[Federal Register Volume 61, Number 5 (Monday, January 8, 1996)]
[Proposed Rules]
[Pages 578-603]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-130]




[[Page 577]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 210, 228, et al.



Securities: Disclosure of Accounting Policies for Derivative Financial 
Instruments, etc.; Proposed Rule

Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / 
Proposed Rules 

[[Page 578]]


SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 239, 240, and 249

[Release Nos. 33-7250; 34-36643; IC-21625; File No. S7-35-95].
RIN 3235-AG42


Proposed Amendments to Require Disclosure of Accounting Policies 
for Derivative Financial Instruments and Derivative Commodity 
Instruments and Disclosure of Qualitative and Quantitative Information 
About Market Risk Inherent in Derivative Financial Instruments, Other 
Financial Instruments, and Derivative Commodity Instruments

AGENCY: Securities and Exchange Commission.

ACTION: Proposed amendments.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') today is soliciting comment on proposed amendments to 
Regulation S-X, Regulation S-K, and various forms, including Form 20-F. 
The proposed amendments are intended to clarify and expand existing 
requirements for financial statement footnote disclosures about 
registrants' accounting policies for derivative financial instruments, 
as defined, and derivative commodity instruments, as defined. In 
addition, the proposed amendments require disclosure outside the 
financial statements of qualitative and quantitative information about 
market risk inherent in derivative financial instruments, other 
financial instruments, as defined, and derivative commodity 
instruments. Also, the release reminds registrants that when they 
provide disclosure about financial instruments, commodity positions, 
firm commitments, and other anticipated transactions (``reported 
items''), such disclosure must include disclosures about derivatives 
that affect directly or indirectly such reported items, to the extent 
the effects of such information are material and necessary to prevent 
the disclosure about the reported item from being misleading. In sum, 
these proposals are designed to make information about derivative 
financial instruments, other financial instruments, and derivative 
commodity instruments more useful to investors seeking to assess the 
market risk inherent in these instruments.

DATES: Comments on the proposed amendments should be received on or 
before May 7, 1996.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549. Comment letters should refer to File No. 
S7-35-95. All comments received will be available for public inspection 
and copying in the Commission's Public Reference Room, 450 Fifth 
Street, N.W., Washington, D.C. 20549.

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 proposing to amend Rule 4-
08 of Regulation S-X <SUP>1 and to add new Item 305 to Regulation S-
K.<SUP>2 Additionally, the Commission is proposing amendments to Forms 
S-1, S-2, S-4, S-11, and F-4 <SUP>3 under the Securities Act of 
1933,<SUP>4 and Rule 14a-3,<SUP>5 Schedule 14A,<SUP>6 and Forms 10, 20-
F, 10-Q, and 10-K <SUP>7 under the Securities Exchange Act of 
1934.<SUP>8

    \1\ 17 CFR 210.4-08. Item 310 of Regulation S-B, CFR 228.310, 
also would be amended to incorporate the changes to Item 4-08 of 
Regulation S-X.
    \2\ 17 CFR Part 229.
    \3\ 17 CFR 239.11, 12, 25, 18, and 34.
    \4\ 15 U.S.C. 77a et seq.
    \5\ 17 CFR 240.14a-3.
    \6\ 17 CFR 240.14a-101.
    \7\ 17 CFR 249.210, 220f, 308a, and 310.
    \8\ 15 U.S.C. 78a et seq.
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I. Executive Summary

    During the last several years, there has been substantial growth 
<SUP>9 in the use of derivative financial instruments, other financial 
instruments, and derivative commodity instruments.<SUP>10 The 
Commission recognizes that these instruments can be effective tools for 
managing registrants' exposures to market risk.<SUP>11 During 1994, 
however, some registrants experienced significant, and sometimes 
unexpected, losses in market risk sensitive instruments due to, among 
other things, changes in interest rates, foreign currency exchange 
rates, and commodity prices. In light of these losses and the 
substantial growth in the use of market risk sensitive instruments, 
public disclosure about these instruments has emerged as an important 
issue in financial markets.

    \9\ The worldwide notional/contract amounts for derivative 
financial instruments and derivative commodity instruments increased 
from $7.1 trillion in 1989 to $62.1 trillion in 1994. 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 Public 
Disclosure of the Trading and Derivatives Activities of Banks and 
Securities Firms, Basle Committee on Banking Supervision (``Basle 
Committee'') and the Technical Committee of the International 
Organization of Securities Commissions (``IOSCO'') (November 1995).
    \10\ See section IV C, 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 
reasonably possible to be settled in cash or with another financial 
instrument. 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\ 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 similar 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, to understand better this emerging issue and 
to assess current disclosure practice, the SEC staff reviewed annual 
reports filed with the Commission by approximately 500 registrants. The 
primary purposes of these reviews were to (i) assess the quality of 
disclosures pertaining to market risk sensitive instruments and (ii) 
determine what, if any, additional information is needed to improve 
disclosures about these instruments. The SEC staff observed that while 
disclosures reviewed in 1995 were more informative than those reviewed 
in 1994, in part, because of improved guidance by the FASB,<SUP>12 
three 

[[Page 579]]
significant disclosure issues remain. Today, to address those 
disclosure issues: <SUP>13

    \12\ In October 1994, the FASB issued Statement of Financial 
Accounting Standards No. 119, ``Disclosures about Derivative 
Financial Instruments and Fair Value of Financial Instruments'' 
(``FAS 119'') (October 1994), which requires disclosures about 
derivative financial instruments. FAS 119 is effective for fiscal 
years ending after December 15, 1994, except for entities with less 
than $150 million in total assets. For those entities, FAS 119 is 
effective for financial statements issued for fiscal years ending 
after December 15, 1995.
    \13\ The FASB currently is working on a project to improve 
accounting recognition and measurement of derivatives. This release 
does not address accounting recognition and measurement of 
derivatives, but focuses solely on disclosure issues related to 
derivatives and other financial instruments.
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    1. The Commission proposes amendments to Regulation S-X requiring 
enhanced descriptions in the footnotes to the financial statements of 
accounting policies for derivative financial instruments and derivative 
commodity instruments.<SUP>14 These disclosures would be required 
unless the registrant's derivative activities are not material. For 
this proposal, the materiality of derivatives activities would be 
measured by the fair values <SUP>15 of derivative financial instruments 
and derivative commodity instruments at the end of each reporting 
period and the fair value of those instruments during each reporting 
period.

    \14\ These disclosure requirements do not relate to, for 
example, other financial instruments. Accounting policy disclosure 
requirements for these other instruments are prescribed by existing 
generally accepted accounting principles and Commission guidance 
(see, e.g., Accounting Principles Board Opinion No. 22, ``Disclosure 
of Accounting Policies'' (``APB 22'') (April 1972).
    \15\ For purposes of this release, the term ``fair value'' has 
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'') (December 1991), paragraph 5).
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    2. The Commission proposes amendments creating a new Item 305 of 
Regulation S-K requiring disclosure outside the financial statements 
<SUP>16 of qualitative and quantitative information about derivative 
financial instruments, other financial instruments, and derivative 
commodity instruments. These disclosures would be required if any of 
the following items are material: (i) the fair values of market risk 
sensitive instruments outstanding at the end of the current reporting 
period or (ii) the potential loss in future earnings, fair values, or 
cash flows of market risk sensitive instruments from reasonably 
possible market movements.<SUP>17

    \16\ See section III B3b, infra, for a discussion about where, 
outside the financial statements, these disclosures would appear.
    \17\ The proposed amendments regarding disclosure of qualitative 
and quantitative information about market risk do not relate solely 
to derivatives, but also to investments in other financial 
instruments. These disclosures would be required for registrants 
that have material investments in other financial instruments, even 
though they have no investments in derivatives.
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    a. In complying with the proposed amendments requiring disclosure 
of quantitative information about market risk, registrants would be 
permitted to select any one of the following three disclosure 
alternatives:
    i. Tabular presentation of expected future cash flow amounts and 
related contract terms categorized by expected maturity dates;
    ii. Sensitivity analysis expressing the possible loss in earnings, 
fair values, or cash flows of market risk sensitive instruments from 
selected hypothetical changes in market rates and prices; or
    iii. Value at risk disclosures expressing the potential loss in 
earnings, fair values, or cash flows of market risk sensitive 
instruments from market movements over a selected period of time with a 
selected likelihood of occurrence.
    b. The proposed qualitative information about market risk would 
include a narrative discussion of (i) a registrant's primary market 
risk exposures \18\ and (ii) how the registrant manages those exposures 
(e.g., a description of the objectives, general strategies, and 
instruments, if any, used to manage those exposures).

    \18\ See note 63, infra, for a definition specifying how the 
term ``primary market risk exposures'' is used in this release.
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    3. The Commission is reminding registrants that when they provide 
disclosure about financial instruments, commodity positions, firm 
commitments, and other anticipated transactions \19\ (``reported 
items''), such disclosure must include information about derivatives 
that affect directly or indirectly such reported items, to the extent 
the effects of such information are material and necessary to prevent 
the disclosure about the reported item from being misleading. For 
example, when information is required to be disclosed in the footnotes 
to the financial statements about interest rates and repricing 
characteristics of debt obligations, registrants should include, when 
material, disclosure of the effects of derivatives. Similarly, summary 
information and disclosures in Management's Discussion and Analysis 
(``MD&A'') about the cost of debt obligations should include, when 
material, disclosure of the effects of derivatives.

    \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 
Statement of Financial Accounting Standards No. 80, ``Accounting for 
Futures Contracts'' (``FAS 80'') (August 1984)).
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    Congress recently adopted the Private Securities Litigation Reform 
Act of 1995 that, among other things, amends the Securities Act and 
Securities Exchange Act to include a safe harbor for forward looking 
information. It is the Commission's intention that forward looking 
disclosures made pursuant to proposed Item 305 of Regulation S-K and 
Item 9A of Form 20-F be subject to an appropriate safe harbor. The 
Commission's staff is continuing to consider how best to craft an 
appropriate safe harbor in light of this recent legislation, and the 
Commission intends to issue a release shortly that would propose that 
the disclosures to be required by new Items 305 and 9A be made subject 
to safe harbor provisions.
    The proposed amendments pertaining to qualitative and quantitative 
information about market risk would not apply to registered investment 
companies \20\ and small business issuers.\21\ However, to the extent 
market risk represents a material known trend, event, or uncertainty, 
small business issuers, like other registrants, would be required to 
discuss the impact of market risk on past and future financial 
condition and results of operations, pursuant to Commission rules 
relating to MD&A.\22\

    \20\ The Commission currently is considering comments and 
suggestions on how to improve the descriptions of risk provided to 
investors by mutual funds and other investment companies. See 
``Improving Descriptions of Risk by Mutual Funds and Other 
Investment Companies,'' Securities Act Release No. 7153, 60 FR 17172 
(April 4, 1995).
    \21\ The proposed amendments relating to accounting policies 
disclosures, however, would apply to both registered investment 
companies and small business issuers.
    \22\ 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 proposed amendments are designed to make disclosures about 
market risk sensitive instruments more useful to investors. They 
represent one step by the Commission to improve registrants' 
disclosures about market risk sensitive instruments. The Commission 
recognizes the evolving nature of market risk sensitive instruments and 
intends to continue considering how best to address disclosure issues 
relating to these instruments. In this regard, if the proposals in this 
release are adopted, the Commission would anticipate reconsidering the 
effectiveness of those rules, as well as the need for additional 
proposals, after a period of five years.

II. Initiatives Regarding Disclosures About Derivatives

    Certain private sector entities have highlighted problems 
associated with 

[[Page 580]]
disclosures about market risk sensitive instruments, as identified by 
users of financial reports. For example, the Association for Investment 
Management and Research (``AIMR''), an organization of financial 
analysts, noted that users ``are confounded by the . . . complexity of 
financial instruments.'' \23\ In addition, after considerable 
investigation into the needs of investors and creditors, the American 
Institute of Certified Public Accountant's (``AICPA'') Special 
Committee on Financial Reporting stated: \24\

    \23\ See AIMR, Financial Reporting in the 1990s and Beyond, page 
30 (1993).
    \24\ See AICPA Special Committee on Financial Reporting, 
Improving Business Reporting--A Customer Focus: Meeting the 
Information Needs of Investors and Creditors (1994).
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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? [page 76]

    Other organizations recently have made recommendations on how to 
improve such disclosures about market risk sensitive instruments. These 
organizations include regulators, such as the 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\

    \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, these organizations have stressed the need to make more 
understandable the risks inherent in market risk sensitive instruments. 
In particular, they have called for 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\ In this regard, the FEI task force suggests two 
distinct approaches. One approach is to provide a high-level summary of 
relevant statistics about outstanding activity at period end. The 
second approach is to communicate the potential loss which could occur 
under specified conditions using either a value at risk or another 
comprehensive model to measure market risk.\32\

    \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 Statement of Financial Accounting Standards No. 119, 
``Disclosures about Derivative Financial Instruments and Fair Value of 
Financial Instruments'' (``FAS 119'') (October 1994).\33\ FAS 119 
prescribes, among other things, 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 
overall market risk.\34\

    \33\ Similar standards were recently adopted or proposed 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 exposure draft entitled, ``Presentation and Disclosure of 
Financial Instruments'' (June 1995), 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, more recent annual reports were reviewed by the SEC staff to 
assess the effect of FAS 119 on disclosures about market risk sensitive 
instruments. As a result of these reviews, the SEC staff observed that 
FAS 119 had a positive effect on the quality of disclosures about 
derivative financial instruments. However, the SEC staff also concluded 
there was a need to improve disclosures about derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments. In particular, the SEC staff identified the following 
three primary disclosure issues.

