, investments accounted
for under the equity method, minority interests in consolidated
enterprises, and equity instruments issued by the registrant and
classified in stockholders' equity in the statement of financial
position.
==========================================START OF PAGE 59======
Derivative commodity instruments include, to the extent such
instruments are not derivative financial instruments, commodity
futures, commodity forwards, commodity swaps, commodity options,
and other commodity instruments with similar characteristics,
that are permitted by contract or business custom to be settled
in cash or with another financial instrument.
Thus, the instrument definitions described above do not
encompass (i) commodity positions, (ii) derivative commodity
instruments that are not permitted by contract or business custom
to be settled in cash or with another financial instrument
(e.g., a commodity forward contract that must be settled in the
commodity), (iii) cash flows from anticipated transactions,
(e.g., operating cash flows from non-financial and non-commodity
instruments), and/or (iv) certain financial instruments not
included among the required disclosure items.-[72]-
V. DISCLOSURE OF THE EFFECTS OF DERIVATIVE INSTRUMENTS ON
DISCLOSURES ABOUT FINANCIAL INSTRUMENTS, COMMODITY
POSITIONS, FIRM COMMITMENTS, AND ANTICIPATED TRANSACTIONS
In conjunction with the adoption of Items 305 and 9A, the
Commission reminds registrants that other reporting obligations
also require certain disclosures about derivatives. The staff's
1994 and 1995 reviews of registrant filings suggested that some
registrants are not providing sufficient disclosure about how
derivatives directly or indirectly affect reported items. As a
result, those disclosures may not have reflected as well as they
---------FOOTNOTES----------
-[72]- See section III B.1.c.(vi), supra, for a further
description of the instruments, positions, and
transactions described in this paragraph.
==========================================START OF PAGE 60======
otherwise might have such matters as the effective terms or
expected cash flows of the derivatives and reported items.
It is fundamental that registrants include in any filings or
reports any material information necessary to make statements
made, in light of the circumstances, not misleading.-[73]-
That is, registrants should provide disclosure about derivatives
that affect, directly or indirectly, the terms, fair values, or
cash flows of the reported items. This includes derivative
transactions that are designated to reported items under
generally accepted accounting principles.-[74]-
Thus, for example, information required to be disclosed in
the footnotes to the financial statements about the interest
rates and repricing characteristics of debt obligations should
include, when material, information about the effects of
derivatives. Similarly, summary information and disclosures in
MD&A about the interest costs of debt obligations should include,
when material, disclosure of the effects of derivatives.
Likewise, when derivatives directly or indirectly affect the
terms and cash flows of items such as securities held as assets,
servicing rights, oil and gas reserves, loan receivables, deposit
liabilities, and leases, disclosure about the terms and cash
flows of those items should include, when material, disclosure of
the effects of derivatives to the extent such disclosure is
---------FOOTNOTES----------
-[73]- See, e.g., Rule 12b-20 under the Exchange Act and
Rule 408 under the Securities Act.
-[74]- See, e.g., FAS 52 21a and FAS 80 4a.
==========================================START OF PAGE 61======
necessary to prevent the disclosure about the reported item from
being misleading.
VI. RESPONSE TO COMMENTS
A. Accounting Policies
1. Disclosure Threshold
In the proposing release, disclosures of accounting policies
for derivatives would have been required if the fair values of
derivative financial instruments and derivative commodity
instruments were material. Commenters noted that the disclosure
threshold in the proposing release is different than the
threshold provided by generally accepted accounting principles
(i.e., APB 22) and Regulation S-X. These commenters indicated
that introducing a new and different threshold could add
unnecessary confusion to the disclosure process. In response to
those commenters, the disclosure threshold in the final rule
relies on the standards of materiality present in APB 22 and
Regulation S-X. APB 22 requires disclosure of accounting
policies that materially affect the determination of financial
position, cash flows, or results of operations. Regulation S-X
limits the information to those matters about which an average
prudent investor ought reasonably be informed.
2. Future Reconsideration
Some commenters urged the Commission to coordinate its
efforts with the FASB, especially by committing to review the
accounting policies disclosure requirements after the FASB
completes its derivatives and hedging project. Those commenters
==========================================START OF PAGE 62======
suggested that when the accounting for derivatives is addressed
comprehensively by the FASB, rules explicitly prescribing the
content of derivative accounting policy disclosures may no longer
be necessary. In response to those commenters concerns, after
the FASB completes its project, the Commission will direct its
staff to review Rule 4-08(n) and Item 310 and to recommend
whether the Commission should amend those items.
==========================================START OF PAGE 63======
B. Quantitative Disclosures About Market Risk
1. Different Alternatives for Different Categories of
Instruments
A number of commenters recommended that the same
quantitative market risk disclosure alternative not be required
(i) for instruments entered into for trading and other than
trading purposes and (ii) for each market risk exposure category
(e.g., interest rates, foreign currency exchange rates, and
commodity prices) within the trading and other than trading
portfolios. For example, some commenters indicated that market
risk inherent in trading portfolios is evaluated using one
approach, such as value at risk, and market risk inherent in the
other than trading portfolios is evaluated using another
approach, such as sensitivity analysis. Similarly, some
commenters suggested that instruments exposed to foreign currency
exchange rate risk are evaluated using one approach, while
instruments exposed to interest rate risk are evaluated using
another approach.
Those commenters suggested that Items 305(a) and 9A(a)
permit the use of different quantitative disclosure alternatives
for the market risks inherent in (i) the trading and other than
trading portfolios and (ii) different market risk exposure
categories within each of these portfolios. Due to the evolving
nature of market risk management technologies, the Commission has
decided it is too early to require that the same disclosure
alternative be used to report market risk across (i) the trading
and other than trading portfolios and (ii) each market risk
==========================================START OF PAGE 64======
exposure category within those portfolios. The Commission,
therefore, has revised the disclosure items to permit the use of
more than one disclosure alternative across each of those
categories.
2. Use of Additional Disclosure Methods
Some commenters suggested adding an alternative that would
allow disclosure of quantitative information about market risk
using a "management approach"; that is, the approach that
management uses internally to manage market risk. They commented
that the approaches in the proposing release (i) do not appear to
allow gap and duration analyses, which are currently used by some
to measure market risk and (ii) may become outdated as new
measurement approaches are developed in the market place. Other
commenters, however, support more consistent reporting and
requested that the Commission limit the quantitative disclosure
alternatives for the sake of comparability.
The approach taken in the final disclosure items strikes a
balance between the different commenters' perspectives. The
Commission believes that the final disclosure items allow most
registrants, if they so desire, to report market risk using one
or more of four common methods of managing market risk. These
methods are: (i) gap analysis, (ii) duration, (iii) sensitivity
analysis, and (iv) value at risk. Gap analysis is a tabular
disclosure approach and with minor revision would satisfy the
tabular disclosure requirements. Likewise, duration is a form of
sensitivity analysis and with minor revision would satisfy the
==========================================START OF PAGE 65======
sensitivity analysis disclosure requirements.
Registrants that do not internally manage market risk using
any of these four common quantitative methods, however, still are
required to report market risk disclosures using the methods
specified by the final disclosure items. The Commission believes
that reporting using a management approach outside of this
framework could result in disclosures that could make it
difficult for investors to assess market risk.
Finally, to address commenters concerns that the
alternatives for reporting market risk may become outdated, the
Commission expects the staff to review the disclosure
requirements periodically and to recommend amendments to those
requirements, when appropriate, to reflect new developments in
market risk management techniques.
3. Proprietary Information
Some commenters indicated that they were concerned that the
proposed quantitative disclosure requirements, particularly the
tabular disclosure, would result in presentation of proprietary
information. They expressed concern that the tabular information
required by the proposal was so detailed and disaggregated that
competitors, suppliers, and market traders potentially may be
able to use the information to exploit the registrants' positions
in the market. Other commenters maintained that, in certain
limited circumstances, period-end reporting of sensitivity
analysis and value at risk amounts also may reveal proprietary
information. Of principal proprietary concern were the
==========================================START OF PAGE 66======
requirements to disclose market risk information for derivative
commodity instruments at both year-end and quarter-end.
After careful consideration of these comments, the
Commission has determined to require disclosure of quantitative
information about market risk. However, the final disclosure
items include the following four provisions to address
proprietary concerns. First, the final disclosure items contain
two alternatives for providing quantitative information about
market risk (i.e., sensitivity analysis and value at risk), which
do not require disclosure of detailed information about specific
positions held by the registrant at period end. Second, the
final disclosure items allow registrants with concerns about
reporting fiscal year-end information, to report the average,
high, and low sensitivity analysis or value at risk amounts for
the reporting period, instead of requiring the reporting of
potentially proprietary year-end information. Third, for interim
reporting, the final disclosure items require registrants to
provide a discussion and analysis of the sources and effects of
material changes in market risk information since the end of the
preceding fiscal year, rather than requiring that registrants
always furnish complete Item 305(a) or Item 9A(a) information
when such material changes occur. Fourth, registrants selecting
the sensitivity analysis or value at risk disclosure alternatives
are not required to provide separate market risk disclosures for
any voluntarily selected instruments, positions, or transactions.
Instead, registrants selecting the sensitivity analysis and value
==========================================START OF PAGE 67======
at risk disclosure alternatives are permitted to present
comprehensive market risk disclosures, which reflect the combined
market risk exposures inherent in both the required and
voluntarily selected instruments, positions, and transactions.
Such comprehensive disclosures do not reveal proprietary
information about the relative amount of market risk inherent in
market risk sensitive instruments and any voluntarily selected
instruments, positions, and transactions.
4. Static Disclosures, Dependence on Assumptions
Some commenters criticized the sensitivity analysis and
value at risk disclosures as being too dependent on assumptions.
They also commented that sensitivity analysis and value at risk
measures are static and may not yield amounts that fairly
represent the dynamic nature of market risk.
The Commission has considered those comments and has
determined to continue to permit use of both the sensitivity
analysis and value at risk disclosure alternatives for the
following primary reasons. First, the sensitivity analysis and
value at risk disclosure alternatives are the most common and
widely accepted methods of measuring net market risk exposures
currently available in the market place. Second, while the
reported quantitative information depends on assumptions,
registrants are required to disclose key assumptions, which
should allow investors to assess the quality of those assumptions
and evaluate the potential impact of variations in those
assumptions on the reported information. Third, an evaluation of
==========================================START OF PAGE 68======
reported quantitative information about market risk, over time,
should help investors assess the dynamic nature of that risk.
5. Summarized Tabular Information
Some commenters indicated that the proposed tabular
presentation of terms and information related to market risk
sensitive instruments would produce lengthy and complex
disclosures. They also asserted that grouping (i) foreign
currency sensitive instruments by functional currency and (ii)
other instruments by the common characteristics specified in the
proposing release (e.g., fixed or variable rate assets or
liabilities, long or short forwards or futures, etc.) would be
burdensome for registrants and the resulting information complex
to analyze. Those commenters suggested that more summarized
information be permitted in the tables. Finally, other
commenters suggested that the proposal was unclear as to the
information that must be disclosed, particularly with regard to
options instruments.
The Commission is concerned that highly summarized tabular
information will not allow investors to analyze and develop an
understanding of a registrant's market risk exposures. Thus, the
grouping requirements in the proposed disclosure items have not
been changed substantially in this release. However, the
Commission has revised the instructions to the final disclosure
items to permit combined disclosure of foreign currency sensitive
instruments exposed to different functional currencies, provided
that those functional currencies (i) are economically related,
==========================================START OF PAGE 69======
(ii) are managed together for internal risk management purposes,
and (iii) have statistical correlations of greater than 75% over
each of the past three years. In addition, the Commission has
provided instructions to the final disclosure items to require
the disaggregated reporting of instruments based on common
characteristics only to the extent such disaggregation is
material. Finally, the Commission has decided to exempt certain
currency swaps and foreign currency denominated debt instruments
from disclosure in the foreign currency risk exposure category if
the currency swap eliminates all foreign currency exposure in the
cash flows of the foreign currency denominated debt instrument.
However, both the currency swap and the foreign currency
denominated debt instrument still should be disclosed in the
interest rate risk exposure category.
With regard to the need for guidance on information to be
included in the table, the Commission has clarified in the final
disclosure items that the table should provide information about
contract terms sufficient to estimate the future cash flows from
market risk sensitive instruments, categorized by expected
maturity dates. In addition, for disclosures about options in
particular, the Commission has made clear in the instructions to
the final disclosure items that tabular information on options
with dissimilar strike prices should be disclosed separately to
help reflect the different market risk exposures inherent in
option instruments.
==========================================START OF PAGE 70======
6. Sensitivity Analysis - Multiple Risk Exposures
Commenters requested additional guidance on how to perform
the sensitivity analysis calculations for registrants with (i)
multiple foreign currency exchange rate exposures and (ii)
instruments that are exposed to rate or price changes in more
than one market risk exposure category (e.g., interest rate risk
and foreign currency rate risk).
In response to those comments, the Commission has added two
clarifying instructions to the disclosure items. First,
registrants with multiple foreign currency exchange rate
exposures should present foreign currency sensitivity analyses
that measure the aggregate sensitivity to all changes in foreign
currency exchange rate exposures, including the changes in both
transactional currency/functional currency exchange rate
exposures and functional currency/reporting currency exchange
rate exposures.-[75]- Second, for sensitivity analysis
calculation purposes, registrants with instruments that are
exposed to rate or price changes in more than one market risk
exposure category should include the instrument in each market
---------FOOTNOTES----------
-[75]- For example, assume a French division of a
registrant presenting its financial statements in
U.S. dollars ($US) invests in a deutschmark(DM)-
denominated debt security. This division
determines that: (i) the French franc (FF) is its
functional currency according to FAS 52, (ii) the
$US is its reporting currency, and (iii) the DM is
its transactional currency. In preparing the
foreign currency sensitivity analysis disclosures,
this registrant should report the aggregate
potential loss from hypothetical changes in both
the DM/FF exchange rate exposure and the FF/$US
exchange rate exposure.
==========================================START OF PAGE 71======
risk category to which the instrument is exposed. Similar
instructions also were added to the value at risk disclosure
requirements.
7. Value at Risk - Contextual Disclosures
To help place reported value at risk amounts in context, the
disclosure items in the proposing release specified that
registrants should report either (i) the average or range in
value at risk amounts for the current reporting period, (ii) the
average or range in actual changes in fair values, earnings, or
cash flows from market risk sensitive instruments occurring
during the current reporting period, or (iii) the percentage of
actual changes in fair values, earnings, or cash flows from
market risk sensitive instruments that exceeded the reported
value at risk amounts during the current reporting period ((i),
(ii), and (iii) collectively are referred to as the "contextual
value at risk disclosures").
Some commenters suggested that the final disclosure items
should encourage, but not require, the contextual value at risk
disclosures. Those commenters stated that the Commission would
be penalizing registrants for choosing the value at risk
disclosure alternative by requiring contextual disclosures that
are not required for the other two disclosure alternatives.
Other commenters, while supporting the disclosure requirements
generally, objected to one or more of the contextual value at
risk disclosures.
The Commission acknowledges the concerns of those
==========================================START OF PAGE 72======
commenters, but has decided not to change significantly the
contextual disclosure requirements because it believes those
disclosures provide investors with information that is important
in evaluating the reported value at risk amounts. The disclosure
items have been modified only to the extent necessary to clarify
the contextual disclosure requirements. These contextual
disclosures are common elements to value at risk management
systems. Similar disclosures are not available for the tabular
presentation and sensitivity analysis alternatives; thus,
comparable contextual disclosures are not required for those
alternatives.
8. Value at Risk - Aggregated Values
The proposed disclosure items would have required disclosure
of an aggregate value at risk amount across all market risk
sensitive instruments. A similar aggregate amount would not have
been required for the other two disclosure alternatives.
Some commenters suggested that it may not be practical to
require an aggregate value at risk amount because most
registrants do not use a single risk measurement method for all
market risk exposures. Other commenters suggested that
registrants providing an aggregate value at risk amount for all
categories of market risk should not be required to disclose
separate value at risk amounts for each market risk exposure
category.
