97-2991. 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 ...  

  • [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]
    
    
          
    
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    _______________________________________________________________________
    
    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
    
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    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
    
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    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
    
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    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).
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        Under these Items, registrants should furnish quantitative 
    information about market risk using one or more of three prescribed 
    alternative methods.45 The three alternative methods, described in 
    detail below, are a tabular presentation, sensitivity analysis, and 
    value at risk.
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        \45\ At the current time, the Commission is not prescribing 
    standardized methods and procedures specifying how to comply with 
    each of these disclosure alternatives. To facilitate comparison 
    across registrants, however, Item 305(a) requires that registrants 
    describe the model and assumptions used to prepare quantitative 
    market risk disclosures.
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        In preparing this quantitative information, registrants should 
    categorize market risk sensitive instruments into instruments entered 
    into for trading purposes and instruments entered into for purposes 
    other than trading. Within both the trading and other than trading 
    portfolios, separate quantitative information should be presented for 
    each market risk exposure category (i.e., interest rate risk, foreign 
    currency exchange rate risk, commodity price risk, and other relevant 
    market risks, such as equity price risk), when material.
        A registrant may use (i) the same alternative for all market risk 
    disclosures, (ii) one alternative, such as value at risk, for all 
    disclosures related to instruments entered into for trading purposes, 
    and another alternative, such as sensitivity analysis, for all 
    disclosures related to instruments entered into for other than trading 
    purposes, or (iii) different or the same alternatives for each category 
    of market risk within the trading and other than trading portfolios.
        (i) Tabular Presentation. The tabular presentation alternative 
    permits
    
    [[Page 6049]]
    
    registrants to provide quantitative information about market risk 
    sensitive instruments in a tabular format. The required information 
    includes the fair values of market risk sensitive instruments and 
    contract terms sufficient to determine the future cash flows from those 
    instruments, categorized by expected maturity dates. These tabular 
    disclosures should present information sufficient to allow readers of 
    the table to determine expected cash flows from market risk sensitive 
    instruments for each of the next five years and the aggregate cash 
    flows expected for the remaining years thereafter.46 These tabular 
    disclosure requirements were selected because expected cash flows are 
    common inputs to market risk measurement methods and, therefore, are 
    expected to help investors make estimates of a registrant's market risk 
    exposures.
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        \46\ In some instances, the tabular presentation alternative is 
    similar to the gap analysis commonly provided by financial 
    institutions. Thus, with minor modifications, if any, those 
    registrants could report a gap analysis and comply with the tabular 
    information requirements.
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        To facilitate an investor's ability to make such estimates, Items 
    305(a) and 9A(a) require that tabular information be grouped based on 
    common market risk characteristics. In particular, those Items require 
    separate presentation of tabular information for instruments: (i) 
    Entered into for trading and other than trading purposes, (ii) subject 
    to different categories of market risk exposure (e.g., interest rate 
    risk, foreign currency exchange rate risk, etc.), and (iii) subject to 
    different market risk characteristics within a particular exposure 
    category (e.g., different functional currencies, 47 different 
    underlying commodity exposures, different instrument types, and 
    different contractual rates or prices). See Items 305(a)(1)(i) and 
    9A(a)(1)(i) for further requirements.
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        \47\ For purpose of Item 305 and Item 9A, functional currency 
    means the currency of the primary economic environment in which the 
    entity operates; normally, that is the currency of the environment 
    in which an entity primarily generates and expends cash. This 
    definition is the same as the definition of functional currency in 
    FAS 52, Appendix E.
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        In particular, when preparing the tabular disclosures registrants 
    should consider whether differences in market risk would be reflected 
    better by separately presenting tabular information for a particular 
    instrument or group of instruments. For example, Items 305(a)(1)(i) and 
    9A(a)(1)(i) require the grouping of options with similar strike prices. 
    This grouping is required because option payouts can differ 
    significantly depending how far the option is in or out of the money. 
    Thus, the separate presentation of tabular information for options with 
    dissimilar strike prices should enhance an investor's ability to 
    determine the potential market risk inherent in those instruments. 
    Registrants should make similar evaluations when determining which 
    instruments should be grouped together within the tabular disclosures.
        Items 305(a) and 9A(a) also require disclosure of information 
    regarding the contents of the table and related assumptions necessary 
    to understand a registrant's market risk disclosures. In this regard, 
    registrants should describe, for example, the different amounts 
    reported in the table for the various categories of the market 
    sensitive instruments (e.g., principal amounts for debt, notional 
    amounts for swaps, and the different types of reported market rates or 
    prices) and key prepayment or reinvestment assumptions relating to the 
    timing of reported amounts. See Items 305(a)(1)(i) and 9A(a)(1)(i) for 
    further details.
        The Appendix to each of these Items provides a sample disclosure 
    format.
        (ii) Sensitivity Analysis. The sensitivity analysis disclosure 
    alternative permits registrants to express the potential loss in future 
    earnings, fair values, or cash flows of market risk sensitive 
    instruments resulting from one or more selected hypothetical changes in 
    interest rates, foreign currency exchange rates, commodity prices, and 
    other relevant market rate or price changes (e.g., equity prices) over 
    a selected time period. 48 Items 305(a) and 9A(a) require that 
    registrants select hypothetical changes in market rates and prices that 
    are expected to reflect reasonably possible 49 near-term 50 
    changes in those rates and prices. Absent economic justification for 
    the selection of a different amount, registrants should use changes 
    that are not less than 10 percent of end of period market rates or 
    prices.
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        \48\ The term ``sensitivity analysis,'' as used in Items 305(a) 
    and 9A(a), describes a general class of models that assesses the 
    risk of loss in market risk sensitive instruments based on 
    hypothetical changes in market rates or prices. The term sensitivity 
    analysis is not meant to refer to any one model for quantifying 
    market risk. Sensitivity analysis models include, for example, 
    duration analysis or other ``sensitivity'' measures already required 
    to be calculated for regulatory purposes for thrift institutions 
    (see Office of Thrift Supervision, Regulatory Capital: Interest Rate 
    Risk Component, 12 CFR 567.5(c)(4) (August 1993)).
        \49\ See note 67, infra, for a definition of the term 
    ``reasonably possible.''
        \50\ See note 66, infra, for a definition of the term ``near-
    term.''
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        Items 305(a) and 9A(a) also require a description of the model, 
    assumptions, and parameters underlying the registrant's sensitivity 
    analysis that are necessary to understand the registrant's market risk 
    disclosure. In this regard, registrants are required to specify, for 
    example, (i) how ``loss'' is defined by the model (e.g., loss in 
    earnings, fair values, or cash flows), (ii) a general description of 
    the modeling technique (e.g., the change in net present values arising 
    from selected shifts in market rates or prices), (iii) the types of 
    instruments covered by the model, and (iv) other relevant information 
    about the model's assumptions and parameters (e.g., the magnitude and 
    timing of selected hypothetical changes in market rates or prices 
    used). See Items 305(a)(1)(ii) and 9A(a)(1)(ii) for further 
    requirements.
        (iii) Value at Risk. The value at risk disclosure alternative 
    permits registrants to express the potential loss in future earnings, 
    fair values, or cash flows of market risk sensitive instruments over a 
    selected period of time, with a selected likelihood of occurrence, from 
    changes in interest rates, foreign currency exchange rates, commodity 
    prices, and other relevant market rates or prices. 51 Items 305(a) 
    and 9A(a) state that when preparing value at risk disclosures, 
    registrants should select confidence intervals that reflect reasonably 
    possible near-term changes in market rates and prices. In this regard, 
    absent economic justification for the selection of different confidence 
    intervals, registrants should use intervals that are 95 percent or 
    higher.
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        \51\ The term ``value at risk,'' as used in Items 305(a) and 
    9A(a), describes a general class of models that provides a 
    probabilistic assessment of the risk of loss in market risk 
    sensitive instruments. The term value at risk is not meant to refer 
    to any one model for quantifying market risk. Value at risk models 
    can be adapted to non-trading activities as well as trading 
    activities and to non-financial institutions as well as financial 
    institutions, depending on the model and assumptions selected by the 
    registrant.
    ---------------------------------------------------------------------------
    
        For each category for which value at risk disclosures are 
    presented, Items 305(a) and 9A(a) require registrants to provide either 
    (i) the average, high and low amounts, or the distribution of value at 
    risk amounts for the reporting period, (ii) the average, high and low 
    amounts, or the distribution of actual changes in fair values, 
    earnings, or cash flows from market risk sensitive instruments 
    occurring during the reporting period, or (iii) the percentage or 
    number of times the actual changes in fair values, earnings, or cash 
    flows from market risk sensitive instruments exceeded the value at risk 
    amounts during the reporting period.
        Items 305(a) and 9A(a) also require a description of the model, 
    assumptions, and parameters underlying the
    
    [[Page 6050]]
    
    registrant's value at risk model that are necessary to understand the 
    registrant's market risk disclosure. In this regard, registrants should 
    specify, for example, (i) how ``loss'' is defined by the model (e.g., 
    loss in earnings, fair values, or cash flows), (ii) the type of model 
    used (e.g., variance/covariance, historical simulation, or Monte Carlo 
    simulation and a description as to how optionality is addressed by the 
    model), (iii) the types of instruments covered by the model, and (iv) 
    other relevant information about the model's assumptions and parameters 
    (e.g., holding periods and confidence intervals). 52 See Items 
    305(a)(1)(iii) and 9A(a)(1)(iii) for further requirements.
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        \52\ The primary differences between the value at risk and 
    sensitivity analysis disclosure alternatives are (i) value at risk 
    analysis reports the potential loss arising from equally likely 
    market movements across instruments, while sensitivity analysis 
    reports the potential loss arising from hypothetical market 
    movements with differing likelihoods of occurrence across 
    instruments and (ii) value at risk explicitly adjusts the potential 
    loss to reflect correlations between market movements, while 
    sensitivity analysis is not designed explicitly to make such 
    adjustments.
    ---------------------------------------------------------------------------
    
        (iv) An Alternative to Reporting Year-End Information. Items 305(a) 
    and 9A(a) require disclosure of quantitative information about market 
    risk as of the end of the latest fiscal year. Alternatively, 
    registrants, such as those with proprietary concerns about reporting 
    year-end information under the sensitivity analysis and value at risk 
    disclosure alternatives, may report the average, high, and low amounts 
    for the reporting period. In determining those average, high, and low 
    amounts for the fiscal year, registrants should use sensitivity 
    analysis or value at risk amounts relating to at least four equal time 
    periods throughout the reporting period (e.g., four quarter-end 
    amounts, 12-month-end amounts, or 52 week-end amounts).
        (v) Other Disclosure Requirements. Items 305(a) and 9A(a) require 
    registrants to provide summarized quantitative information about market 
    risk for the preceding fiscal year. In addition, registrants should 
    discuss the reasons for material quantitative changes in market risk 
    exposures between the current and preceding fiscal years.53 In 
    determining the amount and type of summarized information to be 
    provided for the preceding fiscal year, registrants should evaluate 
    whether sufficient information is disclosed to enable investors to 
    assess material trends in quantitative market risk information. This 
    summary should include information relating to each market risk 
    exposure category disclosed in the preceding or latest fiscal year.
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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.
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        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.
    ---------------------------------------------------------------------------
    
        If either (i) or (ii) in the previous paragraph are material, the 
    registrant should disclose quantitative and qualitative information 
    about market risk, if such market risk for the particular market risk 
    exposure category is material. However, the choice of methods, model 
    characteristics, assumptions, and parameters used to comply with the 
    quantitative market risk disclosures remain at the election of the 
    registrant, provided disclosure is made regarding a material risk of 
    loss in either earnings, fair values, or cash flows.
        For example, if a registrant expects a material near-term loss in 
    fair values only, that registrant should not report quantitative market 
    risk information in terms of earnings or cash flows, rather than fair 
    values. In these circumstances, the registrant could, of course, make 
    additional quantitative disclosures about the loss in earnings or cash 
    flows, but should disclose the risk of loss in fair values. In 
    contrast, if a registrant is required to disclose market risk 
    information because near-term losses in future earnings, fair values, 
    and cash
    
    [[Page 6053]]
    
    flows all are material, it may report quantitative information in terms 
    of either earnings, fair values, or cash flows.
        In assessing the materiality of the fair values of market risk 
    sensitive instruments, those fair values generally should not be 
    netted, except to the extent allowed under FASB Interpretation No. 39, 
    ``Offsetting of Amounts Related to Certain Contracts'' 
    (``Interpretation 39'') (March 1992).68 For example, the fair 
    value of assets generally should not be netted with the fair value of 
    liabilities. Instead, the fair values of such instruments should be 
    aggregated, without netting, for purposes of assessing materiality.
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        \68\ Interpretation 39 states that it is a general principle of 
    accounting that the offsetting of assets and liabilities in the 
    balance sheet is improper except where a right of set off exists. 
    Interpretation 39 defines right of set off and specifies what 
    conditions must be met to have that right. FAS 119 para. 15(d) in 
    disclosing the fair values of instruments also prohibits the netting 
    of fair values, except to the extent that the offsetting of carrying 
    amounts in the statement of financial position is permitted under 
    Interpretation 39.
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        In assessing the materiality of potential near-term losses in 
    future earnings, fair values, or cash flows from reasonably possible 
    near-term changes in market rates or prices, registrants should 
    consider (i) The magnitude of past market movements, (ii) the magnitude 
    of reasonably possible, near-term market movements, and (iii) potential 
    losses that may arise from leverage, option, and multiplier features.
        b. Location of Quantitative and Qualitative Disclosures. As 
    adopted, Items 305 and 9A require that the quantitative and qualitative 
    market risk disclosures be placed outside the financial statements and 
    related notes thereto. As proposed, registrants would have been 
    permitted to disclose such information in the notes to the financial 
    statements. Because of the evolving nature of the disclosures and the 
    FASB's pending project on accounting for derivatives, which also will 
    address disclosures about derivatives within the financial statements, 
    the Commission has determined that the better course, at this time, is 
    to require that the disclosures mandated by Items 305 and 9A be located 
    outside of the financial statements and related notes.
        The Commission believes that the information required by Items 305 
    and 9A should be included in the annual report delivered to 
    shareholders; consequently Rule 14a-3 of the proxy rules has been 
    amended to include this requirement. For other documents delivered to 
    investors, the information should be included or incorporated by 
    reference from other Commission filings.
        c. Cross-Referencing of Disclosures. The Commission believes it is 
    most meaningful to disclose together, in one location, quantitative and 
    qualitative information relating to the same market risk exposure 
    category. However, because market risk sensitive instruments often are 
    used to manage known risks and uncertainties in market rates and 
    prices, the disclosures provided under Items 305 and 9A may overlap 
    with disclosures provided under Item 303 of Regulation S-K. To the 
    extent that the disclosures in a registrant's MD&A satisfy the 
    requirements of Items 305 or 9A, registrants need not repeat this 
    information elsewhere in their filings. If this information is 
    disclosed in more than one location, however, registrants should ensure 
    that the resulting disclosures are meaningful to investors and provide 
    cross-references to the locations of the related disclosures.
        d. Application to Registrants. Items 305 and 9A are required to be 
    followed by many different types of registrants, including, for 
    example, commercial and industrial companies, financial institutions, 
    broker-dealers, service companies, business development companies, and 
    companies registering insurance contracts, such as market-value 
    adjusted annuities and real estate funds underlying annuity contracts. 
    Items 305 and 9A do not apply to registered investment companies and, 
    as described further in Section IV, small business issuers.
        e. Reporting Frequency. Items 305 and 9A apply to all registration 
    statements filed under the Securities Act and all reports, proxy 
    statements, and information statements filed under the Exchange Act 
    that are required to include or incorporate financial statements. 
    However, for reports that include only interim financial statements 
    (e.g., Form 10-Qs), registrants need only present market risk 
    information if there have been material changes in reported market 
    risks faced by the registrant since the end of the most recent fiscal 
    year. In these circumstances, registrants should provide a discussion 
    and analysis that enables investors to assess the sources and effects 
    of those material changes in market risks.
    
    IV. Applicability of Amendments
    
    A. Application to Small Business Issuers
    
        The Commission believes that because of (i) The evolving nature of 
    these disclosures and (ii) the relative costs of complying with these 
    disclosures for small business issuers,69 it is appropriate, at 
    this time, to exempt small business issuers from disclosing 
    quantitative and qualitative information about market risk.70
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        \69\ ``Small business issuer'' is defined to mean any entity 
    that (1) Has revenues of less than $25,000,000, (2) is a United 
    States or Canadian issuer, (3) is not an investment company, and (4) 
    if a majority owned subsidiary, the parent corporation is also a 
    small business issuer. An entity is not a small business issuer, 
    however, if it has a public float (the aggregate market value of the 
    outstanding securities held by non-affiliates) of $25,000,000 or 
    more. See 17 CFR 230.405.
        \70\ Small business issuers will not be required to provide 
    these market risk disclosures whether or not they file on specially 
    designated small business forms.
        In addition, as noted elsewhere in this release, the Commission 
    has extended the safe harbor for forward looking information to Item 
    305 disclosures that are made voluntarily by small business issuers.
    ---------------------------------------------------------------------------
    
        Accordingly, at this time, the Commission is not adopting 
    amendments to Regulation S-B to incorporate an item similar to Item 
    305. Small business issuers, however, are required (i) To comply with 
    the amendment regarding accounting policies disclosures for 
    derivatives, (ii) to comply with Rule 12b-20 under the Exchange Act and 
    Rule 408 under the Securities Act, which require registrants to provide 
    additional information about the material effects of derivatives on 
    other information expressly required to be filed with the Commission, 
    and (iii) to the extent market risk represents a known trend, event, or 
    uncertainty, to discuss the impact of market risk on past and future 
    financial condition and results of operations, pursuant to Item 303 of 
    Regulation S-B.
    
