[Federal Register Volume 62, Number 27 (Monday, February 10, 1997)]
[Rules and Regulations]
[Pages 6044-6079]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2991]


      

[[Page 6043]]

_______________________________________________________________________

Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Part 210, et al.



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; Final Rule

  Federal Register / Vol. 62, No. 27 / Monday, February 10, 1997 / 
Rules and Regulations  

[[Page 6044]]



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, 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 rule.

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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 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: April 11, 1997.

    Compliance Dates: Sec. 210.4-08(n) of Regulation S-X and the 
amendment to Item 310 of Regulation S-B shall apply, 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 apply, 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 305 of Regulation S-K and Item 9A of 
Form 20-F shall apply, 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 apply for filings with the Commission made on or 
after April 11, 1997.

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
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    \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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    The Commission also is making 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
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    \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.
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I. Executive Summary

    During the last several years, the use of derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments 10 increased 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 
sometimes unexpected, losses. Those losses

[[Page 6045]]

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.
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    \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 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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    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:

    \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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    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 the footnotes to the 
financial statements.14
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    \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).
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    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 
statements.16
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    \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.
    \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.
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    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.
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    \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 para. 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;
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    \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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    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.
    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.

    \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., para. 9 of FASB, 
Statement of Financial Accounting Standards No. 80, ``Accounting for 
Futures Contracts,'' (``FAS 80'') (August 1984)).
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    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
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    \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

[[Page 6046]]

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 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.
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    \21\ The FASB currently is working on a project to improve 
accounting recognition, measurement, and related disclosures for 
derivatives.
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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:

    \22\ See AIMR, Financial Reporting in the 1990s and Beyond, page 
30, (1993).
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    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? How has the company accounted for those instruments, 
and how has that accounting affected the financial statements? What 
risks has the company transferred or taken on? 23

    \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).
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    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 Financial Executives Institute (``FEI''). 29
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    \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).
    \29\ See FEI, Derivative Financial Instruments Accounting and 
Disclosure Issues, (``FEI Report'') prepared by FEI CCF/CCR 
Derivatives Disclosure Task Force (August 1994).
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    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
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    \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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    In October 1994, the FASB, responding in part to calls for 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
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    \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 para. 12.
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    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 sensitive instruments. In particular, the SEC staff identified 
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:
     Disclosures should make transparent the impact of 
derivatives on

[[Page 6047]]

a registrant's statements of financial position, cash flows, and 
results of operations;
     Disclosures should provide information about a 
registrant's exposures to market risk;
     Disclosures should explain how market risk sensitive 
instruments are used in the context of the registrant's business;
     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;
     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;
     Disclosures about market risk should address, where 
appropriate, special risks relating to leverage, option, or prepayment 
features; and
     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
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    \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.''
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    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 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 difficult to ascertain and compare the 
financial statement effects of derivatives among registrants.
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    \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 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 para. 3).
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    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 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.
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    \39\ APB 22 para. 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,'' para. 5 (March 
1992); AU Sec. 411.05.
    \40\ See FAS 119 para. 60.
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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 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.

[[Page 6048]]

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 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.
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    \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.
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    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 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:

     Derivative financial instruments--futures, forwards, 
swaps, options, and other financial instruments with similar 
characteristics;
     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;
     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. 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.
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    \42\ See, e.g., FAS 119 para. 8b and Rule 5-02 of Regulation S-
X, 17 CFR 210.5-02, respectively.
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    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.
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    \43\ In particular, FAS 119 para. 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.
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    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 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.
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    \44\ Item 9A(a) of Form 20-F, like the other portions of Item 
9A, is substantively identical to related sections in Item 305.
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    Under these Items, registrants should furnish quantitative 
information about market risk using one or more of three prescribed 
alternative methods.45 The three alternative methods, described in 
detail below, are a tabular presentation, sensitivity analysis, and 
value at risk.
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    \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.
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    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. The tabular presentation alternative 
permits

[[Page 6049]]

