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

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.

9The 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).

10See 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, mortgagebacked 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.

11Market 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.

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

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.

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 1 and to add

new Item 305 to Regulation S–K.2

Additionally, the Commission is

proposing amendments to Forms S–1,

S–2, S–4, S–11, and F–4 3 under the

Securities Act of 1933,4 and Rule 14a–

3,5 Schedule 14A,6 and Forms 10, 20–

F, 10–Q, and 10–K 7 under the Securities

Exchange Act of 1934.8

I. Executive Summary

During the last several years, there has

been substantial growth 9 in the use of

derivative financial instruments, other

financial instruments, and derivative

commodity instruments.10 The

Commission recognizes that these

instruments can be effective tools for

managing registrants’ exposures to

market risk.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.

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,12 three
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 579

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.

13The 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.

14These 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).

15For 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).

16See section III B3b, infra, for a discussion about

where, outside the financial statements, these

disclosures would appear.

17The 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.

18See note 63, infra, for a definition specifying

how the term ‘‘primary market risk exposures’’ is

used in this release.

19For purposes of this release, ‘‘anticipated

transactions’’ means transactions (other than

transactions involving existing assets or liabilities

or transactions necessitated by existing firm

commitments) an enterprise expects, but is not

obligated, to carry out in the normal course of

business (see, e.g., ¶ 9 of Statement of Financial

Accounting Standards No. 80, ‘‘Accounting for

Futures Contracts’’ (‘‘FAS 80’’) (August 1984)).

20The 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).

21The proposed amendments relating to

accounting policies disclosures, however, would

apply to both registered investment companies and

small business issuers.

22See, e.g., Item 303 of Regulation S–B, 17 CFR

228.303, and Item 303 of Regulation S–K, 17 CFR

229.303.

significant disclosure issues remain.

Today, to address those disclosure

issues: 13

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.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 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.

2. The Commission proposes

amendments creating a new Item 305 of

Regulation S–K requiring disclosure

outside the financial statements 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.17

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).

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.

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

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

23See AIMR, Financial Reporting in the 1990s

and Beyond, page 30 (1993).

24See AICPA Special Committee on Financial

Reporting, Improving Business Reporting—A

Customer Focus: Meeting the Information Needs of

Investors and Creditors (1994).

25See 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).

26See Federal Reserve Bank of New York, Public

Disclosure of Risks Related to Market Activity: A

Discussion Paper (November 1994).

27See 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).

28See Group of Thirty, Derivatives: Practices and

Principles (July 1993).

29See FEI, Derivative Financial Instruments

Accounting and Disclosure Issues, (‘‘FEI Report’’)

prepared by FEI CCF/CCR Derivatives Disclosure

Task Force (August 1994).

30See note 26, supra.

31See Attachment A, page 1 of FEI Report.

32See Attachment B, pages 5 and 6 of FEI Report.

33Similar 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.

34See FAS 119 ¶ 12.

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

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

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

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

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:

• Disclosures should allow investors

to understand better how derivatives

affect a registrant’s statements of

financial position, cash flows, and

results of operations;

• Disclosures should provide

information about market risk;

• Disclosures should allow the

investor to understand how market risk

sensitive instruments are used in the

context of the registrant’s business;

• 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;

• 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;

• Disclosures about market risk

should highlight, where appropriate,

special risks relating to leverage, option,

or prepayment features; and

• New disclosure requirements

should build on existing disclosure
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 581

35The 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.’’

36Under 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’’).

37For 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.

38The 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 ¶ 3).

39APB 22 ¶ 12 states:

Disclosure of accounting policies should identify

and describe the accounting policies followed by

the reporting entity and the methods of applying

those principles that materially affect the

determination of financial position, cash flows or

results of operations. In general, the disclosure

should encompass important judgments as to the

appropriateness of principles relating to recognition

of revenue and allocation of asset costs to current

and future periods; in particular, it should

encompass those accounting principles and

methods that involve . . . a selection from existing

acceptable alternatives.

The Accounting Principles Board was the

predecessor to the FASB. Unless superseded by

FASB Statements, APB Opinions continue to be

regarded as the highest level of generally accepted

accounting principles followed by the accounting

profession. See generally AICPA, Statements on

Auditing Standards No. 69, ‘‘The Meaning of

Present Fairly in Conformity With Generally

Accepted Accounting Principles in the Independent

Auditor’s Report,’’ ¶ 5 (March 1992); AU § 411.05.

40See FAS 119 ¶ 60.

41FAS 119 ¶ 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.

42For purposes of this release, the term ‘‘trading

purposes’’ has the same meaning as defined by

generally accepted accounting principles (see, e.g.,

FAS 119 ¶ 9a).