    B. Application to Foreign Private Issuers
    
        Item 9A of Form 20-F requires disclosure by all foreign private 
    issuers of quantitative and qualitative information about market risk. 
    In addition, foreign private issuers that prepare financial statements 
    in accordance with Item 18 of Form 20-F are required to provide all 
    information required by U.S. generally accepted accounting principles 
    and Regulation S-X, including descriptions in the footnotes to the 
    financial statements of the policies used to account for derivatives. 
    Foreign private issuers that prepare financial statements in accordance 
    with Item 17 of Form 20-F are not required to provide financial 
    statement disclosures required by U.S. generally accepted accounting 
    principles and Regulation S-X. The amendments requiring disclosures of 
    accounting policies in Rule 4-08(n) of Regulation S-X do not apply to 
    foreign private issuers filing under Item 17 of Form 20-F. However, 
    foreign private
    
    [[Page 6054]]
    
    issuers filing under Item 17 of Form 20-F should consider the guidance 
    presented in Staff Accounting Bulletin Topic 1:D (``SAB Topic 1:D'') to 
    determine if information regarding accounting policies for derivatives 
    should be provided in MD&A.71
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        \71\ SAB Topic 1:D provides several examples of disclosures in 
    MD&A that might be necessary to enable readers to understand the 
    financial statements as a whole. One of those example disclosures 
    includes significant accounting policies and measurement assumptions 
    which may bear upon an understanding of operating trends or 
    financial condition.
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    C. Scope and Definition of Instruments
    
        The instructions to Rule 4-08(n), Item 305, and Item 9A define 
    financial instruments, derivative financial instruments, other 
    financial instruments, and derivative commodity instruments as follows. 
    ``Financial instruments'' have the same meaning as defined by generally 
    accepted accounting principles (see, e.g., FASB, Statement of Financial 
    Accounting Standards No. 107, ``Disclosures about Fair Value of 
    Financial Instruments,'' (``FAS 107'') paragraphs 3 and 8 (December 
    1991)). ``Derivative financial instruments'' are a subset of financial 
    instruments and include futures, forwards, swaps, options, and other 
    financial instruments with similar characteristics, as defined by 
    generally accepted accounting principles (see, e.g., FAS 119 paragraphs 
    5-7 (October 1994)). See, the General Instructions to Paragraphs 305(a) 
    and 305(b) of Item 305 or the General Instructions to Paragraphs 9A(a) 
    and 9A(b) of Item 9A for further details.
        Other financial instruments include all financial instruments that 
    must be disclosed at fair value under FAS 107, except for derivative 
    financial instruments, as defined above. For example, other financial 
    instruments include trade accounts receivable, investments, loans, 
    structured notes, mortgage-backed securities, trade accounts payable, 
    indexed debt instruments, interest-only and principal-only obligations, 
    deposits, and other debt obligations. However, for purposes of this 
    release, trade accounts receivable and trade accounts payable need not 
    be considered other financial instruments when their carrying amounts 
    approximate fair value. Other financial instruments exclude employers' 
    and plans' obligations for pension and other post-retirement benefits, 
    substantively extinguished debt, insurance contracts, lease contracts, 
    warranty obligations and rights, unconditional purchase obligations, 
    investments accounted for under the equity method, minority interests 
    in consolidated enterprises, and equity instruments issued by the 
    registrant and classified in stockholders' equity in the statement of 
    financial position.
        Derivative commodity instruments include, to the extent such 
    instruments are not derivative financial instruments, commodity 
    futures, commodity forwards, commodity swaps, commodity options, and 
    other commodity instruments with similar characteristics, that are 
    permitted by contract or business custom to be settled in cash or with 
    another financial instrument.
        Thus, the instrument definitions described above do not encompass 
    (i) commodity positions, (ii) derivative commodity instruments that are 
    not permitted by contract or business custom to be settled in cash or 
    with another financial instrument (e.g., a commodity forward contract 
    that must be settled in the commodity), (iii) cash flows from 
    anticipated transactions, (e.g., operating cash flows from non-
    financial and non-commodity instruments), and/or (iv) certain financial 
    instruments not included among the required disclosure items.72
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        \72\ See section III B.1.c.(vi), supra, for a further 
    description of the instruments, positions, and transactions 
    described in this paragraph.
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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.
    ---------------------------------------------------------------------------
    
        \75\ For example, assume a French division of a registrant 
    presenting its financial statements in U.S. dollars ($US) invests in 
    a deutschmark(DM)-denominated debt security. This division 
    determines that: (i) The French franc (FF) is its functional 
    currency according to FAS 52, (ii) the $US is its reporting 
    currency, and (iii) the DM is its transactional currency. In 
    preparing the foreign currency sensitivity analysis disclosures, 
    this registrant should report the aggregate potential loss from 
    hypothetical changes in both the DM/FF exchange rate exposure and 
    the FF/$US exchange rate exposure.
    ---------------------------------------------------------------------------
    
    7. Value at Risk--Contextual Disclosures
        To help place reported value at risk amounts in context, the 
    disclosure items in the proposing release specified that registrants 
    should report either (i) the average or range in value at risk amounts 
    for the current reporting period, (ii) the average or range in actual 
    changes in fair values, earnings, or cash flows from market risk 
    sensitive instruments occurring during the current reporting period, or 
    (iii) the percentage of actual changes in fair values, earnings, or 
    cash flows from market risk sensitive instruments that exceeded the 
    reported value at risk amounts during the current reporting period 
    ((i), (ii), and (iii) collectively are referred to as the ``contextual 
    value at risk disclosures'').
        Some commenters suggested that the final disclosure items should 
    encourage, but not require, the contextual value at risk disclosures. 
    Those commenters stated that the Commission would be penalizing 
    registrants for choosing the value at risk disclosure alternative by 
    requiring contextual disclosures that are not required for the other 
    two disclosure alternatives. Other commenters, while supporting the 
    disclosure requirements generally, objected to one or more of the 
    contextual value at risk disclosures.
        The Commission acknowledges the concerns of those commenters, but 
    has decided not to change significantly the contextual disclosure 
    requirements because it believes those disclosures provide investors 
    with information that is important in evaluating the reported value at 
    risk amounts. The disclosure items have been modified only to the 
    extent necessary to clarify the contextual disclosure requirements. 
    These contextual disclosures are common elements to value at risk 
    management systems. Similar disclosures are not available for the
    
    [[Page 6057]]
    
    tabular presentation and sensitivity analysis alternatives; thus, 
    comparable contextual disclosures are not required for those 
    alternatives.
    8. Value at Risk--Aggregated Values
        The proposed disclosure items would have required disclosure of an 
    aggregate value at risk amount across all market risk sensitive 
    instruments. A similar aggregate amount would not have been required 
    for the other two disclosure alternatives.
        Some commenters suggested that it may not be practical to require 
    an aggregate value at risk amount because most registrants do not use a 
    single risk measurement method for all market risk exposures. Other 
    commenters suggested that registrants providing an aggregate value at 
    risk amount for all categories of market risk should not be required to 
    disclose separate value at risk amounts for each market risk exposure 
    category.
        Recognizing that registrants often do not use the same method 
    internally for managing risk across the different market risk exposure 
    categories within the trading and other than trading portfolios, the 
    final disclosure items encourage, but do not require, reporting of 
    aggregate value at risk (and sensitivity analysis) amounts for the 
    trading and other than trading portfolios. Registrants also should note 
    that they may not report aggregate value at risk amounts for the 
    trading and other than trading portfolios in lieu of the required 
    separate value at risk amounts for each market risk exposure category. 
    Separate value at risk amounts provide information about a registrant's 
    specific market risk exposures, which the Commission believes is useful 
    for investors trying to manage specific risks in their investment 
    portfolios.
    9. Model Parameters
        In order to enhance the comparability of sensitivity analysis and 
    value at risk disclosures, some commenters from the user community 
    suggested that the Commission specify certain model parameters. In 
    particular, those commenters suggested that the Commission establish 
    several standard stress tests to be used to calculate sensitivity 
    analysis disclosures, such as the greater of a 15% or 100 basis point 
    adverse interest rate shift along the entire yield curve. Those 
    standard stress tests would require measurement of the potential loss 
    from reasonably expected market movements. Other commenters, however, 
    requested that the Commission not specify model parameters at this time 
    to allow the reporting to be responsive to the ongoing evolution in 
    risk management systems.
        Due to these evolving practices, a guiding principle in the 
    proposing release was to provide flexibility in the sensitivity 
    analysis and value at risk market risk disclosure requirements to 
    accommodate different types of registrants, different degrees of market 
    risk exposure, and alternative ways of measuring market risk. The 
    Commission continues to believe such flexibility is necessary at this 
    time and, therefore, is not specifying uniform model parameters for the 
    calculation of sensitivity analysis and value at risk disclosures.
        The need for such flexibility, however, should not result in 
    selection of model parameters that are not realistic and meaningful 
    measures of reasonably expected market rate and price changes. 
    Accordingly, the Commission has included guidance in the final 
    disclosure items on certain model parameters that should be used by 
    registrants. In particular, this guidance requires registrants to 
    select both hypothetical changes in market rates or prices for 
    sensitivity analysis and confidence intervals for value at risk that 
    reflect reasonably possible near-term changes in market rates and 
    prices. In this regard, the disclosure items indicate that, absent 
    economic justification for the selection of different model parameters, 
    registrants should use hypothetical changes in market rates or prices 
    that are not less than 10 percent of end of period market rates or 
    prices for sensitivity analysis disclosures and confidence intervals 
    that are 95 percent or higher for value at risk disclosures. In the 
    long-term, as more standard risk management practices and methods of 
    reporting market risk are developed, the Commission anticipates that it 
    will further limit the models, assumptions, and parameters permitted in 
    Items 305(a) and 9A(a) to enhance comparability of reported 
    information.
    10. Comparative Information
        Many commenters requested that, if a registrant changes its method 
    of providing quantitative information about market risk from one year 
    to the next, it should not be required to provide comparable summarized 
    information for the preceding period because preparing such 
    presentations and analyses using the new method for preceding periods 
    would be burdensome and costly. Moreover, they suggested that the cost 
    associated with providing comparable summarized information for the 
    preceding year may be a sufficient disincentive to prevent change to a 
    more sophisticated disclosure alternative.
        The Commission believes that information about market risk is most 
    useful for investors when compared to one or more prior periods. For 
    such information to be meaningful, the information needs to be prepared 
    on a consistent basis from period-to-period. The Commission also 
    believes that registrants should be able to change methods of preparing 
    market risk information as their risk management practices evolve. To 
    mitigate the costs of preparing prior period market risk disclosures, 
    the final disclosure items provide two alternatives to registrants that 
    change disclosure alternatives, key model characteristics, assumptions, 
    or parameters. First, a registrant may provide summarized comparable 
    information, under the new disclosure method, for the year preceding 
    the current year. Alternatively, in addition to providing disclosure 
    for the current year under the new method, the registrant may provide 
    disclosure for the current year and preceding fiscal year under the 
    method used in the preceding year.
    11. Effective Dates
        Commenters suggested that time is needed to allow registrants to 
    prepare and implement the new quantitative disclosures about market 
    risk. The Commission agrees with those commenters and, thus, will phase 
    in the amendments over the next several months so that registrants will 
    have time to respond to the new disclosure requirements. For 
    registrants that are likely to have experience with measuring market 
    risk, such as banks, thrifts, and non-bank and non-thrift registrants 
    with market capitalizations on January 28, 1997 in excess of $2.5 
    billion, Items 305 and 9A are effective for filings with the Commission 
    that include annual financial statements for fiscal years ending after 
    June 15, 1997. For other registrants, those Items are effective for 
    filings with the Commission that include annual financial statements 
    for fiscal years ending after June 15, 1998. In addition, under Items 
    305 and 9A, interim information is not required until after the first 
    fiscal year end in which those Items are effective.
    
    C. Qualitative Disclosures About Market Risk
    
    1. Proprietary Information
        Some commenters expressed concerns that a discussion of primary 
    market risk exposures and how those exposures are managed would be 
    proprietary. The
    
    [[Page 6058]]
    
    Commission acknowledges those concerns, but believes that qualitative 
    information about market risk is important to investors. Without the 
    disclosures required by Item 305(b) and Item 9A(b), investors would be 
    unable to understand a registrant's exposures to market risk and unable 
    to place that registrant's market risk management practices within the 
    context of its business. In addition, the qualitative disclosures are 
    not so specific as to require disclosure of the type of information 
    (e.g., current positions) that may harm a registrant's competitive 
    positions. For these primary reasons the Commission has decided to 
    retain the qualitative market risk disclosure requirements.
    2. Examples of How Market Risks Are Managed
        Proposed Items 305(b) and 9A(b) provide examples of possible 
    disclosures regarding how a registrant manages market risk. These 
    examples include a description of the objectives, general strategies, 
    and instruments used to manage market risk. Some commenters inquired 
    whether the description of one or two of these items would be 
    sufficient. Others asked if the examples are intended to be an all-
    inclusive list of items required by Items 305(b) and 9A(b).
        In general, the examples were intended to reflect minimum 
    disclosures that would be necessary to comply with the qualitative 
    market risk disclosure requirements. The examples were neither meant to 
    address all circumstances nor to be all inclusive. The final disclosure 
    items clearly state that the listed items should be addressed within 
    the required disclosures and that registrants also are responsible for 
    providing any additional information necessary to describe completely 
    their primary market risks and how those risks are managed.
    
    D. Implementation Issues
    
    1. Scope of Disclosures
        Several commenters raised issues about the scope of instruments 
    included in the proposed disclosure items. For example, some suggested 
    that information about derivative commodity instruments should not be 
    required because offsetting exposures relating to commodities held or 
    owned were not required. Thus, the disclosures would be presenting only 
    part of registrants' exposure to market risk. Furthermore, they 
    indicated that registrants that hedge commodity exposures could be 
    disclosing more market risk than those that do not participate in 
    hedging activities, even though they may have less exposure to market 
    risk. Similar arguments were made regarding (i) Hedges of anticipated 
    transactions, foreign currency operating cash flows, and inventories 
    and (ii) issuances of debt to fund property, plant, and equipment. In 
    essence, those commenters suggested that the scope of the disclosure 
    requirements is limited and as a result the information required to be 
    disclosed is incomplete. Some commenters suggested that, to address 
    this issue, the instruments covered by the disclosures be expanded to 
    include all types of instruments with market risk. Other commenters 
    suggested reducing the scope of instruments covered by the disclosures, 
    primarily by eliminating derivative commodity instruments.
        The Commission considered expanding the required quantitative 
    disclosures about market risk to include commodity positions and 
    anticipated transactions. However, many internal risk measurement 
    systems currently do not incorporate many commodity positions and 
    anticipated transactions. Thus, the Commission is not requiring the 
    inclusion of these items at this time.
        The Commission believes that derivative commodity instruments often 
    have risks similar to other derivatives and can be used to alter 
    significantly a registrant's commodity risk profile by, for example, 
    locking in the price of a significant portion of its future purchases 
    of commodity inventory. Accordingly, the Commission continues to 
    include those instruments within the scope of the final disclosure 
    items. Without including such instruments in the required disclosures, 
    it would be difficult for investors to distinguish, for example, 
    between those registrants that are sensitive to changes in commodity 
    prices from those that are not.
        In an effort to make disclosures about market risk more 
    comprehensive, the Commission encourages registrants to include 
    voluntarily commodity positions, anticipated transactions, and other 
    market risk sensitive instruments and positions within their market 
    risk disclosures. When these instruments, transactions, and positions 
    are not included in the quantitative disclosures and, as a result, the 
    disclosures do not fully reflect the net market risk exposures of the 
    registrant, Items 305(a) and 9A(a) require that registrants discuss the 
    limitations of the disclosed market risk information resulting from the 
    absence of those items.
    2. The Definition of Financial Instrument
        Commenters suggested that the definition of financial instruments 
    be clarified to exclude explicitly financial instruments that the FASB 
    excluded from FAS 107. Financial instruments excluded from FAS 107 
    disclosures include insurance contracts, lease contracts, and 
    employers' and plans' obligations for pension and other post-retirement 
    obligations. The cash flows in many of these instruments are affected 
    significantly by more than market risk factors, thereby making the 
    quantification of market risk more difficult. The Commission agrees 
    that these instruments should be excluded from the scope of the final 
    disclosure items. Thus, the relevant instructions to Items 305 and 9A 
    indicate that instruments excluded from FAS 107 are excluded from the 
    scope of the final disclosure items. However, registrants are 
    encouraged to include voluntarily such instruments in their market risk 
    disclosures, if such inclusion would make the information more complete 
    and meaningful.
    3. The Definition of Derivative Commodity Instrument
        In the proposed disclosure items, ``derivative commodity 
    instruments'' were defined to include commodity futures, commodity 
    forwards, commodity swaps, commodity options, and other commodity 
    instruments with similar characteristics that are reasonably possible 
    to be settled in cash or with another financial instrument. Some 
    commenters indicated that a reasonably possible test would be too 
    difficult to apply in practice. That is, it may be difficult to 
    distinguish between a commodity contract for which settlement in cash 
    is reasonably possible and a contract for which settlement in cash is 
    not reasonably possible. Some commenters suggested that derivative 
    commodity instruments be defined as those that may be settled in cash 
    in the normal course of business. Those commenters also suggested that 
    the definition of derivative commodity instruments include specifically 
    derivative instruments in which cash settlement is based on the net 
    change in value of the commodity contract.
        In response to those comments, the Commission has amended the 
    definition of derivative commodity instruments to include commodity 
    futures, commodity forwards, commodity swaps, commodity options, and 
    other commodity instruments with similar characteristics that are 
    permitted by contract or business custom to be settled
    
    [[Page 6059]]
    
    in cash or with another financial instrument. In addition, the final 
    disclosure items make clear that settlement in cash includes settlement 
    in cash of the net change in value of the derivative commodity 
    instrument.
    4. Small Business Issuers
        Some commenters suggested that the disclosure requirements in Items 
    305 and 9A should apply to all registrants that have material positions 
    in instruments covered by the proposed disclosure items, including 
    small business issuers filing documents with the Commission in 
    accordance with Regulation S-B. Due to cost-benefit concerns, however, 
    the Commission has determined that some experience should be gained 
    with the disclosure items before proposing that they be applied to 
    small business issuers.
    5. The Disclosure Threshold
        Some commenters suggested that the Commission change the threshold 
    for requiring disclosures of quantitative information about market risk 
    to conform with the disclosure threshold in MD&A. That suggestion was 
    based on a general observation that both MD&A and proposed Items 305 
    and 9A require disclosure of information about known risks and 
    uncertainties and, therefore, should be subject to the same threshold 
    for determining whether disclosure is required. Those commenters 
    indicated that introducing a new and different disclosure threshold 
    could add unnecessary confusion to the disclosure process.
        MD&A addresses a wide array of risks and uncertainties. Thus, the 
    MD&A disclosure threshold (i) Is broad, applying to many different 
    types of exposures, not just market risk and (ii) does not provide 
    specific guidance directly relevant to a threshold for disclosure of 
    quantitative market risk information. In addition, MD&A focuses on 
    events that are judged to be reasonably likely of occurring.
        In contrast, consistent with many internal risk management systems, 
    Item 305 and Item 9A require reporting of losses from events beyond 
    those deemed reasonably likely of occurring. For example, those 
    disclosure Items require reporting of value at risk information on 
    possible future losses, which, at a minimum, are not expected to be 
    exceeded 95% of the time. Likewise, those disclosure Items require 
    reporting of sensitivity analysis information on possible future losses 
    from reasonably possible, not reasonably likely, near-term changes in 
    market rates and prices. Thus, Item 305 and Item 9A are intended to 
    obtain quantitative information about market risk that is incremental 
    to the disclosures about reasonably likely risks and uncertainties 
    required by MD&A.
        As a result, the Commission has decided to retain the disclosure 
    threshold that was proposed. That threshold provides guidelines that 
    focus on market risk, apply explicitly to quantitative disclosures, and 
    most importantly, require disclosure of losses beyond those deemed 
    reasonably likely of occurring.
    6. ``Future'' Losses
        With respect to the disclosure threshold noted above, commenters 
    suggested that the Commission define how far into the future 
    registrants must look to conclude whether or not they may experience 
    material future losses. They suggested replacing the word ``future'' 
    with either the phrase ``near term'' as it is defined in AICPA 
    Statement of Position 94-6, ``Disclosure of Risks and Uncertainties'' 
    (``SOP 94-6'') (December 1994) or ``one year.''
        The Commission agrees with the commenters and has limited the time 
    period over which losses in earnings, fair values, and cash flows 
    should be evaluated to the ``near term.'' In the final disclosure 
    items, the Commission defines ``near term'' to mean a period of time 
    going forward up to one year from the date of the financial statements, 
    which is consistent with the definition in SOP 94-6.
    7. Safe Harbor
        Nearly all of the commenters favored explicit safe harbor 
    protection for the new disclosure of quantitative and qualitative 
    information about market risk. Commenters did not object to the 
    Commission's proposal to extend the Item 305 and Item 9A safe harbors 
    to all types of issuers and transactions.
        Several commenters suggested modifications to the proposed safe 
    harbor. Those commenters argued that the safe harbors should protect 
    all of the qualitative information required by paragraph (b) of Item 
    305 and Item 9A, and not just statements with respect to future 
    reporting periods provided pursuant to paragraph (b)(1)(iii), as 
    proposed.76 A few of these commenters provided examples of 
    disclosures responsive to paragraphs (b)(1)(i) and (b)(1)(ii) of Item 
    305 and Item 9A that they thought could be viewed as being forward 
    looking. As noted above,77 the rule has been clarified to provide 
    that all statements (other than statements of historical fact) provided 
    pursuant to paragraphs (b)(1)(i), (b)(1)(iii) and (c) of Items 305 and 
    9A are ``forward looking statements'' for purposes of the new safe 
    harbor rules. To the extent that information provided pursuant to 
    paragraph (b)(1)(ii) of Items 305 and 9A includes forward looking 
    statements, those statements would be eligible for safe harbor 
    protection.
    ---------------------------------------------------------------------------
    
        \76\ Item 305(b)(1)(iii) was proposed as Item 305(b)(3).
        \77\ See section III B.3.
    ---------------------------------------------------------------------------
    
        Second, most of the commenters remarking on the issue thought that 
    small business issuers voluntarily providing any of the Item 305 and 
    Item 9A disclosures should have the protection of the safe harbor. 
    Under the proposals, the safe harbor would have applied to voluntary 
    disclosures only if all of the quantitative disclosures or all of the 
    qualitative disclosures were provided. In an effort to encourage small 
    business issuers to provide information that they think is appropriate 
    to an understanding of their market risks, Item 10 of Regulation S-B 
    has been changed to extend the Item 305 safe harbor to any Item 305 
    disclosure that is voluntarily provided by a small business issuer.
        Finally, several commenters requested guidance as to whether 
    registrants would have to include ``meaningful cautionary statements'' 
    in addition to the Item 305 and Item 9A disclosures to obtain the 
    protection of the Item 305 and Item 9A safe harbors. In response to 
    these comments, the Commission has clarified in the rule that, for 
    purposes of the Item 305(a) and 9A(a) quantitative disclosures, a 
    registrant will be deemed to have satisfied the ``meaningful cautionary 
    statements'' prong of the safe harbors if it satisfies the requirements 
    of those items. In particular, these items require a description of the 
    assumptions underlying, and the limitations of, the disclosure 
    provided. For the remainder of the information required by the new 
    items, registrants desiring to qualify for the ``meaningful cautionary 
    statements'' prong of the safe harbor will need to consider what 
    information should be given to alert investors to important factors 
    that could cause actual results to differ materially from the 
    information given in the forward looking statements.
    