    1. Footnote disclosures of accounting policies for derivatives 
often are too general to convey adequately the diversity in 
accounting that exists for derivatives. Thus, it often is difficult 
to determine the impact of derivatives on registrants' statements of 
financial position, cash flows, and results of operations;
    2. Disclosures often focus on derivatives and other financial 
instruments in isolation. Thus, it may be difficult to assess 
whether these instruments increase or decrease the net market risk 
exposure of a registrant; and
    3. Disclosure about financial instruments, commodity positions, 
firm commitments, and other anticipated transactions (``reported 
items'') in the footnotes to the financial statements, MD&A, 
schedules, and selected financial data may not reflect adequately 
the effect of derivatives on such reported items. Thus, without 
disclosure about the effects of derivatives, information about the 
reported items may be incomplete or perhaps misleading.

    The proposals in this release are designed to address these issues. 
They reflect a significant amount of learning by the Commission and its 
staff over the past year and a half about (i) derivatives and related 
risk management activities, and (ii) alternative disclosure approaches 
to make those activities more understandable to investors. In addition, 
during this period, the Commission and its staff developed the 
following guiding principles, which provided the foundation for the 
proposed amendments described in this release:
    <bullet> Disclosures should allow investors to understand better 
how derivatives affect a registrant's statements of financial position, 
cash flows, and results of operations;
    <bullet> Disclosures should provide information about market risk;
    <bullet> Disclosures should allow the investor to understand how 
market risk sensitive instruments are used in the context of the 
registrant's business;
    <bullet> Disclosures about market risk should not focus on 
derivatives in isolation, but rather should reflect the risk of loss 
inherent in all market risk sensitive instruments;
    <bullet> Disclosure requirements about market risk should be 
flexible enough to accommodate different types of registrants, 
different degrees of market risk exposure, and alternative ways of 
measuring market risk;
    <bullet> Disclosures about market risk should highlight, where 
appropriate, special risks relating to leverage, option, or prepayment 
features; and
    <bullet> New disclosure requirements should build on existing 
disclosure 

[[Page 581]]
requirements, where possible, to minimize compliance costs of 
registrants.

III. Discussion of Proposed 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. Although 
the FASB is working on a project that would address comprehensively the 
accounting for derivatives, currently there is very little 
authoritative literature on the accounting for options and complex 
derivatives, many of which are used frequently by registrants.<SUP>35

    \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 very 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 literature, registrants are 
developing accounting practices for options and complex derivatives by 
analogy to the limited amount of literature that does exist. These 
analogies are complicated because existing derivative literature refers 
to at least three distinctly different methods of accounting for 
derivatives (e.g., fair value accounting, deferral accounting, and 
accrual accounting) <SUP>36 and the underlying concepts and criteria 
used in determining the applicability of these accounting methods are 
not consistent.<SUP>37 As a result, during its 1994 and 1995 reviews of 
filings, the SEC staff observed that registrants may account for the 
same type of derivative in many different ways.<SUP>38 Thus, it was 
difficult to compare the financial statement effects of derivatives 
across registrants.

    \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., 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. Rather 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 with changes in that value recognized 
immediately in earnings (see, e.g., FAS 80 para. 3).
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    In order 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 such instruments, 
pursuant to the requirements of APB 22.<SUP>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.'' 
<SUP>40 However, notwithstanding its helpful guidance, FAS 119 does not 
provide an explicit indication of what must be disclosed in accounting 
policies footnotes to make more understandable the effects of 
derivatives on the statements of financial position, cash flows, and 
results of operations, and it does not address disclosure of accounting 
policies for derivative commodity instruments. Thus, to facilitate a 
more informed assessment of the effects of derivatives on financial 
statements, the proposed amendments make explicit the items to be 
disclosed in the accounting policies footnotes for derivative financial 
instruments and derivative commodity instruments.

    \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. Proposed Disclosure Rule
    The proposed amendments pertaining to accounting policies would add 
a new paragraph (n) to Rule 4-08 of Regulation S-X to require 
disclosure in the footnotes to the financial statements of (i) each 
method used to account for derivatives, (ii) types of derivatives 
accounted for under each method, (iii) the criteria required to be met 
for each accounting method used (e.g., the manner in which risk 
reduction, correlation, designation, and/or effectiveness tests are 
applied), (iv) the accounting method used if the specified criteria are 
not met, (v) the accounting for the termination of derivatives 
designated as hedges or used to affect directly or indirectly the 
terms, fair values, or cash flows of a designated item, (vi) the 
accounting for derivatives if the designated item matures, or is sold, 
extinguished, terminated, or, if related to an anticipated transaction, 
is no longer likely to occur, and (vii) where and when derivatives and 
their related gains and losses are reported in the statements of 
financial position, cash flows, and results of operations.<SUP>41

    \41\ FAS 119 para. 11(b) also requires a description of where 
gains and losses from derivative financial instruments held or 
issued for purposes other than trading are reported in the 
statements of financial position and income.
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    The proposed amendments would require registrants to distinguish 
between accounting policies used for derivatives entered into for 
trading purposes from those that are entered into for purposes other 
than trading.<SUP>42 Disclosure of accounting policies for derivatives 
would be required unless the registrant's derivative activities are not 
material. For this proposal, the materiality of derivatives activities 
would be measured by the fair values of derivative financial 
instruments and derivative commodity instruments at the end of each 
reporting period and the fair value of those instruments during each 
reporting period.

    \42\ 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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    In essence, the proposed amendments clarify the application of the 
accounting policy disclosure requirements set forth in FAS 119 for 
derivative financial instruments. They also extend those requirements 
to address the disclosure of accounting policies for derivative 
commodity instruments.<SUP>43

    \43\See note 14, supra. 
    
[[Page 582]]

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3. Requests for Comment
    1. The proposed amendments requiring disclosure of accounting 
policies for derivatives are designed to make it easier for investors 
to assess the financial statement effects of derivative financial 
instruments and derivative commodity instruments. Would the proposed 
disclosures accomplish this objective? If not, are there specific 
disclosures about accounting policies that should be added or deleted?
    2. The proposed amendments relating to disclosures of accounting 
policies are limited to derivative financial instruments and derivative 
commodity instruments. These proposed disclosure requirements do not 
add to the accounting policies disclosure requirements for other 
financial instruments, which are addressed by generally accepted 
accounting principles (e.g., APB 22). Is the scope of instruments 
covered by the proposed amendments requiring additional accounting 
policies disclosures appropriate? If not, which instruments should be 
included or excluded?
    3. Under the proposed amendments, disclosure of accounting policies 
would be required unless the registrant's derivative activities are not 
material. For this proposal, the materiality of derivatives activities 
would be measured by the fair values of derivative financial 
instruments and derivative commodity instruments at the end of each 
reporting period and the fair value of those instruments during each 
reporting period. Is this disclosure threshold appropriate? If not, 
what other threshold could be specified to require disclosure of all 
information a reasonable investor would consider important to decision-
making (e.g., would it be more appropriate to use a disclosure 
threshold similar to the threshold for quantitative and qualitative 
disclosures about market risk proposed in section III B3a of this 
release)?

B. Disclosures of Quantitative and Qualitative Information About Market 
Risk

1. Quantitative Information About Market Risk
a. Background
    Market risk is inherent in both derivative and non-derivative 
instruments, including:
    <bullet> Derivative financial instruments--futures, forwards, 
swaps, options, and other financial instruments with similar 
characteristics;
    <bullet> 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;
    <bullet> Derivative commodity instruments that are reasonably 
possible <SUP>44 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.

    \44\ See note 65, infra, for a definition specifying how the 
term ``reasonably possible'' is used in this release.
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    Generally accepted accounting principles and Commission rules 
require disclosure of certain quantitative information pertaining to 
some of these derivative financial instruments. For example, 
registrants currently are required to disclose notional amounts of 
derivative financial instruments and the nature and terms of debt 
obligations.<SUP>45 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 are unable to assess whether or how 
particular financial and commodity instruments affect a registrant's 
net market risk exposure.

    \45\ See, e.g., FAS 119 para. 8b and Rule 5-02 of Regulation S-
X, 17 CFR 210.5-02.
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    FAS 119 encourages, but does not require, disclosure of 
quantitative information about the overall market risk inherent in 
derivative financial instruments and other instruments subject to 
market risk.<SUP>46 However, the SEC staff has observed that 
registrants often do not make these disclosures.

    \46\ 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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b. Proposed Disclosure Rule
    To allow investors to assess more easily overall market risk, the 
proposed amendments would create a new Item 305(a), which would require 
disclosure, outside the financial statements,<SUP>47 of quantitative 
market risk information for derivative financial instruments, other 
financial instruments, and derivative commodity instruments, to the 
extent it is material. This information would be furnished using one of 
the following three ways, at the election of the registrant.<SUP>48

    \47\ See section III B3b, infra, for a discussion about where, 
outside the financial statements, these disclosures would appear.
    \48\ At the current time, the Commission is not proposing to 
prescribe standardized methods and procedures specifying how to 
comply with each of these disclosure alternatives. To the extent 
registrants use one of these methods internally, they would be 
permitted, but not required, to report quantitative measures of 
market risk using the same method externally. To facilitate 
comparison across registrants, the Commission proposes, below, that 
registrants provide descriptions of the model and assumptions used 
to prepare quantitative market risk disclosures.
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(i) Tabular Presentation
    The first quantitative market risk disclosure alternative would 
permit registrants to provide a tabular presentation of terms and 
information related to derivative financial instruments, other 
financial instruments, and derivative commodity instruments. Such 
information would include, but is not limited to, fair values of 
instruments, expected principal or transaction cash flows, weighted 
average effective rates or prices, and other relevant market risk 
related information. These data are common inputs to market risk 
measurement methods and, therefore, may be useful in understanding a 
registrant's exposure to market risk.
    This tabular information would be summarized by risk exposure 
category (i.e., interest rate risk, foreign currency exchange rate 
risk, commodity price risk, and other similar price risks, such as 
equity price risk) and, within the foreign currency exchange rate risk 
category, by functional currency <SUP>49 (e.g., U.S. dollar, Japanese 
yen). Within each of these risk exposure categories, instruments would 
be grouped based on common characteristics. At a minimum, instruments 
would be distinguished by the following characteristics: (i) Fixed rate 
or variable rate assets or liabilities, (ii) long or short forwards or 
futures, (iii) written or purchased put or call options, (iv) receive 
fixed or receive variable interest rate swaps, and (v) the currency in 
which the instruments' cash flows are denominated. Thus, for example, 
within the interest rate risk exposure category, a registrant might 
present the following list of instruments: fixed rate Mexican peso 
investments, variable rate U.S. dollar 

[[Page 583]]
debt obligations, long U.S. Treasury futures, and Mexican peso receive 
variable interest rate swaps. Derivatives used to manage risks inherent 
in anticipated transactions also would be disclosed separately.

    \49\ For purposes of this release, 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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    For each instrument in the table, expected principal or transaction 
cash flow information would be presented separately for each of the 
next five years, with the remaining expected cash flows presented as an 
aggregate amount. The proposed amendments also would require disclosure 
of information on assumptions necessary to an understanding of a 
registrant's tabular market risk disclosures. In this regard, 
registrants would describe, at a minimum, the differing numbers 
reported in the table for various categories of instruments (e.g., 
principal cash flows for debt, notional amounts for swaps, contract 
amounts for options and futures) and key prepayment and/or reinvestment 
assumptions relating to the timing of reported cash flow amounts. See 
the Appendix to the text of the proposed amendments for a sample 
disclosure.
(ii) Sensitivity Analysis
    The second quantitative market risk disclosure alternative would 
permit registrants to provide disclosure of sensitivity analyses 
expressing the hypothetical loss in future earnings, fair values, or 
cash flows of market risk sensitive instruments over the next reporting 
period due to hypothetical changes in interest rates, currency exchange 
rates, commodity prices, and other similar market price changes (e.g., 
equity prices).<SUP>50 For example, these disclosures may be similar to 
the interest rate ``sensitivity'' measures already required to be 
calculated for regulatory purposes for thrift institutions.<SUP>51 
Under the proposed amendments, earnings, fair values, or cash flows 
sensitivity disclosures would be presented separately for interest rate 
sensitive instruments, currency exchange rate sensitive instruments, 
certain commodity price sensitive instruments, and other types of 
market risk sensitive instruments (e.g., equity instruments).

    \50\ The term ``sensitivity analysis,'' as used in this release, 
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.
    \51\ See Office of Thrift Supervision, Regulatory Capital: 
Interest Rate Risk Component, 12 CFR 567.5(c)(4) (August 1993).
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    The proposed amendments also would require disclosure of the 
assumptions and parameters underlying the registrant's sensitivity 
analysis model that are necessary to an understanding of the 
registrant's market risk disclosure. In this regard, registrants would 
specify, at a minimum, (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., change in net present values arising from 
parallel shifts in market rates or prices and how optionality is 
addressed by the model), (iii) the general 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 in the model by the registrant, 
such as certain commodity instruments and positions, cash flows from 
anticipated transactions, and operating cash flows from non-financial 
and non-commodity instruments), and (iv) other relevant information on 
model parameters (e.g., the magnitudes of parallel shifts in market 
rates or prices used for each category of market risk exposure, the 
method by which discount rates are determined, and key prepayment and/
or reinvestment assumptions).
(iii) Value at Risk
    The third quantitative disclosure alternative would permit 
registrants to provide value at risk disclosures expressing the 
potential entity-wide loss in fair values, earnings, or cash flows of 
market risk sensitive instruments that might arise from adverse market 
movements with a selected likelihood of occurrence over a selected time 
interval.<SUP>52 Additional separate value at risk disclosures would be 
required for interest rate sensitive instruments, currency exchange 
rate sensitive instruments, certain commodity price sensitive 
instruments, and other similar market risk sensitive instruments (e.g., 
equities). In addition, to help place reported value at risk amounts in 
context, registrants would be required to 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.