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.
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    \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.
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    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 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.
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    \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.
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    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.
    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 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.
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    \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, 
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.''
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    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 
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.
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    \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.
---------------------------------------------------------------------------

    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 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

[[Page 6050]]

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 Items 
305(a)(1)(iii) and 9A(a)(1)(iii) for further requirements.
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    \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.
---------------------------------------------------------------------------

    (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 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.
---------------------------------------------------------------------------

    \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 305, a discussion of the reasons for material 
changes in reported amounts as compared to the preceding year is not 
necessary.
---------------------------------------------------------------------------

    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.
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    \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.
---------------------------------------------------------------------------

    (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:

     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;
     Commodity positions--such as investments in corn, 
wheat, oil, gas, lumber, silver, gold, and other commodity inventory 
positions;
     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
---------------------------------------------------------------------------

    \55\ See note 19, supra.
---------------------------------------------------------------------------

     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, 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 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
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    \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.

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[[Page 6051]]

    (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 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 
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 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.
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    \57\ See FAS 119 para. 11a. Footnote 4 of FAS 119 illustrates 
the qualitative disclosures required by para. 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.
---------------------------------------------------------------------------

    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 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.
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    \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.
---------------------------------------------------------------------------

    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 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
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    \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.
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

[[Page 6052]]

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.
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    \62\ Securities Act Release No. 7280; Exchange Act Release No. 
37086; File No. S7-10-96 (April 9, 1996) [61 FR 16672].
---------------------------------------------------------------------------

    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 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.
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    \63\ See section III B.4.b., infra, for a discussion about where 
these disclosures should appear.
---------------------------------------------------------------------------

    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 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 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
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    \64\ Registrants are reminded that the safe harbor requires that 
forward looking statements be identified as such.
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    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.
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    \65\ 17 CFR part 228, et seq.
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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 
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 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.
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    \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 para. 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.
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    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 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

[[Page 6053]]

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.
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    \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 para. 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.
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    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 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 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 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
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    \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 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.
---------------------------------------------------------------------------

    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 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

[[Page 6054]]

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
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    \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.
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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 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.
    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
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    \72\ See section III B.1.c.(vi), supra, for a further 
description of the instruments, positions, and transactions 
described in this paragraph.
---------------------------------------------------------------------------

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 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
---------------------------------------------------------------------------

    \73\ See, e.g., Rule 12b-20 under the Exchange Act and Rule 408 
under the Securities Act.
    \74\ See, e.g., FAS 52 para. 21a and FAS 80 para. 4a.
---------------------------------------------------------------------------

    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 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

[[Page 6055]]

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.

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 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 
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 
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 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

[[Page 6056]]

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 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, (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.
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 risk category to 
which the instrument is exposed. Similar instructions also were added 
to the value at risk disclosure requirements.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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 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

[[Page 6057]]

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 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.
    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 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 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
    Some commenters expressed concerns that a discussion of primary 
market risk exposures and how those exposures are managed would be 
proprietary. The

[[Page 6058]]

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 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 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 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 
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

[[Page 6059]]

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 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.
    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 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 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.
---------------------------------------------------------------------------

    \76\ Item 305(b)(1)(iii) was proposed as Item 305(b)(3).
    \77\ See section III B.3.
---------------------------------------------------------------------------

    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 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

[[Page 6060]]

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 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.
---------------------------------------------------------------------------

    \78\ 15 U.S.C. 78w(a).
    \79\ 15 U.S.C. 77b.
    \80\ 15 U.S.C. 78c.
    \81\ Pub. L. 104-290, 106, 110 Stat. 3416 (1996).
---------------------------------------------------------------------------

    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, 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 to 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 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 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 
benefits will outweigh the related costs, which are discussed below.
---------------------------------------------------------------------------

    \82\ See notes 22-29, supra, for examples of investors, 
regulators, and other private bodies endorsing or recommending 
improved quantitative disclosures about market risk.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \83\ See FAS 119 para. 60.
    \84\ See FAS 119 para. 8. See also note 39, supra, for a 
discussion of the requirements of APB 22.
---------------------------------------------------------------------------

    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 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.