    VII. Certain Findings
    
        Section 23(a) of the Exchange Act 78 requires the Commission, 
    in adopting final rules under the Exchange Act, to consider the anti-
    competitive effect of such rules, if any, and to balance them against 
    the regulatory benefits that further the purposes of the Exchange Act. 
    Furthermore, Section 2 of the
    
    [[Page 6060]]
    
    Securities Act 79 and Section 3 of the Exchange Act,80 as 
    amended by the recently enacted National Securities Market Improvement 
    Act of 1996 (``Market Improvement Act''),81 provide that whenever 
    the Commission is engaged in rulemaking and is required to consider or 
    determine whether an action is necessary or appropriate in the public 
    interest, the Commission also shall consider, in addition to the 
    protection of investors, whether the action will promote efficiency, 
    competition, and capital formation.
    ---------------------------------------------------------------------------
    
        \78\ 15 U.S.C. 78w(a).
        \79\ 15 U.S.C. 77b.
        \80\ 15 U.S.C. 78c.
        \81\ Pub. L. 104-290, 106, 110 Stat. 3416 (1996).
    ---------------------------------------------------------------------------
    
        As discussed in earlier subsections of this release, the Commission 
    has considered carefully the comments that the Item 305(a) and Item 
    9A(a) quantitative disclosures of market risk, as originally proposed, 
    might provide information useful to a registrant's competitors. The 
    Commission has determined, however, that quantitative disclosures will 
    be helpful to investors' understanding of a registrant's market risk 
    exposures and that sensitivity analysis and value at risk disclosures 
    normally do not allow readers to ascertain detailed information about 
    positions held by registrants. However, in response to registrants with 
    proprietary concerns about reporting period-end information under the 
    sensitivity and value at risk disclosure alternatives, the final 
    disclosure items allow reporting of the average, high, and low 
    sensitivity analysis or value at risk amounts for the fiscal year, as 
    an alternative to year-end amounts. In addition, the final disclosure 
    items also require registrants filing interim reports to provide a 
    discussion and analysis of the sources and effects of material changes 
    in market risk information since the end most recent preceding fiscal 
    year, rather than requiring, as originally proposed, that registrants 
    always furnish complete Item 305(a) or Item 9A(a) information, when 
    such material changes occur.
        The Commission has considered the amendments and new disclosure 
    items discussed in this release in light of the comments received in 
    response to the proposing release and the standards embodied in Section 
    2 of the Securities Act and Sections 3 and 23(a) of the Exchange Act. 
    The Commission believes that any burdens on competition imposed by the 
    adoption of these amendments and disclosure items are necessary and 
    appropriate in furtherance of the purposes of the Exchange Act. Some 
    commenters suggested Items 305 and 9A could create incentives for the 
    development of new products that do not trade on exchanges and would 
    not be subject to the new disclosures because of their non-cash-
    settlement feature. The Commission intends to review the effects of the 
    disclosures on the markets and expects to reconsider the disclosure 
    items after three years. The Commission will be able to address any 
    such concerns at such time. The Commission believes that Items 305 and 
    9A are necessary and appropriate in the public interest and for the 
    protection of investors because of the need for improved disclosure 
    about market risk to help investors better understand and evaluate a 
    registrant's exposures to market risk.
        As described in more detail in the cost-benefit section of this 
    release, the Commission made a number of changes from the rules as 
    proposed to increase flexibility for registrants in providing the 
    required disclosures and keeping the cost of compliance to a minimum, 
    thus promoting efficiency. In addition, by enhancing investor's 
    understanding of registrants' market risk exposures the disclosure 
    items should promote the efficient allocation of capital. Thus, the 
    disclosure items will promote competition, efficiency, and enhance the 
    U.S. capital formation process.
    
    VIII. Cost-Benefit Analysis
    
    A. Background
    
        In general, Rule 4-08(n), Item 305, and Item 9A, clarify existing 
    standards and rules, include additional instruments within existing 
    standards, and require specific disclosure alternatives for providing 
    quantitative disclosures regarding market risk sensitive instruments. 
    In particular, these provisions include:
        1. Enhanced descriptions of accounting policies for derivatives;
        2. Quantitative disclosures about market risk; and
        3. Additional qualitative disclosures about market risk.
        These provisions are being adopted in response to requests from 
    investors and others to provide more meaningful information about 
    market risk sensitive instruments.82 The expected benefits of 
    these rules and items are to make information about market risk 
    sensitive instruments, including derivatives, more understandable to 
    investors and others. This increased understanding is expected to 
    enhance the ability of investors to make investment decisions and to 
    improve the efficiency of the markets. The Commission believes these 
    benefits will outweigh the related costs, which are discussed below.
    ---------------------------------------------------------------------------
    
        \82\ See notes 22-29, supra, for examples of investors, 
    regulators, and other private bodies endorsing or recommending 
    improved quantitative disclosures about market risk.
    ---------------------------------------------------------------------------
    
    B. Descriptions of Accounting Policies for Derivatives
    
        FAS 119 was designed, in part, to help investors and others 
    understand how derivative financial instruments are reported in the 
    financial statements.83 FAS 119 requires, among other things, 
    disclosure of the policies used to account for derivative financial 
    instruments, pursuant to the requirements of APB 22.84 However, 
    the scope of FAS 119 is limited to derivative financial instruments 
    and, therefore, it does not apply to other derivative instruments with 
    similar characteristics, such as derivative commodity instruments. In 
    addition, FAS 119 does not provide explicit guidance indicating what 
    must be described in accounting policies footnotes to make the 
    financial statement effects of derivatives more understandable. The SEC 
    staff found that the accounting policies footnotes for derivatives 
    often were too general in nature, not reflecting adequately the choices 
    made by registrants in their accounting for derivatives.
    ---------------------------------------------------------------------------
    
        \83\ See FAS 119 para. 60.
        \84\ See FAS 119 para. 8. See also note 39, supra, for a 
    discussion of the requirements of APB 22.
    ---------------------------------------------------------------------------
    
        New Rule 4-08(n) requires descriptions of accounting policies for 
    derivative financial instruments and derivative commodity instruments, 
    unless the registrant's derivative activities are not material. Thus, 
    the scope of the amendments is broader than the scope of FAS 119. In 
    addition, to help make clear the impact of derivatives on the financial 
    statements, Rule 4-08(n) makes explicit the items to be disclosed in 
    the accounting policies footnotes.
        Rule 4-08(n) is likely to result in a more focused and descriptive 
    discussion of the accounting policies for both derivative financial 
    instruments and derivative commodity instruments. This additional 
    information is likely to result in additional preparation, audit, and 
    printing costs. However, because accounting policies for these 
    instruments are known by registrants and should be known by their 
    auditors, most of the preparation and audit costs are expected to 
    relate to initial compliance with the amendments. These costs, along 
    with expected printing costs, are not estimated to be significant. 
    Other costs, such as ongoing recordkeeping and compliance costs, also 
    are not expected to be significant.
    
    [[Page 6061]]
    
    C. Quantitative Information About Market Risk
    
        As discussed earlier in this release, under Item 305(a) and Item 
    9A(a), registrants are required to present quantitative information 
    about market risk. An important aspect of this requirement, from a cost 
    perspective, is that registrants will have the flexibility to choose 
    one or more of three disclosure alternatives (tabular presentation, 
    sensitivity analysis, or value at risk) to provide such quantitative 
    information about market risk.
        The Commission believes that, for registrants electing to provide 
    tabular disclosure, much of the required information is currently 
    available. Thus, additional costs relating to recordkeeping are not 
    expected to be significant. While increased reporting and compliance 
    burdens may result, in many cases the information presented in the 
    tabular disclosures is used in managing the business activities of the 
    registrant and may be available at relatively low incremental costs. 
    Further, registrants complying with Securities Act Industry Guide 
    3,85 principally financial institutions, already disclose a 
    significant amount of the required information.
    ---------------------------------------------------------------------------
    
        \85\ Securities Act Industry Guide 3, ``Statistical Disclosure 
    by Bank Holding Companies.'' Exchange Act Industry Guide 3 is 
    identical to the Securities Act guide. Detailed disclosures are 
    required under Guide 3 of, among other things, the registrant's: (i) 
    Distribution of assets, liabilities and stockholders' equity; 
    interest rates and interest differential; (ii) investment portfolio; 
    (iii) loan portfolio (including types of loans, maturities and 
    sensitivities of loans to changes in interest rates, risk elements, 
    and loans outstanding in foreign countries); (iv) deposits; and (v) 
    short-term borrowings.
    ---------------------------------------------------------------------------
    
        Registrants that choose to use either the sensitivity or value at 
    risk disclosure alternatives may incur significant additional costs if 
    they currently do not use these methodologies to manage market risk. In 
    contrast, if registrants currently use sensitivity or value at risk 
    analyses to manage market risk, the Commission believes that any 
    additional costs associated with complying with Item 305(a) or Item 
    9A(a) are not expected to be significant. The Commission recognizes 
    that, for some registrants, the start-up costs to prepare the 
    quantitative disclosures about market risk may be significant. However, 
    in the near term, the Commission expects that the development of 
    software related to market risk analysis will reduce these costs 
    materially. In addition, the Commission understands that some of the 
    data and the systems needed to develop these analyses recently have 
    been made available at a relatively moderate cost.86 Moreover, 
    some registrants are required to prepare such information for 
    regulatory capital measurement purposes. In particular, thrift 
    institutions are required to prepare fair value sensitivity analyses 
    for risk-based capital purposes.87 Also, banks and bank holding 
    companies with significant exposure to market risk are required to 
    prepare a value at risk analysis for risk-based capital 
    purposes.88 Thus, the costs associated with the sensitivity and 
    value at risk analyses may vary depending on (i) Whether the registrant 
    currently engages in these analyses for other management or regulatory 
    purposes; and (ii) the particular model and assumptions used in the 
    registrant's calculations. Any registrant that believes the cost of 
    such analyses outweigh the benefits of disclosing them, however, may 
    elect to provide tabular presentation of information about market risk 
    sensitive instruments.
    ---------------------------------------------------------------------------
    
        \86\ See Wall Street Journal, ``Morgan Unveils the Way It 
    Measures Market Risk'' C1 (October 11, 1994).
        \87\ See note 48, supra.
        \88\ See Department of the Treasury, Federal Reserve System, and 
    Federal Deposit Insurance Corporation Joint final rule, ``Risk-Based 
    Capital Standards: Market Risk,'' 61 FR 47358 (September 6, 1996).
    ---------------------------------------------------------------------------
    
        In response to the comment letters, the Commission made several 
    changes in Item 305(a) and Item 9A(a) that should reduce the cost for 
    registrants preparing disclosures of quantitative information about 
    market risk. These changes are described in detail above, under the 
    caption ``Response to Comments.'' In brief, changes that should reduce 
    registrants' costs include:
    
         Delaying the effective date of the market risk 
    disclosure requirements for banks, thrifts, and non-bank and non-
    thrift registrants with market capitalizations on January 28, 1997 
    in excess of $2.5 billion until filings made with the Commission 
    include annual financial statements for years ending after June 15, 
    1997. For non-bank and non-thrift registrants with market 
    capitalizations on January 28, 1997 of $2.5 billion or less, the 
    effective date is delayed until filings with the Commission include 
    annual financial statements for fiscal years ending after June 15, 
    1998.
         Permitting the use of different quantitative disclosure 
    alternatives for market risks inherent in (1) the trading portfolio, 
    (2) the ``other than trading'' portfolio, and (3) different market 
    risk exposure categories within each of those portfolios. This often 
    will allow registrants that use different methods to manage 
    different types of market risk to report quantitative information 
    according to the method used for internal risk management purposes, 
    instead of having to conform all disclosures to one disclosure 
    alternative.
         For the tabular presentation alternative, permitting 
    entities to report together (or group) foreign currency sensitive 
    instruments according to functional currencies that are economically 
    related, are managed together for internal risk purposes, and have 
    statistical correlations of greater than 75% over each of the past 
    three years.
         For the tabular presentation alternative, requiring 
    that instruments be reported based on specified common 
    characteristics only if, or to the extent that, such disaggregation 
    provides material information to investors.
         For the tabular presentation alternative, allowing 
    elimination of disclosure in the foreign currency risk exposure 
    category of currency swaps and foreign currency denominated debt 
    instruments, if the currency swap eliminates all foreign currency 
    exposure in the cash flows of the foreign currency denominated debt 
    instrument.
         Encouraging, rather than requiring, that registrants 
    provide aggregate sensitivity analysis and value at risk amounts for 
    the trading and other than trading portfolios.
         When a registrant changes quantitative disclosure 
    methods from one year to the next, providing two alternatives, 
    rather than one, for disclosing comparative, year-to-year 
    information. First, a registrant may restate the prior year's 
    disclosures based on the new alternative that has been selected for 
    the current year. Second, instead of recreating prior records and 
    information in order to prepare restated information, the registrant 
    may report the prior year's disclosures as originally presented and, 
    in addition to disclosing the current year's information in 
    accordance with the new method, disclose the current year's 
    information under the method used in the prior year.
         Specifically excluding from the scope of the disclosure 
    item certain financial instruments that are not required by 
    generally accepted accounting principles to be disclosed at fair 
    value. Such instruments include but are not limited to pension and 
    other post-retirement benefits, insurance contracts, lease 
    contracts, warranty obligations and rights, and minority positions 
    in consolidated enterprises.
         Limiting to one year how far into the future a 
    registrant must look to determine whether it is reasonably possible 
    that it will experience a loss from its derivative and other 
    financial instruments.
    
        The comment letters did not provide empirical or statistical 
    information about the costs to comply with the proposed quantitative 
    disclosures of market risk. After reviewing the anecdotal information 
    in those letters, however, and despite the changes listed above that 
    further reduce compliance costs, the Commission has reconsidered and 
    increased the estimated time that it may take registrants, on average, 
    to prepare and report quantitative information under Items 305(a) and 
    9A(a). The Commission is increasing to 80 hours the estimated average 
    hours per registrant to comply with Item 305(a) or Item 9A(a). In 
    addition, the
    
    [[Page 6062]]
    
    estimated cost of $40 per hour has been increased to $100 per hour 
    because the Commission believes that the levels of professional 
    services that may be needed to prepare the information may be higher 
    than originally expected. The revised overall cost estimate is 
    approximately $40 million for all registrants complying with the 
    required disclosures of quantitative and qualitative information about 
    market risks.
    
    D. Qualitative Information About Market Risk
    
        FAS 119 requires certain qualitative disclosures about the market 
    risk management activities associated with derivative financial 
    instruments held or issued for purposes other than trading. In 
    particular, FAS 119 requires disclosure of ``the entity's objectives 
    for holding or issuing the derivative financial instruments, the 
    context needed to understand those objectives, and its general 
    strategies for achieving those objectives.'' 89 However, as 
    indicated above, these requirements of FAS 119 only apply to certain 
    derivative financial instruments, and the SEC staff has observed that 
    these disclosures typically have been general in nature, providing only 
    limited insight into an entity's overall market risk management 
    activities.
    ---------------------------------------------------------------------------
    
        \89\ See FAS 119 para. 11a.
    ---------------------------------------------------------------------------
    
        In essence, Items 305(b) and 9A(b) expand certain disclosure 
    requirements set forth in FAS 119 to (1) encompass derivative financial 
    instruments entered into for trading purposes, other financial 
    instruments, and derivative commodity instruments and (2) require 
    registrants to evaluate and describe material changes in their primary 
    risk exposures and their market risk management activities. The 
    Commission believes this will present a more complete discussion of a 
    registrant's exposure to market risks and the way it manages those 
    risks. Because this information is likely to be used by registrants as 
    part of their risk management activities, incremental costs relating to 
    such disclosure are not expected to be significant.
    
    E. Small Business Issuers
    
        As noted earlier, the Commission has determined not to amend 
    Regulation S-B 90 to incorporate an item similar to Item 305. 
    Regulation S-B may be used by small business issuers 91 required 
    to register their securities with the Commission. By excluding small 
    business issuers from all but the accounting policies disclosures that 
    are required by the amendments, the Commission has limited 
    substantially the cost of those proposals for small entities.
    ---------------------------------------------------------------------------
    
        \90\ 17 CFR 228.10 et seq.
        \91\ See note 69, supra.
    ---------------------------------------------------------------------------
    
    IX. Summary of Final Regulatory Flexibility Analysis
    
        The Commission has prepared a Final Regulatory Flexibility Analysis 
    pursuant to the requirements of the Regulatory Flexibility Act, 92 
    regarding the amendments to Rule 4-08 of Regulation S-X, to Regulation 
    S-K to create Item 305, and the conforming amendments to Forms S-1, S-
    2, S-4, S-11, and F-4 under the Securities Act, and Rule 14a-3, 
    Schedule 14A and Forms 10, 20-F, 10-Q, and 10-K under the Exchange Act. 
    This section summarizes that analysis. A copy of the final analysis may 
    be obtained by contacting Robert E. Burns, Chief Counsel, Office of the 
    Chief Accountant, U.S. Securities and Exchange Commission, Mail Stop 
    11-3, 450 Fifth Street, N.W., Washington, D.C. 20549.
    ---------------------------------------------------------------------------
    
        \92\ 5 U.S.C. 604.
    ---------------------------------------------------------------------------
    
        The final regulatory flexibility analysis notes that the amendments 
    clarify existing disclosure requirements, include additional 
    instruments within existing disclosure requirements, and require 
    specific disclosure alternatives for providing quantitative information 
    regarding market sensitive instruments. These amendments are intended 
    to provide investors with a clearer understanding of registrants' use 
    of such instruments and the market risks inherent in those instruments.
        For purposes of the Securities Act of 1933, the term ``small 
    business,'' as used with reference to a registrant (other than an 
    investment company) 93 for the purposes of the Regulatory 
    Flexibility Act, is defined by Rule 157 as an issuer with total assets 
    on the last day of its most recent fiscal year of $5 million or less 
    and which is engaged or proposing to engage in an offering of 
    securities that does not exceed $5 million. 94 For purposes of the 
    Securities Exchange Act of 1934, small business (other than an 
    investment company) is defined in Rule 0-10 to mean issuers having 
    total assets of $5 million or less as of the end of the most recent 
    fiscal year. 95
    ---------------------------------------------------------------------------
    
        \93\ As noted elsewhere in this release, the amendments do not 
    apply to investment companies.
        \94\ 17 C.F.R. 230.157.
        \95\ 17 C.F.R. 240.0-10.
    ---------------------------------------------------------------------------
    
        Approximately 1100 Exchange Act reporting companies satisfy the 
    definition of ``small business'' under Rule 157. As of December 1995, 
    there were approximately 5200 broker-dealers classified as small 
    businesses under the above regulations.
        As fully discussed in the analysis and elsewhere in this release, 
    the Commission has determined not to amend Regulation S-B to 
    incorporate an item similar to Items 305 and 9A. By excluding small 
    business issuers from these new disclosure requirements, the Commission 
    has reduced substantially the impact of the amendments on small 
    entities. Nonetheless, the final regulatory flexibility analysis 
    describes various factors, including changes to the disclosure 
    requirements adopted in response to the comments on the proposing 
    release, that reduce compliance costs for all registrants. These 
    factors also are set forth in the Cost-Benefit Analysis section of this 
    release.
        Rule 4-08 clarifies how the accounting policy disclosure 
    requirements under APB 22 should be applied to derivatives and, 
    therefore, should not place significant additional costs on small 
    entities. The disclosures, however, are likely to result in a more 
    focused and descriptive discussion of the accounting policies for 
    derivatives. Disclosure of this information may result in an increase 
    in costs to prepare and print the disclosures. However, most of the 
    preparation costs are expected to relate to complying initially with 
    the new rule, as the disclosures documenting those policies generally 
    may remain consistent from year to year. These initial costs are not 
    expected to be significant. In addition, because the accounting 
    policies must be known by the registrant in order for the registrant to 
    prepare its financial statements, and should be known by its auditors, 
    no new compliance procedures or recordkeeping is required and there 
    should not be a significant increase, if any, in ongoing compliance 
    costs.
        Moreover, the Commission has determined that, due to the existing 
    disclosure requirements for accounting policies under generally 
    accepted accounting principles and the insignificant economic impact of 
    the enhanced accounting policy disclosures under Rule 4-08, it is 
    neither necessary nor appropriate for the Commission to establish for 
    small entities different compliance or reporting timetables, simplified 
    disclosure requirements, performance standards, or an exemption from 
    the disclosure requirement.
        Only one request was made for the initial regulatory flexibility 
    analysis, and no comments specifically addressed that analysis. 
    Significant cost-benefit issues raised by commenters in response to the 
    proposing release are discussed under the Response to Comments and
    
    [[Page 6063]]
    
    Cost-Benefit Analysis sections of this release, above.
    