    \52\ The term ``value at risk,'' as used in this release, 
describes a general class of models that provide 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.
---------------------------------------------------------------------------

    The proposed amendments also would require disclosure of the model 
assumptions and parameters underlying the registrant's value at risk 
model that are necessary to an understanding of the registrant's market 
risk disclosure. In this regard, registrants would specify, at a 
minimum, (i) how loss is defined by the model (e.g., loss in fair 
values, earnings, or cash flows), (ii) a general description of the 
modeling technique (e.g., variance/covariance, historical simulation, 
Monte Carlo simulation, and how optionality is addressed by the model), 
(iii) the general 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 in the model by the registrant, such as certain 
commodity instruments and positions, cash flows from anticipated 
transactions, and operating cash flows from non-financial and non-
commodity instruments), and (iv) other material information on model 
parameters (e.g., holding period, confidence interval, and the method 
used for aggregating value at risk amounts across market risk exposure 
categories, such as by assuming perfect positive correlation, 
independence, or by using actual observed correlations).<SUP>53

    \53\ The primary differences between the value at risk and 
sensitivity analysis disclosure alternatives are (i) value at risk 
analysis reports the potential loss arising from equally likely 
market movements across instruments, while sensitivity analysis 
reports the potential loss arising from hypothetical market 
movements with differing likelihoods of occurrence across 
instruments and (ii) value at risk explicitly adjusts the potential 
loss to reflect correlations between market movements, while 
sensitivity analysis is not designed explicitly to make such 
adjustments.
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(iv) Other Disclosure Requirements
    The proposed amendments would require presentation of quantitative 
information about market risk at the end of the most recent fiscal year 
or at the end of the most recent reporting period for which a full set 
of financial statements is filed with the Commission. Under the 
proposed amendments, registrants would be required to provide 
separately quantitative information for market risk sensitive 
instruments that are entered into for trading purposes <SUP>54 and 
those 

[[Page 584]]
that are entered into for purposes other than trading. In addition, in 
order to enable an investor to assess material changes in market risk 
information, the proposed amendments would require registrants to 
provide summarized information as of the end of the preceding fiscal 
year or comparable preceding period. Registrants also would be required 
to discuss the reasons for material changes in quantitative information 
about market risk when compared to the information reported in the 
previous period.<SUP>55 Registrants would be allowed to change methods 
of disclosing quantitative information about market risk (e.g., 
changing from tabular presentation to value at risk). However, if they 
change methods, registrants would be required to (i) disclose the 
reasons for any such change and (ii) provide summarized comparable 
information, under the new disclosure method, as of the end of the 
period preceding the current reporting period.

    \54\ See note 42, supra, for a definition specifying how the 
term ``trading purposes'' is used in this release.
    \55\ For transition purposes, the Commission is proposing that 
quantitative disclosures about market risk provided in the initial 
period after the rule is adopted would not contain comparable 
summarized information for the preceding period. Similarly, in the 
initial year after the rule is adopted, a discussion of the reasons 
for material changes in reported amounts as compared to the 
preceding period would not be necessary.
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(v) Encouraged Disclosures
    In essence, the proposed amendments primarily are designed to make 
disclosures about market risk more comprehensive by requiring 
disclosure of quantitative information about market risk that are 
encouraged to be disclosed by FAS 119. The proposals apply to 
derivative financial instruments, other financial instruments, and 
derivative commodity instruments.<SUP>56

    \56\ These disclosures would be required for other financial 
instruments, even if a registrant does not enter into derivatives.
---------------------------------------------------------------------------

    The Commission recognizes that market risk exposures may exist in 
instruments, positions, and transactions other than in those derivative 
financial instruments, other financial instruments, and derivative 
commodity instruments that specifically would be subject to the 
proposed amendments. In particular, market risk, in its broadest view, 
also may be inherent in the following items:
    <bullet> Derivative commodity instruments not reasonably possible 
to be settled in cash or with another financial instrument--such as a 
commodity forward contract that must be settled in the commodity;
    <bullet> Commodity positions--such as investments in corn, wheat, 
oil, gas, lumber, silver, gold, and other commodity inventory 
positions;
    <bullet> Cash flows from anticipated transactions <SUP>57--such as 
cash flows from anticipated purchases and sales of inventory; and

    \57\ See note 19, supra.
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    <bullet> Operating cash flows from non-financial and non-commodity 
instruments-- such as cash flows generated by manufacturing activities.
    The Commission also recognizes, however, that the amount and timing 
of the cash flows inherent in such instruments, positions, and 
transactions often are difficult to estimate. In addition, most 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 proposing at 
this time to require that these items be included in the proposed 
quantitative disclosures about market risk. However, registrants are 
encouraged, when practical, to include voluntarily these items in their 
quantitative market risk disclosures. If these instruments, positions, 
and transactions are not included voluntarily, registrants, 
nonetheless, should consider whether they must address this issue in 
their disclosures identifying limitations of the quantitative 
information, discussed below.<SUP>58

    \58\ In addition, registrants should review the requirements of 
Item 303 of Regulation S-K, 17 CFR 229.303, to ensure that 
disclosures are sufficient to inform readers of material risks to 
which a registrant is exposed. Thus, MD&A would need to discuss the 
risks relating to, for example, anticipated transactions or 
commodity positions, to the extent these transactions or positions 
have, or are reasonably likely to have, a material effect on the 
registrant's liquidity, capital resources, and results of 
operations.
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(vi) Limitations
    The proposed amendments would require that registrants discuss 
limitations that may cause the quantitative information about market 
risk not to reflect fully the overall market risk of the entity. This 
discussion would include (i) a description of each limitation and (ii) 
if applicable, a description of the instruments' features that are not 
reflected fully within the selected quantitative market risk disclosure 
alternative.
    Two illustrative examples are provided. First, as just stated, the 
Commission is allowing certain instruments, positions, and transactions 
to be excluded from quantitative disclosures about market risk. The 
failure of a registrant to include such items in its disclosures, while 
permitted, is a limitation of the quantitative information provided. 
This limitation must be described if the registrant has material 
investments in these instruments, positions, and transactions that 
cause its disclosures not to portray fully the overall market risk of 
the entity.
    Second, each of the quantitative disclosure alternatives may not 
alert investors of the degree of market risk inherent in instruments 
with leverage, option, or prepayment features (e.g., structured notes, 
collateralized mortgage obligations, leveraged swaps, and swaps with 
embedded written options). Tabular information on expected future cash 
flows normally would not indicate that instruments have such features. 
Value at risk and sensitivity analysis models generally do not reflect 
the potential loss arising from all changes in market rates or prices. 
Thus, 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 in 
these instruments 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, the proposed amendments would require a (i) discussion 
of this limitation of the quantitative disclosures and (ii) description 
of the leverage, option, or prepayment features of the instruments 
causing the limitation.
c. Requests for Comment
    1. The proposed amendments are designed specifically to elicit 
disclosure of quantitative information to assist investors and others 
in making an overall assessment of market risk. The Commission 
recognizes that some investors may be unfamiliar with certain of the 
proposed quantitative disclosure methods. Thus, the Commission requests 
comment (a) on whether the proposed quantitative information is 
expected to improve investors' understanding of the market risk 
associated with business activities of a registrant and (b) on the 
extent to which investors will benefit from and understand the proposed 
quantitative market risk alternatives.
    2. The proposed amendments relating to disclosure of quantitative 
information about market risk are limited to derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments. In addition, when preparing these disclosures, registrants 
are encouraged to present information about all instruments, 

[[Page 585]]
positions, and cash flows subject to market risk. Is the scope of 
instruments covered by these proposed amendments sufficient? For 
example, should commodity positions with readily available market 
prices be required to be included in the quantitative disclosures? In 
addition, are there other instruments and positions that should be 
included or excluded?
    3. The Commission is proposing to allow registrants to choose one 
of three alternatives to present quantitative information about market 
risk (i.e., tabular presentation of expected future cash flows and 
terms, sensitivity analysis, or value at risk). Are these the most 
appropriate alternatives? If not, should some alternatives be added or 
deleted? For example, although the Commission has not proposed use of 
interest gap analysis and duration because these market risk 
measurement methods commonly are not used to describe the market risk 
inherent in non-interest rate sensitive instruments and non-fixed 
income instruments, respectively, should these methods also be allowed?
    4. In this release, the Commission proposes amendments designed to 
allow investors to evaluate quantitatively the overall market risk 
inherent in derivative financial instruments, other financial 
instruments, and derivative commodity instruments. Although the 
proposals permit registrants to select one of three alternative 
quantitative disclosure methods, they require that the same general 
disclosure alternative (i.e., tabular presentation of expected future 
cash flows and terms, sensitivity analysis, or value at risk) be used 
to describe quantitatively the market risk inherent (i) in each market 
risk exposure category (e.g., interest rates, foreign currency exchange 
rates, and commodity prices) and (ii) in instruments entered into for 
trading and other than trading purposes. Is this approach practical? 
Should the Commission permit registrants to use different alternatives 
to report the market risk inherent (i) in different categories of 
market risk exposure and/or (ii) in instruments entered into for 
trading and other than trading purposes? If so, how will this affect 
the ability of investors to assess the overall market risk inherent in 
market risk sensitive instruments? Please explain.
    5. The Commission recognizes that risk management methods are 
evolving, and no method is dominant in practice. The proposed 
amendments, therefore, do not require the use of a single measure or 
standardized procedures or assumptions for preparing quantitative 
market risk disclosures. As a result, quantitative information about 
market risk is not likely to be prepared in a uniform manner across 
registrants. However, to facilitate the analysis and comparison of 
quantitative market risk information among registrants, the Commission 
is proposing disclosure of the model and assumptions used to comply 
with the quantitative market risk amendments. Will the proposed 
disclosures about the model and key assumptions provide sufficient 
information for investors to compare market risk across registrants? 
Are there additional disclosures that might further investors' analysis 
and comparison? Is there a better approach to enhancing the 
comparability of the proposed disclosures? For example, despite the 
evolving risk management practices, should standardized procedures be 
developed for preparing disclosures across registrants? Alternatively, 
should minimum acceptable standards be set prescribing model parameters 
and assumptions?
    6. The Commission recognizes that quantitative disclosures about 
market risk may be viewed as more meaningful for certain registrants 
than others. For example, because market risk is one of the primary 
business risks for financial institutions, quantitative information 
about market risk may be more meaningful when applied to financial 
institutions than the same information presented for registrants whose 
primary risks are not related to market risk.
    In this regard, the Commission has proposed that registrants have 
the ability to choose among three disclosure alternatives. These 
alternatives reflect different degrees of sophistication in risk 
measurement methods, thereby permitting registrants flexibility to 
select a disclosure method which corresponds most closely to the degree 
of market risk inherent in their business activities. Are there better 
ways to address how information about market risk should be presented 
for the different types of registrants that file with the Commission? 
In particular, should financial institutions, such as bank holding 
companies, thrift holding companies, finance companies, investment 
banks, mortgage banks, broker-dealers, insurance companies, and similar 
types of registrants have a different set of disclosure requirements 
than other companies? If so, should financial institutions have more 
rigorous disclosure requirements than those proposed in this release or 
should non-financial institutions be exempted from certain of the 
proposed disclosures specified in this release?
    7. In regard to the presentation of tabular information on the 
terms, cash flow amounts, and fair values of market risk sensitive 
instruments, the Commission has specified that information be 
disaggregated by risk exposure category and grouped further based on 
certain common instrument characteristics. Sample disclosures have been 
provided in the Appendix to the text of the proposed amendments to 
illustrate compliance with these requirements. Is the level of 
disaggregation specified in the requirements adequate? Is there a 
better way to present such information?
    8. The proposed amendments requiring disclosure of quantitative 
information about market risk generally are designed to indicate the 
degree of market risk from normal market movements. The proposed 
disclosure alternatives do not specifically require estimates of the 
market risk inherent in unusual markets reflecting worst-case 
scenarios. Should the proposed amendments address specifically market 
risk in worst-case scenarios? If so, what would be a useful standard 
for determining and disclosing a worst-case scenario?
    9. To help place the reported value at risk numbers in context, the 
proposed amendments require that registrants 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 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. Will this information be useful to investors 
and others? Since similar disclosures cannot be developed easily for 
the other disclosure alternatives for presenting quantitative 
information about market risk (i.e. tabular presentation of expected 
cash flows and terms and sensitivity analysis), should these 
disclosures be encouraged, rather than required?
    10. To enable investors to assess material changes in market risk, 
the proposed amendments would require registrants to provide summarized 
quantitative information about market risk for the preceding fiscal 
year. In addition, registrants would be required to discuss the reasons 
for material changes in quantitative information about market risk when 
compared to the information reported in the previous period. Is this 
information necessary to an understanding of the current period market 
risk disclosures? If not, are there other types of information that 
would be 

[[Page 586]]
helpful to investors in assessing material changes in market risk?
    11. Under the proposed amendments, registrants would be allowed to 
change methods of presenting quantitative information about market risk 
provided they (i) explain the reasons for the change and (ii) provide 
summarized comparable information under the new disclosure method for 
the period preceding the current reporting period. Should registrants 
be required to present comparable information for the period preceding 
the current reporting period when they change methods of presenting 
quantitative information about market risk?
    12. The proposed amendments are focused on providing investors with 
improved disclosures about market risk sensitive instruments and the 
impact of market risk on a registrant's financial condition and results 
of operations. Other regulators and private sector entities have set 
forth proposals and made recommendations that would require disclosures 
about derivatives and similar instruments that go beyond the 
disclosures proposed under these proposed amendments.<SUP>59 Such 
recommendations relate to the disclosure of credit risk, liquidity 
risk, legal risk, and operational risk inherent in market risk 
sensitive instruments. The Commission notes that existing generally 
accepted accounting principles (e.g., FAS 105) and Commission 
Regulations (e.g., Items 101 and 303 of Regulation S-K, 17 CFR 229.101 
and 229.303, respectively) already require some disclosures relating to 
these risks. Thus, at this time the Commission does not intend to 
propose additional disclosure requirements about these other risks 
inherent in market risk sensitive instruments. Is this decision 
appropriate?