[[Page 6061]]

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 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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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 
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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    In response to the comment letters, the Commission made 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:

     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.
     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 
alternative.
     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.
     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.
     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.
     Encouraging, rather than requiring, that registrants 
provide aggregate sensitivity analysis and value at risk amounts for 
the trading and other than trading portfolios.
     When a registrant changes quantitative disclosure 
methods 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.
     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.
     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 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

[[Page 6062]]

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 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.
---------------------------------------------------------------------------

    \89\ See FAS 119 para. 11a.
---------------------------------------------------------------------------

    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 those proposals for small entities.
---------------------------------------------------------------------------

    \90\ 17 CFR 228.10 et seq.
    \91\ See note 69, supra.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \92\ 5 U.S.C. 604.
---------------------------------------------------------------------------

    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 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
---------------------------------------------------------------------------

    \93\ As noted elsewhere in this release, the amendments do not 
apply to investment companies.
    \94\ 17 C.F.R. 230.157.
    \95\ 17 C.F.R. 240.0-10.
---------------------------------------------------------------------------

    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 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 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

[[Page 6063]]

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.
---------------------------------------------------------------------------

    \96\ 44 U.S.C. 3501 et seq.
    \97\ 44 U.S.C. 3507.
---------------------------------------------------------------------------

    Also in accordance with the Paperwork Reduction Act, the Commission 
solicited comment on the compliance burdens associated 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 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 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.
    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:


Sec. 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:

[[Page 6064]]

    (1) A discussion of each method used to account for derivative 
financial instruments and derivative commodity 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 (n)

    1. For purposes of this paragraph (n), derivative financial 
instruments and derivative commodity instruments (collectively 
referred to as ``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 (n)(2), (n)(3), (n)(4), and 
(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)).
    3. For purposes of paragraph (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 (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 Sec. 228.10 by adding paragraph (g) to read as 
follows:


Sec. 228.10  (Item 10) General.

* * * * *
    (g) Quantitative and qualitative disclosures about market risk. The 
safe harbor provision included in paragraph (d) of Item 305 of 
Regulation S-K (Sec. 229.305(d) of this chapter) shall apply to 
information required by Item 305 of Regulation S-K (Sec. 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 Sec. 228.310 by revising the first sentence of Note 
2 to read as follows:


Sec. 228.310  (Item 310) Financial Statements.

    Notes--1. * * *.
    2. Regulation S-X (17 CFR 210.1 through 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. * * *
* * * * *

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 Sec. 229.305 to read as follows:


Sec. 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, commodity 
price risk, and other relevant market risks, such as equity price 
risk). A registrant may use one of the three alternatives set forth in 
this section 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

[[Page 6065]]

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 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 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 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 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, 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;

[[Page 6066]]

    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 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., 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));
    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 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));
    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), 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

[[Page 6067]]

include such instruments, positions, and transactions in 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.

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 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, 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 
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 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 of 
the General Instructions to Paragraphs 305(a) and 305(b) are 
material, the registrant should disclose quantitative and 
qualitative information about market

[[Page 6068]]

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 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)).

    (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, 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 
Sec. 230.405 of this chapter and Sec. 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 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 
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.

Appendix to Item 305--Tabular Disclosures

    The tables set forth below are illustrative of the format that 
might be used when a registrant elects to present the information 
required by paragraph (a)(1)(i)(A) of Item 305 regarding terms and 
information about derivative financial instruments, other financial 
instruments, and derivative commodity instruments. These examples 
are for illustrative purposes only. Registrants are not required to 
display the information in the specific format illustrated below. 
Alternative methods of display are permissible as long as the 
disclosure requirements of the section are satisfied. Furthermore, 
these examples were designed primarily to illustrate possible 
formats for presentation of the information required by the 
disclosure item and do not purport to illustrate the broad range of 
derivative financial instruments, other

[[Page 6069]]

financial instruments, and derivative commodity instruments utilized 
by registrants.