    X. Paperwork Reduction Act
    
        The amendments and disclosure items were submitted for review in 
    accordance with the Paperwork Reduction Act of 1995 (``the Act'') 
    96 and were approved by the Office of Management and Budget 
    (``OMB'') in accordance with the clearance procedures of that Act. 
    97 As Regulation S-X, Regulation S-K, and the various forms and 
    rules that are being amended already possess OMB control numbers, new 
    control numbers were not assigned to the collections of information 
    under the amendments. The collection of information requirements under 
    these amendments are mandatory and responses are not confidential. The 
    collections of information are in accordance with 44 U.S.C. 3507. An 
    agency may not conduct or sponsor, and a person is not required to 
    respond to, a collection of information unless it displays a currently 
    valid control number.
    ---------------------------------------------------------------------------
    
        \96\ 44 U.S.C. 3501 et seq.
        \97\ 44 U.S.C. 3507.
    ---------------------------------------------------------------------------
    
        Also in accordance with the Paperwork Reduction Act, the Commission 
    solicited comment on the compliance burdens associated with the 
    proposals, and received no public comment in response. Comments were 
    received, however, that addressed the general costs and benefits 
    associated with the proposed amendment to disclosure Items 305 and 9A. 
    These comments, and the Commission's response, are discussed in the 
    Response to Comments and Cost-Benefit Analysis sections, above.
        As part of its submission to the OMB under the Paperwork Reduction 
    Act, the Commission estimated that approximately 5000 registrants would 
    disclose quantitative and qualitative information under Item 305 or 
    Item 9A. In view of the factors discussed in the Cost-Benefit Analysis 
    section and elsewhere in this release, the Commission recognized that 
    the time required to prepare these disclosures would vary significantly 
    depending on, among other factors, the nature of the registrant's 
    business, its market risk management activities, and other applicable 
    regulatory requirements. The Commission originally estimated that it 
    would take, on average, approximately 40 hours per registrant to 
    prepare such disclosures.
        Upon review of the comment letters, the Commission continues to 
    believe that approximately 5000 registrants will provide Item 305 and 
    Item 9A disclosures. The Commission also continues to believe that many 
    financial services companies will not incur additional expense because 
    they already provide such disclosures. In fact, for some of these 
    companies, their costs may go down as less information may be 
    disclosed. In addition, a significant number of registrants, because of 
    the size or nature of their businesses, do not have a significant 
    number of derivative instruments or do not have complex instruments. 
    For these companies, a simple tabular presentation of debt and similar 
    instruments may suffice. The time and cost to prepare such disclosures 
    should not be significant. For larger commercial corporations, however, 
    the time for preparation and presentation of the required Item 305 or 
    Item 9A information may be more than the Commission initially 
    anticipated. Although no commenter provided statistical or empirical 
    information about the cost to gather, prepare, and disclose such 
    information, several mid to large commercial corporations indicated 
    that they believe they may experience noticeable costs associated with 
    such disclosures. As a result, the Commission is increasing to 80 hours 
    the estimated average hour burden per registrant to comply with Item 
    305 or Item 9A.
    
    XI. Codification Update
    
        The ``Codification of Financial Report Policies'' announced in 
    Financial Reporting Release No. 1 (April 15, 1982) [47 FR 21028] is 
    updated to:
        1. Include a new Section 219, ``Disclosure of Accounting Policies 
    for Derivative Financial Instruments and Derivative Commodity 
    Instruments.''
        2. Include a new paragraph 219.01 to include the text in topic 
    III.A of this release, ``Discussion of Amendments: Disclosure of 
    Accounting Policies for Derivatives.''
        3. Include a new Section 507, ``Disclosure of Quantitative and 
    Qualitative Information About Market Risk Inherent in Derivative 
    Financial Instruments, Other Financial Instruments, and Derivative 
    Commodity Instruments.''
        4. Include a new paragraph 507.01 to include the text in topic II 
    of this release, ``Initiatives Regarding Disclosures About 
    Derivatives.''
        5. Include a new paragraph 507.02 to include the text in topic 
    III.B. of this release, ``Discussion of Amendments: Disclosures of 
    Quantitative and Qualitative Information About Market Risk.''
        6. Include a new paragraph 507.03 to include the text in topic IV 
    of this release, ``Applicability of Amendments.''
        7. Include a new paragraph 507.04 to include the text in topic V of 
    this release, ``Disclosure of the Effects of Derivative Instruments on 
    Reporting Financial Instruments, Commodity Positions, Firm Commitments, 
    and Anticipated Transactions.''
        The Codification is a separate publication of the Commission. It 
    will not be published in the Federal Register/Code of Federal 
    Regulations System.
    
    Statutory Basis
    
        The additions and amendments to the Commission's rules and forms 
    are adopted pursuant to Sections 7, 10, 19, and 27A of the Securities 
    Act of 1933 and Sections 12, 13, 14, 21E, and 23 of the Securities 
    Exchange Act of 1934.
    
    List of Subjects in 17 CFR Parts 210, 228, 229, 239, 240, and 249
    
        Accounting, Reporting and recordkeeping requirements, Securities.
        Text of Amendments
        In accordance with the foregoing, Title 17, Chapter II of the Code 
    of Federal Regulations is amended as follows:
    
    PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
    STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
    1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT 
    COMPANY ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
    
        1. The general authority citation for Part 210 is revised to read 
    as follows:
    
        Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77aa(25), 
    77aa(26), 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e(b), 
    79j(a), 79n, 79t(a), 80a-8, 80a-20, 80a-29, 80a-30, 80a-37a, unless 
    otherwise noted.
    
        2. By amending 210.4-08 by adding paragraph (n) to read as follows:
    
    
    Sec. 210.4-08  General notes to financial statements.
    
    * * * * *
        (n) Accounting policies for certain derivative instruments. 
    Disclosures regarding accounting policies shall include descriptions of 
    the accounting policies used for derivative financial instruments and 
    derivative commodity instruments and the methods of applying those 
    policies that materially affect the determination of financial 
    position, cash flows, or results of operation. This description shall 
    include, to the extent material, each of the following items:
    
    [[Page 6064]]
    
        (1) A discussion of each method used to account for derivative 
    financial instruments and derivative commodity instruments;
        (2) The types of derivative financial instruments and derivative 
    commodity instruments accounted for under each method; (3) The criteria 
    required to be met for each accounting method used, including a 
    discussion of the criteria required to be met for hedge or deferral 
    accounting and accrual or settlement accounting (e.g., whether and how 
    risk reduction, correlation, designation, and effectiveness tests are 
    applied);
        (4) The accounting method used if the criteria specified in 
    paragraph (n)(3) of this section are not met;
        (5) The method used to account for terminations of derivatives 
    designated as hedges or derivatives used to affect directly or 
    indirectly the terms, fair values, or cash flows of a designated item;
        (6) The method used to account for derivatives when the designated 
    item matures, is sold, is extinguished, or is terminated. In addition, 
    the method used to account for derivatives designated to an anticipated 
    transaction, when the anticipated transaction is no longer likely to 
    occur; and
        (7) Where and when derivative financial instruments and derivative 
    commodity instruments, and their related gains and losses, are reported 
    in the statements of financial position, cash flows, and results of 
    operations.
    
    Instructions to Paragraph (n)
    
        1. For purposes of this paragraph (n), derivative financial 
    instruments and derivative commodity instruments (collectively 
    referred to as ``derivatives'') are defined as follows:
        (i) Derivative financial instruments have the same meaning as 
    defined by generally accepted accounting principles (see, e.g., 
    Financial Accounting Standards Board (``FASB''), Statement of 
    Financial Accounting Standards No. 119, ``Disclosure about 
    Derivative Financial Instruments and Fair Value of Financial 
    Instruments,'' (``FAS 119'') paragraphs 5-7, (October 1994)), and 
    include futures, forwards, swaps, options, and other financial 
    instruments with similar characteristics.
        (ii) Derivative commodity instruments include, to the extent 
    such instruments are not derivative financial instruments, commodity 
    futures, commodity forwards, commodity swaps, commodity options, and 
    other commodity instruments with similar characteristics that are 
    permitted by contract or business custom to be settled in cash or 
    with another financial instrument. For purposes of this paragraph, 
    settlement in cash includes settlement in cash of the net change in 
    value of the derivative commodity instrument (e.g., net cash 
    settlement based on changes in the price of the underlying 
    commodity).
        2. For purposes of paragraphs (n)(2), (n)(3), (n)(4), and 
    (n)(7), the required disclosures should address separately 
    derivatives entered into for trading purposes and derivatives 
    entered into for purposes other than trading. For purposes of this 
    paragraph, trading purposes has the same meaning as defined by 
    generally accepted accounting principles (see, e.g., FAS 119, 
    paragraph 9a (October 1994)).
        3. For purposes of paragraph (n)(6), anticipated transactions 
    means transactions (other than transactions involving existing 
    assets or liabilities or transactions necessitated by existing firm 
    commitments) an enterprise expects, but is not obligated, to carry 
    out in the normal course of business (see, e.g., FASB, Statement of 
    Financial Accounting Standards No. 80, ``Accounting for Futures 
    Contracts,'' paragraph 9, (August 1984)).
        4. Registrants should provide disclosures required under 
    paragraph (n) in filings with the Commission that include financial 
    statements of fiscal periods ending after June 15, 1997.
    
    PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
    
        3. The general authority citation for Part 228 is revised to read 
    as follows:
    
        Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
    77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 
    78l, 78m, 78n, 78u-5, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 
    80b-11, unless otherwise noted.
    
        4. By amending Sec. 228.10 by adding paragraph (g) to read as 
    follows:
    
    
    Sec. 228.10  (Item 10) General.
    
    * * * * *
        (g) Quantitative and qualitative disclosures about market risk. The 
    safe harbor provision included in paragraph (d) of Item 305 of 
    Regulation S-K (Sec. 229.305(d) of this chapter) shall apply to 
    information required by Item 305 of Regulation S-K (Sec. 229.305 of 
    this chapter) that is voluntarily provided by or on behalf of a small 
    business issuer as defined in Rule 12b-2 of the Exchange Act.
    
        Note to paragraph (g): Such small business issuers are not 
    required to provide the information required by Item 305 of 
    Regulation S-K.
    
        5. By amending Sec. 228.310 by revising the first sentence of Note 
    2 to read as follows:
    
    
    Sec. 228.310  (Item 310) Financial Statements.
    
        Notes--1. * * *.
        2. Regulation S-X (17 CFR 210.1 through 210.12) Form and Content of 
    and Requirements for Financial Statements shall not apply to the 
    preparation of such financial statements, except that the report and 
    qualifications of the independent accountant shall comply with the 
    requirements of Article 2 of Regulation S-X (17 CFR 210.2), Articles 3-
    19 and 3-20 (17 CFR 210.3-19 and 210.3-20) shall apply to financial 
    statements of foreign private issuers, the description of accounting 
    policies shall comply with Article 4-08(n) of Regulation S-X (17 CFR 
    210.4-08(n)), and small business issuers engaged in oil and gas 
    producing activities shall follow the financial accounting and 
    reporting standards specified in Article 4-10 of Regulation S-X (17 CFR 
    210.4-10) with respect to such activities. * * *
    * * * * *
    
    PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
    ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
    CONSERVATION ACT OF 1975--REGULATION S-K
    
        6. The general authority citation for Part 229 is revised to read 
    in part as follows:
    
        Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
    77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
    77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll(d), 79e, 
    79n, 79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise 
    noted.
    * * * * *
        7. By adding Sec. 229.305 to read as follows:
    
    
    Sec. 229.305  (Item 305) Quantitative and qualitative disclosures about 
    market risk.
    
        (a) Quantitative information about market risk. (1) Registrants 
    shall provide, in their reporting currency, quantitative information 
    about market risk as of the end of the latest fiscal year, in 
    accordance with one of the following three disclosure alternatives. In 
    preparing this quantitative information, registrants shall categorize 
    market risk sensitive instruments into instruments entered into for 
    trading purposes and instruments entered into for purposes other than 
    trading purposes. Within both the trading and other than trading 
    portfolios, separate quantitative information shall be presented, to 
    the extent material, for each market risk exposure category (i.e., 
    interest rate risk, foreign currency exchange rate risk, commodity 
    price risk, and other relevant market risks, such as equity price 
    risk). A registrant may use one of the three alternatives set forth in 
    this section for all of the required quantitative disclosures about 
    market risk. A registrant also may choose, from among the three 
    alternatives, one disclosure alternative for market risk
    
    [[Page 6065]]
    
    sensitive instruments entered into for trading purposes and another 
    disclosure alternative for market risk sensitive instruments entered 
    into for other than trading purposes. Alternatively, a registrant may 
    choose any disclosure alternative, from among the three alternatives, 
    for each risk exposure category within the trading and other than 
    trading portfolios. The three disclosure alternatives are:
        (i)(A)(1) Tabular presentation of information related to market 
    risk sensitive instruments; such information shall include fair values 
    of the market risk sensitive instruments and contract terms sufficient 
    to determine future cash flows from those instruments, categorized by 
    expected maturity dates.
        (2) Tabular information relating to contract terms shall allow 
    readers of the table to determine expected cash flows from the market 
    risk sensitive instruments for each of the next five years. Comparable 
    tabular information for any remaining years shall be displayed as an 
    aggregate amount.
        (3) Within each risk exposure category, the market risk sensitive 
    instruments shall be grouped based on common characteristics. Within 
    the foreign currency exchange rate risk category, the market risk 
    sensitive instruments shall be grouped by functional currency and 
    within the commodity price risk category, the market risk sensitive 
    instruments shall be grouped by type of commodity.
        (4) See the Appendix to this Item for a suggested format for 
    presentation of this information; and
        (B) Registrants shall provide a description of the contents of the 
    table and any related assumptions necessary to understand the 
    disclosures required under paragraph (a)(1)(i)(A) of this Item 305; or
        (ii)(A) Sensitivity analysis disclosures that express the potential 
    loss in future earnings, fair values, or cash flows of market risk 
    sensitive instruments resulting from one or more selected hypothetical 
    changes in interest rates, foreign currency exchange rates, commodity 
    prices, and other relevant market rates or prices over a selected 
    period of time. The magnitude of selected hypothetical changes in rates 
    or prices may differ among and within market risk exposure categories; 
    and
        (B) Registrants shall provide a description of the model, 
    assumptions, and parameters, which are necessary to understand the 
    disclosures required under paragraph (a)(1)(ii)(A) of this Item 305; or
        (iii)(A) Value at risk disclosures that express the potential loss 
    in future earnings, fair values, or cash flows of market risk sensitive 
    instruments over a selected period of time, with a selected likelihood 
    of occurrence, from changes in interest rates, foreign currency 
    exchange rates, commodity prices, and other relevant market rates or 
    prices;
        (B)(1) For each category for which value at risk disclosures are 
    required under paragraph (a)(1)(iii)(A) of this Item 305, provide 
    either:
        (i) The average, high and low amounts, or the distribution of the 
    value at risk amounts for the reporting period; or
        (ii) The average, high and low amounts, or the distribution of 
    actual changes in fair values, earnings, or cash flows from the market 
    risk sensitive instruments occurring during the reporting period; or
        (iii) The percentage or number of times the actual changes in fair 
    values, earnings, or cash flows from the market risk sensitive 
    instruments exceeded the value at risk amounts during the reporting 
    period;
        (2) Information required under paragraph (a)(1)(iii)(B)(1) of this 
    Item 305 is not required for the first fiscal year end in which a 
    registrant must present Item 305 information; and
        (C) Registrants shall provide a description of the model, 
    assumptions, and parameters, which are necessary to understand the 
    disclosures required under paragraphs (a)(1)(iii)(A) and (B) of this 
    Item 305.
        (2) Registrants shall discuss material limitations that cause the 
    information required under paragraph (a)(1) of this Item 305 not to 
    reflect fully the net market risk exposures of the entity. This 
    discussion shall include summarized descriptions of instruments, 
    positions, and transactions omitted from the quantitative market risk 
    disclosure information or the features of instruments, positions, and 
    transactions that are included, but not reflected fully in the 
    quantitative market risk disclosure information.
        (3) Registrants shall present summarized market risk information 
    for the preceding fiscal year. In addition, registrants shall discuss 
    the reasons for material quantitative changes in market risk exposures 
    between the current and preceding fiscal years. Information required by 
    this paragraph (a)(3), however, is not required if disclosure is not 
    required under paragraph (a)(1) of this Item 305 for the current fiscal 
    year. Information required by this paragraph (a)(3) is not required for 
    the first fiscal year end in which a registrant must present Item 305 
    information.
        (4) If registrants change disclosure alternatives or key model 
    characteristics, assumptions, and parameters used in providing 
    quantitative information about market risk (e.g., changing from tabular 
    presentation to value at risk, changing the scope of instruments 
    included in the model, or changing the definition of loss from fair 
    values to earnings), and if the effects of any such change is material, 
    the registrant shall:
        (i) Explain the reasons for the change; and
        (ii) Either provide summarized comparable information, under the 
    new disclosure method, for the year preceding the current year or, in 
    addition to providing disclosure for the current year under the new 
    method, provide disclosures for the current year and preceding fiscal 
    year under the method used in the preceding year.
    