    \59\ See notes 25 and 27, supra.
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    13. Would any of the proposed amendments regarding quantitative 
disclosures about market risk require disclosure of information 
considered highly proprietary by registrants? Are there other methods 
of quantifying and disclosing market risk that would be useful to 
investors and present fewer proprietary concerns?
2. Qualitative Information About Market Risk
a. Background
    A qualitative discussion of a registrant's market risk exposures 
and how those exposures are managed is important to an understanding of 
a registrant's market risk. Such qualitative disclosures help place 
market risk management activities in the context of the business and, 
therefore, are a useful complement to quantitative information about 
market risk.
    FAS 119 requires that certain qualitative disclosures be provided 
about 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.'' <SUP>60 In addition, FAS 
119 requires separate disclosures about derivative financial 
instruments used as hedges of anticipated transactions.<SUP>61 As 
indicated above, these requirements of FAS 119 only apply to certain 
derivatives held or issued for purposes other than trading.

    \60\ 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.
    \61\ See FAS 119 para. 11c.
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b. Proposed Disclosure Rule
    In essence, the proposed qualitative disclosure requirements would 
create a new Item 305(b) of Regulation S-K, which would expand certain 
FAS 119 disclosures 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 material changes in how those exposures are managed. In particular, 
the proposed amendments would require narrative disclosure outside the 
financial statements <SUP>62 of (i) a registrant's primary market risk 
exposures <SUP>63 and (ii) how those exposures are managed (e.g., a 
description of the objectives, general strategies, and instruments, if 
any, used to manage those exposures).

    \62\ See section III B3b, infra.
    \63\ For purposes of this release, 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 similar market rate or price risks (e.g., equity prices) 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 (ii) is most vulnerable to changes in dollar/
yen, dollar/pound, and dollar/peso exchange rates within this 
category of market risk, it would disclose these exposures.
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    In preparing the proposed qualitative disclosures about market 
risk, the Commission expects that registrants would describe their 
primary market risk exposures as they exist at the end of the current 
reporting period and how those risks currently are being managed. 
Registrants also would be required to describe material changes in 
their primary market risk exposures and material changes in how these 
risks are managed as compared to what was in effect during the most 
recent reporting period and what is known or expected to be in effect 
in future reporting periods.
    These proposed qualitative disclosure requirements would apply to 
derivative financial instruments, other financial instruments, and 
derivative commodity instruments. As in the case with respect to the 
quantitative disclosures about market risk, the qualitative disclosures 
should be presented separately for market risk sensitive instruments 
that are entered into for trading purposes and those that are entered 
into for purposes other than trading. In addition, qualitative 
information about market risk should be presented separately for those 
instruments used to manage risks inherent in anticipated transactions.
    Finally, to help make disclosures about market risk more 
comprehensive, as is the case with the quantitative disclosures about 
market risk, the Commission also is proposing to encourage registrants 
to disclose qualitative information about market risk relating to other 
items, such as derivative commodity instruments not reasonably possible 
to be settled in cash or with another financial instrument, commodity 
positions, cash flows from anticipated transactions, and operating cash 
flows from non-financial and non-commodity instruments (e.g., cash 
flows generated by manufacturing activities).<SUP>64

    \64\ See section III B1b(v), 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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c. Requests for Comment
    1. The proposed amendments regarding qualitative disclosure about 
market risk are designed to put market risk management activities into 
the context of a registrant's overall business. Does this qualitative 
information allow investors to understand better the management of 
market risk inherent in the business activities of a registrant? If 
not, are there other disclosure alternatives that would be more 
effective? 

[[Page 587]]

    2. Would any of the proposed amendments regarding qualitative 
disclosures about market risk require the disclosure of information 
considered highly proprietary in nature? Are there other disclosures 
that would be useful to investors and present fewer proprietary 
concerns?
    3. The proposed amendments relating to disclosure of qualitative 
information about market risk are limited to derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments. In addition, when preparing these disclosures, registrants 
are encouraged, but not required, to present information about all 
instruments, positions, and cash flows subject to market risk. Is the 
scope of instruments covered by this proposed amendment sufficient? If 
not, which instruments should be included or excluded?
3. Implementation Issues Relating to Quantitative and Qualitative 
Disclosures About Market Risk
a. Disclosure Threshold
(i) Discussion
    Under the proposed amendments, registrants would be required to 
make quantitative and qualitative disclosures about market risk when 
such risk is material. For purposes of making this materiality 
assessment, registrants would need to consider both (i) the materiality 
of the fair values of derivative financial instruments, other financial 
instruments, and derivative commodity instruments outstanding at the 
end of the current reporting period and (ii) the materiality of the 
potential loss in future cash flows, earnings, or fair values from 
reasonably possible market movements.<SUP>65 If either (i) or (ii) in 
the previous sentence are material, registrants would have to disclose 
qualitative and quantitative information about market risk.

    \65\ For purposes of this release, the term ``reasonably 
possible'' is defined by para. 3 of FASB, Statement of Financial 
Accounting Standards No. 5, ``Accounting for Contingencies'' (``FAS 
5'') (March 1975), which states that ``reasonably possible'' means 
the chance of a future transaction or event occurring is more than 
remote but less than likely.
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    In determining the fair values of market risk sensitive instruments 
outstanding at the end of the current reporting period, registrants 
generally should not net fair values, except to the extent allowed 
under FASB Interpretation No. 39, ``Offsetting of Amounts Related to 
Certain Contracts'' (``Interpretation 39'') (March 1992).<SUP>66 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.<SUP>67

    \66\ 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.
    \67\ In general, the Commission is not proposing the netting of 
fair values for purposes of assessing materiality primarily because 
it believes the establishment of a set of netting rules for fair 
values would be complex and difficult to implement.
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    In determining the materiality of the potential loss in future 
earnings or fair values from reasonably possible market movements, 
registrants should consider (i) the magnitude of past market movements, 
(ii) expectations about the magnitude of reasonably possible future 
market movements, and (iii) potential losses that may arise from 
leverage, option, and/or multiplier features.
(ii) Requests for Comment
    In developing the proposed disclosure thresholds, the Commission 
was interested in establishing thresholds that considered the 
materiality of fair values of market risk sensitive instruments at the 
end of a reporting period and the potential for market risk in those 
instruments in future periods. The Commission believes an assessment of 
the materiality of the instruments held at period end is appropriate 
because investors are likely to be concerned about the market risk 
exposure of an entity whenever their financial statements indicate 
material investments in derivative financial instruments, other 
financial instruments, and derivative commodity instruments. Without 
such disclosure, investors likely would be unable to determine the 
magnitude of the combined market risk exposure inherent in these 
individual instruments. Similarly, the Commission believes an 
assessment of the risk of loss in earnings, cash flows, or fair values 
from reasonably possible future market movements is necessary to 
capture, for example, the potential exposure to market risk in 
instruments with leverage, written option, or prepayment features that 
may not be reflected fully in fair values at period end.
    Are these proposed disclosure thresholds relating to quantitative 
and qualitative disclosures about market risk, including the guidance 
relating to netting of fair values of market risk sensitive 
instruments, appropriate? Are there other disclosure thresholds that 
would provide more meaningful information to investors? For example, 
for purposes of determining the materiality of fair values of market 
risk sensitive instruments at period end, would it be better to 
determine a disclosure threshold based on the materiality of the larger 
of the fair values of (i) assets, and ``off-balance-sheet'' 
unrecognized assets or (ii) liabilities and ``off-balance-sheet'' 
unrecognized liabilities? Alternatively, would the disclosure 
thresholds for MD&A be more appropriate? <SUP>68

    \68\ See SEC Financial Reporting Policies Sec. 501.02 for the 
interpretative release to Item 303 of Regulation S-K, which 
specifies the MD&A disclosure thresholds.
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    Finally, should the Commission take a different approach to 
materiality assessments by specifying quantitative indicators that 
provide a threshold for disclosure, such as ratios of certain notional 
amounts, contractual amounts, fair values, and/or potential future 
losses to either stockholders' equity, earnings from continuing 
operations, and/or some other amount? If so, what specific indicators 
should result in disclosure (e.g., fair value amounts in excess of 10% 
of stockholders' equity, or some other percentage of stockholders' 
equity or some other amount; notional and contractual amounts in excess 
of a specified percentage of stockholders' equity; and/or potential 
loss in earnings or fair values in excess of a specified percentage of 
earnings from continuing operations)? If specific indicators are used, 
should netting of certain amounts be permitted?
b. Location of Quantitative and Qualitative Disclosures
(i) Discussion
    The proposed qualitative and quantitative market risk disclosure 
amendments specify that these disclosures be placed outside the 
financial statements. Thus, for example, this information would be 
required to be included in the annual report to shareholders, but would 
be located outside the financial statements covered by the audit 
opinion. The proposed disclosures are designed to supplement and make 
complete existing information about market risk sensitive instruments 
(e.g., information required to be disclosed by FAS 119) that currently 
appears in prospectuses, registration statements, reports, and other 
documents that are used to make investment and voting decisions and 
that are delivered to investors and shareholders. Thus, the Commission 
is 

[[Page 588]]
recommending that the proposed market risk disclosures be included in 
such documents delivered to investors and shareholders, rather than 
included in documents filed only with the Commission.
(ii) Request for Comment
    The Commission recognizes that the proposed disclosures may be 
complex, especially given the requirement to describe, when 
appropriate, the model and key assumptions used to prepare the 
quantitative disclosures about market risk. Given this complexity, 
would it be better to disclose the proposed information about market 
risk in reports and statements filed with the Commission that are not 
required to be delivered to all shareholders and investors? If so, will 
investors be disadvantaged by the omission of such information from 
delivered documents if it is otherwise required to be included in 
Commission filings and made available for free electronically and 
immediately through the SEC's EDGAR system?
c. Relationship of Proposed Disclosures to MD&A
    Market risk sensitive instruments often are used to manage known 
uncertainties in market rates and prices. Under Item 303 of Regulation 
S-K, registrants currently are required to disclose in MD&A, among 
other things, the impact on past and future financial condition and 
results of operations of known uncertainties. Thus, there is a 
potential for overlap between the proposed amendments under new Item 
305 and current Item 303. To the extent that the disclosures in a 
registrant's MD&A comply with the proposed amendments, registrants 
would not need to repeat this information elsewhere in their filings. 
Likewise, if the proposed disclosures are provided in the footnotes to 
the financial statements, that information also would not need to be 
reported elsewhere.
d. Application to Registrants
(i) Discussion
    New Item 305 would require that all registrants currently required 
to provide MD&A disclosures, pursuant to Item 303 of Regulation S-X, 
also would have to comply with proposed Item 305 of Regulation S-K. As 
a result, to the extent material, quantitative and qualitative 
information about market risk would be required explicitly for 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.
(ii) Request for Comment
    Should proposed Item 305 of Regulation S-K be required for all 
registrants that prepare MD&A pursuant to Item 303 of Regulation S-K? 
If not, which registrants should be exempted from proposed Item 305 of 
Regulation S-K? In particular, should business development companies 
and companies registering insurance contracts be exempted from proposed 
Item 305?
e. Safe Harbor Provision
    As noted by the FASB, some have expressed concern that disclosing 
information about market risk may have legal ramifications for 
registrants if actual outcomes differ from the market risk amounts 
disclosed.<SUP>69 It is the Commission's intention that forward looking 
disclosures made pursuant to proposed Item 305 of Regulation S-K and 
Item 9A of Form 20-F be subject to an appropriate safe harbor.

    \69\ See FAS 119 para. 73. Under the Commission's current safe 
harbor rules, a statement made by or on behalf of an issuer is not 
deemed a fraudulent statement unless it can be shown that the 
statement was made or reaffirmed without a reasonable basis or was 
disclosed other than in good faith. See Rule 175 under the 
Securities Act of 1933 and Rule 3b-6 under the Securities Exchange 
Act of 1934. The Commission has been re-examining Rules 175 and 3b-
6. See Securities Act Release No. 7101 (October 13, 1994), 59 FR 
52723 (October 19, 1994).
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    Congress recently adopted the Private Securities Litigation Reform 
Act of 1995 <SUP>70 that, among other things, amends the Securities Act 
and Securities Exchange Act to include a safe harbor for forward 
looking information. The Commission's staff is continuing to consider 
how best to craft an appropriate safe harbor in light of this recent 
legislation. The Commission intends to issue a release shortly that 
would propose that the disclosures to be required by new Items 305 and 
9A be made subject to safe harbor provisions. Comments received on that 
release will be considered in connection with the comments received on 
this release to enable the Commission to take appropriate action with 
respect to both releases at the same time.