Interest Rate Sensitivity

    The table below provides information about the Company's derivative 
financial instruments and other financial instruments that are 
sensitive to changes in interest rates, including interest rate swaps 
and debt obligations. For debt obligations, the table presents 
principal cash flows and related weighted average interest rates by 
expected maturity dates. For interest rate swaps, the table presents 
notional amounts and weighted average interest rates by expected 
(contractual) maturity dates. Notional amounts are used to calculate 
the contractual payments to be exchanged under the contract. Weighted 
average variable rates are based on implied forward rates in the yield 
curve at the reporting date. The information is presented in U.S. 
dollar equivalents, which is the Company's reporting currency. The 
instrument's actual cash flows are denominated in both U.S. dollars 
($US) and German deutschmarks (DM), as indicated in parentheses.

                                                                                                                                                        
                                                                    December 31, 19X1                                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Expected maturity date                                
                                                                ----------------------------------------------------------------------------------------
                                                                                                                                                  Fair  
                                                                    19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                          Liabilities                                                                                                                   
(7) (US$ Equivalent in millions)                                                                                                                        
                                                                ----------------------------------------------------------------------------------------
Long-term Debt:                                                                                                                                         
    Fixed Rate ($US)...........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    Fixed Rate (DM)............................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    Variable Rate ($US)........................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
                                                                ----------------------------------------------------------------------------------------
                   Interest Rate Derivatives                                                                                                            
(7) (In millions)                                                                                                                                       
                                                                ----------------------------------------------------------------------------------------
Interest Rate Swaps:                                                                                                                                    
    Variable to Fixed ($US)....................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    Fixed to Variable ($US)....................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
        Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
--------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rate Sensitivity

    The table below provides information about the Company's 
derivative financial instruments, other financial instruments, and 
firmly committed sales transactions by functional currency and 
presents such information in U.S. dollar equivalents.1 The 
table summarizes information on instruments and transactions that 
are sensitive to foreign currency exchange rates, including foreign 
currency forward exchange agreements, deutschmark (DM)-denominated 
debt obligations, and firmly committed DM sales transactions. For 
debt obligations, the table presents principal cash flows and 
related weighted average interest rates by expected maturity dates. 
For firmly committed DM-sales transactions, sales amounts are 
presented by the expected transaction date, which are not expected 
to exceed two years. For foreign currency forward exchange 
agreements, the table presents the notional amounts and weighted 
average exchange rates by expected (contractual) maturity dates. 
These notional amounts generally are used to calculate the 
contractual payments to be exchanged under the contract.
---------------------------------------------------------------------------

    \1\ The information is presented in U.S. dollars because that is 
the registrant's reporting currency.

                                                                                                                                                        
                                                                    December 31, 19X1                                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Expected maturity date                                
                                                                ----------------------------------------------------------------------------------------
                                                                                                                                                  Fair  
                                                                    19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
             On-Balance Sheet Financial Instruments                                                                                                     
(7) (US$ Equivalent in millions)                                                                                                                        
                                                                ----------------------------------------------------------------------------------------
$US Functional Currency \2\:                                                                                                                            
    Liabilities                                                                                                                                         
    Long-Term Debt:                                                                                                                                     
        Fixed Rate (DM)........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average interest rate..................................        X.X        X.X        X.X        X.X        X.X         X.X        X.X  .........
                                                                ----------------------------------------------------------------------------------------
                                                                                                                                                        
(7) Expected maturity or transaction date                                                                                                               
      Anticipated Transactions and Related Derivatives \3\                                                                                              
(7) (US$ Equivalent in millions)                                                                                                                        
                                                                ----------------------------------------------------------------------------------------
$US Functional Currency:                                                                                                                                

[[Page 6070]]