    Instructions to Paragraph 305(a)
    
        1. Under paragraph 305(a)(1):
        A. For each market risk exposure category within the trading and 
    other than trading portfolios, registrants may report the average, 
    high, and low sensitivity analysis or value at risk amounts for the 
    reporting period, as an alternative to reporting year-end amounts.
        B. In determining the average, high, and low amounts for the 
    fiscal year under instruction 1.A. of the Instructions to Paragraph 
    305(a), registrants should use sensitivity analysis or value at risk 
    amounts relating to at least four equal time periods throughout the 
    reporting period (e.g., four quarter-end amounts, 12 month-end 
    amounts, or 52 week-end amounts).
        C. Functional currency means functional currency as defined by 
    generally accepted accounting principles (see, e.g., FASB, Statement 
    of Financial Accounting Standards No. 52, ``Foreign Currency 
    Translation'', (``FAS 52'') paragraph 20 (December 1981)).
        D. Registrants using the sensitivity analysis and value at risk 
    disclosure alternatives are encouraged, but not required, to provide 
    quantitative amounts that reflect the aggregate market risk inherent 
    in the trading and other than trading portfolios.
        2. Under paragraph 305(a)(1)(i):
        A. Examples of contract terms sufficient to determine future 
    cash flows from market risk sensitive instruments include, but are 
    not limited to:
        i. Debt instruments--principal amounts and weighted average 
    effective interest rates;
        ii. Forwards and futures--contract amounts and weighted average 
    settlement prices;
        iii. Options--contract amounts and weighted average strike 
    prices;
        iv. Swaps--notional amounts, weighted average pay rates or 
    prices, and weighted average receive rates or prices; and
        v. Complex instruments--likely to be a combination of the 
    contract terms presented in 2.A.i. through iv. of this Instruction;
        B. When grouping based on common characteristics, instruments 
    should be categorized, at a minimum, by the following 
    characteristics, when material:
        i. Fixed rate or variable rate assets or liabilities;
    
    [[Page 6066]]
    
        ii. Long or short forwards and futures;
        iii. Written or purchased put or call options with similar 
    strike prices;
        iv. Receive fixed and pay variable swaps, receive variable and 
    pay fixed swaps, and receive variable and pay variable swaps;
        v. The currency in which the instruments' cash flows are 
    denominated;
        vi. Financial instruments for which foreign currency transaction 
    gains and losses are reported in the same manner as translation 
    adjustments under generally accepted accounting principles (see, 
    e.g., FAS 52 paragraph 20 (December 1981)); and
        vii. Derivatives used to manage risks inherent in anticipated 
    transactions;
        C. Registrants may aggregate information regarding functional 
    currencies that are economically related, managed together for 
    internal risk management purposes, and have statistical correlations 
    of greater than 75% over each of the past three years;
        D. Market risk sensitive instruments that are exposed to rate or 
    price changes in more than one market risk exposure category should 
    be presented within the tabular information for each of the risk 
    exposure categories to which those instruments are exposed;
        E. If a currency swap (see, e.g., FAS 52 Appendix E for a 
    definition of currency swap) eliminates all foreign currency 
    exposures in the cash flows of a foreign currency denominated debt 
    instrument, neither the currency swap nor the foreign currency 
    denominated debt instrument are required to be disclosed in the 
    foreign currency risk exposure category. However, both the currency 
    swap and the foreign currency denominated debt instrument should be 
    disclosed in the interest rate risk exposure category; and
        F. The contents of the table and related assumptions that should 
    be described include, but are not limited to:
        i. The different amounts reported in the table for various 
    categories of the market risk sensitive instruments (e.g., principal 
    amounts for debt, notional amounts for swaps, and contract amounts 
    for options and futures);
        ii. The different types of reported market rates or prices 
    (e.g., contractual rates or prices, spot rates or prices, forward 
    rates or prices); and
        iii. Key prepayment or reinvestment assumptions relating to the 
    timing of reported amounts.
        3. Under paragraph 305(a)(1)(ii):
        A. Registrants should select hypothetical changes in market 
    rates or prices that are expected to reflect reasonably possible 
    near-term changes in those rates and prices. In this regard, absent 
    economic justification for the selection of a different amount, 
    registrants should use changes that are not less than 10 percent of 
    end of period market rates or prices;
        B. For purposes of instruction 3.A. of the Instructions to 
    Paragraph 305(a), the term reasonably possible has the same meaning 
    as defined by generally accepted accounting principles (see, e.g., 
    FASB, Statement of Financial Accounting Standards No. 5, 
    ``Accounting for Contingencies,'' (``FAS 5'') paragraph 3 (March 
    1975));
        C. For purposes of instruction 3.A. of the Instructions to 
    Paragraph 305(a), the term near term means a period of time going 
    forward up to one year from the date of the financial statements 
    (see generally AICPA, Statement of Position 94-6, ``Disclosure of 
    Certain Significant Risks and Uncertainties,'' (``SOP 94-6'') at 
    paragraph 7 (December 30, 1994));
        D. Market risk sensitive instruments that are exposed to rate or 
    price changes in more than one market risk exposure category should 
    be included in the sensitivity analysis disclosures for each market 
    risk category to which those instruments are exposed;
        E. Registrants with multiple foreign currency exchange rate 
    exposures should prepare foreign currency sensitivity analysis 
    disclosures that measure the aggregate sensitivity to changes in all 
    foreign currency exchange rate exposures, including the effects of 
    changes in both transactional currency/functional currency exchange 
    rate exposures and functional currency/reporting currency exchange 
    rate exposures. For example, assume a French division of a 
    registrant presenting its financial statements in U.S. dollars ($US) 
    invests in a deutschmark(DM)-denominated debt security. In these 
    circumstances, the $US is the reporting currency and the DM is the 
    transactional currency. In addition, assume this division determines 
    that the French franc (FF) is its functional currency according to 
    FAS 52. In preparing the foreign currency sensitivity analysis 
    disclosures, this registrant should report the aggregate potential 
    loss from hypothetical changes in both the DM/FF exchange rate 
    exposure and the FF/$US exchange rate exposure; and
        F. Model, assumptions, and parameters that should be described 
    include, but are not limited to, how loss is defined by the model 
    (e.g., loss in earnings, fair values, or cash flows), a general 
    description of the modeling technique (e.g., duration modeling, 
    modeling that measures the change in net present values arising from 
    selected hypothetical changes in market rates or prices, and a 
    description as to how optionality is addressed by the model), the 
    types of instruments covered by the model (e.g., derivative 
    financial instruments, other financial instruments, derivative 
    commodity instruments, and whether other instruments are included 
    voluntarily, such as certain commodity instruments and positions, 
    cash flows from anticipated transactions, and certain financial 
    instruments excluded under instruction 3.C.ii. of the General 
    Instructions to Paragraphs 305(a) and 305(b)), and other relevant 
    information about the model's assumptions and parameters, (e.g., the 
    magnitude and timing of selected hypothetical changes in market 
    rates or prices used, the method by which discount rates are 
    determined, and key prepayment or reinvestment assumptions).
        4. Under paragraph 305(a)(1)(iii):
        A. The confidence intervals selected should reflect reasonably 
    possible near-term changes in market rates and prices. In this 
    regard, absent economic justification for the selection of different 
    confidence intervals, registrants should use intervals that are 95 
    percent or higher;
        B. For purposes of instruction 4.A. of the Instructions to 
    Paragraph 305(a), the term reasonably possible has the same meaning 
    as defined by generally accepted accounting principles (see, e.g., 
    FAS 5, paragraph 3 (March 1975));
        C. For purposes of instruction 4.A. of the Instructions to 
    Paragraphs 305(a), the term near term means a period of time going 
    forward up to one year from the date of the financial statements 
    (see generally SOP 94-6, at paragraph 7 (December 30, 1994));
        D. Registrants with multiple foreign currency exchange rate 
    exposures should prepare foreign currency value at risk analysis 
    disclosures that measure the aggregate sensitivity to changes in all 
    foreign currency exchange rate exposures, including the aggregate 
    effects of changes in both transactional currency/functional 
    currency exchange rate exposures and functional currency/reporting 
    currency exchange rate exposures. For example, assume a French 
    division of a registrant presenting its financial statements in U.S. 
    dollars ($US) invests in a deutschmark(DM)-denominated debt 
    security. In these circumstances, the $US is the reporting currency 
    and the DM is the transactional currency. In addition, assume this 
    division determines that the French franc (FF) is its functional 
    currency according to FAS 52. In preparing the foreign currency 
    value at risk disclosures, this registrant should report the 
    aggregate potential loss from hypothetical changes in both the DM/FF 
    exchange rate exposure and the FF/$US exchange rate exposure; and
        E. Model, assumptions, and parameters that should be described 
    include, but are not limited to, how loss is defined by the model 
    (e.g., loss in earnings, fair values, or cash flows), the type of 
    model used (e.g., variance/covariance, historical simulation, or 
    Monte Carlo simulation and a description as to how optionality is 
    addressed by the model), the types of instruments covered by the 
    model (e.g., derivative financial instruments, other financial 
    instruments, derivative commodity instruments, and whether other 
    instruments are included voluntarily, such as certain commodity 
    instruments and positions, cash flows from anticipated transactions, 
    and certain financial instruments excluded under instruction 3.C.ii. 
    of the General Instructions to Paragraphs 305(a) and 305(b)), and 
    other relevant information about the model's assumptions and 
    parameters, (e.g., holding periods, confidence intervals, and, when 
    appropriate, the methods used for aggregating value at risk amounts 
    across market risk exposure categories, such as by assuming perfect 
    positive correlation, independence, or actual observed correlation).
        5. Under paragraph 305(a)(2), limitations that should be 
    considered include, but are not limited to:
        A. The exclusion of certain market risk sensitive instruments, 
    positions, and transactions from the disclosures required under 
    paragraph 305(a)(1) (e.g., derivative commodity instruments not 
    permitted by contract or business custom to be settled in cash or 
    with another financial instrument, commodity positions, cash flows 
    from anticipated transactions, and certain financial instruments 
    excluded under instruction 3.C.ii. of the General Instructions to 
    Paragraphs 305(a) and 305(b)). Failure to
    
    [[Page 6067]]
    
    include such instruments, positions, and transactions in preparing 
    the disclosures under paragraph 305(a)(1) may be a limitation 
    because the resulting disclosures may not fully reflect the net 
    market risk of a registrant; and
        B. The ability of disclosures required under paragraph 305(a)(1) 
    to reflect fully the market risk that may be inherent in instruments 
    with leverage, option, or prepayment features (e.g., options, 
    including written options, structured notes, collateralized mortgage 
    obligations, leveraged swaps, and options embedded in swaps).
    
        (b) Qualitative information about market risk. (1) To the extent 
    material, describe:
        (i) The registrant's primary market risk exposures;
        (ii) How those exposures are managed. Such descriptions shall 
    include, but not be limited to, a discussion of the objectives, general 
    strategies, and instruments, if any, used to manage those exposures; 
    and
        (iii) Changes in either the registrant's primary market risk 
    exposures or how those exposures are managed, when compared to what was 
    in effect during the most recently completed fiscal year and what is 
    known or expected to be in effect in future reporting periods.
        (2) Qualitative information about market risk shall be presented 
    separately for market risk sensitive instruments entered into for 
    trading purposes and those entered into for purposes other than 
    trading.
    
    Instructions to Paragraph 305(b)
    
        1. For purposes of disclosure under paragraph 305(b), primary 
    market risk exposures means:
        A. The following categories of market risk: interest rate risk, 
    foreign currency exchange rate risk, commodity price risk, and other 
    relevant market rate or price risks (e.g., equity price risk); and
        B. Within each of these categories, the particular markets that 
    present the primary risk of loss to the registrant. For example, if 
    a registrant has a material exposure to foreign currency exchange 
    rate risk and, within this category of market risk, is most 
    vulnerable to changes in dollar/yen, dollar/pound, and dollar/peso 
    exchange rates, the registrant should disclose those exposures. 
    Similarly, if a registrant has a material exposure to interest rate 
    risk and, within this category of market risk, is most vulnerable to 
    changes in short-term U.S. prime interest rates, it should disclose 
    the existence of that exposure.
        2. For purposes of disclosure under paragraph 305(b), 
    registrants should describe primary market risk exposures that exist 
    as of the end of the latest fiscal year, and how those exposures are 
    managed.
    
    General Instructions to Paragraphs 305(a) and 305(b)
    
        1. The disclosures called for by paragraphs 305(a) and 305(b) 
    are intended to clarify the registrant's exposures to market risk 
    associated with activities in derivative financial instruments, 
    other financial instruments, and derivative commodity instruments.
        2. In preparing the disclosures under paragraphs 305(a) and 
    305(b), registrants are required to include derivative financial 
    instruments, other financial instruments, and derivative commodity 
    instruments.
        3. For purposes of paragraphs 305(a) and 305(b), derivative 
    financial instruments, other financial instruments, and derivative 
    commodity instruments (collectively referred to as ``market risk 
    sensitive instruments'') are defined as follows:
        A. Derivative financial instruments has the same meaning as 
    defined by generally accepted accounting principles (see, e.g., 
    FASB, Statement of Financial Accounting Standards No. 119, 
    ``Disclosure about Derivative Financial Instruments and Fair Value 
    of Financial Instruments,'' (``FAS 119'') paragraphs 5-7 (October 
    1994)), and includes futures, forwards, swaps, options, and other 
    financial instruments with similar characteristics;
        B. Other financial instruments means all financial instruments 
    as defined by generally accepted accounting principles for which 
    fair value disclosures are required (see, e.g., FASB, Statement of 
    Financial Accounting Standards No. 107, ``Disclosures about Fair 
    Value of Financial Instruments,'' (``FAS 107'') paragraphs 3 and 8 
    (December 1991)), except for derivative financial instruments, as 
    defined above;
        C.i. Other financial instruments include, but are not limited 
    to, trade accounts receivable, investments, loans, structured notes, 
    mortgage-backed securities, trade accounts payable, indexed debt 
    instruments, interest-only and principal-only obligations, deposits, 
    and other debt obligations;
        ii. Other financial instruments exclude employers' and plans' 
    obligations for pension and other post-retirement benefits, 
    substantively extinguished debt, insurance contracts, lease 
    contracts, warranty obligations and rights, unconditional purchase 
    obligations, investments accounted for under the equity method, 
    minority interests in consolidated enterprises, and equity 
    instruments issued by the registrant and classified in stockholders' 
    equity in the statement of financial position (see, e.g., FAS 107, 
    paragraph 8 (December 1991)). For purposes of this item, trade 
    accounts receivable and trade accounts payable need not be 
    considered other financial instruments when their carrying amounts 
    approximate fair value; and
        D. Derivative commodity instruments include, to the extent such 
    instruments are not derivative financial instruments, commodity 
    futures, commodity forwards, commodity swaps, commodity options, and 
    other commodity instruments with similar characteristics that are 
    permitted by contract or business custom to be settled in cash or 
    with another financial instrument. For purposes of this paragraph, 
    settlement in cash includes settlement in cash of the net change in 
    value of the derivative commodity instrument (e.g., net cash 
    settlement based on changes in the price of the underlying 
    commodity).
        4.A. In addition to providing required disclosures for the 
    market risk sensitive instruments defined in instruction 2. of the 
    General Instructions to Paragraphs 305(a) and 305(b), registrants 
    are encouraged to include other market risk sensitive instruments, 
    positions, and transactions within the disclosures required under 
    paragraphs 305(a) and 305(b). Such instruments, positions, and 
    transactions might include commodity positions, derivative commodity 
    instruments that are not permitted by contract or business custom to 
    be settled in cash or with another financial instrument, cash flows 
    from anticipated transactions, and certain financial instruments 
    excluded under instruction 3.C.ii. of the General Instructions to 
    Paragraphs 305(a) and 305(b).
        B. Registrants that voluntarily include other market risk 
    sensitive instruments, positions and transactions within their 
    quantitative disclosures about market risk under the sensitivity 
    analysis or value at risk disclosure alternatives are not required 
    to provide separate market risk disclosures for any voluntarily 
    selected instruments, positions, or transactions. Instead, 
    registrants selecting the sensitivity analysis and value at risk 
    disclosure alternatives are permitted to present comprehensive 
    market risk disclosures, which reflect the combined market risk 
    exposures inherent in both the required and any voluntarily selected 
    instruments, position, or transactions. Registrants that choose the 
    tabular presentation disclosure alternative should present 
    voluntarily selected instruments, positions, or transactions in a 
    manner consistent with the requirements in Item 305(a) for market 
    risk sensitive instruments.
        C. If a registrant elects to include voluntarily a particular 
    type of instrument, position, or transaction in their quantitative 
    disclosures about market risk, that registrant should include all, 
    rather than some, of those instruments, positions, or transactions 
    within those disclosures. For example, if a registrant holds in 
    inventory a particular type of commodity position and elects to 
    include that commodity position within their market risk 
    disclosures, the registrant should include the entire commodity 
    position, rather than only a portion thereof, in their quantitative 
    disclosures about market risk.
        5.A. Under paragraphs 305(a) and 305(b), a materiality 
    assessment should be made for each market risk exposure category 
    within the trading and other than trading portfolios.
        B. For purposes of making the materiality assessment under 
    instruction 5.A. of the General Instructions to Paragraphs 305(a) 
    and 305(b), registrants should evaluate both:
        i. The materiality of the fair values of derivative financial 
    instruments, other financial instruments, and derivative commodity 
    instruments outstanding as of the end of the latest fiscal year; and
        ii. The materiality of potential, near-term losses in future 
    earnings, fair values, and/or cash flows from reasonably possible 
    near-term changes in market rates or prices.
        iii. If either paragraphs B.i. or B.ii. in this instruction of 
    the General Instructions to Paragraphs 305(a) and 305(b) are 
    material, the registrant should disclose quantitative and 
    qualitative information about market
    
    [[Page 6068]]
    
    risk, if such market risk for the particular market risk exposure 
    category is material.
        C. For purposes of instruction 5.B.i. of the General 
    Instructions to Paragraphs 305(a) and 305(b), registrants generally 
    should not net fair values, except to the extent allowed under 
    generally accepted accounting principles (see, e.g., FASB 
    Interpretation No. 39, ``Offsetting of Amounts Related to Certain 
    Contracts'' (March 1992)). For example, under this instruction, the 
    fair value of assets generally should not be netted with the fair 
    value of liabilities.
        D. For purposes of instruction 5.B.ii. of the General 
    Instructions to Paragraphs 305(a) and 305(b), registrants should 
    consider, among other things, the magnitude of:
        i. Past market movements;
        ii. Reasonably possible, near-term market movements; and
        iii. Potential losses that may arise from leverage, option, and 
    multiplier features.
        E. For purposes of instructions 5.B.ii and 5.D.ii of the General 
    Instructions to Paragraphs 305(a) and 305(b), the term near term 
    means a period of time going forward up to one year from the date of 
    the financial statements (see generally SOP 94-6, at paragraph 7 
    (December 30, 1994)).
        F. For the purpose of instructions 5.B.ii. and 5.D.ii. of the 
    General Instructions to Paragraphs 305(a) and 305(b), the term 
    reasonably possible has the same meaning as defined by generally 
    accepted accounting principles (see, e.g., FAS 5, paragraph 3 (March 
    1975)).
        6. For purposes of paragraphs 305(a) and 305(b), registrants 
    should present the information outside of, and not incorporate the 
    information into, the financial statements (including the footnotes 
    to the financial statements). In addition, registrants are 
    encouraged to provide the required information in one location. 
    However, alternative presentation, such as inclusion of all or part 
    of the information in Management's Discussion and Analysis, may be 
    used at the discretion of the registrant. If information is 
    disclosed in more than one location, registrants should provide 
    cross-references to the locations of the related disclosures.
        7. For purposes of the instructions to paragraphs 305(a) and 
    305(b), trading purposes has the same meaning as defined by 
    generally accepted accounting principles (see, e.g., FAS 119, 
    paragraph 9a (October 1994)). In addition, anticipated transactions 
    means transactions (other than transactions involving existing 
    assets or liabilities or transactions necessitated by existing firm 
    commitments) an enterprise expects, but is not obligated, to carry 
    out in the normal course of business (see, e.g., FASB, Statement of 
    Financial Accounting Standards No. 80, ``Accounting for Futures 
    Contracts,'' paragraph 9, (August 1984)).
    
        (c) Interim periods. If interim period financial statements are 
    included or are required to be included by Article 3 of Regulation S-X 
    (17 CFR 210), discussion and analysis shall be provided so as to enable 
    the reader to assess the sources and effects of material changes in 
    information that would be provided under Item 305 of Regulation S-K 
    from the end of the preceding fiscal year to the date of the most 
    recent interim balance sheet.
    
    Instructions to Paragraph 305(c)
    
        1. Information required under paragraph (c) of this Item 305 is 
    not required until after the first fiscal year end in which this 
    Item 305 is applicable.
    
        (d) Safe Harbor. (1) The safe harbor provided in Section 27A of the 
    Securities Act of 1933 (15 U.S.C. 77z-2) and Section 21E of the 
    Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe 
    harbors'') shall apply, with respect to all types of issuers and 
    transactions, to information provided pursuant to paragraphs (a), (b), 
    and (c) of this Item 305, provided that the disclosure is made by: an 
    issuer; a person acting on behalf of the issuer; an outside reviewer 
    retained by the issuer making a statement on behalf of the issuer; or 
    an underwriter, with respect to information provided by the issuer or 
    information derived from information provided by the issuer.
        (2) For purposes of paragraph (d) of this Item 305 only:
        (i) All information required by paragraphs (a), (b)(1)(i), 
    (b)(1)(iii), and (c) of this Item 305 is considered forward looking 
    statements for purposes of the statutory safe harbors, except for 
    historical facts such as the terms of particular contracts and the 
    number of market risk sensitive instruments held during or at the end 
    of the reporting period; and
        (ii) With respect to paragraph (a) of this Item 305, the meaningful 
    cautionary statements prong of the statutory safe harbors will be 
    satisfied if a registrant satisfies all requirements of that same 
    paragraph (a) of this Item 305.
        (e) Small business issuers. Small business issuers, as defined in 
    Sec. 230.405 of this chapter and Sec. 230.12b-2 of this chapter, need 
    not provide the information required by this Item 305, whether or not 
    they file on forms specially designated as small business issuer forms.
    