Recognizing that registrants often do not use the same
method internally for managing risk across the different market
==========================================START OF PAGE 73======
risk exposure categories within the trading and other than
trading portfolios, the final disclosure items encourage, but do
not require, reporting of aggregate value at risk (and
sensitivity analysis) amounts for the trading and other than
trading portfolios. Registrants also should note that they may
not report aggregate value at risk amounts for the trading and
other than trading portfolios in lieu of the required separate
value at risk amounts for each market risk exposure category.
Separate value at risk amounts provide information about a
registrant's specific market risk exposures, which the Commission
believes is useful for investors trying to manage specific risks
in their investment portfolios.
9. Model Parameters
In order to enhance the comparability of sensitivity
analysis and value at risk disclosures, some commenters from the
user community suggested that the Commission specify certain
model parameters. In particular, those commenters suggested that
the Commission establish several standard stress tests to be used
to calculate sensitivity analysis disclosures, such as the
greater of a 15% or 100 basis point adverse interest rate shift
along the entire yield curve. Those standard stress tests would
require measurement of the potential loss from reasonably
expected market movements. Other commenters, however, requested
that the Commission not specify model parameters at this time to
allow the reporting to be responsive to the ongoing evolution in
risk management systems.
==========================================START OF PAGE 74======
Due to these evolving practices, a guiding principle in the
proposing release was to provide flexibility in the sensitivity
analysis and value at risk market risk disclosure requirements to
accommodate different types of registrants, different degrees of
market risk exposure, and alternative ways of measuring market
risk. The Commission continues to believe such flexibility is
necessary at this time and, therefore, is not specifying uniform
model parameters for the calculation of sensitivity analysis and
value at risk disclosures.
The need for such flexibility, however, should not result in
selection of model parameters that are not realistic and
meaningful measures of reasonably expected market rate and price
changes. Accordingly, the Commission has included guidance in
the final disclosure items on certain model parameters that
should be used by registrants. In particular, this guidance
requires registrants to select both hypothetical changes in
market rates or prices for sensitivity analysis and confidence
intervals for value at risk that reflect reasonably possible
near-term changes in market rates and prices. In this regard,
the disclosure items indicate that, absent economic justification
for the selection of different model parameters, registrants
should use hypothetical changes in market rates or prices that
are not less than 10 percent of end of period market rates or
prices for sensitivity analysis disclosures and confidence
intervals that are 95 percent or higher for value at risk
disclosures. In the long-term, as more standard risk management
==========================================START OF PAGE 75======
practices and methods of reporting market risk are developed, the
Commission anticipates that it will further limit the models,
assumptions, and parameters permitted in Items 305(a) and 9A(a)
to enhance comparability of reported information.
10. Comparative Information
Many commenters requested that, if a registrant changes its
method of providing quantitative information about market risk
from one year to the next, it should not be required to provide
comparable summarized information for the preceding period
because preparing such presentations and analyses using the new
method for preceding periods would be burdensome and costly.
Moreover, they suggested that the cost associated with providing
comparable summarized information for the preceding year may be a
sufficient disincentive to prevent change to a more sophisticated
disclosure alternative.
The Commission believes that information about market risk
is most useful for investors when compared to one or more prior
periods. For such information to be meaningful, the information
needs to be prepared on a consistent basis from period-to-period.
The Commission also believes that registrants should be able to
change methods of preparing market risk information as their risk
management practices evolve. To mitigate the costs of preparing
prior period market risk disclosures, the final disclosure items
provide two alternatives to registrants that change disclosure
alternatives, key model characteristics, assumptions, or
parameters. First, a registrant may provide summarized
==========================================START OF PAGE 76======
comparable information, under the new disclosure method, for the
year preceding the current year. Alternatively, in addition to
providing disclosure for the current year under the new method,
the registrant may provide disclosure for the current year and
preceding fiscal year under the method used in the preceding
year.
11. Effective Dates
Commenters suggested that time is needed to allow
registrants to prepare and implement the new quantitative
disclosures about market risk. The Commission agrees with those
commenters and, thus, will phase in the amendments over the next
several months so that registrants will have time to respond to
the new disclosure requirements. For registrants that are likely
to have experience with measuring market risk, such as banks,
thrifts, and non-bank and non-thrift registrants with market
capitalizations on January 28, 1997 in excess of $2.5 billion,
Items 305 and 9A are effective for filings with the Commission
that include annual financial statements for fiscal years ending
after June 15, 1997. For other registrants, those Items are
effective for filings with the Commission that include annual
financial statements for fiscal years ending after June 15, 1998.
In addition, under Items 305 and 9A, interim information is not
required until after the first fiscal year end in which those
Items are effective.
C. Qualitative Disclosures About Market Risk
1. Proprietary Information
==========================================START OF PAGE 77======
Some commenters expressed concerns that a discussion of
primary market risk exposures and how those exposures are managed
would be proprietary. The Commission acknowledges those
concerns, but believes that qualitative information about market
risk is important to investors. Without the disclosures required
by Item 305(b) and Item 9A(b), investors would be unable to
understand a registrant's exposures to market risk and unable to
place that registrant's market risk management practices within
the context of its business. In addition, the qualitative
disclosures are not so specific as to require disclosure of the
type of information (e.g., current positions) that may harm a
registrant's competitive positions. For these primary reasons
the Commission has decided to retain the qualitative market risk
disclosure requirements.
2. Examples of How Market Risks are Managed
Proposed Items 305(b) and 9A(b) provide examples of possible
disclosures regarding how a registrant manages market risk.
These examples include a description of the objectives, general
strategies, and instruments used to manage market risk. Some
commenters inquired whether the description of one or two of
these items would be sufficient. Others asked if the examples
are intended to be an all-inclusive list of items required by
Items 305(b) and 9A(b).
In general, the examples were intended to reflect minimum
disclosures that would be necessary to comply with the
qualitative market risk disclosure requirements. The examples
==========================================START OF PAGE 78======
were neither meant to address all circumstances nor to be all
inclusive. The final disclosure items clearly state that the
listed items should be addressed within the required disclosures
and that registrants also are responsible for providing any
additional information necessary to describe completely their
primary market risks and how those risks are managed.
D. Implementation Issues
1. Scope of Disclosures
Several commenters raised issues about the scope of
instruments included in the proposed disclosure items. For
example, some suggested that information about derivative
commodity instruments should not be required because offsetting
exposures relating to commodities held or owned were not
required. Thus, the disclosures would be presenting only part of
registrants' exposure to market risk. Furthermore, they
indicated that registrants that hedge commodity exposures could
be disclosing more market risk than those that do not participate
in hedging activities, even though they may have less exposure to
market risk. Similar arguments were made regarding (i) hedges of
anticipated transactions, foreign currency operating cash flows,
and inventories and (ii) issuances of debt to fund property,
plant, and equipment. In essence, those commenters suggested
that the scope of the disclosure requirements is limited and as a
result the information required to be disclosed is incomplete.
Some commenters suggested that, to address this issue, the
instruments covered by the disclosures be expanded to include all
==========================================START OF PAGE 79======
types of instruments with market risk. Other commenters
suggested reducing the scope of instruments covered by the
disclosures, primarily by eliminating derivative commodity
instruments.
The Commission considered expanding the required
quantitative disclosures about market risk to include commodity
positions and anticipated transactions. However, many internal
risk measurement systems currently do not incorporate many
commodity positions and anticipated transactions. Thus, the
Commission is not requiring the inclusion of these items at this
time.
The Commission believes that derivative commodity
instruments often have risks similar to other derivatives and can
be used to alter significantly a registrant's commodity risk
profile by, for example, locking in the price of a significant
portion of its future purchases of commodity inventory.
Accordingly, the Commission continues to include those
instruments within the scope of the final disclosure items.
Without including such instruments in the required disclosures,
it would be difficult for investors to distinguish, for example,
between those registrants that are sensitive to changes in
commodity prices from those that are not.
In an effort to make disclosures about market risk more
comprehensive, the Commission encourages registrants to include
voluntarily commodity positions, anticipated transactions, and
other market risk sensitive instruments and positions within
==========================================START OF PAGE 80======
their market risk disclosures. When these instruments,
transactions, and positions are not included in the quantitative
disclosures and, as a result, the disclosures do not fully
reflect the net market risk exposures of the registrant, Items
305(a) and 9A(a) require that registrants discuss the limitations
of the disclosed market risk information resulting from the
absence of those items.
2. The Definition of Financial Instrument
Commenters suggested that the definition of financial
instruments be clarified to exclude explicitly financial
instruments that the FASB excluded from FAS 107. Financial
instruments excluded from FAS 107 disclosures include insurance
contracts, lease contracts, and employers' and plans' obligations
for pension and other post-retirement obligations. The cash
flows in many of these instruments are affected significantly by
more than market risk factors, thereby making the quantification
of market risk more difficult. The Commission agrees that these
instruments should be excluded from the scope of the final
disclosure items. Thus, the relevant instructions to Items 305
and 9A indicate that instruments excluded from FAS 107 are
excluded from the scope of the final disclosure items. However,
registrants are encouraged to include voluntarily such
instruments in their market risk disclosures, if such inclusion
would make the information more complete and meaningful.
3. The Definition of Derivative Commodity Instrument
In the proposed disclosure items, "derivative commodity
==========================================START OF PAGE 81======
instruments" were defined to include commodity futures, commodity
forwards, commodity swaps, commodity options, and other commodity
instruments with similar characteristics that are reasonably
possible to be settled in cash or with another financial
instrument. Some commenters indicated that a reasonably possible
test would be too difficult to apply in practice. That is, it
may be difficult to distinguish between a commodity contract for
which settlement in cash is reasonably possible and a contract
for which settlement in cash is not reasonably possible. Some
commenters suggested that derivative commodity instruments be
defined as those that may be settled in cash in the normal course
of business. Those commenters also suggested that the definition
of derivative commodity instruments include specifically
derivative instruments in which cash settlement is based on the
net change in value of the commodity contract.
In response to those comments, the Commission has amended
the definition of derivative commodity instruments to include
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are permitted by contract or business custom
to be settled in cash or with another financial instrument. In
addition, the final disclosure items make clear that settlement
in cash includes settlement in cash of the net change in value of
the derivative commodity instrument.
4. Small Business Issuers
Some commenters suggested that the disclosure requirements
==========================================START OF PAGE 82======
in Items 305 and 9A should apply to all registrants that have
material positions in instruments covered by the proposed
disclosure items, including small business issuers filing
documents with the Commission in accordance with Regulation S-B.
Due to cost-benefit concerns, however, the Commission has
determined that some experience should be gained with the
disclosure items before proposing that they be applied to small
business issuers.
5. The Disclosure Threshold
Some commenters suggested that the Commission change the
threshold for requiring disclosures of quantitative information
about market risk to conform with the disclosure threshold in
MD&A. That suggestion was based on a general observation that
both MD&A and proposed Items 305 and 9A require disclosure of
information about known risks and uncertainties and, therefore,
should be subject to the same threshold for determining whether
disclosure is required. Those commenters indicated that
introducing a new and different disclosure threshold could add
unnecessary confusion to the disclosure process.
MD&A addresses a wide array of risks and uncertainties.
Thus, the MD&A disclosure threshold (i) is broad, applying to
many different types of exposures, not just market risk and (ii)
does not provide specific guidance directly relevant to a
threshold for disclosure of quantitative market risk information.
In addition, MD&A focuses on events that are judged to be
reasonably likely of occurring.
==========================================START OF PAGE 83======
In contrast, consistent with many internal risk management
systems, Item 305 and Item 9A require reporting of losses from
events beyond those deemed reasonably likely of occurring. For
example, those disclosure Items require reporting of value at
risk information on possible future losses, which, at a minimum,
are not expected to be exceeded 95% of the time. Likewise, those
disclosure Items require reporting of sensitivity analysis
information on possible future losses from reasonably possible,
not reasonably likely, near-term changes in market rates and
prices. Thus, Item 305 and Item 9A are intended to obtain
quantitative information about market risk that is incremental to
the disclosures about reasonably likely risks and uncertainties
required by MD&A.
As a result, the Commission has decided to retain the
disclosure threshold that was proposed. That threshold provides
guidelines that focus on market risk, apply explicitly to
quantitative disclosures, and most importantly, require
disclosure of losses beyond those deemed reasonably likely of
occurring.
6. "Future" Losses
With respect to the disclosure threshold noted above,
commenters suggested that the Commission define how far into the
future registrants must look to conclude whether or not they may
experience material future losses. They suggested replacing the
word "future" with either the phrase "near term" as it is defined
in AICPA Statement of Position 94-6, "Disclosure of Risks and
==========================================START OF PAGE 84======
Uncertainties" ("SOP 94-6") (December 1994) or "one year."
The Commission agrees with the commenters and has limited
the time period over which losses in earnings, fair values, and
cash flows should be evaluated to the "near term." In the final
disclosure items, the Commission defines "near term" to mean a
period of time going forward up to one year from the date of the
financial statements, which is consistent with the definition in
SOP 94-6.
7. Safe Harbor
Nearly all of the commenters favored explicit safe harbor
protection for the new disclosure of quantitative and qualitative
information about market risk. Commenters did not object to the
Commission's proposal to extend the Item 305 and Item 9A safe
harbors to all types of issuers and transactions.
Several commenters suggested modifications to the proposed
safe harbor. Those commenters argued that the safe harbors
should protect all of the qualitative information required by
paragraph (b) of Item 305 and Item 9A, and not just statements
with respect to future reporting periods provided pursuant to
paragraph (b)(1)(iii), as proposed.-[76]- A few of these
commenters provided examples of disclosures responsive to
paragraphs (b)(1)(i) and (b)(1)(ii) of Item 305 and Item 9A that
they thought could be viewed as being forward looking. As noted
---------FOOTNOTES----------
-[76]- Item 305(b)(1)(iii) was proposed as Item
305(b)(3).
==========================================START OF PAGE 85======
above,-[77]- the rule has been clarified to provide that
all statements (other than statements of historical fact)
provided pursuant to paragraphs (b)(1)(i), (b)(1)(iii) and (c) of
Items 305 and 9A are "forward looking statements" for purposes of
the new safe harbor rules. To the extent that information
provided pursuant to paragraph (b)(1)(ii) of Items 305 and 9A
includes forward looking statements, those statements would be
eligible for safe harbor protection.
Second, most of the commenters remarking on the issue
thought that small business issuers voluntarily providing any of
the Item 305 and Item 9A disclosures should have the protection
of the safe harbor. Under the proposals, the safe harbor would
have applied to voluntary disclosures only if all of the
quantitative disclosures or all of the qualitative disclosures
were provided. In an effort to encourage small business issuers
to provide information that they think is appropriate to an
understanding of their market risks, Item 10 of Regulation S-B
has been changed to extend the Item 305 safe harbor to any Item
305 disclosure that is voluntarily provided by a small business
issuer.
Finally, several commenters requested guidance as to whether
registrants would have to include "meaningful cautionary
statements" in addition to the Item 305 and Item 9A disclosures
to obtain the protection of the Item 305 and Item 9A safe
harbors. In response to these comments, the Commission has
---------FOOTNOTES----------
-[77]- See section III B.3.
==========================================START OF PAGE 86======
clarified in the rule that, for purposes of the Item 305(a) and
9A(a) quantitative disclosures, a registrant will be deemed to
have satisfied the "meaningful cautionary statements" prong of
the safe harbors if it satisfies the requirements of those items.
In particular, these items require a description of the
assumptions underlying, and the limitations of, the disclosure
provided. For the remainder of the information required by the
new items, registrants desiring to qualify for the "meaningful
cautionary statements" prong of the safe harbor will need to
consider what information should be given to alert investors to
important factors that could cause actual results to differ
materially from the information given in the forward looking
statements.
VII. CERTAIN FINDINGS
Section 23(a) of the Exchange Act-[78]- requires the
Commission, in adopting final rules under the Exchange Act, to
consider the anti-competitive effect of such rules, if any, and
to balance them against the regulatory benefits that further the
purposes of the Exchange Act. Furthermore, Section 2 of the
Securities Act-[79]- and Section 3 of the Exchange
Act,-[80]- as amended by the recently enacted National
Securities Market Improvement Act of 1996 ("Market Improvement
---------FOOTNOTES----------
-[78]- 15 U.S.C. 78w(a).