                                                                                                                                                        
    Firmly committed Sales Contracts (DM)......................       $XXX       $XXX  .........  .........  .........  ..........       $XXX       $XXX
        Forward Exchange Agreements                                                                                                                     
        (Receive $US/Pay DM):..................................                                                                                         
            Contract Amount....................................        XXX        XXX  .........  .........  .........  ..........        XXX        XXX
            Average Contractual Exchange Rate..................        X.X        X.X  .........  .........  .........  ..........        X.X  .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\2\ Similar tabular information would be provided for other functional currencies.                                                                      
\3\ Pursuant to General Instruction 4. to Items 305(a) and 305(b) of Regulation S-K, registrants may include cash flows from anticipated transactions   
  and operating cash flows resulting from non-financial and non-commodity instruments.                                                                  

Commodity Price Sensitivity

    The table below provides information about the Company's corn 
inventory and futures contracts that are sensitive to changes in 
commodity prices, specifically corn prices. For inventory, the table 
presents the carrying amount and fair value at December 31, 19x1. For 
the futures contracts the table presents the notional amounts in 
bushels, the weighted average contract prices, and the total dollar 
contract amount by expected maturity dates, the latest of which occurs 
one year from the reporting date. Contract amounts are used to 
calculate the contractual payments and quantity of corn to be exchanged 
under the futures contracts.

                                                                        
                            December 31, 19X1                           
------------------------------------------------------------------------
                                                  Carrying              
                                                   amount    Fair  value
------------------------------------------------------------------------
                                                                        
(1) (In millions)                                                       
    On Balance Sheet Commodity Position and                             
              Related Derivatives                                       
    Corn Inventory \4\........................         $XXX         $XXX
------------------------------------------------------------------------
                                                  Expected              
                                                  maturity       Fair   
                                                    1992        value   
------------------------------------------------------------------------
              Related Derivatives                                       
Futures Contracts (Short):                                              
    Contract Volumes (100,000 bushels)........          XXX  ...........
    Weighted Average Price (Per 100,000                                 
     bushels).................................        $X.XX  ...........
    Contract Amount ($US in millions).........         $XXX         $XXX
------------------------------------------------------------------------
\4\ Pursuant to General Instruction 4. to Items 305(a) and 305(b) of    
  Regulation S-K, registrants may include information on commodity      
  positions, such as corn inventory.                                    

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 Sec. 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 
(Sec. 229.305 of this chapter), quantitative and qualitative 
disclosures about market risk.
* * * * *
    10. By amending Form S-2 (referenced in Sec. 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 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 (Sec. 229.305 of this 
chapter).
* * * * *
Item 12. Incorporation of Certain Information by Reference
    (a) * * *
    (3) * * *

[[Page 6071]]

    (ix) quantitative and qualitative disclosures about market risk as 
required by Item 305 of Regulation S-K (Sec. 229.305 of this chapter).
* * * * *
    11. By amending Form S-11 (referenced in Sec. 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.

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 
(Sec. 229.305 of this chapter).
* * * * *
    12. By amending Form S-4 (referenced in Sec. 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
* * * * *
    (b) * * *
    (3) * * *
    (vii) Item 305 of Regulation S-K (Sec. 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 (Sec. 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 (Sec. 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 (Sec. 229.305 of this chapter), 
quantitative and qualitative disclosures about market risk.
* * * * *
    13. By amending Form F-4 (referenced in Sec. 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.
* * * * *
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 Sec. 240.14a-3 by adding paragraph (b)(5)(iii) to 
read as follows:


Sec. 240.14a-3  Information to be furnished to security holders.

* * * * *
    (b) * * *
    (5) * * *
    (iii) The report shall contain the quantitative and qualitative 
disclosures about market risk required by Item 305 of Regulation S-K 
(Sec. 229.305 of this chapter).
* * * * *
    16. By amending Sec. 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:


Sec. 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

* * * * *
    6. A registered investment company need not comply with items 
(a)(2), (a)(3), and (a)(5) of this Item 13.
* * * * *

[[Page 6072]]

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 (Sec. 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 (Sec. 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 (Sec. 229.305 of this chapter), 
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 Sec. 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 (Secs. 229.301, 229.303, and 229.305 of this chapter).
* * * * *
    19. By amending Form 20-F (referenced in Sec. 249.220f) by 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 (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 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 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

[[Page 6073]]

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 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 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 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 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 
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,

[[Page 6074]]

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 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 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., 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), 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 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;

[[Page 6075]]

    (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.