    General Instructions to Paragraphs 305(a), 305(b), 305(c), 305(d), 
    and 305(e)
    
        1. Bank registrants, thrift registrants, and non-bank and non-
    thrift registrants with market capitalizations on January 28, 1997 
    in excess of $2.5 billion should provide Item 305 disclosures in 
    filings with the Commission that include annual financial statements 
    for fiscal years ending after June 15, 1997. Non-bank and non-thrift 
    registrants with market capitalizations on January 28, 1997 of $2.5 
    billion or less should provide Item 305 disclosures in filings with 
    the Commission that include financial statements for fiscal years 
    ending after June 15, 1998.
        2.A. For purposes of instruction 1. of the General Instructions 
    to Paragraphs 305(a), 305(b), 305(c), 305(d), and 305(e), bank 
    registrants and thrift registrants include any registrant which has 
    control over a depository institution.
        B. For purposes of instruction 2.A. of the General Instructions 
    to Paragraphs 305(a), 305(b), 305(c), 305(d), and 305(e), a 
    registrant has control over a depository institution if:
        i. The registrant directly or indirectly or acting through one 
    or more other persons owns, controls, or has power to vote 25% or 
    more of any class of voting securities of the depository 
    institution;
        ii. The registrant controls in any manner the election of a 
    majority of the directors or trustees of the depository institution; 
    or
        iii. The Federal Reserve Board or Office of Thrift Supervision 
    determines, after notice and opportunity for hearing, that the 
    registrant directly or indirectly exercises a controlling influence 
    over the management or policies of the depository institution.
        C. For purposes of instruction 2.B. of the General Instructions 
    to Paragraphs 305(a), 305(b), 305(c), 305(d), and 305(e), a 
    depository institution means any of the following:
        i. An insured depository institution as defined in section 
    3(c)(2) of the Federal Deposit Insurance Act (12 U.S.C.A. Sec. 1813 
    (c));
        ii. An institution organized under the laws of the United 
    States, any State of the United States, the District of Columbia, 
    any territory of the United States, Puerto Rico, Guam, American 
    Somoa, or the Virgin Islands, which both accepts demand deposits or 
    deposits that the depositor may withdraw by check or similar means 
    for payment to third parties or others and is engaged in the 
    business of making commercial loans.
        D. For purposes of instruction 1. of the General Instructions to 
    Paragraphs 305(a), 305(b), 305(c), 305(d) and 305(e), market 
    capitalization is the aggregate market value of common equity as set 
    forth in General Instruction I.B.1. of Form S-3; provided however, 
    that common equity held by affiliates is included in the calculation 
    of market capitalization; and provided further that instead of using 
    the 60 day period prior to filing referenced in General Instruction 
    I.B.1. of Form S-3, the measurement date is January 28, 1997.
    
    Appendix to Item 305--Tabular Disclosures
    
        The tables set forth below are illustrative of the format that 
    might be used when a registrant elects to present the information 
    required by paragraph (a)(1)(i)(A) of Item 305 regarding terms and 
    information about derivative financial instruments, other financial 
    instruments, and derivative commodity instruments. These examples 
    are for illustrative purposes only. Registrants are not required to 
    display the information in the specific format illustrated below. 
    Alternative methods of display are permissible as long as the 
    disclosure requirements of the section are satisfied. Furthermore, 
    these examples were designed primarily to illustrate possible 
    formats for presentation of the information required by the 
    disclosure item and do not purport to illustrate the broad range of 
    derivative financial instruments, other
    
    [[Page 6069]]
    
    financial instruments, and derivative commodity instruments utilized 
    by registrants.
    
    Interest Rate Sensitivity
    
        The table below provides information about the Company's derivative 
    financial instruments and other financial instruments that are 
    sensitive to changes in interest rates, including interest rate swaps 
    and debt obligations. For debt obligations, the table presents 
    principal cash flows and related weighted average interest rates by 
    expected maturity dates. For interest rate swaps, the table presents 
    notional amounts and weighted average interest rates by expected 
    (contractual) maturity dates. Notional amounts are used to calculate 
    the contractual payments to be exchanged under the contract. Weighted 
    average variable rates are based on implied forward rates in the yield 
    curve at the reporting date. The information is presented in U.S. 
    dollar equivalents, which is the Company's reporting currency. The 
    instrument's actual cash flows are denominated in both U.S. dollars 
    ($US) and German deutschmarks (DM), as indicated in parentheses.
    
                                                                                                                                                            
                                                                        December 31, 19X1                                                                   
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Expected maturity date                                
                                                                    ----------------------------------------------------------------------------------------
                                                                                                                                                      Fair  
                                                                        19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                              Liabilities                                                                                                                   
    (7) (US$ Equivalent in millions)                                                                                                                        
                                                                    ----------------------------------------------------------------------------------------
    Long-term Debt:                                                                                                                                         
        Fixed Rate ($US)...........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Fixed Rate (DM)............................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Variable Rate ($US)........................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
                                                                    ----------------------------------------------------------------------------------------
                       Interest Rate Derivatives                                                                                                            
    (7) (In millions)                                                                                                                                       
                                                                    ----------------------------------------------------------------------------------------
    Interest Rate Swaps:                                                                                                                                    
        Variable to Fixed ($US)....................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
            Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Fixed to Variable ($US)....................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
            Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    
    Exchange Rate Sensitivity
    
        The table below provides information about the Company's 
    derivative financial instruments, other financial instruments, and 
    firmly committed sales transactions by functional currency and 
    presents such information in U.S. dollar equivalents.1 The 
    table summarizes information on instruments and transactions that 
    are sensitive to foreign currency exchange rates, including foreign 
    currency forward exchange agreements, deutschmark (DM)-denominated 
    debt obligations, and firmly committed DM sales transactions. For 
    debt obligations, the table presents principal cash flows and 
    related weighted average interest rates by expected maturity dates. 
    For firmly committed DM-sales transactions, sales amounts are 
    presented by the expected transaction date, which are not expected 
    to exceed two years. For foreign currency forward exchange 
    agreements, the table presents the notional amounts and weighted 
    average exchange rates by expected (contractual) maturity dates. 
    These notional amounts generally are used to calculate the 
    contractual payments to be exchanged under the contract.
    ---------------------------------------------------------------------------
    
        \1\ The information is presented in U.S. dollars because that is 
    the registrant's reporting currency.
    
                                                                                                                                                            
                                                                        December 31, 19X1                                                                   
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Expected maturity date                                
                                                                    ----------------------------------------------------------------------------------------
                                                                                                                                                      Fair  
                                                                        19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 On-Balance Sheet Financial Instruments                                                                                                     
    (7) (US$ Equivalent in millions)                                                                                                                        
                                                                    ----------------------------------------------------------------------------------------
    $US Functional Currency \2\:                                                                                                                            
        Liabilities                                                                                                                                         
        Long-Term Debt:                                                                                                                                     
            Fixed Rate (DM)........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average interest rate..................................        X.X        X.X        X.X        X.X        X.X         X.X        X.X  .........
                                                                    ----------------------------------------------------------------------------------------
                                                                                                                                                            
    (7) Expected maturity or transaction date                                                                                                               
          Anticipated Transactions and Related Derivatives \3\                                                                                              
    (7) (US$ Equivalent in millions)                                                                                                                        
                                                                    ----------------------------------------------------------------------------------------
    $US Functional Currency:                                                                                                                                
    
    [[Page 6070]]
    
                                                                                                                                                            
        Firmly committed Sales Contracts (DM)......................       $XXX       $XXX  .........  .........  .........  ..........       $XXX       $XXX
            Forward Exchange Agreements                                                                                                                     
            (Receive $US/Pay DM):..................................                                                                                         
                Contract Amount....................................        XXX        XXX  .........  .........  .........  ..........        XXX        XXX
                Average Contractual Exchange Rate..................        X.X        X.X  .........  .........  .........  ..........        X.X  .........
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \2\ Similar tabular information would be provided for other functional currencies.                                                                      
    \3\ Pursuant to General Instruction 4. to Items 305(a) and 305(b) of Regulation S-K, registrants may include cash flows from anticipated transactions   
      and operating cash flows resulting from non-financial and non-commodity instruments.                                                                  
    
    Commodity Price Sensitivity
    
        The table below provides information about the Company's corn 
    inventory and futures contracts that are sensitive to changes in 
    commodity prices, specifically corn prices. For inventory, the table 
    presents the carrying amount and fair value at December 31, 19x1. For 
    the futures contracts the table presents the notional amounts in 
    bushels, the weighted average contract prices, and the total dollar 
    contract amount by expected maturity dates, the latest of which occurs 
    one year from the reporting date. Contract amounts are used to 
    calculate the contractual payments and quantity of corn to be exchanged 
    under the futures contracts.
    
                                                                            
                                December 31, 19X1                           
    ------------------------------------------------------------------------
                                                      Carrying              
                                                       amount    Fair  value
    ------------------------------------------------------------------------
                                                                            
    (1) (In millions)                                                       
        On Balance Sheet Commodity Position and                             
                  Related Derivatives                                       
        Corn Inventory \4\........................         $XXX         $XXX
    ------------------------------------------------------------------------
                                                      Expected              
                                                      maturity       Fair   
                                                        1992        value   
    ------------------------------------------------------------------------
                  Related Derivatives                                       
    Futures Contracts (Short):                                              
        Contract Volumes (100,000 bushels)........          XXX  ...........
        Weighted Average Price (Per 100,000                                 
         bushels).................................        $X.XX  ...........
        Contract Amount ($US in millions).........         $XXX         $XXX
    ------------------------------------------------------------------------
    \4\ Pursuant to General Instruction 4. to Items 305(a) and 305(b) of    
      Regulation S-K, registrants may include information on commodity      
      positions, such as corn inventory.                                    
    
    PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
    
        8. The general authority citation for Part 239 is revised to read, 
    in part, as follows:
    
        Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
    78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
    79l, 79m, 79n, 79q, 79t, 80a-8, 80a-29, 80a-30 and 80a-37, unless 
    otherwise noted.
    * * * * *
        9. By amending Form S-1 (referenced in Sec. 239.11) by 
    redesignating Items 11(j) through 11(m) as Items 11(k) through 11(n) 
    and adding Item 11(j) to read as follows:
    
        Note--The text of Form S-1 does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form S-1--Registration Statement Under the Securities Act of 1933
    
    * * * * *
    Item 11. Information with Respect to the Registrant
    * * * * *
        (j) Information required by Item 305 of Regulation S-K 
    (Sec. 229.305 of this chapter), quantitative and qualitative 
    disclosures about market risk.
    * * * * *
        10. By amending Form S-2 (referenced in Sec. 239.12) by adding 
    paragraph (9) to Item 11(b), removing ``and'' at the end of Item 
    12(a)(3)(vii), removing the period at the end of Item 12(a)(3)(viii) 
    and in its place adding ``; and'', and adding paragraph (ix) to Item 
    12(a)(3) to read as follows:
    
        Note--The text of Form S-2 does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form S-2--Registration Statement Under the Securities Act of 1933
    
    * * * * *
    Item 11. Information with Respect to the Registrant
        (a) * * *
        (b) * * *
        (9) Furnish quantitative and qualitative disclosures about market 
    risk required by Item 305 of Regulation S-K (Sec. 229.305 of this 
    chapter).
    * * * * *
    Item 12. Incorporation of Certain Information by Reference
        (a) * * *
        (3) * * *
    
    [[Page 6071]]
    
        (ix) quantitative and qualitative disclosures about market risk as 
    required by Item 305 of Regulation S-K (Sec. 229.305 of this chapter).
    * * * * *
        11. By amending Form S-11 (referenced in Sec. 239.18) to 
    redesignate Items 30 through 36 as Items 31 through 37 and to add Item 
    30 to Part I to read as follows:
    
        Note--The text of Form S-11 does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form S-11--Registration Statement Under the Securities Act of 1933
    
    * * * * *
    Item 30. Quantitative and Qualitative Disclosures About Market Risk
        Furnish the information required by Item 305 of Regulation S-K 
    (Sec. 229.305 of this chapter).
    * * * * *
        12. By amending Form S-4 (referenced in Sec. 239.25) by removing 
    ``and'' at the end of Item 12(b)(3)(v) and the period at the end of 
    Item 12(b)(3)(vi) and in its place adding ``; and'', adding paragraph 
    (vii) to Item 12(b)(3), removing ``and'' at the end of Item 13(a)(3)(v) 
    and the period at the end of Item 13(a)(3)(vi) and in its place adding 
    ``; and'', adding paragraph (vii) to Item 13(a)(3), removing ``and'' at 
    the end of Item 14(h) and the period at the end of Item 14(i) and in 
    its place adding ``; and'', adding paragraph (j) to Item 14, and adding 
    paragraph (10) to Item 17(b) to read as follows:
    
        Note--The text of Form S-4 does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form S-4--Registration Statement Under the Securities Act of 1933
    
    * * * * *
    Item 12. Information with Respect to S-2 or S-3 Registrants
    * * * * *
        (b) * * *
        (3) * * *
        (vii) Item 305 of Regulation S-K (Sec. 229.305 of this chapter), 
    quantitative and qualitative disclosures about market risk.
    * * * * *
    Item 13. Incorporation of Certain Information by Reference
    * * * * *
        (a) * * *
        (3) * * *
        (vii) Item 305 of Regulation S-K (Sec. 229.305 of this chapter) 
    quantitative and qualitative disclosures about market risk.
    * * * * *
    Item 14. Information with Respect to Registrants Other Than S-3 or S-2 
    Registrants
    * * * * *
        (j) Item 305 of Regulation S-K (Sec. 229.305 of this chapter), 
    quantitative and qualitative disclosures about market risk.
    * * * * *
    Item 17. Information with Respect to Companies Other Than S-3 or S-2 
    Companies
    * * * * *
        (b) * * *
        (10) Item 305 of Regulation S-K (Sec. 229.305 of this chapter), 
    quantitative and qualitative disclosures about market risk.
    * * * * *
        13. By amending Form F-4 (referenced in Sec. 239.34) to redesignate 
    Item 12(b)(3)(vi) as Item 12(b)(3)(vi)(A), add paragraph (B) to Item 
    12(b)(3)(vi), redesignate Item 14(g) as Item 14(g)(1), add Item 
    14(g)(2), redesignate Item 17(b)(4) as Item 17(b)(4)(i), and add Item 
    17(b)(4)(ii) to read as follows:
    
        Note--The text of Form F-4 does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form F-4--Registration Statement Under the Securities Act of 1933
    
    * * * * *
    Item 12. Information With Respect to F-2 or F-3 Registrants
    * * * * *
        (b) * * *
        (3) * * *
        (vi)(A) * * *
        (B) Item 9A of Form 20-F, quantitative and qualitative disclosures 
    of market risk.
    * * * * *
    Item 14. Information With Respect to Foreign Registrants Other Than F-2 
    or F-3 Registrants
    * * * * *
        (g)(1) * * *
        (2) Item 9A of Form 20-F, quantitative and qualitative disclosures 
    of market risk.
    * * * * *
    Item 17. Information With Respect to Foreign Companies Other Than F-2 
    or F-3 Companies
    * * * * *
        (b) * * *
        (4)(i) * * *
        (b)(4)(ii) Item 9A of Form 20-F, quantitative and qualitative 
    disclosures of market risk.
    * * * * *
    
    PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
    1934
    
        14. The general authority citation for Part 240 is revised to read 
    in part as follows:
    
        Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
    77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78k, 78k-1, 
    78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 79q, 
    79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 80b-11, unless 
    otherwise noted.
    * * * * *
        15. By amending Sec. 240.14a-3 by adding paragraph (b)(5)(iii) to 
    read as follows:
    
    
    Sec. 240.14a-3  Information to be furnished to security holders.
    
    * * * * *
        (b) * * *
        (5) * * *
        (iii) The report shall contain the quantitative and qualitative 
    disclosures about market risk required by Item 305 of Regulation S-K 
    (Sec. 229.305 of this chapter).
    * * * * *
        16. By amending Sec. 240.14a-101 to remove the word ``and'' at the 
    end of Item 13(a)(4), redesignate Item 13(a)(5) as Item 13(a)(6), add 
    Item 13(a)(5), add Instruction 6 to Item 13, remove ``and'' at the end 
    of Item 14(b)(2)(i)(B)(3)(vi) and the period at the end of Item 
    14(b)(2)(i)(B)(3)(vii) and in its place add ``; and'', add paragraph 
    (viii) to Item 14(b)(2)(i)(B)(3), remove ``and'' at the end of Item 
    14(b)(2)(ii)(A)(3)(v) and the period at the end of Item 
    14(b)(2)(ii)(A)(3)(vi) and in its place add ``; and'', add paragraph 
    (vii) to Item 14(b)(2)(ii)(A)(3), remove ``and'' at the end of Item 
    14(b)(3)(i)(H) and the period at the end of Item 14(b)(3)(i)(I) and in 
    its place add ``; and'', add paragraph (J) to Item 14(b)(3)(i), and add 
    Instruction 8 to Item 14 to read as follows:
    
    
    Sec. 240.14a-101  Schedule 14A. Information required in proxy 
    statement.
    
    * * * * *
    Item 13. Financial and other information
        (a) Information required. * * *
        (5) Item 305 of Regulation S-K, quantitative and qualitative 
    disclosures about market risk; and
    * * * * *
    
    Instructions to Item 13
    
    * * * * *
        6. A registered investment company need not comply with items 
    (a)(2), (a)(3), and (a)(5) of this Item 13.
    * * * * *
    
    [[Page 6072]]
    
    Item 14. Mergers, consolidations, acquisitions and similar matters
    * * * * *
        (b) Information about the registrant and the other person.
    * * * * *
        (2) Information with respect to S-2 or S-3 registrants.
        (i) Information required to be furnished. * * *
        (B) * * *
        (3) * * *
        (viii) Item 305 of Regulation S-K (Sec. 229.305 of this chapter), 
    quantitative and qualitative disclosures about market risk.
        (ii) Incorporation of certain information by reference. ***
        (A) * * *
        (3) * * *
        (vii) Item 305 of Regulation S-K (Sec. 229.305 of this chapter), 
    quantitative and qualitative disclosures about market risk.
    * * * * *
        (3) Information with respect to registrants other than S-2 or S-3 
    registrants.
        (i) * * *
        (J) Item 305 of Regulation S-K (Sec. 229.305 of this chapter), 
    quantitative and qualitative disclosures about market risk.
    * * * * *
    
    Instructions to Item 14
    
    * * * * *
        8. A registered management investment company need not comply with 
    items (A), (D), (F), (G), (H), and (J) of paragraph (b)(3)(i) of this 
    Item 14.
    * * * * *
    
    PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
    
        17. The authority for Part 249 continues to read, in part, as 
    follows:
    
        Authority: 15 U.S.C. 78a, et seq., unless otherwise noted;
    
        18. By amending Form 10 (referenced in Sec. 249.210) by revising 
    Item 2 to read as follows:
    
        Note--The text of Form 10 does not, and this amendment will not, 
    appear in the Code of Federal Regulations.
    