-[79]- 15 U.S.C. 77b.
-[80]- 15 U.S.C. 78c.
==========================================START OF PAGE 87======
Act"),-[81]- provide that whenever the Commission is
engaged in rulemaking and is required to consider or determine
whether an action is necessary or appropriate in the public
interest, the Commission also shall consider, in addition to the
protection of investors, whether the action will promote
efficiency, competition, and capital formation.
As discussed in earlier subsections of this release, the
Commission has considered carefully the comments that the Item
305(a) and Item 9A(a) quantitative disclosures of market risk, as
originally proposed, might provide information useful to a
registrant's competitors. The Commission has determined,
however, that quantitative disclosures will be helpful to
investors' understanding of a registrant's market risk exposures
and that sensitivity analysis and value at risk disclosures
normally do not allow readers to ascertain detailed information
about positions held by registrants. However, in response to
registrants with proprietary concerns about reporting period-end
information under the sensitivity and value at risk disclosure
alternatives, the final disclosure items allow reporting of the
average, high, and low sensitivity analysis or value at risk
amounts for the fiscal year, as an alternative to year-end
amounts. In addition, the final disclosure items also require
registrants filing interim reports to provide a discussion and
analysis of the sources and effects of material changes in market
risk information since the end most recent preceding fiscal year,
---------FOOTNOTES----------
-[81]- Pub. L. No. 104-290, 106, 110 Stat. 3416 (1996).
==========================================START OF PAGE 88======
rather than requiring, as originally proposed, that registrants
always furnish complete Item 305(a) or Item 9A(a) information,
when such material changes occur.
The Commission has considered the amendments and new
disclosure items discussed in this release in light of the
comments received in response to the proposing release and the
standards embodied in Section 2 of the Securities Act and
Sections 3 and 23(a) of the Exchange Act. The Commission
believes that any burdens on competition imposed by the adoption
of these amendments and disclosure items are necessary and
appropriate in furtherance of the purposes of the Exchange Act.
Some commenters suggested Items 305 and 9A could create
incentives for the development of new products that do not trade
on exchanges and would not be subject the new disclosures because
of their non-cash-settlement feature. The Commission intends to
review the effects of the disclosures on the markets and expects
to reconsider the disclosure items after three years. The
Commission will be able to address any such concerns at such
time. The Commission believes that Items 305 and 9A are
necessary and appropriate in the public interest and for the
protection of investors because of the need for improved
disclosure about market risk to help investors better understand
and evaluate a registrant's exposures to market risk.
As described in more detail in the cost-benefit section of
this release, the Commission made a number of changes from the
rules as proposed to increase flexibility for registrants in
==========================================START OF PAGE 89======
providing the required disclosures and keeping the cost of
compliance to a minimum, thus promoting efficiency. In addition,
by enhancing investor's understanding of registrants' market risk
exposures the disclosure items should promote the efficient
allocation of capital. Thus, the disclosure items will promote
==========================================START OF PAGE 90======
competition, efficiency, and enhance the U.S. capital formation
process.
VIII. COST-BENEFIT ANALYSIS
A. Background
In general, Rule 4-08(n), Item 305, and Item 9A, clarify
existing standards and rules, include additional instruments
within existing standards, and require specific disclosure
alternatives for providing quantitative disclosures regarding
market risk sensitive instruments. In particular, these
provisions include:
1. Enhanced descriptions of accounting policies for
derivatives;
2. Quantitative disclosures about market risk; and
3. Additional qualitative disclosures about market risk.
These provisions are being adopted in response to requests
from investors and others to provide more meaningful information
about market risk sensitive instruments.-[82]- The
expected benefits of these rules and items are to make
information about market risk sensitive instruments, including
derivatives, more understandable to investors and others. This
increased understanding is expected to enhance the ability of
investors to make investment decisions and to improve the
efficiency of the markets. The Commission believes these
---------FOOTNOTES----------
-[82]- See notes 22-29, supra, for examples of investors,
regulators, and other private bodies endorsing or
recommending improved quantitative disclosures
about market risk.
==========================================START OF PAGE 91======
benefits will outweigh the related costs, which are discussed
below.
==========================================START OF PAGE 92======
B. Descriptions of Accounting Policies for Derivatives
FAS 119 was designed, in part, to help investors and others
understand how derivative financial instruments are reported in
the financial statements.-[83]- FAS 119 requires, among
other things, disclosure of the policies used to account for
derivative financial instruments, pursuant to the requirements of
APB 22.-[84]- However, the scope of FAS 119 is limited to
derivative financial instruments and, therefore, it does not
apply to other derivative instruments with similar
characteristics, such as derivative commodity instruments. In
addition, FAS 119 does not provide explicit guidance indicating
what must be described in accounting policies footnotes to make
the financial statement effects of derivatives more
understandable. The SEC staff found that the accounting policies
footnotes for derivatives often were too general in nature, not
reflecting adequately the choices made by registrants in their
accounting for derivatives.
New Rule 4-08(n) requires descriptions of accounting
policies for derivative financial instruments and derivative
commodity instruments, unless the registrant's derivative
activities are not material. Thus, the scope of the amendments
is broader than the scope of FAS 119. In addition, to help make
clear the impact of derivatives on the financial statements, Rule
---------FOOTNOTES----------
-[83]- See FAS 119 60.
-[84]- See FAS 119 8. See also note 39, supra, for a
discussion of the requirements of APB 22.
==========================================START OF PAGE 93======
4-08(n) makes explicit the items to be disclosed in the
accounting policies footnotes.
Rule 4-08(n) is likely to result in a more focused and
descriptive discussion of the accounting policies for both
derivative financial instruments and derivative commodity
instruments. This additional information is likely to result in
additional preparation, audit, and printing costs. However,
because accounting policies for these instruments are known by
registrants and should be known by their auditors, most of the
preparation and audit costs are expected to relate to initial
compliance with the amendments. These costs, along with expected
printing costs, are not estimated to be significant. Other
costs, such as ongoing recordkeeping and compliance costs, also
are not expected to be significant.
C. Quantitative Information About Market Risk
As discussed earlier in this release, under Item 305(a) and
Item 9A(a), registrants are required to present quantitative
information about market risk. An important aspect of this
requirement, from a cost perspective, is that registrants will
have the flexibility to choose one or more of three disclosure
alternatives (tabular presentation, sensitivity analysis, or
value at risk) to provide such quantitative information about
market risk.
The Commission believes that, for registrants electing to
provide tabular disclosure, much of the required information is
currently available. Thus, additional costs relating to
==========================================START OF PAGE 94======
recordkeeping are not expected to be significant. While
increased reporting and compliance burdens may result, in many
cases the information presented in the tabular disclosures is
used in managing the business activities of the registrant and
may be available at relatively low incremental costs. Further,
registrants complying with Securities Act Industry Guide
3,-[85]- principally financial institutions, already
disclose a significant amount of the required information.
Registrants that choose to use either the sensitivity or
value at risk disclosure alternatives may incur significant
additional costs if they currently do not use these methodologies
to manage market risk. In contrast, if registrants currently use
sensitivity or value at risk analyses to manage market risk, the
Commission believes that any additional costs associated with
complying with Item 305(a) or Item 9A(a) are not expected to be
significant. The Commission recognizes that, for some
registrants, the start-up costs to prepare the quantitative
disclosures about market risk may be significant. However, in
the near term, the Commission expects that the development of
---------FOOTNOTES----------
-[85]- Securities Act Industry Guide 3, "Statistical
Disclosure by Bank Holding Companies." Exchange
Act Industry Guide 3 is identical to the
Securities Act guide. Detailed disclosures are
required under Guide 3 of, among other things, the
registrant's: (i) distribution of assets,
liabilities and stockholders' equity; interest
rates and interest differential; (ii) investment
portfolio; (iii) loan portfolio (including types
of loans, maturities and sensitivities of loans to
changes in interest rates, risk elements, and
loans outstanding in foreign countries); (iv)
deposits; and (v) short-term borrowings.
==========================================START OF PAGE 95======
software related to market risk analysis will reduce these costs
materially. In addition, the Commission understands that some of
the data and the systems needed to develop these analyses
recently have been made available at a relatively moderate
cost.-[86]- Moreover, some registrants are required to
prepare such information for regulatory capital measurement
purposes. In particular, thrift institutions are required to
prepare fair value sensitivity analyses for risk-based capital
purposes.-[87]- Also, banks and bank holding companies
with significant exposure to market risk are required to prepare
a value at risk analysis for risk-based capital
purposes.-[88]- Thus, the costs associated with the
sensitivity and value at risk analyses may vary depending on (i)
whether the registrant currently engages in these analyses for
other management or regulatory purposes and (ii) the particular
model and assumptions used in the registrant's calculations. Any
registrant that believes the cost of such analyses outweigh the
benefits of disclosing them, however, may elect to provide
tabular presentation of information about market risk sensitive
instruments.
In response to the comment letters, the Commission made
---------FOOTNOTES----------
-[86]- See Wall Street Journal, "Morgan Unveils the Way
It Measures Market Risk" C1 (October 11, 1994).
-[87]- See note 48, supra.
-[88]- See Department of the Treasury, Federal Reserve
System, and Federal Deposit Insurance Corporation
Joint final rule, "Risk-Based Capital Standards:
Market Risk," 61 FR 47358 (September 6, 1996).
==========================================START OF PAGE 96======
several changes in Item 305(a) and Item 9A(a) that should reduce
the cost for registrants preparing disclosures of quantitative
information about market risk. These changes are described in
detail above, under the caption "Response to Comments." In
brief, changes that should reduce registrants' costs include:
ù Delaying the effective date of the market risk disclosure
requirements for banks, thrifts, and non-bank and non-thrift
registrants with market capitalizations on January 28, 1997
in excess of $2.5 billion until filings made with the
Commission include annual financial statements for years
ending after June 15, 1997. For non-bank and non-thrift
registrants with market capitalizations on January 28, 1997
of $2.5 billion or less, the effective date is delayed until
filings with the Commission include annual financial
statements for fiscal years ending after June 15, 1998.
ù Permitting the use of different quantitative disclosure
alternatives for market risks inherent in (1) the trading
portfolio, (2) the "other than trading" portfolio, and (3)
different market risk exposure categories within each of
those portfolios. This often will allow registrants that
use different methods to manage different types of market
risk to report quantitative information according to the
method used for internal risk management purposes, instead
of having to conform all disclosures to one disclosure
==========================================START OF PAGE 97======
alternative.
ù For the tabular presentation alternative, permitting
entities to report together (or group) foreign currency
sensitive instruments according to functional currencies
that are economically related, are managed together for
internal risk purposes, and have statistical correlations of
greater than 75% over each of the past three years.
ù For the tabular presentation alternative, requiring that
instruments be reported based on specified common
characteristics only if, or to the extent that, such
disaggregation provides material information to investors.
ù For the tabular presentation alternative, allowing
elimination of disclosure in the foreign currency risk
exposure category of currency swaps and foreign currency
denominated debt instruments, if the currency swap
eliminates all foreign currency exposure in the cash flows
of the foreign currency denominated debt instrument.
ù Encouraging, rather than requiring, that registrants provide
aggregate sensitivity analysis and value at risk amounts for
the trading and other than trading portfolios.
ù When a registrant changes quantitative disclosure methods
==========================================START OF PAGE 98======
from one year to the next, providing two alternatives,
rather than one, for disclosing comparative, year-to-year
information. First, a registrant may restate the prior
year's disclosures based on the new alternative that has
been selected for the current year. Second, instead of
recreating prior records and information in order to prepare
restated information, the registrant may report the prior
year's disclosures as originally presented and, in addition
to disclosing the current year's information in accordance
with the new method, disclose the current year's information
under the method used in the prior year.
ù Specifically excluding from the scope of the disclosure item
certain financial instruments that are not required by
generally accepted accounting principles to be disclosed at
fair value. Such instruments include but are not limited to
pension and other post-retirement benefits, insurance
contracts, lease contracts, warranty obligations and rights,
and minority positions in consolidated enterprises.
ù Limiting to one year how far into the future a registrant
must look to determine whether it is reasonably possible
that it will experience a loss from its derivative and other
financial instruments.
The comment letters did not provide empirical or statistical
information about the costs to comply with the proposed
==========================================START OF PAGE 99======
quantitative disclosures of market risk. After reviewing the
anecdotal information in those letters, however, and despite the
changes listed above that further reduce compliance costs, the
Commission has reconsidered and increased the estimated time that
it may take registrants, on average, to prepare and report
quantitative information under Items 305(a) and 9A(a). The
Commission is increasing to 80 hours the estimated average hours
per registrant to comply with Item 305(a) or Item 9A(a). In
addition, the estimated cost of $40 per hour has been increased
to $100 per hour because the Commission believes that the levels
of professional services that may be needed to prepare the
information may be higher than originally expected. The revised
overall cost estimate is approximately $40 million for all
registrants complying with the required disclosures of
quantitative and qualitative information about market risks.
D. Qualitative Information About Market Risk
FAS 119 requires certain qualitative disclosures about the
market risk management activities associated with derivative
financial instruments held or issued for purposes other than
trading. In particular, FAS 119 requires disclosure of "the
entity's objectives for holding or issuing the derivative
financial instruments, the context needed to understand those
objectives, and its general strategies for achieving those
objectives."-[89]- However, as indicated above, these
requirements of FAS 119 only apply to certain derivative
---------FOOTNOTES----------
-[89]- See FAS 119 11a.
==========================================START OF PAGE 100======
financial instruments, and the SEC staff has observed that these
disclosures typically have been general in nature, providing only
limited insight into an entity's overall market risk management
activities.
In essence, Items 305(b) and 9A(b) expand certain disclosure
requirements set forth in FAS 119 to (1) encompass derivative
financial instruments entered into for trading purposes, other
financial instruments, and derivative commodity instruments and
(2) require registrants to evaluate and describe material changes
in their primary risk exposures and their market risk management
activities. The Commission believes this will present a more
complete discussion of a registrant's exposure to market risks
and the way it manages those risks. Because this information is
likely to be used by registrants as part of their risk management
activities, incremental costs relating to such disclosure are not
expected to be significant.
E. Small Business Issuers
As noted earlier, the Commission has determined not to amend
Regulation S-B-[90]- to incorporate an item similar to Item
305. Regulation S-B may be used by small business
issuers-[91]- required to register their securities with
the Commission. By excluding small business issuers from all but
the accounting policies disclosures that are required by the
amendments, the Commission has limited substantially the cost of
---------FOOTNOTES----------
-[90]- 17 CFR 228.10 et seq.
-[91]- See note 69, supra.
==========================================START OF PAGE 101======
those proposals for small entities.
==========================================START OF PAGE 102======
IX. SUMMARY OF FINAL REGULATORY FLEXIBILITY ANALYSIS
The Commission has prepared a Final Regulatory Flexibility
Analysis pursuant to the requirements of the Regulatory
Flexibility Act,-[92]- regarding the amendments to Rule 4-
08 of Regulation S-X, to Regulation S-K to create Item 305, and
the conforming amendments to Forms S-1, S-2, S-4, S-11, and F-4
under the Securities Act, and Rule 14a-3, Schedule 14A and Forms
10, 20-F, 10-Q, and 10-K under the Exchange Act. This section
summarizes that analysis. A copy of the final analysis may be
obtained by contacting Robert E. Burns, Chief Counsel, Office of
the Chief Accountant, U.S. Securities and Exchange Commission,
Mail Stop 11-3, 450 Fifth Street, N.W., Washington, D.C. 20549.
The final regulatory flexibility analysis notes that the
amendments clarify existing disclosure requirements, include
additional instruments within existing disclosure requirements,
and require specific disclosure alternatives for providing
quantitative information regarding market sensitive instruments.
These amendments are intended to provide investors with a clearer
understanding of registrants' use of such instruments and the
market risks inherent in those instruments.
For purposes of the Securities Act of 1933, the term "small
business," as used with reference to a registrant (other than an
investment company)-[93]- for the purposes of the
---------FOOTNOTES----------
-[92]- 5 U.S.C. 604.
