[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.
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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.
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(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.
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\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.
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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.
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(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
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\55\ See note 19, supra.
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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.
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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.
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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.
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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.
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\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.
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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].
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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.
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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.
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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.
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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
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\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.
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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.
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\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.
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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.
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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.
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\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).
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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.
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\82\ See notes 22-29, supra, for examples of investors,
regulators, and other private bodies endorsing or recommending
improved quantitative disclosures about market risk.
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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.
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\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.
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\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.
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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.
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\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).
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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.
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\89\ See FAS 119 para. 11a.
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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.
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\90\ 17 CFR 228.10 et seq.
\91\ See note 69, supra.
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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.
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\92\ 5 U.S.C. 604.
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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
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\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.
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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.
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\96\ 44 U.S.C. 3501 et seq.
\97\ 44 U.S.C. 3507.
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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