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, 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, 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 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.
    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.

[[Page 6076]]

    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 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 (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 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 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 
Sec. 230.405 of this chapter and Sec. 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 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
    ii. 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:

[[Page 6077]]

    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 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.

Appendix to Item 9A--Tabular Disclosures

    The tables set forth below are illustrative of the format that 
might be used when a registrant elects to present the information 
required by paragraph (a)(1)(i)(A) of Item 9A regarding terms and 
information about derivative financial instruments, other financial 
instruments, and derivative commodity instruments. These examples 
are for illustrative purposes only. Registrants are not required to 
display the information in the specific format illustrated below. 
Alternative methods of display are permissible as long as the 
disclosure requirements of the section are satisfied. Furthermore, 
these examples were designed primarily to illustrate possible 
formats for presentation of the information required by the 
disclosure item and do not purport to illustrate the broad range of 
derivative financial instruments, other financial instruments, and 
derivative commodity instruments utilized by registrants.

Interest Rate Sensitivity

    The table below provides information about the Company's 
derivative financial instruments and other financial instruments 
that are sensitive to changes in interest rates, including interest 
rate swaps and debt obligations. For debt obligations, the table 
presents principal cash flows and related weighted average interest 
rates by expected maturity dates. For interest rate swaps, the table 
presents notional amounts and weighted average interest rates by 
expected (contractual) maturity dates. Notional amounts are used to 
calculate the contractual payments to be exchanged under the 
contract. Weighted average variable rates are based on implied 
forward rates in the yield curve at the reporting date. The 
information is presented in U.S. dollar equivalents, which is the 
Company's reporting currency. The instrument's actual cash flows are 
denominated in both U.S. dollars ($US) and German deutschmarks (DM), 
as indicated in parentheses.

                                                                                                                                                        
                                                                    December 31, 19X1                                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Expected maturity date                                
                                                                ----------------------------------------------------------------------------------------
                                                                                                                                                  Fair  
                                                                    19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                          Liabilities                                                                                                                   
(7)(US$ Equivalent in millions)                                                                                                                         
                                                                ----------------------------------------------------------------------------------------
Long-term Debt:                                                                                                                                         
    Fixed Rate ($US)...........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    Fixed Rate (DM)............................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    Variable Rate ($US)........................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
                                                                ----------------------------------------------------------------------------------------
                   Interest Rate Derivatives                                                                                                            
(7)(In millions)                                                                                                                                        
                                                                ----------------------------------------------------------------------------------------
Interest Rate Swaps:                                                                                                                                    
    Variable to Fixed ($US)....................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    Fixed to Variable ($US)....................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
        Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
--------------------------------------------------------------------------------------------------------------------------------------------------------

Exchange Rate Sensitivity

    The table below provides information about the Company's 
derivative financial instruments, other financial instruments, and 
firmly committed sales transactions by functional currency and 
presents such information in U.S. dollar equivalents. 1 The 
table summarizes information on instruments and transactions that 
are sensitive to foreign currency exchange rates, including foreign 
currency forward exchange agreements, deutschmark (DM)-denominated 
debt obligations, and firmly committed DM sales transactions. For 
debt obligations, the table presents principal cash flows and 
related weighted average interest rates by expected maturity dates. 
For firmly committed DM-sales transactions, sales amounts are 
presented by the expected transaction date, which are not expected 
to exceed two years. For foreign currency forward exchange 
agreements, the table presents the notional amounts and weighted 
average exchange rates by expected (contractual) maturity dates. 
These notional amounts generally are used to calculate the 
contractual payments to be exchanged under the contract.
---------------------------------------------------------------------------

    \1\ The information is presented in U.S. dollars because that is 
the registrant's reporting currency.