-[93]- As noted elsewhere in this release, the amendments
do not apply to investment companies.
==========================================START OF PAGE 103======
Regulatory Flexibility Act, is defined by Rule 157 as an issuer
with total assets on the last day of its most recent fiscal year
of $5 million or less and which is engaged or proposing to engage
in an offering of securities that does not exceed $5
million.-[94]- For purposes of the Securities Exchange Act of
1934, small business (other than an investment company) is
defined in Rule 0-10 to mean issuers having total assets of $5
million or less as of the end of the most recent fiscal
year.-[95]-
Approximately 1100 Exchange Act reporting companies satisfy
the definition of "small business" under Rule 157. As of
December 1995, there were approximately 5200 broker-dealers
classified as small businesses under the above regulations.
As fully discussed in the analysis and elsewhere in this
release, the Commission has determined not to amend Regulation S-
B to incorporate an item similar to Items 305 and 9A. By
excluding small business issuers from these new disclosure
requirements, the Commission has reduced substantially the impact
of the amendments on small entities. Nonetheless, the final
regulatory flexibility analysis describes various factors,
including changes to the disclosure requirements adopted in
response to the comments on the proposing release, that reduce
compliance costs for all registrants. These factors also are set
---------FOOTNOTES----------
-[94]- 17 C.F.R. 230.157.
-[95]- 17 C.F.R. 240.0-10.
==========================================START OF PAGE 104======
forth in the Cost-Benefit Analysis section of this release.
Rule 4-08 clarifies how the accounting policy disclosure
requirements under APB 22 should be applied to derivatives and,
therefore, should not place significant additional costs on small
entities. The disclosures, however, are likely to result in a
more focused and descriptive discussion of the accounting
policies for derivatives. Disclosure of this information may
result in an increase in costs to prepare and print the
disclosures. However, most of the preparation costs are expected
to relate to complying initially with the new rule, as the
disclosures documenting those policies generally may remain
consistent from year to year. These initial costs are not
expected to be significant. In addition, because the accounting
policies must be known by the registrant in order for the
registrant to prepare its financial statements, and should be
known by its auditors, no new compliance procedures or
recordkeeping is required and there should not be a significant
increase, if any, in ongoing compliance costs.
Moreover, the Commission has determined that, due to the
existing disclosure requirements for accounting policies under
generally accepted accounting principles and the insignificant
economic impact of the enhanced accounting policy disclosures
under Rule 4-08, it is neither necessary nor appropriate for the
Commission to establish for small entities different compliance
or reporting timetables, simplified disclosure requirements,
performance standards, or an exemption from the disclosure
==========================================START OF PAGE 105======
requirement.
Only one request was made for the initial regulatory
flexibility analysis, and no comments specifically addressed that
analysis. Significant cost-benefit issues raised by commenters
in response to the proposing release are discussed under the
Response to Comments and Cost-Benefit Analysis sections of this
release, above.
X. PAPERWORK REDUCTION ACT
The amendments and disclosure items were submitted for
review in accordance with the Paperwork Reduction Act of 1995
("the Act")-[96]- and were approved by the Office of
Management and Budget ("OMB") in accordance with the clearance
procedures of that Act.-[97]- As Regulation S-X,
Regulation S-K, and the various forms and rules that are being
amended already possess OMB control numbers, new control numbers
were not assigned to the collections of information under the
amendments. The collection of information requirements under
these amendments are mandatory and responses are not
confidential. The collections of information are in accordance
with 44 U.S.C. 3507. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
unless it displays a currently valid control number.
Also in accordance with the Paperwork Reduction Act, the
Commission solicited comment on the compliance burdens associated
---------FOOTNOTES----------
-[96]- 44 U.S.C. 3501 et seq.
-[97]- 44 U.S.C. 3507.
==========================================START OF PAGE 106======
with the proposals, and received no public comment in response.
Comments were received, however, that addressed the general costs
and benefits associated with the proposed amendment to disclosure
Items 305 and 9A. These comments, and the Commission's response,
are discussed in the Response to Comments and Cost-Benefit
Analysis sections, above.
As part of its submission to the OMB under the Paperwork
Reduction Act, the Commission estimated that approximately 5000
registrants would disclose quantitative and qualitative
information under Item 305 or Item 9A. In view of the factors
discussed in the Cost-Benefit Analysis section and elsewhere in
this release, the Commission recognized that the time required to
prepare these disclosures would vary significantly depending on,
among other factors, the nature of the registrant's business, its
market risk management activities, and other applicable
regulatory requirements. The Commission originally estimated
that it would take, on average, approximately 40 hours per
registrant to prepare such disclosures.
Upon review of the comment letters, the Commission continues
to believe that approximately 5000 registrants will provide Item
305 and Item 9A disclosures. The Commission also continues to
believe that many financial services companies will not incur
additional expense because they already provide such disclosures.
In fact, for some of these companies, their costs may go down as
less information may be disclosed. In addition, a significant
number of registrants, because of the size or nature of their
==========================================START OF PAGE 107======
businesses, do not have a significant number of derivative
instruments or do not have complex instruments. For these
companies, a simple tabular presentation of debt and similar
instruments may suffice. The time and cost to prepare such
disclosures should not be significant. For larger commercial
corporations, however, the time for preparation and presentation
of the required Item 305 or Item 9A information may be more than
the Commission initially anticipated. Although no commenter
provided statistical or empirical information about the cost to
gather, prepare, and disclose such information, several mid to
large commercial corporations indicated that they believe they
may experience noticeable costs associated with such disclosures.
As a result, the Commission is increasing to 80 hours the
estimated average hour burden per registrant to comply with Item
305 or Item 9A.
XI. CODIFICATION UPDATE
The "Codification of Financial Report Policies" announced in
Financial Reporting Release No. 1 (April 15, 1982) [47 FR 21028]
is updated to:
1. Include a new Section 219, "Disclosure of Accounting
Policies for Derivative Financial Instruments and Derivative
Commodity Instruments."
2. Include a new paragraph 219.01 to include the text in
topic III.A of this release, "Discussion of Amendments:
Disclosure of Accounting Policies for Derivatives."
3. Include a new Section 507, "Disclosure of Quantitative
==========================================START OF PAGE 108======
and Qualitative Information About Market Risk Inherent in
Derivative Financial Instruments, Other Financial Instruments,
and Derivative Commodity Instruments."
4. Include a new paragraph 507.01 to include the text in
topic II of this release, "Initiatives Regarding Disclosures
About Derivatives."
5. Include a new paragraph 507.02 to include the text in
topic III.B. of this release, "Discussion of Amendments:
Disclosures of Quantitative and Qualitative Information About
Market Risk."
6. Include a new paragraph 507.03 to include the text in
topic IV of this release, "Applicability of Amendments."
7. Include a new paragraph 507.04 to include the text in
topic V of this release, "Disclosure of the Effects of Derivative
Instruments on Reporting Financial Instruments, Commodity
Positions, Firm Commitments, and Anticipated Transactions."
The Codification is a separate publication of the
Commission. It will not be published in the Federal
Register/Code of Federal Regulations System.
STATUTORY BASIS
The additions and amendments to the Commission's rules and
forms are adopted pursuant to Sections 7, 10, 19, and 27A of the
Securities Act of 1933 and Sections 12, 13, 14, 21E, and 23 of
the Securities Exchange Act of 1934.
List of Subjects in 17 CFR Parts 210, 228, 229, 239, 240, and 249
Accounting, Reporting and recordkeeping requirements, Securities.
==========================================START OF PAGE 109======
TEXT OF AMENDMENTS
In accordance with the foregoing, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
PART 210- FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT
OF 1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935,
INVESTMENT COMPANY ACT OF 1940, AND ENERGY POLICY AND
CONSERVATION ACT OF 1975
1. The general authority citation for Part 210 is revised
to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2,
77aa(25), 77aa(26), 78l, 78m, 78n, 78o(d), 78u-5, 78w(a),
78ll(d), 79e(b), 79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-
30, 80a-37a, unless otherwise noted.
2. By amending 210.4-08 by adding paragraph (n) to read as
follows:
210.4-08 General notes to financial statements.
* * * * *
(n) Accounting policies for certain derivative instruments.
Disclosures regarding accounting policies shall include
descriptions of the accounting policies used for derivative
financial instruments and derivative commodity instruments and
the methods of applying those policies that materially affect the
determination of financial position, cash flows, or results of
operation. This description shall include, to the extent
material, each of the following items:
(1) A discussion of each method used to account for
derivative financial instruments and derivative commodity
==========================================START OF PAGE 110======
instruments;
(2) The types of derivative financial instruments and
derivative commodity instruments accounted for under each method;
(3) The criteria required to be met for each accounting
method used, including a discussion of the criteria required to
be met for hedge or deferral accounting and accrual or settlement
accounting (e.g., whether and how risk reduction, correlation,
designation, and effectiveness tests are applied);
(4) The accounting method used if the criteria specified in
paragraph (n)(3) of this section are not met;
(5) The method used to account for terminations of
derivatives designated as hedges or derivatives used to affect
directly or indirectly the terms, fair values, or cash flows of a
designated item;
(6) The method used to account for derivatives when the
designated item matures, is sold, is extinguished, or is
terminated. In addition, the method used to account for
derivatives designated to an anticipated transaction, when the
anticipated transaction is no longer likely to occur; and
(7) Where and when derivative financial instruments and
derivative commodity instruments, and their related gains and
losses, are reported in the statements of financial position,
cash flows, and results of operations.
Instructions to Paragraph 4-08(n). 1. For purposes of this
paragraph 4-08(n), derivative financial instruments and
derivative commodity instruments (collectively referred to as
==========================================START OF PAGE 111======
"derivatives") are defined as follows:
(i) Derivative financial instruments have the same meaning
as defined by generally accepted accounting principles (see,
e.g., Financial Accounting Standards Board ("FASB"), Statement of
Financial Accounting Standards No. 119, "Disclosure about
Derivative Financial Instruments and Fair Value of Financial
Instruments," ("FAS 119") paragraphs 5-7, (October 1994)), and
include futures, forwards, swaps, options, and other financial
instruments with similar characteristics.
(ii) Derivative commodity instruments include, to the
extent such instruments are not derivative financial instruments,
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are permitted by contract or business custom
to be settled in cash or with another financial instrument. For
purposes of this paragraph, settlement in cash includes
settlement in cash of the net change in value of the derivative
commodity instrument (e.g., net cash settlement based on changes
in the price of the underlying commodity).
2. For purposes of paragraphs 4-08(n)(2), 4-08(n)(3), 4-
08(n)(4), and 4-08(n)(7), the required disclosures should address
separately derivatives entered into for trading purposes and
derivatives entered into for purposes other than trading. For
purposes of this paragraph, trading purposes has the same meaning
as defined by generally accepted accounting principles (see,
e.g., FAS 119, paragraph 9a (October 1994)).
==========================================START OF PAGE 112======
3. For purposes of paragraph 4-08(n)(6), anticipated
transactions means transactions (other than transactions
involving existing assets or liabilities or transactions
necessitated by existing firm commitments) an enterprise expects,
but is not obligated, to carry out in the normal course of
business (see, e.g., FASB, Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts," paragraph
9, (August 1984)).
4. Registrants should provide disclosures required under
paragraph 4-08(n) in filings with the Commission that include
financial statements of fiscal periods ending after June 15,
1997.
PART 228 - INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS
ISSUERS
3. The general authority citation for Part 228 is revised
to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77z-2, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj,
77nnn, 77sss, 78l, 78m, 78n, 78u-5, 78o, 78w, 78ll, 80a-8, 80a-
29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
4. By amending 228.10 by adding paragraph (g) to read as
follows:
228.10 (Item 10) General.
* * * * *
(g) Quantitative and qualitative disclosures about market
risk. The safe harbor provision included in paragraph (d) of
==========================================START OF PAGE 113======
Item 305 of Regulation S-K ( 229.305(d) of this chapter) shall
apply to information required by Item 305 of Regulation S-K (
229.305 of this chapter) that is voluntarily provided by or on
behalf of a small business issuer as defined in Rule 12b-2 of the
Exchange Act.
Note to paragraph (g):
Such small business issuers are not required to provide
the information required by Item 305 of Regulation S-K.
5. By amending the NOTES to 228.310 by revising the
first sentence of Note 2 to read as follows:
228.310 (Item 310) Financial Statements.
NOTES--1. * * *
2. Regulation S-X (17 CFR 210.1 - 210.12) Form and Content
of and Requirements for Financial Statements shall not apply to
the preparation of such financial statements, except that the
report and qualifications of the independent accountant shall
comply with the requirements of Article 2 of Regulation S-X (17
CFR 210.2), Articles 3-19 and 3-20 (17 CFR 210.3-19 and 210.3-20)
shall apply to financial statements of foreign private issuers,
the description of accounting policies shall comply with Article
4-08(n) of Regulation S-X (17 CFR 210.4-08(n)), and small
business issuers engaged in oil and gas producing activities
shall follow the financial accounting and reporting standards
specified in Article 4-10 of Regulation S-X (17 CFR 210.4-10)
with respect to such activities. * * *
* * * * *
==========================================START OF PAGE 114======
PART 229- STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY
POLICY AND CONSERVATION ACT OF 1975 - REGULATION S-K
6. The general authority citation for Part 229 is revised
to read in part as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s,
77z-2, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii,
77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5,
78w, 78ll(d), 79e, 79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.
* * * * *
7. By adding 229.305 to read as follows:
229.305 (Item 305) Quantitative and qualitative disclosures
about market risk.
(a) Quantitative information about market risk. (1)
Registrants shall provide, in their reporting currency,
quantitative information about market risk as of the end of the
latest fiscal year, in accordance with one of the following three
disclosure alternatives. In preparing this quantitative
information, registrants shall categorize market risk sensitive
instruments into instruments entered into for trading purposes
and instruments entered into for purposes other than trading
purposes. Within both the trading and other than trading
portfolios, separate quantitative information shall be presented,
to the extent material, for each market risk exposure category
(i.e., interest rate risk, foreign currency exchange rate risk,
==========================================START OF PAGE 115======
commodity price risk, and other relevant market risks, such as
equity price risk). A registrant may use one of the three
alternatives set forth below for all of the required quantitative
disclosures about market risk. A registrant also may choose,
from among the three alternatives, one disclosure alternative for
market risk sensitive instruments entered into for trading
purposes and another disclosure alternative for market risk
sensitive instruments entered into for other than trading
purposes. Alternatively, a registrant may choose any disclosure
alternative, from among the three alternatives, for each risk
exposure category within the trading and other than trading
portfolios. The three disclosure alternatives are:
(i)(A)(1) Tabular presentation of information related to
market risk sensitive instruments; such information shall include
fair values of the market risk sensitive instruments and contract
terms sufficient to determine future cash flows from those
instruments, categorized by expected maturity dates.
(2) Tabular information relating to contract terms shall
allow readers of the table to determine expected cash flows from
the market risk sensitive instruments for each of the next five
years. Comparable tabular information for any remaining years
shall be displayed as an aggregate amount.
(3) Within each risk exposure category, the market risk
sensitive instruments shall be grouped based on common
characteristics. Within the foreign currency exchange rate risk
category, the market risk sensitive instruments shall be grouped
==========================================START OF PAGE 116======
by functional currency and within the commodity price risk
category, the market risk sensitive instruments shall be grouped
by type of commodity.