    Form 10--General Form for Registration of Securities
    
    * * * * *
    Item 2. Financial Information
        Furnish the information required by Items 301, 303, and 305 of 
    Regulation S-K (Secs. 229.301, 229.303, and 229.305 of this chapter).
    * * * * *
        19. By amending Form 20-F (referenced in Sec. 249.220f) by adding 
    Item 9A to be inserted after Item 9 and before Item 10 in Part I to 
    read as follows:
    
        Note--The text of Form 20-F does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form 20-F--Registration Statement Pursuant to Section 12(b) or (g) of 
    the Securities Exchange Act of 1934; or Annual Report Pursuant to 
    Section 13 or 15(d) of the Securities Exchange Act of 1934; or 
    Transaction Report Pursuant to Section 13 or 15(d) of the Securities 
    Exchange Act of 1934
    
    * * * * *
    Part I
    * * * * *
    Item 9A. Quantitative and Qualitative Disclosures About Market Risk
        (a) Quantitative information about market risk. (1) Registrants 
    shall provide, in their reporting currency, quantitative information 
    about market risk as of the end of the latest fiscal year, in 
    accordance with one of the following three disclosure alternatives. In 
    preparing this quantitative information, registrants shall categorize 
    market risk sensitive instruments into instruments entered into for 
    trading purposes and instruments entered into for purposes other than 
    trading purposes. Within both the trading and other than trading 
    portfolios, separate quantitative information shall be presented, to 
    the extent material, for each market risk exposure category (i.e., 
    interest rate risk, foreign currency exchange rate risk, commodity 
    price risk, and other relevant market risks, such as equity price 
    risk). A registrant may use one of the three alternatives set forth 
    below for all of the required quantitative disclosures about market 
    risk. A registrant also may choose, from among the three alternatives, 
    one disclosure alternative for market risk sensitive instruments 
    entered into for trading purposes and another disclosure alternative 
    for market risk sensitive instruments entered into for other than 
    trading purposes. Alternatively, a registrant may choose any disclosure 
    alternative, from among the three alternatives, for each risk exposure 
    category within the trading and other than trading portfolios. The 
    three disclosure alternatives are:
        (i)(A)(1) Tabular presentation of information related to market 
    risk sensitive instruments; such information shall include fair values 
    of the market risk sensitive instruments and contract terms sufficient 
    to determine future cash flows from those instruments, categorized by 
    expected maturity dates.
        (2) Tabular information relating to contract terms shall allow 
    readers of the table to determine expected cash flows from the market 
    risk sensitive instruments for each of the next five years. Comparable 
    tabular information for any remaining years shall be displayed as an 
    aggregate amount.
        (3) Within each risk exposure category, the market risk sensitive 
    instruments shall be grouped based on common characteristics. Within 
    the foreign currency exchange rate risk category, the market risk 
    sensitive instruments shall be grouped by functional currency and 
    within the commodity price risk category, the market risk sensitive 
    instruments shall be grouped by type of commodity.
        (4) See the Appendix to this Item for a suggested format for 
    presentation of this information; and
        (B) Registrants shall provide a description of the contents of the 
    table and any related assumptions necessary to understand the 
    disclosures required under paragraph (a)(1)(i)(A) of this Item 9A; or
        (ii)(A) Sensitivity analysis disclosures that express the potential 
    loss in future earnings, fair values, or cash flows of market risk 
    sensitive instruments resulting from one or more selected hypothetical 
    changes in interest rates, foreign currency exchange rates, commodity 
    prices, and other relevant market rates or prices over a selected 
    period of time. The magnitude of selected hypothetical changes in rates 
    or prices may differ among and within market risk exposure categories; 
    and
        (B) Registrants shall provide a description of the model, 
    assumptions, and parameters, which are necessary to understand the 
    disclosures required under paragraph (a)(1)(ii)(A) of this Item 9A; or
        (iii)(A) Value at risk disclosures that express the potential loss 
    in future earnings, fair values, or cash flows of market risk sensitive 
    instruments over a selected period of time, with a selected likelihood 
    of occurrence, from changes in interest rates, foreign currency 
    exchange rates, commodity prices, and other relevant market rates or 
    prices;
        (B)(1) For each category for which value at risk disclosures are 
    required under paragraph (a)(1)(iii)(A) of this Item 9A, provide 
    either:
        (i) The average, high and low amounts, or the distribution of the 
    value at risk amounts for the reporting period; or
        (ii) The average, high and low amounts, or the distribution of 
    actual changes in fair values, earnings, or cash
    
    [[Page 6073]]
    
    flows from the market risk sensitive instruments occurring during the 
    reporting period; or
        (iii) The percentage or number of times the actual changes in fair 
    values, earnings, or cash flows from the market risk sensitive 
    instruments exceeded the value at risk amounts during the reporting 
    period;
        (2) Information required under paragraph (a)(1)(iii)(B)(1) of this 
    Item 9A is not required for the first fiscal year end in which a 
    registrant must present Item 9A information; and
        (C) Registrants shall provide a description of the model, 
    assumptions, and parameters, which are necessary to understand the 
    disclosures required under paragraphs (a)(1)(iii) (A) and (B) of this 
    Item 9A.
        (2) Registrants shall discuss material limitations that cause the 
    information required under paragraph (a)(1) of this Item 9A not to 
    reflect fully the net market risk exposures of the entity. This 
    discussion shall include summarized descriptions of instruments, 
    positions, and transactions omitted from the quantitative market risk 
    disclosure information or the features of instruments, positions, and 
    transactions that are included, but not reflected fully in the 
    quantitative market risk disclosure information.
        (3) Registrants shall present summarized market risk information 
    for the preceding fiscal year. In addition, registrants shall discuss 
    the reasons for material quantitative changes in market risk exposures 
    between the current and preceding fiscal years. Information required by 
    this paragraph (a)(3), however, is not required if disclosure is not 
    required under paragraph (a)(1) of this Item 9A for the current fiscal 
    year. Information required by this paragraph (a)(3) is not required for 
    the first fiscal year end in which a registrant must present Item 9A 
    information.
        (4) If registrants change disclosure alternatives or key model 
    characteristics, assumptions, and parameters used in providing 
    quantitative information about market risk (e.g., changing from tabular 
    presentation to value at risk, changing the scope of instruments 
    included in the model, or changing the definition of loss from fair 
    values to earnings), and if the effects of any such change is material, 
    the registrant shall:
        (i) Explain the reasons for the change; and
        (ii) Either provide summarized comparable information, under the 
    new disclosure method, for the year preceding the current year or, in 
    addition to providing disclosure for the current year under the new 
    method, provide disclosures for the current year and preceding fiscal 
    year under the method used in the preceding year.
    
    Instructions to Item 9A(a)
    
        1. Under Item 9A(a)(1):
        A. For each market risk exposure category within the trading and 
    other than trading portfolios, registrants may report the average, 
    high, and low sensitivity analysis or value at risk amounts for the 
    reporting period, as an alternative to reporting year-end amounts.
        B. In determining the average, high, and low amounts for the fiscal 
    year under instruction 1.A. of the Instructions to Item 9A(a), 
    registrants should use sensitivity analysis or value at risk amounts 
    relating to at least four equal time periods throughout the reporting 
    period (e.g., four quarter-end amounts, 12 month-end amounts, or 52 
    week-end amounts).
        C. Functional currency means functional currency as defined by 
    generally accepted accounting principles (see, e.g., FASB, Statement of 
    Financial Accounting Standards No. 52, ``Foreign Currency 
    Translation'', (``FAS 52'') paragraph 20 (December 1981)).
        D. Registrants using the sensitivity analysis and value at risk 
    disclosure alternatives are encouraged, but not required, to provide 
    quantitative amounts that reflect the aggregate market risk inherent in 
    the trading and other than trading portfolios.
        2. Under Item 9A(a)(1)(i):
        A. Examples of contract terms sufficient to determine future cash 
    flows from market risk sensitive instruments include, but are not 
    limited to:
        i. Debt instruments--principal amounts and weighted average 
    effective interest rates;
        ii. Forwards and futures--contract amounts and weighted average 
    settlement prices;
        iii. Options--contract amounts and weighted average strike prices;
        iv. Swaps--notional amounts, weighted average pay rates or prices, 
    and weighted average receive rates or prices; and
        v. Complex instruments--likely to be a combination of the contract 
    terms presented in 2.A.i. through iv. of this Instruction;
        B. When grouping based on common characteristics, instruments 
    should be categorized, at a minimum, by the following characteristics, 
    when material:
        i. Fixed rate or variable rate assets or liabilities;
        ii. Long or short forwards and futures;
        iii. Written or purchased put or call options with similar strike 
    prices;
        iv. Receive fixed and pay variable swaps, receive variable and pay 
    fixed swaps, and receive variable and pay variable swaps;
        v. The currency in which the instruments' cash flows are 
    denominated;
        vi. Financial instruments for which foreign currency transaction 
    gains and losses are reported in the same manner as translation 
    adjustments under generally accepted accounting principles (see, e.g., 
    FAS 52 paragraph 20 (December 1981)); and
        vii. Derivatives used to manage risks inherent in anticipated 
    transactions;
        C. Registrants may aggregate information regarding functional 
    currencies that are economically related, managed together for internal 
    risk management purposes, and have statistical correlations of greater 
    than 75% over each of the past three years;
        D. Market risk sensitive instruments that are exposed to rate or 
    price changes in more than one market risk exposure category should be 
    presented within the tabular information for each of the risk exposure 
    categories to which those instruments are exposed;
        E. If a currency swap (see, e.g., FAS 52 Appendix E for a 
    definition of currency swap) eliminates all foreign currency exposures 
    in the cash flows of a foreign currency denominated debt instrument, 
    neither the currency swap nor the foreign currency denominated debt 
    instrument are required to be disclosed in the foreign currency risk 
    exposure category. However, both the currency swap and the foreign 
    currency denominated debt instrument should be disclosed in the 
    interest rate risk exposure category; and
        F. The contents of the table and related assumptions that should be 
    described include, but are not limited to:
        i. The different amounts reported in the table for various 
    categories of the market risk sensitive instruments (e.g., principal 
    amounts for debt, notional amounts for swaps, and contract amounts for 
    options and futures);
        ii. The different types of reported market rates or prices (e.g., 
    contractual rates or prices, spot rates or prices, forward rates or 
    prices); and
        iii. Key prepayment or reinvestment assumptions relating to the 
    timing of reported amounts.
        3. Under Item 9A(a)(1)(ii):
        A. Registrants should select hypothetical changes in market rates 
    or prices that are expected to reflect reasonably possible near-term 
    changes in those rates and prices. In this regard, absent economic 
    justification for the selection of a different amount,
    
    [[Page 6074]]
    
    registrants should use changes that are not less than 10 percent of end 
    of period market rates or prices;
        B. For purposes of instruction 3.A. of the Instructions to Item 
    9A(a), the term reasonably possible has the same meaning as defined by 
    generally accepted accounting principles (see, e.g., FASB, Statement of 
    Financial Accounting Standards No. 5, ``Accounting for Contingencies,'' 
    (``FAS 5'') paragraph 3 (March 1975));
        C. For purposes of instruction 3.A. of the Instructions to Item 
    9A(a), the term near term means a period of time going forward up to 
    one year from the date of the financial statements (see generally 
    AICPA, Statement of Position 94-6, ``Disclosure of Certain Significant 
    Risks and Uncertainties,'' (``SOP 94-6'') at paragraph 7 (December 30, 
    1994));
        D. Market risk sensitive instruments that are exposed to rate or 
    price changes in more than one market risk exposure category should be 
    included in the sensitivity analysis disclosures for each market risk 
    category to which those instruments are exposed;
        E. Registrants with multiple foreign currency exchange rate 
    exposures should prepare foreign currency sensitivity analysis 
    disclosures that measure the aggregate sensitivity to changes in all 
    foreign currency exchange rate exposures, including the effects of 
    changes in both transactional currency/functional currency exchange 
    rate exposures and functional currency/reporting currency exchange rate 
    exposures. For example, assume a French division of a registrant 
    presenting its financial statements in U.S. dollars ($US) invests in a 
    deutschmark(DM)-denominated debt security. In these circumstances, the 
    $US is the reporting currency and the DM is the transactional currency. 
    In addition, assume this division determines that the French franc (FF) 
    is its functional currency according to FAS 52. In preparing the 
    foreign currency sensitivity analysis disclosures, this registrant 
    should report the aggregate potential loss from hypothetical changes in 
    both the DM/FF exchange rate exposure and the FF/$US exchange rate 
    exposure; and
        F. Model, assumptions, and parameters that should be described 
    include, but are not limited to, how loss is defined by the model 
    (e.g., loss in earnings, fair values, or cash flows), a general 
    description of the modeling technique (e.g., duration modeling, 
    modeling that measures the change in net present values arising from 
    selected hypothetical changes in market rates or prices, and a 
    description as to how optionality is addressed by the model), the types 
    of instruments covered by the model (e.g., derivative financial 
    instruments, other financial instruments, derivative commodity 
    instruments, and whether other instruments are included voluntarily, 
    such as certain commodity instruments and positions, cash flows from 
    anticipated transactions, and certain financial instruments excluded 
    under instruction 3.C.ii. of the General Instructions to Items 9A(a) 
    and 9A(b)), and other relevant information about the model's 
    assumptions and parameters (e.g., the magnitude and timing of selected 
    hypothetical changes in market rates or prices used, the method by 
    which discount rates are determined, and key prepayment or reinvestment 
    assumptions).
        4. Under Item 9A(a)(1)(iii):
        A. The confidence intervals selected should reflect reasonably 
    possible near-term changes in market rates and prices. In this regard, 
    absent economic justification for the selection of different confidence 
    intervals, registrants should use intervals that are 95 percent or 
    higher;
        B. For purposes of instruction 4.A. of the Instructions to Item 
    9A(a), the term reasonably possible has the same meaning as defined by 
    generally accepted accounting principles (see, e.g., FAS 5, paragraph 3 
    (March 1975));
        C. For purposes of instruction 4.A. of the Instructions to Item 
    9A(a), the term near term means a period of time going forward up to 
    one year from the date of the financial statements (see generally SOP 
    94-6, at paragraph 7 (December 30, 1994));
        D. Registrants with multiple foreign currency exchange rate 
    exposures should prepare foreign currency value at risk analysis 
    disclosures that measure the aggregate sensitivity to changes in all 
    foreign currency exchange rate exposures, including the aggregate 
    effects of changes in both transactional currency/functional currency 
    exchange rate exposures and functional currency/reporting currency 
    exchange rate exposures. For example, assume a French division of a 
    registrant presenting its financial statements in U.S. dollars ($US) 
    invests in a deutschmark(DM)-denominated debt security. In these 
    circumstances, the $US is the reporting currency and the DM is the 
    transactional currency. In addition, assume this division determines 
    that the French franc (FF) is its functional currency according to FAS 
    52. In preparing the foreign currency value at risk disclosures, this 
    registrant should report the aggregate potential loss from hypothetical 
    changes in both the DM/FF exchange rate exposure and the FF/$US 
    exchange rate exposure; and
        E. Model, assumptions, and parameters that should be described 
    include, but are not limited to, how loss is defined by the model 
    (e.g., loss in earnings, fair values, or cash flows), the type of model 
    used (e.g., variance/covariance, historical simulation, or Monte Carlo 
    simulation and a description as to how optionality is addressed by the 
    model), the types of instruments covered by the model (e.g., derivative 
    financial instruments, other financial instruments, derivative 
    commodity instruments, and whether other instruments are included 
    voluntarily, such as certain commodity instruments and positions, cash 
    flows from anticipated transactions, and certain financial instruments 
    excluded under instruction 3.C.ii. of the General Instructions to Items 
    9A(a) and 9A(b)), and other relevant information about the model's 
    assumptions and parameters, (e.g., holding periods, confidence 
    intervals, and, when appropriate, the methods used for aggregating 
    value at risk amounts across market risk exposure categories, such as 
    by assuming perfect positive correlation, independence, or actual 
    observed correlation).
        5. Under Item 9A(a)(2), limitations that should be considered 
    include, but are not limited to:
        A. The exclusion of certain market risk sensitive instruments, 
    positions, and transactions from the disclosures required under Item 
    9A(a)(1) (e.g., derivative commodity instruments not permitted by 
    contract or business custom to be settled in cash or with another 
    financial instrument, commodity positions, cash flows from anticipated 
    transactions, and certain financial instruments excluded under 
    instruction 3.C.ii. of the General Instructions to Items 9A(a) and 
    9A(b)). Failure to include such instruments, positions, and 
    transactions in preparing the disclosures under Item 9A(a)(1) may be a 
    limitation because the resulting disclosures may not fully reflect the 
    net market risk of a registrant; and
        B. The ability of disclosures required under Item 9A(a)(1) to 
    reflect fully the market risk that may be inherent in instruments with 
    leverage, option, or prepayment features (e.g., options, including 
    written options, structured notes, collateralized mortgage obligations, 
    leveraged swaps, and options embedded in swaps).
        (b) Qualitative information about market risk. (1) To the extent 
    material, describe:
        (i) The registrant's primary market risk exposures;
    
    [[Page 6075]]
    
        (ii) How those exposures are managed. Such descriptions shall 
    include, but not be limited to, a discussion of the objectives, general 
    strategies, and instruments, if any, used to manage those exposures; 
    and
        (iii) Changes in either the registrant's primary market risk 
    exposures or how those exposures are managed, when compared to what was 
    in effect during the most recently completed fiscal year and what is 
    known or expected to be in effect in future reporting periods.
        (2) Qualitative information about market risk shall be presented 
    separately for market risk sensitive instruments entered into for 
    trading purposes and those entered into for purposes other than 
    trading.
    
    Instructions to Item 9A(b)
    
        1. For purposes of disclosure under Item 9A(b), primary market risk 
    exposures means:
        A. The following categories of market risk: Interest rate risk, 
    foreign currency exchange rate risk, commodity price risk, and other 
    relevant market rate or price risks (e.g., equity price risk); and
        B. Within each of these categories, the particular markets that 
    present the primary risk of loss to the registrant. For example, if a 
    registrant has a material exposure to foreign currency exchange rate 
    risk and, within this category of market risk, is most vulnerable to 
    changes in dollar/yen, dollar/pound, and dollar/peso exchange rates, 
    the registrant should disclose those exposures. Similarly, if a 
    registrant has a material exposure to interest rate risk and, within 
    this category of market risk, is most vulnerable to changes in short-
    term U.S. prime interest rates, it should disclose the existence of 
    that exposure.
        2. For purposes of disclosure under Item 9A(b), registrants should 
    describe primary market risk exposures that exist as of the end of the 
    latest fiscal year, and how those exposures are managed.
    
    General Instructions to Items 9A(a) and 9A(b)
    
        1. The disclosures called for by Items 9A(a) and 9A(b) are intended 
    to clarify the registrant's exposures to market risk associated with 
    activities in derivative financial instruments, other financial 
    instruments, and derivative commodity instruments.
        2. In preparing the disclosures under Items 9A(a) and 9A(b), 
    registrants are required to include derivative financial instruments, 
    other financial instruments, and derivative commodity instruments.
        3. For purposes of Items 9A(a) and 9A(b), derivative financial 
    instruments, other financial instruments, and derivative commodity 
    instruments (collectively referred to as ``market risk sensitive 
    instruments'') are defined as follows:
        A. Derivative financial instruments has the same meaning as defined 
    by generally accepted accounting principles (see, e.g., FASB, Statement 
    of Financial Accounting Standards No. 119, ``Disclosure about 
    Derivative Financial Instruments and Fair Value of Financial 
    Instruments,'' (``FAS 119'') paragraphs 5-7 (October 1994)), and 
    includes futures, forwards, swaps, options, and other financial 
    instruments with similar characteristics;
        B. Other financial instruments means all financial instruments as 
    defined by generally accepted accounting principles for which fair 
    value disclosures are required (see, e.g., FASB, Statement of Financial 
    Accounting Standards No. 107, ``Disclosures about Fair Value of 
    Financial Instruments,'' (``FAS 107'') paragraphs 3 and 8 (December 
    1991)), except for derivative financial instruments, as defined above;
        C.i. Other financial instruments include, but are not limited to, 
    trade accounts receivable, investments, loans, structured notes, 
    mortgage-backed securities, trade accounts payable, indexed debt 
    instruments, interest-only and principal-only obligations, deposits, 
    and other debt obligations;
        ii. Other financial instruments exclude employers' and plans' 
    obligations for pension and other post-retirement benefits, 
    substantively extinguished debt, insurance contracts, lease contracts, 
    warranty obligations and rights, unconditional purchase obligations, 
    investments accounted for under the equity method, minority interests 
    in consolidated enterprises, and equity instruments issued by the 
    registrant and classified in stockholders' equity in the statement of 
    financial position (see, e.g., FAS 107, paragraph 8 (December 1991)). 
    For purposes of this item, trade accounts receivable and trade accounts 
    payable need not be considered other financial instruments when their 
    carrying amounts approximate fair value; and
        D. Derivative commodity instruments include, to the extent such 
    instruments are not derivative financial instruments, commodity 
    futures, commodity forwards, commodity swaps, commodity options, and 
    other commodity instruments with similar characteristics that are 
    permitted by contract or business custom to be settled in cash or with 
    another financial instrument. For purposes of this paragraph, 
    settlement in cash includes settlement in cash of the net change in 
    value of the derivative commodity instrument (e.g., net cash settlement 
    based on changes in the price of the underlying commodity).
        4.A. In addition to providing required disclosures for the market 
    risk sensitive instruments defined in instruction 2. of the General 
    Instructions to Items 9A(a) and 9A(b), registrants are encouraged to 
    include other market risk sensitive instruments, positions, and 
    transactions within the disclosures required under Items 9A(a) and 
    9A(b). Such instruments, positions, and transactions might include 
    commodity positions, derivative commodity instruments that are not 
    permitted by contract or business custom to be settled in cash or with 
    another financial instrument, cash flows from anticipated transactions, 
    and certain financial instruments excluded under instruction 3.C.ii. of 
    the General Instructions to Items 9A(a) and 9A(b).
        B. Registrants that voluntarily include other market risk sensitive 
    instruments, positions and transactions within their quantitative 
    disclosures about market risk under the sensitivity analysis or value 
    at risk disclosure alternatives are not required to provide separate 
    market risk disclosures for any voluntarily selected instruments, 
    positions, or transactions. Instead, registrants selecting the 
    sensitivity analysis and value at risk disclosure alternatives are 
    permitted to present comprehensive market risk disclosures, which 
    reflect the combined market risk exposures inherent in both the 
    required and any voluntarily selected instruments, position, or 
    transactions. Registrants that choose the tabular presentation 
    disclosure alternative should present voluntarily selected instruments, 
    positions, or transactions in a manner consistent with the requirements 
    in Item 9A(a) for market risk sensitive instruments.
        C. If a registrant elects to include voluntarily a particular type 
    of instrument, position, or transaction in their quantitative 
    disclosures about market risk, that registrant should include all, 
    rather than some, of those instruments, positions, or transactions 
    within those disclosures. For example, if a registrant holds in 
    inventory a particular type of commodity position and elects to include 
    that commodity position within their market risk disclosures, the 
    registrant should include the entire commodity position, rather than 
    only a portion thereof, in their quantitative disclosures about market 
    risk.
        5.A. Under Items 9A(a) and 9A(b), a materiality assessment should 
    be made for each market risk exposure category within the trading and 
    other than trading portfolios.
    