43See note 14, supra.

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.35

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) 36 and the underlying

concepts and criteria used in

determining the applicability of these

accounting methods are not

consistent.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.38 Thus, it was

difficult to compare the financial

statement effects of derivatives across

registrants.

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 22.39

Specifically, FAS 119 emphasizes the

disclosure of ‘‘policies for recognizing

(or not recognizing) and measuring

derivative financial instruments . . .

and when recognized, where those

instruments and related gains and losses

are reported in the statements of

financial position and income.’’ 40

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.

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.41

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.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.

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.43
582 Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules

44See note 65, infra, for a definition specifying

how the term ‘‘reasonably possible’’ is used in this

release.

45See, e.g., FAS 119 ¶ 8b and Rule 5–02 of

Regulation S–X, 17 CFR 210.5–02.

46 In particular, FAS 119 ¶ 12 lists five possible

quantitative methods of measuring and disclosing

market risk. They are: (i) details about current

positions and perhaps activity during the period,

(ii) the hypothetical effects on equity, or on annual

income, of several possible changes in market price,

(iii) a gap analysis of interest rate repricing or

maturity dates, (iv) the duration of the financial

instruments, and (v) the entity’s value at risk from

derivative financial instruments and from other

positions at the end of the reporting period and the

average value at risk during the year.

47See section III B3b, infra, for a discussion about

where, outside the financial statements, these

disclosures would appear.

48At 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.

49For 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.

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:

• Derivative financial instruments—

futures, forwards, swaps, options, and

other financial instruments with similar

characteristics;

• Other financial instruments—nonderivative financial instruments, such as

investments, loans, structured notes,

mortgage-backed securities, indexed

debt instruments, interest-only and

principal-only obligations, deposits, and

other debt obligations;

• Derivative commodity instruments

that are reasonably possible 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.

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.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.

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.46 However, the

SEC staff has observed that registrants

often do not make these disclosures.

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,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.48

(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 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
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 583

50The 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.

51See Office of Thrift Supervision, Regulatory

Capital: Interest Rate Risk Component, 12 CFR

567.5(c)(4) (August 1993).

52The 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.

53The 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.

54See note 42, supra, for a definition specifying

how the term ‘‘trading purposes’’ is used in this

release.

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.

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).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.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).

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.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.

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).53

(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 54 and those
584 Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules

55For 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.

56These disclosures would be required for other

financial instruments, even if a registrant does not

enter into derivatives.

57See note 19, supra.

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.

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.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.

(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.56

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:

• 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;

• Commodity positions—such as

investments in corn, wheat, oil, gas,

lumber, silver, gold, and other

commodity inventory positions;

• Cash flows from anticipated

transactions 57—such as cash flows from

anticipated purchases and sales of

inventory; and

• Operating cash flows from nonfinancial 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.58

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

59See notes 25 and 27, supra.

60See FAS 119 ¶ 11a. Footnote 4 of FAS 119

illustrates the qualitative disclosures required by

¶ 11a. That footnote states:

If an entity’s objective for a derivative position is

to keep a risk from the entity’s non-derivative assets

below a specified level, the context would be a

description of those assets and their risks, and a

strategy might be purchasing put options in a

specified proportion to the assets at risk.

61See FAS 119 ¶ 11c.

62See section III B3b, infra.

63For 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.

64See 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.

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.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?

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.’’ 60 In

addition, FAS 119 requires separate

disclosures about derivative financial

instruments used as hedges of

anticipated transactions.61 As indicated

above, these requirements of FAS 119

only apply to certain derivatives held or

issued for purposes other than trading.

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 62 of (i) a

registrant’s primary market risk

exposures 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).

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 noncommodity instruments (e.g., cash flows

generated by manufacturing activities).64

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?
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 587

65For purposes of this release, the term

‘‘reasonably possible’’ is defined by ¶ 3 of FASB,

Statement of Financial Accounting Standards No.

5, ‘‘Accounting for Contingencies’’ (‘‘FAS 5’’)

(March 1975), which states that ‘‘reasonably

possible’’ means the chance of a future transaction

or event occurring is more than remote but less than

likely.

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

¶ 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.

68See SEC Financial Reporting Policies § 501.02

for the interpretative release to Item 303 of

Regulation S-K, which specifies the MD&A

disclosure thresholds.

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.65 If either (i) or (ii)

in the previous sentence are material,

registrants would have to disclose

qualitative and quantitative information

about market risk.

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).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.67

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-balancesheet’’ unrecognized assets or (ii)

liabilities and ‘‘off-balance-sheet’’

unrecognized liabilities? Alternatively,

would the disclosure thresholds for

MD&A be more appropriate? 68

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

69See FAS 119 ¶ 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).