(4) See the Appendix to this Item for a suggested format
for presentation of this information; and
(B) Registrants shall provide a description of the contents
of the table and any related assumptions necessary to understand
the disclosures required under paragraph (a)(1)(i)(A) of this
Item 305; or
(ii)(A) Sensitivity analysis disclosures that express the
potential loss in future earnings, fair values, or cash flows of
market risk sensitive instruments resulting from one or more
selected hypothetical changes in interest rates, foreign currency
exchange rates, commodity prices, and other relevant market rates
or prices over a selected period of time. The magnitude of
selected hypothetical changes in rates or prices may differ among
and within market risk exposure categories; and
(B) Registrants shall provide a description of the model,
assumptions, and parameters, which are necessary to understand
the disclosures required under paragraph (a)(1)(ii)(A) of this
Item 305; or
(iii)(A) Value at risk disclosures that express the
potential loss in future earnings, fair values, or cash flows of
market risk sensitive instruments over a selected period of time,
with a selected likelihood of occurrence, from changes in
interest rates, foreign currency exchange rates, commodity
==========================================START OF PAGE 117======
prices, and other relevant market rates or prices;
(B)(1) For each category for which value at risk
disclosures are required under paragraph (a)(1)(iii)(A) of this
Item 305, provide either:
(i) The average, high and low amounts, or the distribution
of the value at risk amounts for the reporting period; or
(ii) The average, high and low amounts, or the distribution
of actual changes in fair values, earnings, or cash flows from
the market risk sensitive instruments occurring during the
reporting period; or
(iii) The percentage or number of times the actual changes
in fair values, earnings, or cash flows from the market risk
sensitive instruments exceeded the value at risk amounts during
the reporting period;
(2) Information required under paragraph (a)(1)(iii)(B)(1)
of this Item 305 is not required for the first fiscal year end in
which a registrant must present Item 305 information; and
(C) Registrants shall provide a description of the model,
assumptions, and parameters, which are necessary to understand
the disclosures required under paragraphs (a)(1)(iii)(A) and (B)
of this Item 305.
(2) Registrants shall discuss material limitations that
cause the information required under paragraph (a)(1) of this
Item 305 not to reflect fully the net market risk exposures of
the entity. This discussion shall include summarized
descriptions of instruments, positions, and transactions omitted
==========================================START OF PAGE 118======
from the quantitative market risk disclosure information or the
features of instruments, positions, and transactions that are
included, but not reflected fully in the quantitative market risk
disclosure information.
(3) Registrants shall present summarized market risk
information for the preceding fiscal year. In addition,
registrants shall discuss the reasons for material quantitative
changes in market risk exposures between the current and
preceding fiscal years. Information required by this paragraph
(a)(3), however, is not required if disclosure is not required
under paragraph (a)(1) of this Item 305 for the current fiscal
year. Information required by this paragraph (a)(3) is not
required for the first fiscal year end in which a registrant must
present Item 305 information.
(4) If registrants change disclosure alternatives or key
model characteristics, assumptions, and parameters used in
providing quantitative information about market risk (e.g.,
changing from tabular presentation to value at risk, changing the
scope of instruments included in the model, or changing the
definition of loss from fair values to earnings), and if the
effects of any such change is material, the registrant shall:
(i) Explain the reasons for the change; and
(ii) Either provide summarized comparable information,
under the new disclosure method, for the year preceding the
current year or, in addition to providing disclosure for the
current year under the new method, provide disclosures for the
==========================================START OF PAGE 119======
current year and preceding fiscal year under the method used in
the preceding year.
Instructions to Paragraph 305(a).
1. Under paragraph 305(a)(1):
A. For each market risk exposure category within the
trading and other than trading portfolios, registrants may report
the average, high, and low sensitivity analysis or value at risk
amounts for the reporting period, as an alternative to reporting
year-end amounts.
B. In determining the average, high, and low amounts for
the fiscal year under instruction 1.A. of the Instructions to
Paragraph 305(a), registrants should use sensitivity analysis or
value at risk amounts relating to at least four equal time
periods throughout the reporting period (e.g., four quarter-end
amounts, 12 month-end amounts, or 52 week-end amounts).
C. Functional currency means functional currency as defined
by generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", ("FAS 52") paragraph 20 (December 1981)).
D. Registrants using the sensitivity analysis and value at
risk disclosure alternatives are encouraged, but not required, to
provide quantitative amounts that reflect the aggregate market
risk inherent in the trading and other than trading portfolios.
2. Under paragraph 305(a)(1)(i):
A. Examples of contract terms sufficient to determine
future cash flows from market risk sensitive instruments include,
==========================================START OF PAGE 120======
but are not limited to:
i. Debt instruments - principal amounts and weighted
average effective interest rates;
ii. Forwards and futures - contract amounts and weighted
average settlement prices;
iii. Options - contract amounts and weighted average strike
prices;
iv. Swaps - notional amounts, weighted average pay rates or
prices, and weighted average receive rates or prices; and
v. Complex instruments - likely to be a combination of the
contract terms presented in 2.A.i. through iv. of this
Instruction;
B. When grouping based on common characteristics,
instruments should be categorized, at a minimum, by the following
characteristics, when material:
i. Fixed rate or variable rate assets or liabilities;
ii. Long or short forwards and futures;
iii. Written or purchased put or call options with similar
strike prices;
iv. Receive fixed and pay variable swaps, receive variable
and pay fixed swaps, and receive variable and pay variable swaps;
v. The currency in which the instruments' cash flows are
denominated;
vi. Financial instruments for which foreign currency
transaction gains and losses are reported in the same manner as
translation adjustments under generally accepted accounting
==========================================START OF PAGE 121======
principles (see, e.g., FAS 52 paragraph 20 (December 1981)); and
vii. Derivatives used to manage risks inherent in
anticipated transactions;
C. Registrants may aggregate information regarding
functional currencies that are economically related, managed
together for internal risk management purposes, and have
statistical correlations of greater than 75% over each of the
past three years;
D. Market risk sensitive instruments that are exposed to
rate or price changes in more than one market risk exposure
category should be presented within the tabular information for
each of the risk exposure categories to which those instruments
are exposed;
E. If a currency swap (see, e.g., FAS 52 Appendix E for a
definition of currency swap) eliminates all foreign currency
exposures in the cash flows of a foreign currency denominated
debt instrument, neither the currency swap nor the foreign
currency denominated debt instrument are required to be disclosed
in the foreign currency risk exposure category. However, both
the currency swap and the foreign currency denominated debt
instrument should be disclosed in the interest rate risk exposure
category; and
F. The contents of the table and related assumptions that
should be described include, but are not limited to:
i. The different amounts reported in the table for various
categories of the market risk sensitive instruments (e.g.,
==========================================START OF PAGE 122======
principal amounts for debt, notional amounts for swaps, and
contract amounts for options and futures);
ii. The different types of reported market rates or prices
(e.g., contractual rates or prices, spot rates or prices, forward
rates or prices); and
iii. Key prepayment or reinvestment assumptions relating to
the timing of reported amounts.
3. Under paragraph 305(a)(1)(ii):
A. Registrants should select hypothetical changes in market
rates or prices that are expected to reflect reasonably possible
near-term changes in those rates and prices. In this regard,
absent economic justification for the selection of a different
amount, registrants should use changes that are not less than 10
percent of end of period market rates or prices;
B. For purposes of instruction 3.A. of the Instructions to
Paragraph 305(a), the term reasonably possible has the same
meaning as defined by generally accepted accounting principles
(see, e.g., FASB, Statement of Financial Accounting Standards No.
5, "Accounting for Contingencies," ("FAS 5") paragraph 3 (March
1975));
C. For purposes of instruction 3.A. of the Instructions to
Paragraph 305(a), the term near term means a period of time going
forward up to one year from the date of the financial statements
(see generally AICPA, Statement of Position 94-6, "Disclosure of
Certain Significant Risks and Uncertainties," ("SOP 94-6") at
paragraph 7 (December 30, 1994));
==========================================START OF PAGE 123======
D. Market risk sensitive instruments that are exposed to
rate or price changes in more than one market risk exposure
category should be included in the sensitivity analysis
disclosures for each market risk category to which those
instruments are exposed;
E. Registrants with multiple foreign currency exchange rate
exposures should prepare foreign currency sensitivity analysis
disclosures that measure the aggregate sensitivity to changes in
all foreign currency exchange rate exposures, including the
effects of changes in both transactional currency/functional
currency exchange rate exposures and functional
currency/reporting currency exchange rate exposures. For
example, assume a French division of a registrant presenting its
financial statements in U.S. dollars ($US) invests in a
deutschmark(DM)-denominated debt security. In these
circumstances, the $US is the reporting currency and the DM is
the transactional currency. In addition, assume this division
determines that the French franc (FF) is its functional currency
according to FAS 52. In preparing the foreign currency
sensitivity analysis disclosures, this registrant should report
the aggregate potential loss from hypothetical changes in both
the DM/FF exchange rate exposure and the FF/$US exchange rate
exposure; and
F. Model, assumptions, and parameters that should be
described include, but are not limited to, how loss is defined by
the model (e.g., loss in earnings, fair values, or cash flows), a
==========================================START OF PAGE 124======
general description of the modeling technique (e.g., duration
modeling, modeling that measures the change in net present values
arising from selected hypothetical changes in market rates or
prices, and a description as to how optionality is addressed by
the model), the types of instruments covered by the model (e.g.,
derivative financial instruments, other financial instruments,
derivative commodity instruments, and whether other instruments
are included voluntarily, such as certain commodity instruments
and positions, cash flows from anticipated transactions, and
certain financial instruments excluded under instruction 3.C.ii.
of the General Instructions to Paragraphs 305(a) and 305(b)), and
other relevant information about the model's assumptions and
parameters, (e.g., the magnitude and timing of selected
hypothetical changes in market rates or prices used, the method
by which discount rates are determined, and key prepayment or
reinvestment assumptions).
4. Under paragraph 305(a)(1)(iii):
A. The confidence intervals selected should reflect
reasonably possible near-term changes in market rates and prices.
In this regard, absent economic justification for the selection
of different confidence intervals, registrants should use
intervals that are 95 percent or higher;
B. For purposes of instruction 4.A. of the Instructions to
Paragraph 305(a), the term reasonably possible has the same
meaning as defined by generally accepted accounting principles
(see, e.g., FAS 5, paragraph 3 (March 1975));
==========================================START OF PAGE 125======
C. For purposes of instruction 4.A. of the Instructions to
Paragraphs 305(a), the term near term means a period of time
going forward up to one year from the date of the financial
statements (see generally SOP 94-6, at paragraph 7 (December 30,
1994));
D. Registrants with multiple foreign currency exchange rate
exposures should prepare foreign currency value at risk analysis
disclosures that measure the aggregate sensitivity to changes in
all foreign currency exchange rate exposures, including the
aggregate effects of changes in both transactional
currency/functional currency exchange rate exposures and
functional currency/reporting currency exchange rate exposures.
For example, assume a French division of a registrant presenting
its financial statements in U.S. dollars ($US) invests in a
deutschmark(DM)-denominated debt security. In these
circumstances, the $US is the reporting currency and the DM is
the transactional currency. In addition, assume this division
determines that the French franc (FF) is its functional currency
according to FAS 52. In preparing the foreign currency value at
risk disclosures, this registrant should report the aggregate
potential loss from hypothetical changes in both the DM/FF
exchange rate exposure and the FF/$US exchange rate exposure;
and
E. Model, assumptions, and parameters that should be
described include, but are not limited to, how loss is defined by
the model (e.g., loss in earnings, fair values, or cash flows),
==========================================START OF PAGE 126======
the type of model used (e.g., variance/covariance, historical
simulation, or Monte Carlo simulation and a description as to how
optionality is addressed by the model), the types of instruments
covered by the model (e.g., derivative financial instruments,
other financial instruments, derivative commodity instruments,
and whether other instruments are included voluntarily, such as
certain commodity instruments and positions, cash flows from
anticipated transactions, and certain financial instruments
excluded under instruction 3.C.ii. of the General Instructions to
Paragraphs 305(a) and 305(b)), and other relevant information
about the model's assumptions and parameters, (e.g., holding
periods, confidence intervals, and, when appropriate, the methods
used for aggregating value at risk amounts across market risk
exposure categories, such as by assuming perfect positive
correlation, independence, or actual observed correlation).
5. Under paragraph 305(a)(2), limitations that should be
considered include, but are not limited to:
A. The exclusion of certain market risk sensitive
instruments, positions, and transactions from the disclosures
required under paragraph 305(a)(1) (e.g., derivative commodity
instruments not permitted by contract or business custom to be
settled in cash or with another financial instrument, commodity
positions, cash flows from anticipated transactions, and certain
financial instruments excluded under instruction 3.C.ii. of the
General Instructions to Paragraphs 305(a) and 305(b)). Failure
to include such instruments, positions, and transactions in
==========================================START OF PAGE 127======
preparing the disclosures under paragraph 305(a)(1) may be a
limitation because the resulting disclosures may not fully
reflect the net market risk of a registrant; and
B. The ability of disclosures required under paragraph
305(a)(1) to reflect fully the market risk that may be inherent
in instruments with leverage, option, or prepayment features
(e.g., options, including written options, structured notes,
collateralized mortgage obligations, leveraged swaps, and options
embedded in swaps).
(b) Qualitative information about market risk. (1) To the
extent material, describe:
(i) The registrant's primary market risk exposures;
(ii) How those exposures are managed. Such descriptions
shall include, but not be limited to, a discussion of the
objectives, general strategies, and instruments, if any, used to
manage those exposures; and
(iii) Changes in either the registrant's primary market risk
exposures or how those exposures are managed, when compared to
what was in effect during the most recently completed fiscal year
and what is known or expected to be in effect in future reporting
periods.
(2) Qualitative information about market risk shall be
presented separately for market risk sensitive instruments
entered into for trading purposes and those entered into for
purposes other than trading.
==========================================START OF PAGE 128======
Instructions to Paragraph 305(b).
1. For purposes of disclosure under paragraph 305(b),
primary market risk exposures means:
A. The following categories of market risk: interest rate
risk, foreign currency exchange rate risk, commodity price risk,
and other relevant market rate or price risks (e.g., equity price
risk); and
B. Within each of these categories, the particular markets
that present the primary risk of loss to the registrant. For
example, if a registrant has a material exposure to foreign
currency exchange rate risk and, within this category of market
risk, is most vulnerable to changes in dollar/yen, dollar/pound,
and dollar/peso exchange rates, the registrant should disclose
those exposures. Similarly, if a registrant has a material
exposure to interest rate risk and, within this category of
market risk, is most vulnerable to changes in short-term U.S.
prime interest rates, it should disclose the existence of that
exposure.
2. For purposes of disclosure under paragraph 305(b),
registrants should describe primary market risk exposures that
exist as of the end of the latest fiscal year, and how those
exposures are managed.
General Instructions to Paragraphs 305(a) and 305(b).
1. The disclosures called for by paragraphs 305(a) and
305(b) are intended to clarify the registrant's exposures to
market risk associated with activities in derivative financial
==========================================START OF PAGE 129======
instruments, other financial instruments, and derivative
commodity instruments.
2. In preparing the disclosures under paragraphs 305(a) and
305(b), registrants are required to include derivative financial
instruments, other financial instruments, and derivative
commodity instruments.
3. For purposes of paragraphs 305(a) and 305(b), derivative
financial instruments, other financial instruments, and
derivative commodity instruments (collectively referred to as
"market risk sensitive instruments") are defined as follows:
A. Derivative financial instruments has the same meaning as
defined by generally accepted accounting principles (see, e.g.,
FASB, Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," ("FAS 119") paragraphs 5-7 (October
1994)), and includes futures, forwards, swaps, options, and other
financial instruments with similar characteristics;
B. Other financial instruments means all financial
instruments as defined by generally accepted accounting
principles for which fair value disclosures are required (see,
e.g., FASB, Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," ("FAS
107") paragraphs 3 and 8 (December 1991)), except for derivative
financial instruments, as defined above;
C.i. Other financial instruments include, but are not
limited to, trade accounts receivable, investments, loans,
==========================================START OF PAGE 130======
structured notes, mortgage-backed securities, trade accounts
payable, indexed debt instruments, interest-only and principal-
only obligations, deposits, and other debt obligations;
ii. Other financial instruments exclude employers and
plans obligations for pension and other post-retirement
benefits, substantively extinguished debt, insurance contracts,
lease contracts, warranty obligations and rights, unconditional
purchase obligations, investments accounted for under the equity
method, minority interests in consolidated enterprises, and
equity instruments issued by the registrant and classified in
stockholders' equity in the statement of financial position (see,
e.g., FAS 107, paragraph 8 (December 1991)). For purposes of
this item, trade accounts receivable and trade accounts payable
need not be considered other financial instruments when their
carrying amounts approximate fair value; and
D. Derivative commodity instruments include, to the extent
such instruments are not derivative financial instruments,
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are permitted by contract or business custom
to be settled in cash or with another financial instrument. For
purposes of this paragraph, settlement in cash includes
settlement in cash of the net change in value of the derivative
commodity instrument (e.g., net cash settlement based on changes
in the price of the underlying commodity).