[[Page 6078]]



                                                                                                                                                        
                                                                    December 31, 19X1                                                                   
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Expected maturity date                                
                                                                ----------------------------------------------------------------------------------------
                                                                                                                                                  Fair  
                                                                    19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
             On-Balance Sheet Financial Instruments                                                                                                     
(7)(US$ Equivalent in millions)                                                                                                                         
                                                                ----------------------------------------------------------------------------------------
$US Functional Currency 2:                                                                                                                              
    Liabilities................................................                                                                                         
    Long-Term Debt:............................................                                                                                         
        Fixed Rate (DM)........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
                                                                ----------------------------------------------------------------------------------------
                                                                                                                                                        
(7)Expected maturity or transaction date                                                                                                                
       Anticipated Transactions and Related Derivatives 3                                                                                               
(7)(US$ Equivalent in millions)                                                                                                                         
                                                                ----------------------------------------------------------------------------------------
$US Functional Currency:                                                                                                                                
    Firmly committed Sales Contracts (DM)......................       $XXX       $XXX  .........  .........  .........  ..........       $XXX       $XXX
        Forward Exchange Agreements (Receive $US/Pay DM):                                                                                               
    Contract Amount............................................        XXX        XXX  .........  .........  .........  ..........        XXX        XXX
    Average Contractual Exchange Rate..........................       X.X%       X.X%  .........  .........  .........  ..........       X.X%  .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\2\ Similar tabular information would be provided for other functional currencies.                                                                      
\3\ Pursuant to General Instruction 4. to Items 9A(a) and 9A(b) of Form 20-F, registrants may include cash flows from anticipated transactions and      
  operating cash flows resulting from non-financial and non-commodity instruments.                                                                      

Commodity Price Sensitivity

    The table below provides information about the Company's corn 
inventory and futures contracts that are sensitive to changes in 
commodity prices, specifically corn prices. For inventory, the table 
presents the carrying amount and fair value at December 31, 19x1. 
For the futures contracts the table presents the notional amounts in 
bushels, the weighted average contract prices, and the total dollar 
contract amount by expected maturity dates, the latest of which 
occurs one year from the reporting date. Contract amounts are used 
to calculate the contractual payments and quantity of corn to be 
exchanged under the futures contracts.

                                                                        
                            December 31, 19X1                           
------------------------------------------------------------------------
                                                  Carrying              
                                                   amount    Fair  value
------------------------------------------------------------------------
                                                                        
(1)(In millions)                                                        
    On Balance Sheet Commodity Position and                             
              Related Derivatives                                       
    Corn Inventory 4..........................         $XXX         $XXX
------------------------------------------------------------------------
                                                  Expected              
                                                  maturity       Fair   
                                                    1992        value   
------------------------------------------------------------------------
              Related Derivatives                                       
Futures Contracts (Short):                                              
    Contract Volumes (100,000 bushels)........          XXX  ...........
    Weighted Average Price (Per 100,000                                 
     bushels).................................        $X.XX  ...........
    Contract Amount ($US in millions).........         $XXX         $XXX
------------------------------------------------------------------------
4 Pursuant to General Instruction 4. to Items 305(a) and 305(b) of      
  Regulation S-K, registrants may include information on commodity      
  positions, such as corn inventory.                                    

    20. By amending Form 10-Q (referenced in Sec. 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 
Item 3 of Part I, Quantitative and Qualitative Disclosures About Market 
Risk.
* * * * *

Part I--Financial Information

* * * * *

[[Page 6079]]

Item 3. Quantitative and Qualitative Disclosures About Market Risk
    Furnish the information required by Item 305 of Regulation S-K 
(Sec. 229.305 of this chapter).
* * * * *
    21. By amending Form 10-K (referenced in Sec. 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 
(Sec. 229.305 of this chapter).
* * * * *
    Dated: January 31, 1997.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2991 Filed 2-7-97; 8:45 am]
BILLING CODE 8010-01-P