    \70\ Private Securities Litigation Reform Act of 1995, Pub. L. 
No. 104-67 (December 22, 1995).
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IV. Applicability of Proposed Amendments

A. Application to Small Business Issuers

1. Discussion
    The Commission believes that because of the newness and evolving 
nature of these disclosures, as well as the relative costs of complying 
with these disclosures for small business issuers,<SUP>71 that it is 
appropriate, at this time, to exempt small business issuers from the 
proposed disclosures of quantitative and qualitative information about 
market risk. Accordingly, at this time, the Commission is not proposing 
to amend Regulation S-B to incorporate an item similar to proposed Item 
305 of Regulation S-K. Small business issuers, however, still would be 
required (i) to comply with the proposed amendment regarding accounting 
policies disclosures for derivatives, (ii) to comply with Rule 12b-20 
and Rule 408 as described in section VI of this release, thereby being 
responsive to guidance reminding registrants to provide additional 
information about the effects of derivatives on 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, 17 CFR 
228.303.

    \71\ ``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, 17 CFR 230.405.
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2. Request for Comment
    Should small business issuers be excluded from either a portion or 
all of the proposed quantitative and qualitative disclosures about 
market risk? If not, should application of these proposed amendments to 
small business issuers be delayed to provide them more time to become 
familiar with and implement the amendments?

B. Application to Foreign Private Issuers

1. Discussion
    The need for improved disclosures about market risk sensitive 
instruments is not an issue limited to domestic registrants. Standard 
setters throughout the world have recognized and have begun to address 
the need for improvement in such disclosures for foreign companies, 
including some foreign private issuers that have registered securities 
with the Commission.<SUP>72 The Commission is proposing to amend Form 
20-F to require disclosure by all foreign private 

[[Page 589]]
issuers of quantitative and qualitative information about market risk.

    \72\ See note 33, supra.
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    In addition, those foreign private issuers that prepare financial 
statements in accordance with Item 18 of Form 20-F would be required to 
provide descriptions in the footnotes to the financial statements of 
the policies used to account for derivatives. In contrast, 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 generally accepted accounting principles and 
Regulation S-X, including disclosures about accounting policies.<SUP>73 
Thus, the proposed amendments requiring disclosures of accounting 
policies would not apply to foreign private issuers filing under Item 
17 of Form 20-F. However, foreign private issuers filing under Item 17 
of Form 20-F would need to 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.<SUP>74

    \73\ Foreign private issuers complying with Item 18 of Form 20-F 
must provide all information required by US generally accepted 
accounting principles and Regulation S-X. Disclosures required by US 
generally accepted accounting principles but not required by foreign 
generally accepted accounting principles on which the financial 
statements are prepared need not be furnished pursuant to Item 17 of 
Form 20-F. Compliance with Item 17 of Form 20-F is acceptable for 
registration statements or annual reports on Form 20-F. With certain 
exceptions, foreign private issuers offering securities must comply 
with Item 18 of Form 20-F.
    \74\ 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.
---------------------------------------------------------------------------

2. Request for Comment
    Should foreign private issuers be subject to the proposed 
amendments? In particular, are the proposed differences in disclosure 
that would be applicable to foreign private issuers that file under 
Items 17 and 18 of Form 20-F appropriate? For example, should foreign 
private issuers filing under Item 17 of Form 20-F be required to 
provide accounting policies disclosures? Should application of some or 
all of the proposed amendments to foreign private issuers be delayed to 
provide them more time to become familiar with and implement the 
amendments? If so, which portions of the proposed amendments should be 
delayed and what period of delay would be appropriate (six months, one 
year, or some other time period)?

C. Scope and Definition of Instruments

    For purposes of this release, financial instruments, derivative 
financial instruments, other financial instruments, and derivative 
commodity instruments are defined as follows. ``Financial instruments'' 
have the same meaning as that set forth in paragraph 3 of FAS 
107.<SUP>75 ``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 paragraphs 5-7 of FAS 119.<SUP>76

    \75\ FAS 107 para. 3 states:
    A financial instrument is defined as cash, evidence of an 
ownership interest in an entity, or a contract that both:
    a. Imposes on one entity a contractual obligation (1) to deliver 
cash or another financial instrument to a second entity or (2) to 
exchange other financial instruments on potentially unfavorable 
terms with the second entity.
    b. Conveys to that second entity a contractual right (1) to 
receive cash or another financial instrument from the first entity 
or (2) to exchange other financial instruments on potentially 
favorable terms with the first entity.
    \76\ FAS 119 Paras. 5-7 state:
    5. For purposes of this Statement, a derivative financial 
instrument is a futures, forward, swap, or option contract, or other 
financial instrument with similar characteristics.
    6. Examples of other financial instruments with characteristics 
similar to option contracts include interest rate caps or floors and 
fixed-rate loan commitments. Those instruments have characteristics 
similar to options in that they provide the holder with benefits of 
favorable movements in the price of an underlying asset or index 
with limited or no exposure to losses from unfavorable price 
movements, generally in return for a premium paid at inception by 
the holder to the issuer. Variable-rate loan commitments and other 
variable-rate financial instruments also may have characteristics 
similar to option contracts. For example, contract rate adjustments 
may lag changes in market rates or be subject to caps or floors. 
Examples of other financial instruments with characteristics similar 
to forward contracts include various kinds of commitments to 
purchase stocks or bonds, forward interest rate agreements, and 
interest rate collars. Those instruments are similar to forwards in 
that they provide benefits of favorable movements in the price of an 
underlying asset or index and exposure to losses from unfavorable 
price movements, generally with no payments at inception.
    7. The definition of derivative financial instrument in 
paragraph 5 excludes all on-balance-sheet receivables and payables, 
including those that ``derive'' their values or contractually 
required cash flows from the price of some other security or index, 
such as mortgage-backed securities, interest-only and principal-only 
obligations, and indexed debt instruments. It also excludes option 
features that are embedded within an on-balance-sheet receivable or 
payable, for example, the conversion feature and call provisions 
embedded in convertible bonds.
---------------------------------------------------------------------------

    Other financial instruments include all financial instruments as 
defined in paragraph 3 of 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 should not be 
considered other financial instruments when their carrying amounts 
approximate fair value.
    Commodity derivative 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 
reasonably possible to be settled in cash or with another financial 
instrument.<SUP>77

    \77\ The term ``reasonably possible'' as used in the proposed 
rulemaking amendments is consistent with para. 3 of FAS 5, which 
defines ``reasonably possible'' to mean the chance of a future 
transaction or event occurring is more than remote but less than 
likely.
---------------------------------------------------------------------------

    Thus, the instrument definitions described above do not encompass 
(i) commodity positions, (ii) derivative commodity instruments that are 
not reasonably possible 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, and/or 
(iv) operating cash flows from non-financial and non-commodity 
instruments.<SUP>78

    \78\ See section III B1b(v), supra, for a further description of 
the instruments, positions, and transactions described in this 
paragraph.
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D. Reporting Frequency

1. Discussion
    The proposed amendments would apply to all registration statements 
filed under the Securities Act and all reports and proxy and 
information statements filed under the Exchange Act that are required 
to include or incorporate financial statements. However, for reports 
that only include interim financial statements (e.g., Form 10-Qs), the 
proposed amendments would need to be complied with only to the extent 
there has been a material change in the information disclosed as of the 
preceding fiscal year end. Thus, for example, the quantitative and 
qualitative information about market risk required by the proposed 
amendments would be included in interim filings only if there was a 
material change in that information when compared to the information 

[[Page 590]]
presented as of the end of the preceding fiscal year.
2. Request for Comment
    Is the frequency of reporting proposed in the amendments adequate? 
Alternatively, given that market risk sensitive instruments allow a 
registrant to change rapidly its exposures to market risk, should the 
proposed disclosures be provided in all interim filings?

V. General Request for Comment

    The Commission seeks comment from all interested persons wishing to 
address any aspect of the proposed amendments. In addition to the 
requests for comments listed throughout this release, the Commission 
also is requesting comment on whether the proposed amendments, if 
adopted, would have an adverse impact on competition or would impose a 
burden on competition that is neither necessary nor appropriate in 
furthering the purposes of the Securities Act and the Exchange Act. 
Comments in this regard will be considered by the Commission in 
complying with its responsibilities under Section 23(a) of the Exchange 
Act, 15 U.S.C. 78w(a).

VI. Disclosure of the Effects of Derivative Instruments on Reporting 
Financial Instruments, Commodity Positions, Firm Commitments, and 
Anticipated Transactions

    In conjunction with the publication today of proposed rules to 
require specific additional disclosures concerning market risk 
sensitive instruments, including derivatives, the Commission is taking 
this opportunity to remind registrants of existing obligations that may 
already require certain disclosures about derivatives. The staff's 1994 
and 1995 reviews of registrant filings suggested that some registrants 
may not be providing sufficient disclosure about how derivatives 
directly or indirectly affect reported items. As a result, those 
disclosures that are being made may not accurately reflect such matters 
as the effective terms or expected cash flows of the reported items.
    It is fundamental that registrants must include in any filings or 
reports any material information that may be necessary to make 
statements made, in light of the circumstances under which they are 
made, not misleading.<SUP>79 That is, registrants must provide 
disclosure about derivatives that affect, directly or indirectly, the 
terms, fair values, or cash flows, of the reported items. This would 
include derivative transactions that are designated to reported items 
under generally accepted accounting principles.<SUP>80

    \79\ See, e.g., Rule 12b-20, 17 CFR 240.12b-20, under the 
Securities Exchange Act of 1934 (``Exchange Act'') and Rule 408, 17 
CFR 230.408 under the Securities Act of 1933 (``Securities Act'').
    \80\ 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, 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 
these 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.

VII. Cost-Benefit Analysis

A. Background

    To assist the Commission in its evaluation of the costs and 
benefits that may result from the proposed disclosure requirements 
discussed in this release, commenters are requested to provide views 
and data relating to any costs and benefits associated with the 
proposed amendments. In general, the proposed amendments clarify 
existing standards and rules, include additional instruments within 
existing standards, and provide alternatives for quantitative 
disclosures regarding market risk sensitive instruments. In particular, 
the proposed amendments provide:
    1. Enhanced descriptions of accounting policies for derivative 
financial instruments and derivative commodity instruments;
    2. Quantitative disclosures about market risk; and
    3. Qualitative disclosures about market risk.
    The Commission is proposing these amendments in response to 
requests from investors and others to provide more meaningful 
information about market risk sensitive instruments.<SUP>81 The 
expected benefits of these proposed amendments are to make information 
about market risk sensitive instruments, including derivative 
instruments, more understandable to investors and others. This 
increased understanding is expected to enhance the ability of investors 
to make investment decisions and also improve the efficiency of 
markets. The Commission believes these benefits will outweigh the 
related costs, which are discussed below.

    \81\ See notes 23-29, supra, for examples of investors, 
regulators, and other private bodies endorsing or recommending 
improved quantitative disclosures about market risk.
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B. Descriptions of Accounting Policies for Derivatives

    FAS 119 was designed, in part, to help investors and others 
understand how derivative financial instruments are reported in the 
financial statements.<SUP>82 Thus, FAS 119 requires, among other 
things, disclosure of the policies used to account for derivative 
financial instruments, pursuant to the requirements of APB 22.<SUP>83 
However, the scope of FAS 119 is limited to derivative financial 
instruments; 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 many choices made by registrants in their 
accounting for derivatives.

    \82\ See FAS 119 para. 60.
    \83\ See FAS 119 para. 8. See also note 39, supra, for a 
discussion of the requirements of APB 22.
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    The current proposed amendments require 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 proposed amendments is broader than 
the scope of FAS 119. In addition, to help make clear the impact of 
derivatives on the financial statements, the proposed amendments make 
explicit the items to be disclosed in the accounting policies 
footnotes.
    The proposed amendments are 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, 

[[Page 591]]
most of the preparation and audit costs are expected to relate to 
initial compliance with the proposed amendments. These costs, along 
with expected printing costs, are not estimated to be significant. 
Other costs, such as ongoing recordkeeping and compliance costs, also 
are not expected to be significant.

C. Quantitative Information About Market Risk

    As discussed earlier in this release, under the proposed 
amendments, registrants would be 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 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, therefore, may be available at relatively low 
incremental costs. Further, registrants complying with Securities Act 
Industry Guide 3,\84\ principally financial institutions, already 
disclose a significant amount of the requested information.

    \84\ 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) summary of loan 
loss experience; (v) deposits; (vi) return on equity and assets; and 
(vii) short-term borrowings.
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    Registrants that choose to use either the sensitivity or value at 
risk disclosure alternatives may incur significant additional costs if 
they currently do not use these methodologies to manage market risk. In 
contrast, if registrants currently use sensitivity or value at risk 
analyses to manage market risk, the Commission believes that any 
additional costs associated with complying with the proposed amendments 
are likely to be negligible. 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.\85\ 
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 analysis 
amounts for risk-based capital purposes.\86\ Also, bank holding 
companies may be required, under a proposed rulemaking requirement, to 
prepare a value at risk analysis for risk-based capital purposes.\87\ 
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.

    \85\ See Wall Street Journal, ``Morgan Unveils the Way It 
Measures Market Risk'' C1 (October 11, 1994).
    \86\ See note 51, supra.
    \87\ See Department of the Treasury, Notice of Proposed 
Rulemaking, ``Risk-Based Capital Standards: Market Risk,'' 60 FR 
38082 (July 25, 1995): see also Federal Reserve System, Request of 
Comments, ``Capital Requirements for Market Risk,'' 60 FR 38142 
(July 25, 1995).
---------------------------------------------------------------------------

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.'' \88\ 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.

    \88\ See FAS 119 para. 11a.
---------------------------------------------------------------------------

    In essence, the proposed amendments expand certain disclosure 
requirements set forth in FAS 119 to (i) encompass derivative financial 
instruments entered into for trading purposes, other financial 
instruments, and derivative commodity instruments and (ii) require 
registrants to evaluate and describe material changes in their primary 
risk exposures and their market risk management activities. The 
Commission believes this should 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 \89\ to incorporate an item similar to Item 305 of 
Regulation S-K. Regulation S-B may be used by small business issuers 
\90\ required to register their securities with the Commission. By 
excluding small business issuers from all but the accounting policies 
disclosures that would be required by the proposed amendments, the 
Commission has limited substantially the cost of these proposals for 
small entities.