    [[Page 6076]]
    
        B. For purposes of making the materiality assessment under 
    instruction 5.A. of the General Instructions to Items 9A(a) and 9A(b), 
    registrants should evaluate both:
        i. The materiality of the fair values of derivative financial 
    instruments, other financial instruments, and derivative commodity 
    instruments outstanding as of the end of the latest fiscal year; and
        ii. The materiality of potential, near-term losses in future 
    earnings, fair values, and cash flows from reasonably possible near-
    term changes in market rates or prices.
        iii. If either paragraphs B.i. or B.ii. in this instruction of the 
    General Instructions to Items 9A(a) and 9A(b) are material, the 
    registrant should disclose quantitative and qualitative information 
    about market risk, if such market risk for the particular market risk 
    exposure category is material.
        C. For purposes of instruction 5.B.i. of the General Instructions 
    to Items 9A(a) and 9A(b), registrants generally should not net fair 
    values, except to the extent allowed under generally accepted 
    accounting principles (see, e.g., FASB Interpretation No. 39, 
    ``Offsetting of Amounts Related to Certain Contracts'' (March 1992)). 
    For example, under this instruction, the fair value of assets generally 
    should not be netted with the fair value of liabilities.
        D. For purposes of instruction 5.B.ii. of the General Instructions 
    to Items 9A(a) and 9A(b), registrants should consider, among other 
    things, the magnitude of:
        i. Past market movements;
        ii. Reasonably possible, near-term market movements; and
        iii. Potential losses that may arise from leverage, option, and 
    multiplier features.
        E. For purposes of instructions 5.B.ii. and 5.D.ii. of the General 
    Instructions to Items 9A(a) and 9A(b), the term near term means a 
    period of time going forward up to one year from the date of the 
    financial statements (see generally SOP 94-6, at paragraph 7 (December 
    30, 1994)).
        F. For the purpose of instructions 5.B.ii. and 5.D.ii. of the 
    General Instructions to Items 9A(a) and 9A(b), the term reasonably 
    possible has the same meaning as defined by generally accepted 
    accounting principles (see, e.g., FAS 5, paragraph 3 (March 1975)).
        6. For purposes of Items 9A(a) and 9A(b), registrants should 
    present the information outside of, and not incorporate the information 
    into, the financial statements (including the footnotes to the 
    financial statements). In addition, registrants are encouraged to 
    provide the required information in one location. However, alternative 
    presentation, such as inclusion of all or part of the information in 
    Management's Discussion and Analysis, may be used at the discretion of 
    the registrant. If information is disclosed in more than one location, 
    registrants should provide cross-references to the locations of the 
    related disclosures.
        7. For purposes of the instructions to Items 9A(a) and 9A(b), 
    trading purposes has the same meaning as defined by generally accepted 
    accounting principles (see, e.g., FAS 119, paragraph 9a (October 
    1994)). In addition, anticipated transactions means transactions (other 
    than transactions involving existing assets or liabilities or 
    transactions necessitated by existing firm commitments) an enterprise 
    expects, but is not obligated, to carry out in the normal course of 
    business (see, e.g., FASB, Statement of Financial Accounting Standards 
    No. 80, ``Accounting for Futures Contracts,'' paragraph 9, (August 
    1984)).
        (c) Interim periods. If interim period financial statements are 
    included or are required to be included by Article 3 of Regulation S-X 
    (17 CFR 210), discussion and analysis shall be provided so as to enable 
    the reader to assess the sources and effects of material changes in 
    information that would be provided under Item 9A of Form 20-F from the 
    end of the preceding fiscal year to the date of the most recent interim 
    balance sheet.
    
    Instructions to Item 9A(c)
    
        1. Information required by paragraph (c) of this Item 9A is not 
    required until after the first fiscal year end in which this Item 9A is 
    applicable.
        (d) Safe Harbor. (1) The safe harbor provided in Section 27A of the 
    Securities Act of 1933 (15 U.S.C. 77z-2) and Section 21E of the 
    Securities Exchange Act of 1934 (15 U.S.C. 78u-5) (``statutory safe 
    harbors'') shall apply, with respect to all types of issuers and 
    transactions, to information provided pursuant to paragraphs (a), (b), 
    and (c) of this Item 9A, provided that the disclosure is made by an 
    issuer; a person acting on behalf of the issuer; an outside reviewer 
    retained by the issuer making a statement on behalf of the issuer; or 
    an underwriter, with respect to information provided by the issuer or 
    information derived from information provided by the issuer.
        (2) For purposes of this paragraph (d) of this Item 9A only:
        (i) All information required by paragraphs (a), (b)(1)(i), 
    (b)(1)(iii), and (c) of this Item 9A is considered forward looking 
    statements for purposes of the statutory safe harbors, except for 
    historical facts such as the terms of particular contracts and the 
    number of market risk sensitive instruments held during or at the end 
    of the reporting period; and
        (ii) With respect to paragraph (a) of this Item 9A, the meaningful 
    cautionary statements prong of the statutory safe harbors will be 
    satisfied if a registrant satisfies all requirements of that same 
    paragraph (a) of this Item 9A.
        (e) Small business issuers. Small business issuers, as defined in 
    Sec. 230.405 of this chapter and Sec. 240.12b-2 of this chapter, need 
    not provide the information required by this Item 9A, whether or not 
    they file on forms specially designated as small business issuer forms.
    
    General Instructions to Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e)
    
        1. Bank registrants, thrift registrants, and non-bank and non-
    thrift registrants with market capitalizations on January 28, 1997 in 
    excess of $2.5 billion should provide Item 9A disclosures in filings 
    with the Commission that include annual financial statements for fiscal 
    years ending after June 15, 1997. Non-bank and non-thrift registrants 
    with market capitalizations on January 28, 1997 of $2.5 billion or less 
    should provide Item 9A disclosures in filings with the Commission that 
    include annual financial statements for fiscal years ending after June 
    15, 1998.
        2.A. For purposes of instruction 1. of the General Instructions to 
    Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), bank registrants and 
    thrift registrants include any registrant which has control over a 
    depository institution.
        B. For purposes of instruction 2.A. of the General Instructions to 
    Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), a registrant has control 
    over a depository institution if:
        i. The registrant directly or indirectly or acting through one or 
    more other persons owns, controls, or has power to vote 25% or more of 
    any class of voting securities of the depository institution;
        ii. The registrant controls in any manner the election of a 
    majority of the directors or trustees of the depository institution; or
        ii. The Federal Reserve Board or Office of Thrift Supervision 
    determines, after notice and opportunity for hearing, that the 
    registrant directly or indirectly exercises a controlling influence 
    over the management or policies of the depository institution;
        C. For purposes of instruction 2.B. of the General Instructions to 
    Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), a depository institution 
    means any of the following:
    
    [[Page 6077]]
    
        i. An insured depository institution as defined in section 3(c)(2) 
    of the Federal Deposit Insurance Act (12 U.S.C.A. Sec. 1813 (c));
        ii. An institution organized under the laws of the United States, 
    any State of the United States, the District of Columbia, any territory 
    of the United States, Puerto Rico, Guam, American Somoa, or the Virgin 
    Islands, which both accepts demand deposits or deposits that the 
    depositor may withdraw by check or similar means for payment to third 
    parties or others and is engaged in the business of making commercial 
    loans.
        D. For purposes of instruction 1. of the General Instructions to 
    Items 9A(a), 9A(b), 9A(c), 9A(d), and 9A(e), market capitalization is 
    the aggregate market value of common equity as set forth in General 
    Instruction I.B.1. of Form S-3; provided however, that common equity 
    held by affiliates is included in the calculation of market 
    capitalization; and provided further that instead of using the 60 day 
    period prior to filing referenced in General Instruction I.B.1. of Form 
    S-3, the measurement date is January 28, 1997.
    
    Appendix to Item 9A--Tabular Disclosures
    
        The tables set forth below are illustrative of the format that 
    might be used when a registrant elects to present the information 
    required by paragraph (a)(1)(i)(A) of Item 9A regarding terms and 
    information about derivative financial instruments, other financial 
    instruments, and derivative commodity instruments. These examples 
    are for illustrative purposes only. Registrants are not required to 
    display the information in the specific format illustrated below. 
    Alternative methods of display are permissible as long as the 
    disclosure requirements of the section are satisfied. Furthermore, 
    these examples were designed primarily to illustrate possible 
    formats for presentation of the information required by the 
    disclosure item and do not purport to illustrate the broad range of 
    derivative financial instruments, other financial instruments, and 
    derivative commodity instruments utilized by registrants.
    
    Interest Rate Sensitivity
    
        The table below provides information about the Company's 
    derivative financial instruments and other financial instruments 
    that are sensitive to changes in interest rates, including interest 
    rate swaps and debt obligations. For debt obligations, the table 
    presents principal cash flows and related weighted average interest 
    rates by expected maturity dates. For interest rate swaps, the table 
    presents notional amounts and weighted average interest rates by 
    expected (contractual) maturity dates. Notional amounts are used to 
    calculate the contractual payments to be exchanged under the 
    contract. Weighted average variable rates are based on implied 
    forward rates in the yield curve at the reporting date. The 
    information is presented in U.S. dollar equivalents, which is the 
    Company's reporting currency. The instrument's actual cash flows are 
    denominated in both U.S. dollars ($US) and German deutschmarks (DM), 
    as indicated in parentheses.
    
                                                                                                                                                            
                                                                        December 31, 19X1                                                                   
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Expected maturity date                                
                                                                    ----------------------------------------------------------------------------------------
                                                                                                                                                      Fair  
                                                                        19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                              Liabilities                                                                                                                   
    (7)(US$ Equivalent in millions)                                                                                                                         
                                                                    ----------------------------------------------------------------------------------------
    Long-term Debt:                                                                                                                                         
        Fixed Rate ($US)...........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Fixed Rate (DM)............................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Variable Rate ($US)........................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
                                                                    ----------------------------------------------------------------------------------------
                       Interest Rate Derivatives                                                                                                            
    (7)(In millions)                                                                                                                                        
                                                                    ----------------------------------------------------------------------------------------
    Interest Rate Swaps:                                                                                                                                    
        Variable to Fixed ($US)....................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
            Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
        Fixed to Variable ($US)....................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average pay rate.......................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
            Average receive rate...................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    
    Exchange Rate Sensitivity
    
        The table below provides information about the Company's 
    derivative financial instruments, other financial instruments, and 
    firmly committed sales transactions by functional currency and 
    presents such information in U.S. dollar equivalents. 1 The 
    table summarizes information on instruments and transactions that 
    are sensitive to foreign currency exchange rates, including foreign 
    currency forward exchange agreements, deutschmark (DM)-denominated 
    debt obligations, and firmly committed DM sales transactions. For 
    debt obligations, the table presents principal cash flows and 
    related weighted average interest rates by expected maturity dates. 
    For firmly committed DM-sales transactions, sales amounts are 
    presented by the expected transaction date, which are not expected 
    to exceed two years. For foreign currency forward exchange 
    agreements, the table presents the notional amounts and weighted 
    average exchange rates by expected (contractual) maturity dates. 
    These notional amounts generally are used to calculate the 
    contractual payments to be exchanged under the contract.
    ---------------------------------------------------------------------------
    
        \1\ The information is presented in U.S. dollars because that is 
    the registrant's reporting currency.
    
    [[Page 6078]]
    
    
    
                                                                                                                                                            
                                                                        December 31, 19X1                                                                   
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                      Expected maturity date                                
                                                                    ----------------------------------------------------------------------------------------
                                                                                                                                                      Fair  
                                                                        19X2       19X3       19X4       19X5       19X6    Thereafter    Total      value  
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 On-Balance Sheet Financial Instruments                                                                                                     
    (7)(US$ Equivalent in millions)                                                                                                                         
                                                                    ----------------------------------------------------------------------------------------
    $US Functional Currency 2:                                                                                                                              
        Liabilities................................................                                                                                         
        Long-Term Debt:............................................                                                                                         
            Fixed Rate (DM)........................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average interest rate..................................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%           
                                                                    ----------------------------------------------------------------------------------------
                                                                                                                                                            
    (7)Expected maturity or transaction date                                                                                                                
           Anticipated Transactions and Related Derivatives 3                                                                                               
    (7)(US$ Equivalent in millions)                                                                                                                         
                                                                    ----------------------------------------------------------------------------------------
    $US Functional Currency:                                                                                                                                
        Firmly committed Sales Contracts (DM)......................       $XXX       $XXX  .........  .........  .........  ..........       $XXX       $XXX
            Forward Exchange Agreements (Receive $US/Pay DM):                                                                                               
        Contract Amount............................................        XXX        XXX  .........  .........  .........  ..........        XXX        XXX
        Average Contractual Exchange Rate..........................       X.X%       X.X%  .........  .........  .........  ..........       X.X%  .........
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \2\ Similar tabular information would be provided for other functional currencies.                                                                      
    \3\ Pursuant to General Instruction 4. to Items 9A(a) and 9A(b) of Form 20-F, registrants may include cash flows from anticipated transactions and      
      operating cash flows resulting from non-financial and non-commodity instruments.                                                                      
    
    Commodity Price Sensitivity
    
        The table below provides information about the Company's corn 
    inventory and futures contracts that are sensitive to changes in 
    commodity prices, specifically corn prices. For inventory, the table 
    presents the carrying amount and fair value at December 31, 19x1. 
    For the futures contracts the table presents the notional amounts in 
    bushels, the weighted average contract prices, and the total dollar 
    contract amount by expected maturity dates, the latest of which 
    occurs one year from the reporting date. Contract amounts are used 
    to calculate the contractual payments and quantity of corn to be 
    exchanged under the futures contracts.
    
                                                                            
                                December 31, 19X1                           
    ------------------------------------------------------------------------
                                                      Carrying              
                                                       amount    Fair  value
    ------------------------------------------------------------------------
                                                                            
    (1)(In millions)                                                        
        On Balance Sheet Commodity Position and                             
                  Related Derivatives                                       
        Corn Inventory 4..........................         $XXX         $XXX
    ------------------------------------------------------------------------
                                                      Expected              
                                                      maturity       Fair   
                                                        1992        value   
    ------------------------------------------------------------------------
                  Related Derivatives                                       
    Futures Contracts (Short):                                              
        Contract Volumes (100,000 bushels)........          XXX  ...........
        Weighted Average Price (Per 100,000                                 
         bushels).................................        $X.XX  ...........
        Contract Amount ($US in millions).........         $XXX         $XXX
    ------------------------------------------------------------------------
    4 Pursuant to General Instruction 4. to Items 305(a) and 305(b) of      
      Regulation S-K, registrants may include information on commodity      
      positions, such as corn inventory.                                    
    
        20. By amending Form 10-Q (referenced in Sec. 249.308a) by 
    removing references to ``Items 1 and 2 of Part I of this form'' and 
    adding in their place references to ``Items 1, 2, and 3 of Part I of 
    this form'' in paragraphs 1 and 2 of General Instruction F, adding 
    paragraph 2.c. to General Instruction H and Item 3 to Part I to read 
    as follows:
        Note--The text of Form 10-Q does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form 10-Q--Quarterly Report Pursuant to Section 13 or 15(d) of the 
    Securities Exchange Act of 1934; or Transition Report Pursuant to 
    Section 13 or 15(d) of the Securities Exchange Act of 1934
    
    * * * * *
    
    General Instructions
    
    * * * * *
    H. Omission of Information by Certain Wholly-Owned Subsidiaries
    * * * * *
        2. * * * c. Such registrants may omit the information called for by 
    Item 3 of Part I, Quantitative and Qualitative Disclosures About Market 
    Risk.
    * * * * *
    
    Part I--Financial Information
    
    * * * * *
    
    [[Page 6079]]
    
    Item 3. Quantitative and Qualitative Disclosures About Market Risk
        Furnish the information required by Item 305 of Regulation S-K 
    (Sec. 229.305 of this chapter).
    * * * * *
        21. By amending Form 10-K (referenced in Sec. 249.310) by adding 
    Item 7A to be inserted after Item 7 and before Item 8 in Part II to 
    read as follows:
        Note--The text of Form 10-K does not, and this amendment will 
    not, appear in the Code of Federal Regulations.
    
    Form 10-K--Annual Report Pursuant to Section 13 or 15(d) of the 
    Securities Exchange Act of 1934; or Transition Report Pursuant to 
    Section 13 or 15(d) of the Securities Exchange Act of 1934
    
    * * * * *
    
    Part II
    
    * * * * *
    Item 7A. Quantitative and Qualitative Disclosures About Market Risk
        Furnish the information required by Item 305 of Regulation S-K 
    (Sec. 229.305 of this chapter).
    * * * * *
        Dated: January 31, 1997.
    
        By the Commission.
    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 97-2991 Filed 2-7-97; 8:45 am]
    BILLING CODE 8010-01-P
    
    
    

Document Information

Published:
02/10/1997
Department:
Securities and Exchange Commission
Entry Type:
Rule
Action:
Final rule.
Document Number:
97-2991
Pages:
6044-6079 (36 pages)
Docket Numbers:
Release Nos. 33-7386, 34-38223, IC-22487, FR-48, International Series No. 1047, File No. S7-35-95
RINs:
3235-AG42: Disclosure of Accounting Policies for Derivative Instruments and Disclosure of Qualitative and Quantitative Information About Market Risk in Certain Instruments, 3235-AG77: Safe Harbor for Disclosure of Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments, and Derivative Commodity Instruments
RIN Links:
https://www.federalregister.gov/regulations/3235-AG42/disclosure-of-accounting-policies-for-derivative-instruments-and-disclosure-of-qualitative-and-quant, https://www.federalregister.gov/regulations/3235-AG77/safe-harbor-for-disclosure-of-market-risk-inherent-in-derivative-financial-instruments-other-financi
PDF File:
97-2991.pdf
CFR: (8)
17 CFR 228.10
17 CFR 228.310
17 CFR 229.305
17 CFR 230.405
17 CFR 230.405
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