4.A. In addition to providing required disclosures for the
==========================================START OF PAGE 131======
market risk sensitive instruments defined in instruction 2. of
the General Instructions to Paragraphs 305(a) and 305(b),
registrants are encouraged to include other market risk sensitive
instruments, positions, and transactions within the disclosures
required under paragraphs 305(a) and 305(b). Such instruments,
positions, and transactions might include commodity positions,
derivative commodity instruments that are not permitted by
contract or business custom to be settled in cash or with another
financial instrument, cash flows from anticipated transactions,
and certain financial instruments excluded under instruction
3.C.ii. of the General Instructions to Paragraphs 305(a) and
305(b).
B. Registrants that voluntarily include other market risk
sensitive instruments, positions and transactions within their
quantitative disclosures about market risk under the sensitivity
analysis or value at risk disclosure alternatives are not
required to provide separate market risk disclosures for any
voluntarily selected instruments, positions, or transactions.
Instead, registrants selecting the sensitivity analysis and value
at risk disclosure alternatives are permitted to present
comprehensive market risk disclosures, which reflect the combined
market risk exposures inherent in both the required and any
voluntarily selected instruments, position, or transactions.
Registrants that choose the tabular presentation disclosure
alternative should present voluntarily selected instruments,
positions, or transactions in a manner consistent with the
==========================================START OF PAGE 132======
requirements in Item 305(a) for market risk sensitive
instruments.
C. If a registrant elects to include voluntarily a
particular type of instrument, position, or transaction in their
quantitative disclosures about market risk, that registrant
should include all, rather than some, of those instruments,
positions, or transactions within those disclosures. For
example, if a registrant holds in inventory a particular type of
commodity position and elects to include that commodity position
within their market risk disclosures, the registrant should
include the entire commodity position, rather than only a portion
thereof, in their quantitative disclosures about market risk.
5.A. Under paragraphs 305(a) and 305(b), a materiality
assessment should be made for each market risk exposure category
within the trading and other than trading portfolios.
B. For purposes of making the materiality assessment under
instruction 5.A. of the General Instructions to Paragraphs 305(a)
and 305(b), registrants should evaluate both:
i. The materiality of the fair values of derivative
financial instruments, other financial instruments, and
derivative commodity instruments outstanding as of the end of the
latest fiscal year; and
ii. The materiality of potential, near-term losses in
future earnings, fair values, and/or cash flows from reasonably
possible near-term changes in market rates or prices.
iii. If either paragraphs B.i. or B.ii. in this instruction
==========================================START OF PAGE 133======
of the General Instructions to Paragraphs 305(a) and 305(b) are
material, the registrant should disclose quantitative and
qualitative information about market risk, if such market risk
for the particular market risk exposure category is material.
C. For purposes of instruction 5.B.i. of the General
Instructions to Paragraphs 305(a) and 305(b), registrants
generally should not net fair values, except to the extent
allowed under generally accepted accounting principles (see,
e.g., FASB Interpretation No. 39, "Offsetting of Amounts Related
to Certain Contracts" (March 1992)). For example, under this
instruction, the fair value of assets generally should not be
netted with the fair value of liabilities.
D. For purposes of instruction 5.B.ii. of the General
Instructions to Paragraphs 305(a) and 305(b), registrants should
consider, among other things, the magnitude of:
i. Past market movements;
ii. Reasonably possible, near-term market movements; and
iii. Potential losses that may arise from leverage, option,
and multiplier features.
E. For purposes of instructions 5.B.ii and 5.D.ii of the
General Instructions to Paragraphs 305(a) and 305(b), the term
near term means a period of time going forward up to one year
from the date of the financial statements (see generally SOP 94-
6, at paragraph 7 (December 30, 1994)).
F. For the purpose of instructions 5.B.ii. and 5.D.ii. of
the General Instructions to Paragraphs 305(a) and 305(b), the
==========================================START OF PAGE 134======
term reasonably possible has the same meaning as defined by
generally accepted accounting principles (see, e.g., FAS 5,
paragraph 3 (March 1975)).
6. For purposes of paragraphs 305(a) and 305(b),
registrants should present the information outside of, and not
incorporate the information into, the financial statements
(including the footnotes to the financial statements). In
addition, registrants are encouraged to provide the required
information in one location. However, alternative presentation,
such as inclusion of all or part of the information in
Management's Discussion and Analysis, may be used at the
discretion of the registrant. If information is disclosed in
more than one location, registrants should provide cross-
references to the locations of the related disclosures.
7. For purposes of the instructions to paragraphs 305(a)
and 305(b), trading purposes has the same meaning as defined by
generally accepted accounting principles (see, e.g., FAS 119,
paragraph 9a (October 1994)). In addition, anticipated
transactions means transactions (other than transactions
involving existing assets or liabilities or transactions
necessitated by existing firm commitments) an enterprise expects,
but is not obligated, to carry out in the normal course of
business (see, e.g., FASB, Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts," paragraph
9, (August 1984)).
==========================================START OF PAGE 135======
(c) Interim periods. If interim period financial
statements are included or are required to be included by Article
3 of Regulation S-X (17 CFR 210), discussion and analysis shall
be provided so as to enable the reader to assess the sources and
effects of material changes in information that would be provided
under Item 305 of Regulation S-K from the end of the preceding
fiscal year to the date of the most recent interim balance sheet.
Instructions to Paragraph 305(c).
1. Information required under paragraph (c) of this Item
305 is not required until after the first fiscal year end in
which this Item 305 is applicable.
(d) Safe Harbor. (1) The safe harbor provided in Section
27A of the Securities Act of 1933 (15 U.S.C. 77z-2) and Section
21E of the Securities Exchange Act of 1934 (15 U.S.C. 78u-5)
("statutory safe harbors") shall apply, with respect to all types
of issuers and transactions, to information provided pursuant to
paragraphs (a), (b), and (c) of this Item 305, provided that the
disclosure is made by: an issuer; a person acting on behalf of
the issuer; an outside reviewer retained by the issuer making a
statement on behalf of the issuer; or an underwriter, with
respect to information provided by the issuer or information
derived from information provided by the issuer.
(2) For purposes of paragraph (d) of this Item 305 only:
(i) All information required by paragraphs (a), (b)(1)(i),
(b)(1)(iii), and (c) of this Item 305 is considered forward
looking statements for purposes of the statutory safe harbors,
==========================================START OF PAGE 136======
except for historical facts such as the terms of particular
contracts and the number of market risk sensitive instruments
held during or at the end of the reporting period; and
(ii) With respect to paragraph (a) of this Item 305, the
meaningful cautionary statements prong of the statutory safe
harbors will be satisfied if a registrant satisfies all
requirements of that same paragraph (a) of this Item 305.
(e) Small business issuers. Small business issuers, as
defined in 230.405 of this chapter and 230.12b-2 of this
chapter, need not provide the information required by this Item
305, whether or not they file on forms specially designated as
small business issuer forms.
General Instructions to Paragraphs 305(a), 305(b), 305(c),
305(d), and 305(e).
1. Bank registrants, thrift registrants, and non-bank and
non-thrift registrants with market capitalizations on January 28,
1997 in excess of $2.5 billion should provide Item 305
disclosures in filings with the Commission that include annual
financial statements for fiscal years ending after June 15, 1997.
Non-bank and non-thrift registrants with market capitalizations
on January 28, 1997 of $2.5 billion or less should provide Item
305 disclosures in filings with the Commission that include
financial statements for fiscal years ending after June 15, 1998.
2.A. For purposes of instruction 1. of the General
Instructions to Paragraphs 305(a), 305(b), 305(c), 305(d), and
305(e), bank registrants and thrift registrants include any
==========================================START OF PAGE 137======
registrant which has control over a depository institution.
B. For purposes of instruction 2.A. of the General
Instructions to Paragraphs 305(a), 305(b), 305(c), 305(d), and
305(e), a registrant has control over a depository institution
if:
i. The registrant directly or indirectly or acting through
one or more other persons owns, controls, or has power to vote
25% or more of any class of voting securities of the depository
institution;
ii. The registrant controls in any manner the election of a
majority of the directors or trustees of the depository
institution; or
iii. The Federal Reserve Board or Office of Thrift
Supervision determines, after notice and opportunity for hearing,
that the registrant directly or indirectly exercises a
controlling influence over the management or policies of the
depository institution.
C. For purposes of instruction 2.B. of the General
Instructions to Paragraphs 305(a), 305(b), 305(c), 305(d), and
305(e), a depository institution means any of the following:
i. An insured depository institution as defined in section
3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C.A. Sec.
1813 (c));
ii. An institution organized under the laws of the United
States, any State of the United States, the District of Columbia,
any territory of the United States, Puerto Rico, Guam, American
==========================================START OF PAGE 138======
Somoa, or the Virgin Islands, which both accepts demand deposits
or deposits that the depositor may withdraw by check or similar
means for payment to third parties or others and is engaged in
the business of making commercial loans.
D. For purposes of instruction 1. of the General
Instructions to Paragraphs 305(a), 305(b), 305(c), 305(d) and
305(e), market capitalization is the aggregate market value of
common equity as set forth in General Instruction I.B.1. of Form
S-3; provided however, that common equity held by affiliates is
included in the calculation of market capitalization; and
provided further that instead of using the 60 day period prior to
filing referenced in General Instruction I.B.1. of Form S-3, the
measurement date is January 28, 1997.
==========================================START OF PAGE 139======
Appendix to Item 305 -- Tabular Disclosures
Appendix not presented - for a copy contact the Securities
and Exchange Commission's Public Reference Office at 202-942-
8090.
==========================================START OF PAGE 140======
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
8. The general authority citation for Part 239 is revised
to read, in part, as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss,
78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f,
79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-
37, unless otherwise noted.
* * * * *
9. By amending Form S-1 (referenced in 239.11) by
redesignating Items 11(j) through 11(m) as Items 11(k) through
11(n) and adding Item 11(j) to read as follows:
Note - The text of Form S-1 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form S-1
Registration Statement Under the Securities Act of 1933
* * * * *
Item 11. Information with Respect to the Registrant.
* * * * *
(j) Information required by Item 305 of Regulation S-K (
229.305 of this chapter), quantitative and qualitative
disclosures about market risk.
* * * * *
10. By amending Form S-2 (referenced in 239.12) by adding
paragraph (9) to Item 11(b), removing "and" at the end of Item
12(a)(3)(vii), removing the period at the end of Item
==========================================START OF PAGE 141======
12(a)(3)(viii) and in its place adding "; and", and adding
paragraph (ix) to Item 12(a)(3) to read as follows:
Note - The text of Form S-2 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form S-2
Registration Statement Under the Securities Act of 1933
* * * * *
Item 11. Information with Respect to the Registrant.
(a) * * *
(b) * * *
(9) Furnish quantitative and qualitative disclosures about
market risk required by Item 305 of Regulation S-K ( 229.305 of
this chapter).
* * * * *
Item 12. Incorporation of Certain Information by Reference.
(a) * * *
(3) * * *
(ix) quantitative and qualitative disclosures about market
risk as required by Item 305 of Regulation S-K ( 229.305 of this
chapter).
* * * * *
11. By amending Form S-11 (referenced in 239.18) to
redesignate Items 30 through 36 as Items 31 through 37 and to add
Item 30 to Part I to read as follows:
Note - The text of Form S-11 does not, and this amendment
will not, appear in the Code of Federal Regulations.
==========================================START OF PAGE 142======
Form S-11
Registration Statement Under the Securities Act of 1933
* * * * *
Item 30. Quantitative and Qualitative Disclosures About Market
Risk.
Furnish the information required by Item 305 of Regulation
S-K ( 229.305 of this chapter).
* * * * *
12. By amending Form S-4 (referenced in 239.25) by
removing "and" at the end of Item 12(b)(3)(v) and the period at
the end of Item 12(b)(3)(vi) and in its place adding "; and",
adding paragraph (vii) to Item 12(b)(3), removing "and" at the
end of Item 13(a)(3)(v) and the period at the end of Item
13(a)(3)(vi) and in its place adding "; and", adding paragraph
(vii) to Item 13(a)(3), removing "and" at the end of Item 14(h)
and the period at the end of Item 14(i) and in its place adding
"; and", adding paragraph (j) to Item 14, and adding paragraph
(10) to Item 17(b) to read as follows:
Note - The text of Form S-4 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form S-4
Registration Statement Under the Securities Act of 1933
* * * * *
Item 12. Information with Respect to S-2 or S-3 Registrants.
==========================================START OF PAGE 143======
* * * * *
(b) * * *
(3) * * *
(vii) Item 305 of Regulation S-K ( 229.305 of this
chapter), quantitative and qualitative disclosures about market
risk.
* * * * *
Item 13. Incorporation of Certain Information by Reference.
* * * * *
(a) * * *
(3) * * *
(vii) Item 305 of Regulation S-K ( 229.305 of this
chapter) quantitative and qualitative disclosures about market
risk.
* * * * *
Item 14. Information with Respect to Registrants Other Than S-3
or S-2 Registrants.
* * * * *
(j) Item 305 of Regulation S-K ( 229.305 of this chapter),
quantitative and qualitative disclosures about market risk.
* * * * *
Item 17. Information with Respect to Companies Other Than S-3 or
S-2 Companies.
* * * * *
(b) * * *
(10) Item 305 of Regulation S-K ( 229.305 of this chapter),
==========================================START OF PAGE 144======
quantitative and qualitative disclosures about market risk.
* * * * *
13. By amending Form F-4 (referenced in 239.34) to
redesignate Item 12(b)(3)(vi) as Item 12(b)(3)(vi)(A), add
paragraph (B) to Item 12(b)(3)(vi), redesignate Item 14(g) as
Item 14(g)(1), add Item 14(g)(2), redesignate Item 17(b)(4) as
Item 17(b)(4)(i), and add Item 17(b)(4)(ii) to read as follows:
Note - The text of Form F-4 does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form F-4
Registration Statement Under the Securities Act of 1933
* * * * *
Item 12. Information With Respect to F-2 or F-3 Registrants.
* * * * *
(b) * * *
(3) * * *
(vi)(A) * * *
(B) Item 9A of Form 20-F, quantitative and qualitative
disclosures of market risk.
* * * * *
Item 14. Information With Respect to Foreign Registrants Other
Than F-2 or F-3 Registrants.
* * * * *
(g)(1) * * *
(2) Item 9A of Form 20-F, quantitative and qualitative
disclosures of market risk.
==========================================START OF PAGE 145======
* * * * *
Item 17. Information With Respect to Foreign Companies Other
Than F-2 or F-3 Companies.
* * * * *
(b) * * *
(4)(i) * * *
(b)(4)(ii) Item 9A of Form 20-F, quantitative and
qualitative disclosures of market risk.
* * * * *
PART 240 - GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT
OF 1934
14. The general authority citation for Part 240 is revised
to read in part as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee,
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1,
78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 79q,
79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11,
unless otherwise noted.
* * * * *
15. By amending 240.14a-3 by adding paragraph (b)(5)(iii)
to read as follows:
240.14a-3 Information to be furnished to security holders.
* * * * *
(b) * * *
(5) * * *
==========================================START OF PAGE 146======
(iii) The report shall contain the quantitative and
qualitative disclosures about market risk required by Item 305 of
Regulation S-K ( 229.305 of this chapter).
* * * * *
16. By amending 240.14a-101 to remove the word "and" at
the end of Item 13(a)(4), redesignate Item 13(a)(5) as Item
13(a)(6), add Item 13(a)(5), add Instruction 6 to Item 13, remove
"and" at the end of Item 14(b)(2)(i)(B)(3)(vi) and the period at
the end of Item 14(b)(2)(i)(B)(3)(vii) and in its place add ";
and", add paragraph (viii) to Item 14(b)(2)(i)(B)(3), remove
"and" at the end of Item 14(b)(2)(ii)(A)(3)(v) and the period at
the end of Item 14(b)(2)(ii)(A)(3)(vi) and in its place add ";
and", add paragraph (vii) to Item 14(b)(2)(ii)(A)(3), remove
"and" at the end of Item 14(b)(3)(i)(H) and the period at the end
of Item 14(b)(3)(i)(I) and in its place add "; and", add
paragraph (J) to Item 14(b)(3)(i), and add Instruction 8 to Item
14 to read as follows:
240.14a-101 Schedule 14A. Information required in proxy
statement.