    \89\ 17 CFR 228.10 et seq.
    \90\ See note 71, supra.
---------------------------------------------------------------------------

    The Commission will reassess reporting, recordkeeping, compliance 
requirements, and other cost-benefit issues in light of comments it 
receives in response to the proposed amendments.

VII. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis pursuant to the requirements of the Regulatory Flexibility 
Act,\91\ regarding the proposed amendments to Rule 4-08 of Regulation 
S-X and to Regulation S-K to create Item 305. Additionally, the 
Commission is proposing amendments to Forms S-1, S-2, S-4, S-11, and F-
4 under the Securities Act of 1933, and Rule 14a-3, Schedule 14A and 
Forms 10, 20-F, 10-Q, and 10-K under the Exchange Act. The analysis 
notes that the amendments would clarify existing disclosure 
requirements, include additional instruments within existing disclosure 
requirements, and provide disclosure alternatives for quantitative 
information regarding derivative financial instruments, other financial 
instruments, and derivative commodity instruments. These amendments are 
intended to provide investors with information that provides a clearer 
understanding of registrants' use of such instruments, and the market 
risks inherent in those instruments.

    \91\ 5 U.S.C. Sec. 603.
---------------------------------------------------------------------------

    The analysis notes that, although the proposed amendments may 
increase the 

[[Page 592]]
reporting burden for those registrants not currently providing 
comparable disclosures, there should not be a significant impact on 
recordkeeping or other compliance burdens. The analysis also indicates 
that the proposals do not conflict or overlap with existing 
requirements but rather tailor them for specific purposes.
    As more fully discussed in the analysis and noted in the Cost-
Benefit Analysis section of this release, the Commission has determined 
not to amend Regulation S-B to incorporate an item similar to proposed 
Item 305 of Regulation S-K. The Commission, therefore, has reduced the 
impact of the proposed amendments on small business issuers.

Request for Comment

    Written comments are encouraged with respect to any aspect of the 
Initial Regulatory Flexibility Analysis. Such comments will be 
considered in preparation of the Final Regulatory Flexibility Analysis 
if the proposed amendments are adopted. A copy of the Initial 
Regulatory Flexibility Analysis may be obtained by contacting Robert E. 
Burns, Chief Counsel, Office of the Chief Accountant, at (202) 942-
4400, Securities and Exchange Commission, 450 Fifth Street, NW., Mail 
Stop 11-3, Washington, DC 20549.

List of Subjects in 17 CFR Parts 210, 228, 229, 239, 240, and 249

    Accounting, Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendments

    In accordance with the foregoing, Title 17, Chapter II of the Code 
of Federal Regulations is proposed to be 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 authority citation for Part 210 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77aa(25), 
77aa(26), 78l, 78m, 78n, 78o(d), 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 Sec. 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. In 
connection with the accounting policies disclosures required by 
generally accepted accounting principles, identify and describe all 
accounting principles and the methods of applying those principles that 
affect the recognition and measurement of derivative financial 
instruments and derivative commodity instruments, as defined in the 
instructions to this paragraph, unless the registrant's derivatives 
activities are not material. Materiality of derivative activities shall 
be measured by the fair values of derivative financial instrument and 
derivative commodity instruments at the end of each reporting period 
and the fair value of those instruments during each reporting period. 
This description shall include:
    (1) A description 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 
(e.g., the manner in which the type of risk reduction, correlation, 
designation, and/or effectiveness tests are applied);
    (4) The accounting method used if the specified criteria are not 
met;
    (5) The accounting for terminations of derivatives designated as 
hedges or used to affect directly or indirectly the terms, fair values, 
or cash flows of a designated item;
    (6) The accounting for derivatives if the designated item matures, 
or is sold, extinguished, terminated, or, if related to an anticipated 
transaction, is no longer likely to occur; and
    (7) Where and when derivative financial instruments and derivative 
commodity instruments and their related gains and losses are reported 
in the statements of financial position, cash flows, and results of 
operations.

    Instructions to Paragraph 4-08(n). 1. In preparing the 
accounting policies disclosures under this paragraph 4-08(n), 
registrants should include those derivative financial instruments 
and derivative commodity instruments that are held during, or 
outstanding at the end of, each reporting period.
    2. For purposes of this paragraph 4-08(n), derivative financial 
instruments and derivative commodity instruments 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,'' paragraphs 5-7, (October 1994) (``FAS 119'')), and 
includes 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 
reasonably possible to be settled in cash or with another financial 
instrument. For purposes of this paragraph, 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,'' 
paragraph 3 (March 1975)).
    3. For purposes of these instructions, ``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. For purposes of paragraphs 4-08(n)(2), 4-08(n)(3), 4-
08(n)(4), and 4-08(n)(7) registrants should distinguish derivative 
financial instruments and derivative commodity instruments entered 
into for trading purposes from those instruments that are 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., FASB, Statement 
of Accounting Standards No. 119, ``Disclosure about Derivative 
Financial Instruments and Fair Value of Financial Instruments,'' 
paragraph 9a, (October 1994)).

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    3. The authority citation for Part 228 continues to read as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 77sss, 
78l, 78m, 78n, 78o, 78w, 78ll, 80a-8, 80a-29, 80a-30, 80a-37, 80b-
11, unless otherwise noted.

    4. By amending the NOTES to 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 210.1-210.12] 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 

[[Page 593]]
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

    5. The authority citation for part 229 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 
77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 
77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79e, 79n, 
79t, 80a-8, 80a-29, 80a-30, 80a-37, 80b-11, unless otherwise noted.
* * * * *
    6. By adding Sec. 229.305 (Item 305) to read as follows:


Sec. 229.305  (Item 305) Quantitative and qualitative disclosures about 
market risk.

    (a) Quantitative information about market risk. (1) To the extent 
material, registrants shall provide quantitative disclosures about 
market risk, as of the end of the latest fiscal year. Such disclosures 
should be provided using any one of the following three disclosure 
alternatives at the election of the registrant:
    (i)(A)(1) Tabular presentation of terms and information related to 
market risk sensitive instruments; such information (e.g., expected 
cash flows by maturity dates) should be categorized according to risk 
exposure category (e.g., interest rate risk, foreign currency exchange 
rate risk, commodity price risk, and other similar market risks, such 
as equity price risk), and within the foreign currency exchange rate 
risk category, by functional currency (e.g., U.S. dollar, Japanese 
yen).
    (2) Within each of these risk exposure categories, instruments 
should be grouped based on common characteristics. At a minimum, 
instruments should be distinguished by the following characteristics:
    (i) Fixed rate or variable rate assets or liabilities;
    (ii) Long or short forwards or futures;
    (iii) Written or purchased put or call options;
    (iv) Receive fixed or receive variable interest rate swaps; and
    (v) The currency in which the instruments' cash flows are 
denominated.
    (3) For each instrument in the table, expected cash flow 
information should be presented separately for each of the next five 
years with the remaining expected cash flows presented as an aggregate 
amount. Derivatives used to manage risks inherent in anticipated 
transactions also should be disclosed separately; and
    (B) A description of assumptions necessary to an understanding of 
the disclosures required under paragraph (a)(1)(i) (A) of this item 305 
(see the appendix to this Item for a suggested tabular format for 
presentation of this information), or
    (ii)(A) Sensitivity analyses that express the hypothetical loss in 
future earnings, fair values, or cash flows of market risk sensitive 
instruments resulting from at least one selected hypothetical change in 
interest rates, currency exchange rates, commodity prices, and similar 
market rates or prices over a selected time period. The magnitude of 
each selected hypothetical change in rates or prices may differ across 
risk exposures. Separate sensitivity analysis disclosures should be 
made for each category of risk exposure, i.e., interest rate risk, 
foreign currency exchange rate risk, commodity price risk, and other 
similar market risks, such as equity price risk; and
    (B) A description of the model assumptions and parameters necessary 
to an understanding of 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 fair values, earnings, or cash flows from market movements (e.g., 
changes in interest rates, foreign currency exchange rates, commodity 
prices, and other similar market rates or prices) over a selected time 
period with a selected likelihood of occurrence; value at risk 
disclosures should be made on an aggregate basis for all market risk 
sensitive instruments and for each category of market risk exposure, 
such as interest rate risk, foreign currency exchange rate risk, 
commodity price risk, and other similar market risks, such as equity 
price risk;
    (B) For each risk exposure category either:
    (1) The average or range in the value at risk numbers for the 
reported period;
    (2) The average or range in actual changes in fair values, 
earnings, or cash flows of instruments occurring during the reporting 
period; or
    (3) The percentage of time the actual changes in fair values, 
earnings, or cash flows of market risk sensitive instruments exceeded 
the reported value at risk amounts during the current reporting period; 
(The information in this paragraph (a)(1)(iii)(B) is not required for 
[the first fiscal year end for which this section is effective]), and
    (C) A description of the model assumptions and parameters necessary 
to an understanding of the disclosures required under paragraphs 
(a)(1)(iii) (A) and (B) of this item 305.
    (2) Registrants shall discuss material limitations that may cause 
the information required under paragraph (a)(1) of this item 305 not to 
reflect the overall market risk of the entity. This discussion shall 
include descriptions of:
    (i) Each limitation; and
    (ii) If applicable, the instruments' features that are not 
reflected fully within the selected quantitative market risk disclosure 
alternative.
    (3) Registrants shall present summarized information for the 
preceding fiscal year. Registrants also shall discuss the reasons for 
material changes in quantitative information about market risk when 
compared to the information reported in the previous period. 
Information required by this paragraph (a)(3) of item 305, however, is 
not required if disclosure is not required pursuant to paragraph (a)(1) 
of this item 305 for the current fiscal year. Information required by 
this paragraph (a)(3) of item 305 is not required [for the first fiscal 
year end in which item 305 is effective].
    (4) Registrants may change methods of presenting quantitative 
information about market risk (e.g., changing from tabular presentation 
to value at risk). However, if such a change is made the registrants 
shall:
    (i) Explain the reasons for the change; and
    (ii) Provide summarized comparable information, under the new 
disclosure method, for the year preceding the current year.

    Instructions to Paragraph 305(a).
    1. In preparing the disclosures under paragraph 305(a), 
registrants are required to include derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments, as specified in the General Instructions to Paragraphs 
305(a) and 305(b).
    2. In preparing disclosures under paragraph 305(a), registrants 
should distinguish derivative financial instruments, other financial 
instruments, and derivative commodity instruments entered into for 
trading purposes from those instruments that are entered into for 
purposes other than trading.
    3. In preparing disclosures under paragraph 305(a), registrants 
may include 

[[Page 594]]
other market risk sensitive instruments, positions, and transactions 
that are not addressed in instruction 1. to paragraph 305(a). Such 
instruments, positions, and transactions might include commodity 
positions, derivative commodity instruments that are not reasonably 
possible to be settled in cash or with another financial instrument, 
cash flows from anticipated transactions, and operating cash flows 
from non-financial and non-commodity instruments (e.g., cash flows 
generated by manufacturing activities). Registrants choosing to 
include voluntarily these instruments, positions, and cash flows for 
purposes of paragraphs 305(a)1(ii) and 305(a)1(iii) are required to 
state that they have included such instruments, positions, and cash 
flows.
    4. Under paragraph 305(a)(1)(i):
    (A) The examples of terms and information relating to market 
risk sensitive instruments that should be disclosed include, but are 
not limited to, the instruments' fair values, expected principal or 
transaction cash flows, weighted average effective rates or prices, 
and other relevant market risk related information;
    (B) 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'') Appendix E (December 1981);
    (C) Model assumptions that should be described include, but are 
not limited to, specification of the differing numbers reported in 
the table for various categories of instruments (e.g., principal 
cash flows for debt, notional amounts for swaps, and contract 
amounts for options and futures) and key prepayment and/or 
reinvestment assumptions relating to the timing of reported cash 
flow amounts; and
    (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 under each of 
those risk exposure categories.
    5. Under paragraph 305(a)(1)(ii), 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., change in net present values arising from parallel 
shifts in market rates or prices and 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 operating 
cash flows from non-financial and non-commodity instruments), and 
other relevant information on the model's parameters, (e.g., the 
magnitudes of parallel shifts in market rates or prices used, the 
method by which discount rates are determined, and key prepayment 
and/or reinvestment assumptions).
    6. Under paragraph 305(a)(1)(iii), 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), type of model used (e.g., variance/
covariance, historical simulation, Monte Carlo simulation, and 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 operating cash flows from non-financial and non-
commodity instruments), and other relevant information on model 
parameters, (e.g., holding period, confidence interval, and the 
method used for aggregating value at risk amounts across market risk 
exposure categories, such as by assuming perfect positive 
correlation, independence, or actual observed correlation).
    7. 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 
reasonably possible to be settled in cash or with another financial 
instrument, commodity positions, cash flows from anticipated 
transactions, and operating cash flows from non-financial and non-
commodity instruments, such as cash flows from manufacturing 
activities). Failure to include such instruments, positions, and 
transactions in preparing the disclosures under paragraph 305(a)(1) 
may be a limitation because the resulting information may not fully 
reflect the overall 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., 
structured notes, collateralized mortgage obligations, leveraged 
swaps, and swaps with embedded written options).

    (b) Qualitative information about market risk. To the extent 
material, describe:
    (1) The registrant's primary market risk exposures;
    (2) How those exposures are managed (e.g., a description of the 
objectives, general strategies, and instruments, if any, used to manage 
those exposures); and
    (3) 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 recent reporting period and what is known or 
expected to be in effect in future reporting periods.