* * * * *
Item 13. Financial and other information
(a) Information required. * * *
(5) Item 305 of Regulation S-K, quantitative and
qualitative disclosures about market risk; and
* * * * *
Instructions to Item 13.
==========================================START OF PAGE 147======
* * * * *
6. A registered investment company need not comply with
items (a)(2), (a)(3), and (a)(5) of this Item 13.
* * * * *
Item 14. Mergers, consolidations, acquisitions and similar
matters.
* * * * *
(b) Information about the registrant and the other person.
* * * * *
(2) Information with respect to S-2 or S-3 registrants.
(i) Information required to be furnished. * * *
(B) * * *
(3) * * *
(viii) Item 305 of Regulation S-K ( 229.305 of this
chapter), quantitative and qualitative disclosures about market
risk.
(ii) Incorporation of certain information by reference. ***
(A) * * *
(3) * * *
(vii) Item 305 of Regulation S-K ( 229.305 of this
chapter), quantitative and qualitative disclosures about market
risk.
* * * * *
(3) Information with respect to registrants other than S-2
or S-3 registrants.
(i) * * *
(J) Item 305 of Regulation S-K ( 229.305 of this chapter),
==========================================START OF PAGE 148======
quantitative and qualitative disclosures about market risk.
* * * * *
Instructions to Item 14.
* * * * *
8. A registered management investment company need not
comply with items (A), (D), (F), (G), (H), and (J) of paragraph
(b)(3)(i) of this Item 14.
* * * * *
PART 249 - FORMS, SECURITIES EXCHANGE ACT OF 1934
17. The authority for Part 249 continues to read, in part,
as follows:
Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
18. By amending Form 10 (referenced in 249.210) by
revising Item 2 to read as follows:
Note - The text of Form 10 does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10
General Form For Registration of Securities
* * * * *
Item 2. Financial Information.
Furnish the information required by Items 301, 303, and 305
of Regulation S-K ( 229.301, 229.303, and 229.305 of this
chapter).
* * * * *
19. By amending Form 20-F (referenced in 249.220f) by
==========================================START OF PAGE 149======
adding Item 9A to be inserted after Item 9 and before Item 10 in
Part I to read as follows:
Note - The text of Form 20-F does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 20-F
Registration Statement Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
or
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
or
Transaction Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
* * * * *
Part I
* * * * *
Item 9A. Quantitative and Qualitative Disclosures About
Market Risk.
(a) Quantitative information about market risk. (1)
Registrants shall provide, in their reporting currency,
quantitative information about market risk as of the end of the
latest fiscal year, in accordance with one of the following three
disclosure alternatives. In preparing this quantitative
information, registrants shall categorize market risk sensitive
instruments into instruments entered into for trading purposes
and instruments entered into for purposes other than trading
purposes. Within both the trading and other than trading
portfolios, separate quantitative information shall be presented,
to the extent material, for each market risk exposure category
==========================================START OF PAGE 150======
(i.e., interest rate risk, foreign currency exchange rate risk,
commodity price risk, and other relevant market risks, such as
equity price risk). A registrant may use one of the three
alternatives set forth below for all of the required quantitative
disclosures about market risk. A registrant also may choose,
from among the three alternatives, one disclosure alternative for
market risk sensitive instruments entered into for trading
purposes and another disclosure alternative for market risk
sensitive instruments entered into for other than trading
purposes. Alternatively, a registrant may choose any disclosure
alternative, from among the three alternatives, for each risk
exposure category within the trading and other than trading
portfolios. The three disclosure alternatives are:
(i)(A)(1) Tabular presentation of information related to
market risk sensitive instruments; such information shall include
fair values of the market risk sensitive instruments and contract
terms sufficient to determine future cash flows from those
instruments, categorized by expected maturity dates.
(2) Tabular information relating to contract terms shall
allow readers of the table to determine expected cash flows from
the market risk sensitive instruments for each of the next five
years. Comparable tabular information for any remaining years
shall be displayed as an aggregate amount.
(3) Within each risk exposure category, the market risk
sensitive instruments shall be grouped based on common
characteristics. Within the foreign currency exchange rate risk
==========================================START OF PAGE 151======
category, the market risk sensitive instruments shall be grouped
by functional currency and within the commodity price risk
category, the market risk sensitive instruments shall be grouped
by type of commodity.
(4) See the Appendix to this Item for a suggested format
for presentation of this information; and
(B) Registrants shall provide a description of the contents
of the table and any related assumptions necessary to understand
the disclosures required under paragraph (a)(1)(i)(A) of this
Item 9A; or
(ii)(A) Sensitivity analysis disclosures that express the
potential loss in future earnings, fair values, or cash flows of
market risk sensitive instruments resulting from one or more
selected hypothetical changes in interest rates, foreign currency
exchange rates, commodity prices, and other relevant market rates
or prices over a selected period of time. The magnitude of
selected hypothetical changes in rates or prices may differ among
and within market risk exposure categories; and
(B) Registrants shall provide a description of the model,
assumptions, and parameters, which are necessary to understand
the disclosures required under paragraph (a)(1)(ii)(A) of this
Item 9A; or
(iii)(A) Value at risk disclosures that express the
potential loss in future earnings, fair values, or cash flows of
market risk sensitive instruments over a selected period of time,
with a selected likelihood of occurrence, from changes in
==========================================START OF PAGE 152======
interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rates or prices;
(B)(1) For each category for which value at risk
disclosures are required under paragraph (a)(1)(iii)(A) of this
Item 9A, provide either:
(i) The average, high and low amounts, or the distribution
of the value at risk amounts for the reporting period; or
(ii) The average, high and low amounts, or the distribution
of actual changes in fair values, earnings, or cash flows from
the market risk sensitive instruments occurring during the
reporting period; or
(iii) The percentage or number of times the actual changes
in fair values, earnings, or cash flows from the market risk
sensitive instruments exceeded the value at risk amounts during
the reporting period;
(2) Information required under paragraph (a)(1)(iii)(B)(1)
of this Item 9A is not required for the first fiscal year end in
which a registrant must present Item 9A information; and
(C) Registrants shall provide a description of the model,
assumptions, and parameters, which are necessary to understand
the disclosures required under paragraphs (a)(1)(iii)(A) and (B)
of this Item 9A.
(2) Registrants shall discuss material limitations that
cause the information required under paragraph (a)(1) of this
Item 9A not to reflect fully the net market risk exposures of the
entity. This discussion shall include summarized descriptions of
==========================================START OF PAGE 153======
instruments, positions, and transactions omitted from the
quantitative market risk disclosure information or the features
of instruments, positions, and transactions that are included,
but not reflected fully in the quantitative market risk
disclosure information.
(3) Registrants shall present summarized market risk
information for the preceding fiscal year. In addition,
registrants shall discuss the reasons for material quantitative
changes in market risk exposures between the current and
preceding fiscal years. Information required by this paragraph
(a)(3), however, is not required if disclosure is not required
under paragraph (a)(1) of this Item 9A for the current fiscal
year. Information required by this paragraph (a)(3) is not
required for the first fiscal year end in which a registrant must
present Item 9A information.
(4) If registrants change disclosure alternatives or key
model characteristics, assumptions, and parameters used in
providing quantitative information about market risk (e.g.,
changing from tabular presentation to value at risk, changing the
scope of instruments included in the model, or changing the
definition of loss from fair values to earnings), and if the
effects of any such change is material, the registrant shall:
(i) Explain the reasons for the change; and
(ii) Either provide summarized comparable information,
under the new disclosure method, for the year preceding the
current year or, in addition to providing disclosure for the
==========================================START OF PAGE 154======
current year under the new method, provide disclosures for the
current year and preceding fiscal year under the method used in
the preceding year.
Instructions to Item 9A(a).
1. Under Item 9A(a)(1):
A. For each market risk exposure category within the
trading and other than trading portfolios, registrants may report
the average, high, and low sensitivity analysis or value at risk
amounts for the reporting period, as an alternative to reporting
year-end amounts.
B. In determining the average, high, and low amounts for
the fiscal year under instruction 1.A. of the Instructions to
Item 9A(a), registrants should use sensitivity analysis or value
at risk amounts relating to at least four equal time periods
throughout the reporting period (e.g., four quarter-end amounts,
12 month-end amounts, or 52 week-end amounts).
C. Functional currency means functional currency as defined
by generally accepted accounting principles (see, e.g., FASB,
Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation", ("FAS 52") paragraph 20 (December 1981)).
D. Registrants using the sensitivity analysis and value at
risk disclosure alternatives are encouraged, but not required, to
provide quantitative amounts that reflect the aggregate market
risk inherent in the trading and other than trading portfolios.
2. Under Item 9A(a)(1)(i):
A. Examples of contract terms sufficient to determine
==========================================START OF PAGE 155======
future cash flows from market risk sensitive instruments include,
but are not limited to:
i. Debt instruments - principal amounts and weighted
average effective interest rates;
ii. Forwards and futures - contract amounts and weighted
average settlement prices;
iii. Options - contract amounts and weighted average strike
prices;
iv. Swaps - notional amounts, weighted average pay rates or
prices, and weighted average receive rates or prices; and
v. Complex instruments - likely to be a combination of the
contract terms presented in 2.A.i. through iv. of this
Instruction;
B. When grouping based on common characteristics,
instruments should be categorized, at a minimum, by the following
characteristics, when material:
i. Fixed rate or variable rate assets or liabilities;
ii. Long or short forwards and futures;
iii. Written or purchased put or call options with similar
strike prices;
iv. Receive fixed and pay variable swaps, receive variable
and pay fixed swaps, and receive variable and pay variable swaps;
v. The currency in which the instruments' cash flows are
denominated;
vi. Financial instruments for which foreign currency
transaction gains and losses are reported in the same manner as
==========================================START OF PAGE 156======
translation adjustments under generally accepted accounting
principles (see, e.g., FAS 52 paragraph 20 (December 1981)); and
vii. Derivatives used to manage risks inherent in
anticipated transactions;
C. Registrants may aggregate information regarding
functional currencies that are economically related, managed
together for internal risk management purposes, and have
statistical correlations of greater than 75% over each of the
past three years;
D. Market risk sensitive instruments that are exposed to
rate or price changes in more than one market risk exposure
category should be presented within the tabular information for
each of the risk exposure categories to which those instruments
are exposed;
E. If a currency swap (see, e.g., FAS 52 Appendix E for a
definition of currency swap) eliminates all foreign currency
exposures in the cash flows of a foreign currency denominated
debt instrument, neither the currency swap nor the foreign
currency denominated debt instrument are required to be disclosed
in the foreign currency risk exposure category. However, both
the currency swap and the foreign currency denominated debt
instrument should be disclosed in the interest rate risk exposure
category; and
F. The contents of the table and related assumptions that
should be described include, but are not limited to:
i. The different amounts reported in the table for various
==========================================START OF PAGE 157======
categories of the market risk sensitive instruments (e.g.,
principal amounts for debt, notional amounts for swaps, and
contract amounts for options and futures);
ii. The different types of reported market rates or prices
(e.g., contractual rates or prices, spot rates or prices, forward
rates or prices); and
iii. Key prepayment or reinvestment assumptions relating to
the timing of reported amounts.
3. Under Item 9A(a)(1)(ii):
A. Registrants should select hypothetical changes in market
rates or prices that are expected to reflect reasonably possible
near-term changes in those rates and prices. In this regard,
absent economic justification for the selection of a different
amount, registrants should use changes that are not less than 10
percent of end of period market rates or prices;
B. For purposes of instruction 3.A. of the Instructions to
Item 9A(a), the term reasonably possible has the same meaning as
defined by generally accepted accounting principles (see, e.g.,
FASB, Statement of Financial Accounting Standards No. 5,
"Accounting for Contingencies," ("FAS 5") paragraph 3 (March
1975));
C. For purposes of instruction 3.A. of the Instructions to
Item 9A(a), the term near term means a period of time going
forward up to one year from the date of the financial statements
(see generally AICPA, Statement of Position 94-6, "Disclosure of
Certain Significant Risks and Uncertainties," ("SOP 94-6") at
==========================================START OF PAGE 158======
paragraph 7 (December 30, 1994));
D. Market risk sensitive instruments that are exposed to
rate or price changes in more than one market risk exposure
category should be included in the sensitivity analysis
disclosures for each market risk category to which those
instruments are exposed;
E. Registrants with multiple foreign currency exchange rate
exposures should prepare foreign currency sensitivity analysis
disclosures that measure the aggregate sensitivity to changes in
all foreign currency exchange rate exposures, including the
effects of changes in both transactional currency/functional
currency exchange rate exposures and functional
currency/reporting currency exchange rate exposures. For
example, assume a French division of a registrant presenting its
financial statements in U.S. dollars ($US) invests in a
deutschmark(DM)-denominated debt security. In these
circumstances, the $US is the reporting currency and the DM is
the transactional currency. In addition, assume this division
determines that the French franc (FF) is its functional currency
according to FAS 52. In preparing the foreign currency
sensitivity analysis disclosures, this registrant should report
the aggregate potential loss from hypothetical changes in both
the DM/FF exchange rate exposure and the FF/$US exchange rate
exposure; and
F. Model, assumptions, and parameters that should be
described include, but are not limited to, how loss is defined by
==========================================START OF PAGE 159======
the model (e.g., loss in earnings, fair values, or cash flows), a
general description of the modeling technique (e.g., duration
modeling, modeling that measures the change in net present values
arising from selected hypothetical changes in market rates or
prices, and a description as to how optionality is addressed by
the model), the types of instruments covered by the model (e.g.,
derivative financial instruments, other financial instruments,
derivative commodity instruments, and whether other instruments
are included voluntarily, such as certain commodity instruments
and positions, cash flows from anticipated transactions, and
certain financial instruments excluded under instruction 3.C.ii.
of the General Instructions to Items 9A(a) and 9A(b)), and other
relevant information about the model's assumptions and
parameters, (e.g., the magnitude and timing of selected
hypothetical changes in market rates or prices used, the method
by which discount rates are determined, and key prepayment or
reinvestment assumptions).
4. Under Item 9A(a)(1)(iii):
A. The confidence intervals selected should reflect
reasonably possible near-term changes in market rates and prices.
In this regard, absent economic justification for the selection
of different confidence intervals, registrants should use
intervals that are 95 percent or higher;
B. For purposes of instruction 4.A. of the Instructions to
Item 9A(a), the term reasonably possible has the same meaning as
defined by generally accepted accounting principles (see, e.g.,
==========================================START OF PAGE 160======
FAS 5, paragraph 3 (March 1975));
C. For purposes of instruction 4.A. of the Instructions to
Item 9A(a), the term near term means a period of time going
forward up to one year from the date of the financial statements
(see generally SOP 94-6, at paragraph 7 (December 30, 1994));
D. Registrants with multiple foreign currency exchange rate
exposures should prepare foreign currency value at risk analysis
disclosures that measure the aggregate sensitivity to changes in
all foreign currency exchange rate exposures, including the
aggregate effects of changes in both transactional
currency/functional currency exchange rate exposures and
functional currency/reporting currency exchange rate exposures.
For example, assume a French division of a registrant presenting
its financial statements in U.S. dollars ($US) invests in a
deutschmark(DM)-denominated debt security. In these
circumstances, the $US is the reporting currency and the DM is
the transactional currency. In addition, assume this division
determines that the French franc (FF) is its functional currency
according to FAS 52. In preparing the foreign currency value at
risk disclosures, this registrant should report the aggregate
potential loss from hypothetical changes in both the DM/FF
exchange rate exposure and the FF/$US exchange rate exposure;
and
E. Model, assumptions, and parameters that should be
described include, but are not limited to, how loss is defined by
the model (e.g., loss in earnings, fair values, or cash flows),
==========================================START OF PAGE 161======
the type of model used (e.g., variance/covariance, historical
simulation, or Monte Carlo simulation and a description as to how
optionality is addressed by the model), the types of instruments
covered by the model (e.g., derivative financial instruments,
other financial instruments, derivative commodity instruments,
and whether other instruments are included voluntarily, such as
certain commodity instruments and positions, cash flows from
anticipated transactions, and certain financial instruments
excluded under instruction 3.C.ii. of the General Instructions to
Items 9A(a) and 9A(b)), and other relevant information about the
model's assumptions and parameters, (e.g., holding periods,
confidence intervals, and, when appropriate, the methods used for
aggregating value at risk amounts across market risk exposure
categories, such as by assuming perfect positive correlation,
independence, or actual observed correlation).
5. Under Item 9A(a)(2), limitations that should be
considered include, but are not limited to:
A. The exclusion of certain market risk sensitive
instruments, positions, and transactions from the disclosures
required under Item 9A(a)(1) (e.g., derivative commodity
instruments not permitted by contract or business custom to be
settled in cash or with another financial instrument, commodity
positions, cash flows from anticipated transactions, and certain
financial instruments excluded under instruction 3.C.ii. of the
General Instructions to Items 9A(a) and 9A(b)). Failure to
include such instruments, positions, and transactions in
==========================================START OF PAGE 162======
preparing the disclosures under Item 9A(a)(1) may be a limitation
because the resulting disclosures may not fully reflect the net
market risk of a registrant; and
B. The ability of disclosures required under Item 9A(a)(1)
to reflect fully the market risk that may be inherent in
instruments with leverage, option, or prepayment features (e.g.,
options, including written options, structured notes,
collateralized mortgage obligations, leveraged swaps, and options
embedded in swaps).
(b) Qualitative information about market risk. (1) To the
extent material, describe:
(i) The registrant's primary market risk exposures;
(ii) How those exposures are managed. Such descriptions
shall include, but not be limited to, a discussion of the
objectives, general strategies, and instruments, if any, used to
manage those exposures; and
(iii) Changes in either the registrant's primary market risk
exposures or how those exposures are managed, when compared to
what was in effect during the most recently completed fiscal year
and what is known or expected to be in effect in future reporting
periods.
(2) Qualitative information about market risk shall be
presented separately for market risk sensitive instruments
entered into for trading purposes and those entered into for
purposes other than trading.
==========================================START OF PAGE 163======
Instructions to Item 9A(b).
1. For purposes of disclosure under Item 9A(b), primary
market risk exposures means:
A. The following categories of market risk: interest rate
risk, foreign currency exchange rate risk, commodity price risk,
and other relevant market rate or price risks (e.g., equity price
risk); and
B. Within each of these categories, the particular markets
that present the primary risk of loss to the registrant. For
example, if a registrant has a material exposure to foreign
currency exchange rate risk and, within this category of market
risk, is most vulnerable to changes in dollar/yen, dollar/pound,
and dollar/peso exchange rates, the registrant should disclose
those exposures. Similarly, if a registrant has a material
exposure to interest rate risk and, within this category of
market risk, is most vulnerable to changes in short-term U.S.
prime interest rates, it should disclose the existence of that
exposure.
2. For purposes of disclosure under Item 9A(b), registrants
should describe primary market risk exposures that exist as of
the end of the latest fiscal year, and how those exposures are
managed.
General Instructions to Items 9A(a) and 9A(b).
1. The disclosures called for by Items 9A(a) and 9A(b) are
intended to clarify the registrant's exposures to market risk
associated with activities in derivative financial instruments,
==========================================START OF PAGE 164======
other financial instruments, and derivative commodity
instruments.
2. In preparing the disclosures under Items 9A(a) and
9A(b), registrants are required to include derivative financial
instruments, other financial instruments, and derivative
commodity instruments.
3. For purposes of Items 9A(a) and 9A(b), derivative
financial instruments, other financial instruments, and
derivative commodity instruments (collectively referred to as
"market risk sensitive instruments") are defined as follows:
A. Derivative financial instruments has the same meaning as
defined by generally accepted accounting principles (see, e.g.,
FASB, Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value
of Financial Instruments," ("FAS 119") paragraphs 5-7 (October
1994)), and includes futures, forwards, swaps, options, and other
financial instruments with similar characteristics;
B. Other financial instruments means all financial
instruments as defined by generally accepted accounting
principles for which fair value disclosures are required (see,
e.g., FASB, Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments," ("FAS
107") paragraphs 3 and 8 (December 1991)), except for derivative
financial instruments, as defined above;
C.i. Other financial instruments include, but are not
limited to, trade accounts receivable, investments, loans,
==========================================START OF PAGE 165======
structured notes, mortgage-backed securities, trade accounts
payable, indexed debt instruments, interest-only and principal-
only obligations, deposits, and other debt obligations;
ii. Other financial instruments exclude employers and
plans obligations for pension and other post-retirement
benefits, substantively extinguished debt, insurance contracts,
lease contracts, warranty obligations and rights, unconditional
purchase obligations, investments accounted for under the equity
method, minority interests in consolidated enterprises, and
equity instruments issued by the registrant and classified in
stockholders' equity in the statement of financial position (see,
e.g., FAS 107, paragraph 8 (December 1991)). For purposes of
this item, trade accounts receivable and trade accounts payable
need not be considered other financial instruments when their
carrying amounts approximate fair value; and
D. Derivative commodity instruments include, to the extent
such instruments are not derivative financial instruments,
commodity futures, commodity forwards, commodity swaps, commodity
options, and other commodity instruments with similar
characteristics that are permitted by contract or business custom
to be settled in cash or with another financial instrument. For
purposes of this paragraph, settlement in cash includes
settlement in cash of the net change in value of the derivative
commodity instrument (e.g., net cash settlement based on changes
in the price of the underlying commodity).
4.A. In addition to providing required disclosures for the
==========================================START OF PAGE 166======
market risk sensitive instruments defined in instruction 2. of
the General Instructions to Items 9A(a) and 9A(b), registrants
are encouraged to include other market risk sensitive
instruments, positions, and transactions within the disclosures
required under Items 9A(a) and 9A(b). Such instruments,
positions, and transactions might include commodity positions,
derivative commodity instruments that are not permitted by
contract or business custom to be settled in cash or with another
financial instrument, cash flows from anticipated transactions,
and certain financial instruments excluded under instruction
3.C.ii. of the General Instructions to Items 9A(a) and 9A(b).
B. Registrants that voluntarily include other market risk
sensitive instruments, positions and transactions within their
quantitative disclosures about market risk under the sensitivity
analysis or value at risk disclosure alternatives are not
required to provide separate market risk disclosures for any
voluntarily selected instruments, positions, or transactions.
Instead, registrants selecting the sensitivity analysis and value
at risk disclosure alternatives are permitted to present
comprehensive market risk disclosures, which reflect the combined
market risk exposures inherent in both the required and any
voluntarily selected instruments, position, or transactions.
Registrants that choose the tabular presentation disclosure
alternative should present voluntarily selected instruments,
positions, or transactions in a manner consistent with the
requirements in Item 9A(a) for market risk sensitive instruments.
==========================================START OF PAGE 167======
C. If a registrant elects to include voluntarily a
particular type of instrument, position, or transaction in their
quantitative disclosures about market risk, that registrant
should include all, rather than some, of those instruments,
positions, or transactions within those disclosures. For
example, if a registrant holds in inventory a particular type of
commodity position and elects to include that commodity position
within their market risk disclosures, the registrant should
include the entire commodity position, rather than only a portion
thereof, in their quantitative disclosures about market risk.
5.A. Under Items 9A(a) and 9A(b), a materiality assessment
should be made for each market risk exposure category within the
trading and other than trading portfolios.
B. For purposes of making the materiality assessment under
instruction 5.A. of the General Instructions to Items 9A(a) and
9A(b), registrants should evaluate both:
i. The materiality of the fair values of derivative
financial instruments, other financial instruments, and
derivative commodity instruments outstanding as of the end of the
latest fiscal year; and
ii. The materiality of potential, near-term losses in
future earnings, fair values, and cash flows from reasonably
possible near-term changes in market rates or prices.
iii. If either paragraphs B.i. or B.ii. in this instruction
of the General Instructions to Items 9A(a) and 9A(b) are
material, the registrant should disclose quantitative and
==========================================START OF PAGE 168======
qualitative information about market risk, if such market risk
for the particular market risk exposure category is material.
C. For purposes of instruction 5.B.i. of the General
Instructions to Items 9A(a) and 9A(b), registrants generally
should not net fair values, except to the extent allowed under
generally accepted accounting principles (see, e.g., FASB
Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts" (March 1992)). For example, under this instruction,
the fair value of assets generally should not be netted with the
fair value of liabilities.
D. For purposes of instruction 5.B.ii. of the General
Instructions to Items 9A(a) and 9A(b), registrants should
consider, among other things, the magnitude of:
i. Past market movements;
ii. Reasonably possible, near-term market movements; and
iii. Potential losses that may arise from leverage, option,
and multiplier features.
E. For purposes of instructions 5.B.ii. and 5.D.ii. of the
General Instructions to Items 9A(a) and 9A(b), the term near term
means a period of time going forward up to one year from the date
of the financial statements (see generally SOP 94-6, at paragraph
7 (December 30, 1994)).
F. For the purpose of instructions 5.B.ii. and 5.D.ii. of
the General Instructions to Items 9A(a) and 9A(b), the term
reasonably possible has the same meaning as defined by generally
accepted accounting principles (see, e.g., FAS 5, paragraph 3
==========================================START OF PAGE 169======
(March 1975)).
6. For purposes of Items 9A(a) and 9A(b), registrants
should present the information outside of, and not incorporate
the information into, the financial statements (including the
footnotes to the financial statements). In addition, registrants
are encouraged to provide the required information in one
location. However, alternative presentation, such as inclusion
of all or part of the information in Management's Discussion and
Analysis, may be used at the discretion of the registrant. If
information is disclosed in more than one location, registrants
should provide cross-references to the locations of the related
disclosures.
7. For purposes of the instructions to Items 9A(a) and
9A(b), trading purposes has the same meaning as defined by
generally accepted accounting principles (see, e.g., FAS 119,
paragraph 9a (October 1994)). In addition, anticipated
transactions means transactions (other than transactions
involving existing assets or liabilities or transactions
necessitated by existing firm commitments) an enterprise expects,
but is not obligated, to carry out in the normal course of
business (see, e.g., FASB, Statement of Financial Accounting
Standards No. 80, "Accounting for Futures Contracts," paragraph
9, (August 1984)).
(c) Interim periods. If interim period financial
statements are included or are required to be included by Article
3 of Regulation S-X (17 CFR 210), discussion and analysis shall
==========================================START OF PAGE 170======
be provided so as to enable the reader to assess the sources and
effects of material changes in information that would be provided
under Item 9A of Form 20-F from the end of the preceding fiscal
year to the date of the most recent interim balance sheet.
Instructions to Item 9A(c).
1. Information required by paragraph (c) of this Item 9A is
not required until after the first fiscal year end in which this
Item 9A is applicable.
(d) Safe Harbor. (1) The safe harbor provided in Section
27A of the Securities Act of 1933 (15 U.S.C. 77z-2) and Section
21E of the Securities Exchange Act of 1934 (15 U.S.C. 78u-5)
("statutory safe harbors") shall apply, with respect to all types
of issuers and transactions, to information provided pursuant to
paragraphs (a), (b), and (c) of this Item 9A, provided that the
disclosure is made by an issuer; a person acting on behalf of the
issuer; an outside reviewer retained by the issuer making a
statement on behalf of the issuer; or an underwriter, with
respect to information provided by the issuer or information
derived from information provided by the issuer.
(2) For purposes of this paragraph (d) of this Item 9A
only:
(i) All information required by paragraphs (a), (b)(1)(i),
(b)(1)(iii), and (c) of this Item 9A is considered forward
looking statements for purposes of the statutory safe harbors,
except for historical facts such as the terms of particular
contracts and the number of market risk sensitive instruments
==========================================START OF PAGE 171======
held during or at the end of the reporting period; and
(ii) With respect to paragraph (a) of this Item 9A, the
meaningful cautionary statements prong of the statutory safe
harbors will be satisfied if a registrant satisfies all
requirements of that same paragraph (a) of this Item 9A.
(e) Small business issuers. Small business issuers, as
defined in 230.405 of this chaprter and 240.12b-2 of this
chapter, need not provide the information required by this Item
9A, whether or not they file on forms specially designated as
small business issuer forms.
General Instructions to Items 9A(a), 9A(b), 9A(c), 9A(d),
and 9A(e).
1. Bank registrants, thrift registrants, and non-bank and
non-thrift registrants with market capitalizations on January 28,
1997 in excess of $2.5 billion should provide Item 9A disclosures
in filings with the Commission that include annual financial
statements for fiscal years ending after June 15, 1997. Non-bank
and non-thrift registrants with market capitalizations on January
28, 1997 of $2.5 billion or less should provide Item 9A
disclosures in filings with the Commission that include annual
financial statements for fiscal years ending after June 15, 1998.
2.A. For purposes of instruction 1. of the General
Instructions to Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), bank
registrants and thrift registrants include any registrant which
has control over a depository institution.
B. For purposes of instruction 2.A. of the General
==========================================START OF PAGE 172======
Instructions to Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), a
registrant has control over a depository institution if:
i. The registrant directly or indirectly or acting through
one or more other persons owns, controls, or has power to vote
25% or more of any class of voting securities of the depository
institution;
ii. The registrant controls in any manner the election of a
majority of the directors or trustees of the depository
institution; or
iii. The Federal Reserve Board or Office of Thrift
Supervision determines, after notice and opportunity for hearing,
that the registrant directly or indirectly exercises a
controlling influence over the management or policies of the
depository institution;
C. For purposes of instruction 2.B. of the General
Instructions to Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), a
depository institution means any of the following:
i. An insured depository institution as defined in section
3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C.A. Sec.
1813 (c));
ii. An institution organized under the laws of the United
States, any State of the United States, the District of Columbia,
any territory of the United States, Puerto Rico, Guam, American
Somoa, or the Virgin Islands, which both accepts demand deposits
or deposits that the depositor may withdraw by check or similar
means for payment to third parties or others and is engaged in
==========================================START OF PAGE 173======
the business of making commercial loans.
D. For purposes of instruction 1. of the General
Instructions to Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e),
market capitalization is the aggregate market value of common
equity as set forth in General Instruction I.B.1. of Form S-3;
provided however, that common equity held by affiliates is
included in the calculation of market capitalization; and
provided further that instead of using the 60 day period prior to
filing referenced in General Instruction I.B.1. of Form S-3, the
measurement date is January 28, 1997.
==========================================START OF PAGE 174======
Appendix to Item 9A -- Tabular Disclosures
Appendix not presented - for a copy contact the Securities
and Exchange Commission's Public Reference Office at 202-942-
8090.
* * * * *
20. By amending Form 10-Q (referenced in 249.308a) by
removing references to "Items 1 and 2 of Part I of this form" and
adding in their place references to "Items 1, 2, and 3 of Part I
of this form" in paragraphs 1 and 2 of General Instruction F,
adding paragraph 2.c. to General Instruction H and Item 3 to Part
I to read as follows:
Note - The text of Form 10-Q does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
* * * * *
General Instructions
* * * * *
H. Omission of Information by Certain Wholly-Owned Subsidiaries
* * * * *
2. * * *
c. Such registrants may omit the information called for by
==========================================START OF PAGE 175======
Item 3 of Part I, Quantitative and Qualitative Disclosures About
Market Risk.
* * * * *
Part I - Financial Information
* * * * *
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Furnish the information required by Item 305 of Regulation
S-K ( 229.305 of this chapter).
* * * * *
21. By amending Form 10-K (referenced in 249.310) by
adding Item 7A to be inserted after Item 7 and before Item 8 in
Part II to read as follows:
Note - The text of Form 10-K does not, and this amendment
will not, appear in the Code of Federal Regulations.
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
or
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
* * * * *
Part II
* * * * *
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.
Furnish the information required by Item 305 of Regulation
S-K ( 229.305 of this chapter).
==========================================START OF PAGE 176======
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
January 31, 1997