    Instructions to Paragraph 305(b).
    1. The disclosures required by this paragraph relate to the 
market risk exposures inherent in derivative financial instruments, 
other financial instruments, and derivative commodity instruments, 
as defined in the General Instructions to Paragraphs 305(a) and 
305(b).
    2. In preparing disclosures under paragraph 305(b), the 
qualitative information about market risk should be presented 
separately for derivative financial instruments, other financial 
instruments, and derivative commodity instruments that are entered 
into for trading purposes and those that are entered into for 
purposes other than trading. In addition, qualitative information 
about market risk should be presented separately for those 
instruments used to manage risks inherent in anticipated 
transactions.
    3. Primary market risk exposures, for the purposes of this 
paragraph, mean:
    (A) The following categories of market risk: interest rate risk, 
foreign currency exchange rate risk, commodity price risk, and other 
similar market rate or price risks (e.g., equity prices); 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 would disclose these 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 would disclose 
this exposure.
    4. For purposes of disclosure under paragraph (b) of this item 
305, registrants should describe primary market risk exposures that 
exist at the end of the current reporting period, and how those 
exposures are managed.
    General Instructions to Paragraphs 305(a) and 305(b).
    1. The disclosure called for by paragraphs 305(a) and 305(b) is 
intended to clarify the registrant's exposure to market risks 
associated with activities in derivative financial instruments, 
other financial instruments, and derivative commodity instruments.
    2. For purposes of paragraphs 305(a) and 305(b), derivative 
financial instruments, other financial instruments, and derivative 
commodity instruments (referred collectively as ``market rate 
sensitive instruments'' or ``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,'' 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 (see, e.g., 
FASB, Statement of Financial Accounting Standards No. 107, 
``Disclosures about Fair Value of Financial Instruments,'' paragraph 
3, (December 1991)), except for derivative financial instruments, as 
defined above; 

[[Page 595]]

    (C) 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. However, for purposes of this release, 
trade accounts receivable and trade accounts payable should 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 
reasonably possible to be settled in cash or with another financial 
instrument. For purposes of paragraphs 305(a) and 305(b) and these 
general instructions, 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,'' paragraph 3 (March 1975)).
    3. For purposes of paragraphs 305(a) and 305(b), disclosure is 
not required for:
    (A) Commodity positions;
    (B) Derivative commodity instruments that are not reasonably 
possible to be settled in cash or with another financial instrument;
    (C) Cash flows from anticipated transactions; and/or
    (D) Operating cash flows from non-financial and non-commodity 
instruments.
    4. (A) For purposes of making a materiality assessment under 
paragraphs 305(a) and 305(b), registrants should consider both:
    (i) The materiality of the fair values of derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments outstanding at the end of the current reporting period; 
and
    (ii) The materiality of the potential loss in future earnings, 
fair values, or cash flows from reasonably possible market 
movements.
    (B) If either (i) or (ii) of instruction 4.(A) is material, then 
the disclosures under paragraphs 305(a) and 305(b) are required.
    (C) In determining the materiality of the fair values of market 
risk sensitive instruments outstanding at the end of the current 
reporting period, 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. In determining the 
materiality of the potential loss in future earnings or fair values 
from reasonably possible market movements, registrants should 
consider both the magnitude of past market movements, as well as 
expectations about the magnitude of future market movements. In 
addition, in making the determination under this instruction about 
the materiality of the potential loss in future earnings, fair 
values, or cash flows, registrants should consider, among other 
things, potential losses that may arise from leverage, option, and/
or multiplier features.
    5. For purposes of presenting quantitative and qualitative 
information about market risk, registrants generally should provide 
the required information in one location. However, alternative 
presentation, such as inclusion of all or part of the information in 
the footnotes to the financial statements or in Management's 
Discussion and Analysis, may be used at the discretion of the 
registrant.
    6. 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., FASB, Statement 
of Financial Accounting Standards No. 119, ``Disclosure About 
Derivative Financial Instruments and Fair Value of Financial 
Instruments,'' 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 (e.g., FASB, Statement of Financial Accounting 
Standards No. 80, ``Accounting for Futures Contracts,'' paragraph 9 
(August 1984)).

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 manner 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 proposed 
section 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. Weighted average variable rates are based on 
implied forward rates in the yield curve at the reporting date. 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. 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. dollar 
($U.S.) and German deutschmarks (DMs), as indicated in parentheses.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Expected maturity date                                           
                                                                 ------------------------------------------------------------------               Fair  
                       December 31, 19 x 1                                                                                 There-     Total      value  
                                                                    19 x 2     19 x 3     19 x 4     19 x 5     19 x 6     after                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Liabilities:                                                                                                                                            
    Long-term Debt:                                                                                                                                     
        Fixed Rate ($US)........................................       $XXX       $XXX       $XXX       $XXX       $XXX       $XXX       $XXX       $XXX
            Average interest rate...............................       X.X%       X.X%       X.X%       X.X%       X.X%       X.X%       X.X%           
        Fixed Rate (DMs)........................................        XXX        XXX        XXX        XXX        XXX        XXX        XXX        XXX
            Average interest rate...............................       X.X%       X.X%       X.X%       X.X%       X.X%       X.X%       X.X%           
        Variable Rate ($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%           
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                                                                                                                        

[[Page 596]]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Expected maturity date                                           
                                                                 ------------------------------------------------------------------               Fair  
                    Interest Rate Derivatives                                                                              There-     Total      value  
                                                                    19 x 2     19 x 3     19 x 4     19 x 5     19 x 6     after                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.<SUP>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.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Expected maturity date                                           
                                                                 ------------------------------------------------------------------               Fair  
                       December 31, 19 x 1                                                                                 There-     Total      value  
                                                                    19 x 2     19 x 3     19 x 4     19 x 5     19 x 6     after                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7) (US$ Equivalent in Millions)                                                                                                                        
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
On-Balance Sheet Financial Instruments:                                                                                                                 
    $US Functional Currency <SUP>2 Liabilities                                                                                                               
        Long-Term Debt (DM).....................................       $XXX       $XXX       $XXX       $XXX       $XXX       $XXX       $XXX       $XXX
        Average U.S. dollar/DM Exchange Rate....................        X.X        X.X        X.X        X.X        X.X        X.X        X.X           
--------------------------------------------------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Expected maturity or transaction date                                   
                                                                 ------------------------------------------------------------------               Fair  
                                                                                                                           There-     Total      value  
                                                                    19 x 2     19 x 3     19 x 4     19 x 5     19 x 6     after                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7) (US$ Equivalent in millions)                                                                                                                        
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Anticipated Transactions and Related Derivatives <SUP>3                                                                                                      
    $US Functional Currency:                                                                                                                            
        Firmly committed transactions:                                                                                                                  
            Sales Contracts (DM)................................       $XXX       $XXX  .........  .........  .........  .........       $XXX       $XXX
        Forward Exchange Agreements (Receive $US/Pay DM)                                                                                                
            Contract Amount.....................................        XXX        XXX  .........  .........  .........  .........        XXX        XXX
            Average Exchange Rate...............................        X.X        X.X  .........  .........  .........  .........       X.X            
--------------------------------------------------------------------------------------------------------------------------------------------------------
<SUP>2 Similar tabular information would be provided for other functional currencies.                                                                        
<SUP>3 Pursuant to Instruction 3 to proposed Item 305(a) 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.

                                                                                                                                                        

[[Page 597]]
------------------------------------------------------------------------
                                                  Carrying              
              December 31, 19 x 1                  amount     Fair value
------------------------------------------------------------------------
                                                                        
(1) (In millions)                                                       
                                                                        
------------------------------------------------------------------------
On Balance Sheet Commodity Position and                                 
 Related Derivatives:                                                   
    Corn Inventory............................         $XXX       $XXX <SUP>4
------------------------------------------------------------------------



------------------------------------------------------------------------
                                                  Expected              
                                                  maturity    Fair value
                                                    1992                
------------------------------------------------------------------------
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 
------------------------------------------------------------------------
<SUP>4 Pursuant to Instruction 3 to proposed Item 305 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

    7. The authority citation for Part 239 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77sss, 78c, 78l, 
78m, 78n, 78o(d), 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.
* * * * *
    8. By amending Form S-1 (referenced in 239.11) by redesignating 
items 11(j) through 11(m) as items 11(k) through 11(n) and adding item 
11(j) to read as follows:

    Note--The text of Form S-1 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form S-1

Registration Statement Under the Securities Act of 1933

* * * * *

Item 11. Information With Respect to the Registrant

* * * * *
    (j) Information required by Item 305 of Regulation S-K 
(Sec. 229.305 of this chapter), quantitative and qualitative 
disclosures about market risk.
* * * * *
    9. 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) * * *
    (ix) quantitative and qualitative disclosures about market risk 
as required by Item 305 of Regulation S-K (Sec. 229.305 of this 
chapter).
* * * * *
    10. 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.
* * * * *
    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

* * * * * 

[[Page 598]]


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 F-4 (referenced in Sec. 239.34) to redesignate 
Item 12(b)(3)(vi) as Item 12(b)(3)(vi)(A), add new paragraph (B) to 
Item 12(b)(3)(vi), redesignate Item 14(g) as Item 14(g)(1), add new 
Item 14(g)(2), redesignate Item 17(b)(4) as Item 17(b)(4)(i), and add 
new 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) * * *
    (g)(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

    13. The authority citation for Part 240 continues to read in part 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78q, 78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-
37, 80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    14. By amending Sec. 240.14a-3 by adding paragraph (b)(5)(iii) to 
read as follows:


Sec. 240.14a-3  Information to be furnished 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).
* * * * *
    15. 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 
Instructions 8, 9, and 10 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.
* * * * *

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, quantitative and qualitative 
disclosures about market risk.
* * * * *
    (3) Information with respect to registrants other than S-2 or S-
3 registrants.
    (i) * * *
    (A) * * *
    (J) Item 305 of Regulation S-K, quantitative and qualitative 
disclosures about market risk.
* * * * *
    Instructions to Item 14.
* * * * *
    8. A registered management company need not comply with Items 
(i), (iii), (iv), (v), (vi), and (viii) of paragraph (b)(2)(i)(B)(3) 
of this Item 14.
    9. A registered management company need not comply with Items 
(i), (ii), (iii), (iv), (v), and (vii) of paragraph (b)(2)(ii)(A)(3) 
of this Item 14.
    10. A registered management company need not comply with items 
(A), (B), (D), (F), (G), (H), and (J) of paragraph (b)(3)(i) of this 
Item 14.
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    16. The authority for Part 249 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.

    17. 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).
* * * * *
    18. 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

* * * * * 

[[Page 599]]


Item 9A. Quantitative and Qualitative Disclosures About Market 
Risk.

    (a) Quantitative information about market risk. (1) To the 
extent material, registrants shall provide quantitative disclosures 
about market risk, as of the end of the latest fiscal year. Such 
disclosures should be provided using any one of the following three 
disclosure alternatives at the election of the registrant:
    (i)(A)(1) Tabular presentation of terms and information related 
to market risk sensitive instruments; such information (e.g., 
expected cash flows by maturity dates) should be categorized 
according to risk exposure category (e.g., interest rate risk, 
foreign currency exchange rate risk, commodity price risk, and other 
similar market risks, such as equity price risk), and within the 
foreign currency exchange rate risk category, by functional currency 
(e.g., U.S. dollar, Japanese yen).
    (2) Within each of these risk exposure categories, instruments 
should be grouped based on common characteristics. At a minimum, 
instruments should be distinguished by the following 
characteristics:
    (i) Fixed rate or variable rate assets or liabilities;
    (ii) Long or short forwards or futures;
    (iii) Written or purchased put or call options;
    (iv) Receive fixed or receive variable interest rate swaps; and
    (v) The currency in which the instruments' cash flows are 
denominated.
    (3) For each instrument in the table, expected cash flow 
information should be presented separately for each of the next five 
years with the remaining expected cash flows presented as an 
aggregate amount. Derivatives used to manage risks inherent in 
anticipated transactions also should be disclosed separately; and
    (B) A description of assumptions necessary to an understanding 
of the disclosures required under subparagraph (A) of this item 
9A(a)(1)(i) (see the Appendix to this Item for a suggested tabular 
format for presentation of this information), or
    (ii)(A) Sensitivity analyses that express the hypothetical loss 
in future earnings, fair values, or cash flows of market risk 
sensitive instruments resulting from at least one selected 
hypothetical change in interest rates, currency exchange rates, 
commodity prices, and similar market rates or prices over a selected 
time period. The magnitude of each selected hypothetical change in 
rates or prices may differ across risk exposures. Separate 
sensitivity analysis disclosures should be made for each category of 
risk exposure, i.e., interest rate risk, foreign currency exchange 
rate risk, commodity price risk, and other similar market risks, 
such as equity price risk; and
    (B) A description of the model assumptions and parameters 
necessary to an understanding of the disclosures required under 
subparagraph (A) of this item 9A(a)(1)(ii); or
    (iii)(A) Value at risk disclosures that express the potential 
loss in fair values, earnings, or cash flows from market movements 
(e.g., changes in interest rates, foreign currency exchange rates, 
commodity prices, and other similar market rates or prices) over a 
selected time period with a selected likelihood of occurrence; value 
at risk disclosures should be made on an aggregate basis for all 
market risk sensitive instruments and for each category of market 
risk exposure, such as interest rate risk, foreign currency exchange 
rate risk, commodity price risk, and other similar market risks, 
such as equity price risk;
    (B) For each risk exposure category either:
    (1) The average or range in the value at risk numbers for the 
reported period;
    (2) The average or range in actual changes in fair values, 
earnings, or cash flows of instruments occurring during the 
reporting period; or
    (3) The percentage of time the actual changes in fair values, 
earnings, or cash flows of market risk sensitive instruments 
exceeded the reported value at risk amounts during the current 
reporting period; (The information in this subparagraph (B) is not 
required for the first fiscal year end for which this rule is 
effective) and
    (C) A description of the model assumptions and parameters 
necessary to an understanding of the disclosures required under 
subparagraphs (A) and (B) of this Item 9A(a)(1)(iii).
    (2) Registrants shall discuss material limitations that may 
cause the information required under paragraph (a)(1) of this item 
9A not to reflect the overall market risk of the entity. This 
discussion shall include descriptions of:
    (i) Each limitation; and
    (ii) If applicable, the instruments' features that are not 
reflected fully within the selected quantitative market risk 
disclosure alternative.
    (3) Registrants shall present summarized information for the 
preceding fiscal year. Registrants also shall discuss the reasons 
for material changes in quantitative information about market risk 
when compared to the information reported in the previous period. 
Information required by this paragraph (a)(3) of item 9A, however, 
is not required if disclosure is not required pursuant to paragraph 
(a)(1) of this item 9A for the current fiscal year. Information 
required by this paragraph (a)(3) of item 9A is not required for the 
first fiscal year end in which this item 9A is effective.
    (4) Registrants may change methods of presenting quantitative 
information about market risk (e.g., changing from tabular 
presentation to value at risk). However, if such a change is made 
the registrants shall:
    (i) Explain the reasons for the change; and
    (ii) Provide summarized comparable information, under the new 
disclosure method, for the year preceding the current year.
    Instructions to Paragraph 9A(a).
    1. In preparing the disclosures under paragraph 9A(a), 
registrants are required to include derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments, as specified in the General Instructions to Paragraphs 
9A(a) and 9A(b).
    2. In preparing disclosures under paragraph 9A(a), registrants 
should distinguish derivative financial instruments, other financial 
instruments, and derivative commodity instruments entered into for 
trading purposes from those instruments that are entered into for 
purposes other than trading.
    3. In preparing disclosures under paragraph 9A(a), registrants 
may include other market risk sensitive instruments, positions, and 
transactions that are not addressed in instruction 1. to paragraph 
9A(a). Such instruments, positions, and transactions might include 
commodity positions, derivative commodity instruments that are not 
reasonably possible to be settled in cash or with another financial 
instrument, cash flows from anticipated transactions, and operating 
cash flows from non-financial and non-commodity instruments (e.g., 
cash flows generated by manufacturing activities). Registrants 
choosing to include voluntarily these instruments, positions, and 
cash flows for purposes of paragraphs 9A(a)1(ii) and 9A(a)1(iii) are 
required to state that they have included such instruments, 
positions, and cash flows.
    4. Under paragraph 9A(a)(1)(i):
    (A) The examples of terms and information relating to market 
risk sensitive instruments that should be disclosed include, but are 
not limited to, the instruments' fair values, expected principal or 
transaction cash flows, weighted average effective rates or prices, 
and other relevant market risk related information;
    (B) 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'') Appendix E (December 1981);
    (C) Model assumptions that should be described include, but are 
not limited to, specification of the differing numbers reported in 
the table for various categories of instruments (e.g., principal 
cash flows for debt, notional amounts for swaps, and contract 
amounts for options and futures) and key prepayment and/or 
reinvestment assumptions relating to the timing of reported cash 
flow amounts; and
    (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 under each of 
those risk exposure categories.
    5. Under paragraph 9A(a)(1)(ii), 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., change in net present values arising from parallel 
shifts in market rates or prices and 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 operating 
cash flows from non-financial and non-commodity 

[[Page 600]]
instruments), and other relevant information on the model's parameters, 
(e.g., the magnitudes of parallel shifts in market rates or prices 
used, the method by which discount rates are determined, and key 
prepayment and/or reinvestment assumptions).
    6. Under paragraph 9A(a)(1)(iii), 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), type of model used (e.g., variance/
covariance, historical simulation, Monte Carlo simulation, and 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 operating cash flows from non-financial and non-
commodity instruments), and other relevant information on model 
parameters, (e.g., holding period, confidence interval, and the 
method used for aggregating value at risk amounts across market risk 
exposure categories, such as by assuming perfect positive 
correlation, independence, or actual observed correlation).
    7. Under paragraph 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 
paragraph 9A(a)(1) (e.g., derivative commodity instruments not 
reasonably possible to be settled in cash or with another financial 
instrument, commodity positions, cash flows from anticipated 
transactions, and operating cash flows from non-financial and non-
commodity instruments, such as cash flows from manufacturing 
activities). Failure to include such instruments, positions, and 
transactions in preparing the disclosures under paragraph 9A(a)(1) 
may be a limitation because the resulting information may not fully 
reflect the overall market risk of a registrant; and
    (B) The ability of disclosures required under paragraph 9A(a)(1) 
to reflect fully the market risk that may be inherent in instruments 
with leverage, option, or prepayment features (e.g., structured 
notes, collateralized mortgage obligations, leveraged swaps, and 
swaps with embedded written options).
    (b) Qualitative information about market risk. To the extent 
material, describe:
    (1) The registrant's primary market risk exposures;
    (2) How those exposures are managed (e.g., a description of the 
objectives, general strategies, and instruments, if any, used to 
manage those exposures); and
    (3) 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 recent reporting period and what is 
known or expected to be in effect in future reporting periods.
    Instructions to Paragraph 9A(b).
    1. The disclosures required by this paragraph 9A(b) relate to 
the market risk exposures inherent in derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments, as defined in the General Instructions to Paragraphs 
9A(a) and 9A(b).
    2. In preparing disclosures under paragraph 9A(b), the 
qualitative information about market risk should be presented 
separately for derivative financial instruments, other financial 
instruments, and derivative commodity instruments that are entered 
into for trading purposes and those that are entered into for 
purposes other than trading. In addition, qualitative information 
about market risk should be presented separately for those 
instruments used to manage risks inherent in anticipated 
transactions.
    3. Primary market risk exposures, for the purposes of this 
paragraph, mean:
    (A) The following categories of market risk: interest rate risk, 
foreign currency exchange rate risk, commodity price risk, and other 
similar market rate or price risks (e.g., equity prices); 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 would disclose these 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 would disclose 
this exposure.
    4. For purposes of disclosure under paragraph (b) of this item 
9A, registrants should describe primary market risk exposures that 
exist at the end of the current reporting period, and how those 
exposures are managed.
    General Instructions to Paragraphs 9A(a) and 9A(b).
    1. The disclosure called for by paragraphs 9A(a) and 9A(b) is 
intended to clarify the registrant's exposure to market risks 
associated with activities in derivative financial instruments, 
other financial instruments, and derivative commodity instruments.
    2. For purposes of paragraphs 9A(a) and 9A(b), derivative 
financial instruments, other financial instruments, and derivative 
commodity instruments (referred collectively as ``market rate 
sensitive instruments'' or ``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,'' 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 (see, e.g., 
FASB, Statement of Financial Accounting Standards No. 107, 
``Disclosures about Fair Value of Financial Instruments,'' paragraph 
3, (December 1991)), except for derivative financial instruments, as 
defined above;
    (C) 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. However, for purposes of this release, 
trade accounts receivable and trade accounts payable should 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 
reasonably possible to be settled in cash or with another financial 
instrument. For purposes of paragraphs 9A(a) and 9A(b) and these 
general instructions, 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,'' paragraph 3, (March 1975)).
    3. For purposes of paragraphs 9A(a) and 9A(b), disclosure is not 
required for:
    (A) Commodity positions;
    (B) Derivative commodity instruments that are not reasonably 
possible to be settled in cash or with another financial instrument;
    (C) Cash flows from anticipated transactions; and/or
    (D) Operating cash flows from non-financial and non-commodity 
instruments.
    4. (A) For purposes of making a materiality assessment under 
paragraphs 9A(a) and 9A(b), registrants should consider both:
    (i) The materiality of the fair values of derivative financial 
instruments, other financial instruments, and derivative commodity 
instruments outstanding at the end of the current reporting period; 
and
    (ii) The materiality of the potential loss in future earnings or 
fair values from reasonably possible market movements.
    (B) If either (i) or (ii) of instruction 4. (A) is material, 
then the disclosures under paragraphs 9A(a) and 9A(b) are required.
    (C) In determining the materiality of the fair values of market 
risk sensitive instruments outstanding at the end of the current 
reporting period, 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. In determining the 
materiality of the potential loss in future earnings or fair values 
from reasonably possible market movements, registrants should 
consider both the magnitude of past market movements, as well as 
expectations about the magnitude of future market movements. In 
addition, in making the determination under this instruction 

[[Page 601]]
about the materiality of the potential loss in future earnings, fair 
values, or cash flows, registrants should consider, among other 
things, potential losses that may arise from leverage, option, and/
or multiplier features.
    5. For purposes of presenting quantitative and qualitative 
information about market risk, registrants generally should provide 
the required information in one location. However, alternative 
presentation, such as inclusion of all or part of the information in 
the footnotes to the financial statements or in Management's 
Discussion and Analysis, may be used if such presentation would be 
more meaningful to investors.
    6. For purposes of the instructions to paragraphs 9A(a) and 
9A(b), ``trading purposes'' 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,'' 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 (e.g., FASB, Statement of Financial Accounting 
Standards No. 80, ``Accounting for Futures Contracts,'' paragraph 9, 
(August 1984)).

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 manner 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 proposed 
section 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, which 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. Weighted average variable rates are based on 
implied forward rates in the yield curve at the reporting date. 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. The information is presented in US dollar 
equivalents, which is the Company's reporting currency. The 
instrument's actual cash flows are denominated in both US dollar ($US) 
and German deutschmarks (DMs), as indicated in parentheses.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Expected maturity date                                           
                      December 31, 19 x 1                       -------------------------------------------------------------------   Total       Fair  
                                                                   19 x 2     19 x 3     19 x 4     19 x 5     19 x 6   Thereafter               Value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7) (In millions)                                                                                                                                       
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Liabilities:                                                                                                                                            
    Long-term Debt:                                                                                                                                     
        Fixed Rate ($US).......................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
            Average interest rate..............................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%  .........
        Fixed Rate (DMs).......................................        XXX        XXX        XXX        XXX        XXX         XXX        XXX        XXX
            Average interest rate..............................       X.X%       X.X%       X.X%       X.X%       X.X%        X.X%       X.X%  .........
        Variable Rate ($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%  .........
--------------------------------------------------------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Expected maturity date                                           
                                                                -------------------------------------------------------------------   Total       Fair  
                                                                   19 x 2     19 x 3     19 x 4     19 x 5     19 x 6   Thereafter               value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7) (In millions)                                                                                                                                       
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Interest Rate Derivatives:                                                                                                                              
    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.<SUP>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 

[[Page 602]]
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.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       Expected maturity date                                           
                      December 31, 19 x 1                       -------------------------------------------------------------------   Total       Fair  
                                                                   19 x 2     19 x 3     19 x 4     19 x 5     19 x 6   Thereafter               value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7) (US$ Equivalent in Millions)                                                                                                                        
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
On-Balance Sheet Financial Instruments:                                                                                                                 
    $US Functional Currency \2\ Liabilities                                                                                                             
        Long-Term Debt (DM)....................................       $XXX       $XXX       $XXX       $XXX       $XXX        $XXX       $XXX       $XXX
        Average U.S. dollar /DM Exchange Rate..................        X.X        X.X        X.X        X.X        X.X         X.X        X.X  .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\2\ Similar tabular information would be provided for other functional currencies.                                                                      


--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Expected maturity or transaction date                                          
                                                                ------------------------------------------------------- Thereafter    Total       Fair  
                                                                   19 x 2     19 x 3     19 x 4     19 x 5     19 x 6                            value  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
(7) (US$ Equivalent in millions)                                                                                                                        
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Anticipated Transactions and Related Derivatives \3\                                                                                                    
    $US Functional Currency:                                                                                                                            
         Firmly committed transactions:                                                                                                                 
            Sales Contracts (DM)...............................       $XXX       $XXX  .........  .........  .........  ..........       $XXX       $XXX
        Forward Exchange Agreements (Receive $US/Pay DM):                                                                                               
            Contract Amount....................................        XXX        XXX  .........  .........  .........  ..........       $XXX       $XXX
            Average Exchange Rate..............................        X.X        X.X  .........  .........  .........  ..........        X.X  .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\3\ Pursuant to Instruction 3 to proposed Item 9A 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 
within 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, 19 x 1              Carrying amount      Fair Value
------------------------------------------------------------------------
On Balance Sheet Commodity Position                                     
 and Related Derivatives:                                               
 (1) (In millions)                                                      
                                                                        
------------------------------------------------------------------------
    Corn Inventory.................  $XXX..................       $XXX <SUP>4
------------------------------------------------------------------------
\4\ Pursuant to proposed Instruction 3 to proposed Item 9A of Form 20-F,
  registrants may include information on commodity positions, such as   
  corn inventory.                                                       


------------------------------------------------------------------------
                                                  Expected              
                                                  maturity    Fair value
                                                    1992                
------------------------------------------------------------------------
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
------------------------------------------------------------------------

* * * * *
    19. 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 

[[Page 603]]


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

* * * * *

Item 3. Quantitative and Qualitative Disclosures About Market Risk

    If there has been a material change in the information required 
by Item 305 of Regulation S-K (Sec. 229.305 of this chapter) from 
the end of the preceding fiscal year to the date of the most recent 
interim balance sheet provided, furnish the information required by 
Item 305 of Regulation S-K.
* * * * *
    20. 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: December 28, 1995.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-130 Filed 1-5-96; 8:45 am]
BILLING CODE 8010-01-P