70Private Securities Litigation Reform Act of

1995, Pub. L. No. 104–67 (December 22, 1995).

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.

72See note 33, supra.

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 marketvalue 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.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.

Congress recently adopted the Private

Securities Litigation Reform Act of

1995 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.

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,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.

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.72 The Commission is

proposing to amend Form 20–F to

require disclosure by all foreign private
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 589

73Foreign 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.

74SAB 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.

75FAS 107 ¶ 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.

76FAS 119 ¶¶ 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-balancesheet 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, interestonly 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.

77The term ‘‘reasonably possible’’ as used in the

proposed rulemaking amendments is consistent

with ¶ 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.

78See section III B1b(v), supra, for a further

description of the instruments, positions, and

transactions described in this paragraph.

issuers of quantitative and qualitative

information about market risk.

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.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.74

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 107.75 ‘‘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 119.76

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.77

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 noncommodity instruments.78

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

79See, 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’’).

80See, e.g., FAS 52 ¶ 21a and FAS 80 ¶ 4a.

81See notes 23–29, supra, for examples of

investors, regulators, and other private bodies

endorsing or recommending improved quantitative

disclosures about market risk.

82See FAS 119 ¶ 60.

83See FAS 119 ¶ 8. See also note 39, supra, for

a discussion of the requirements of APB 22.

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.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.80

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.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.

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.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 22.83 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.

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,
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 591

84Securities 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.

85See Wall Street Journal, ‘‘Morgan Unveils the

Way It Measures Market Risk’’ C1 (October 11,

1994).

86See note 51, supra.

87See 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).

88See FAS 119 ¶ 11a.

89 17 CFR 228.10 et seq.

90See note 71, supra.

91 5 U.S.C. § 603.

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.

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.

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.

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 SB89 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.

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.

The analysis notes that, although the

proposed amendments may increase the
592 Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules

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 § 210.4–08 by adding

paragraph (n) to read as follows:

§ 210.4–08 General notes to financial

statements.

* * * * *

(n) Accounting policies for certain

derivative instruments. 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

§ 228.310 by revising the first sentence

of note 2 to read as follows:

§ 228.310 (Item 310) Financial Statements.

Notes—1. * * *

2. Regulation S–X [17 CFR 210.1–

210.12] Form and Content of and

Requirements for Financial Statements

shall not apply to the preparation of

such financial statements, except that

the report and qualifications of the

independent accountant shall comply

with the requirements of article 2 of

regulation S–X [17 CFR 210.2], articles
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 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 § 229.305 (Item 305) to

read as follows:

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

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

[Dollar amounts in millions]

December 31, 19×1

Expected maturity date

Total Fair value

19×2 19×3 19×4 19×5 19×6 Thereafter

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

1The information is presented in U.S. dollars

because that is the registrant’s reporting currency.

[Dollar amounts in millions]

Interest Rate Derivatives

Expected maturity date

Total Fair value

19×2 19×3 19×4 19×5 19×6 Thereafter

Interest Rate Swaps:

Variable to Fixed ($US) ............................. $XXX $XXX $XXX $XXX $XXX $XXX $XXX $XXX

Average pay rate ................................ X.X% X.X% X.X% X.X% X.X% X.X% X.X%

Average receive rate .......................... X.X% X.X% X.X% X.X% X.X% X.X% X.X%

Fixed to Variable ($US) ............................. XXX XXX XXX XXX XXX XXX XXX XXX

Average pay rate ................................ X.X% X.X% X.X% X.X% X.X% X.X% X.X%

Average receive rate .......................... X.X% X.X% X.X% X.X% X.X% X.X% X.X%

Exchange Rate Sensitivity

The table below provides information

about the Company’s derivative

financial instruments, other financial

instruments, and firmly committed sales

transactions by functional currency and

presents such information in U.S. dollar

equivalents.1 The table summarizes

information on instruments and

transactions that are sensitive to foreign

currency exchange rates, including

foreign currency forward exchange

agreements, deutschmark (DM)-

denominated debt obligations, and

firmly committed DM sales transactions.

For debt obligations, the table presents

principal cash flows and related

weighted average interest rates by

expected maturity dates. For firmly

committed DM-sales transactions, sales

amounts are presented by the expected

transaction date, which are not expected

to exceed two years. For foreign

currency forward exchange agreements,

the table presents the notional amounts

and weighted average exchange rates by

expected (contractual) maturity dates.

These notional amounts generally are

used to calculate the contractual

payments to be exchanged under the

contract.

December 31, 19×1

Expected maturity date

Total Fair value

19×2 19×3 19×4 19×5 19×6 Thereafter

(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

Expected maturity or transaction date

Total Fair value

19×2 19×3 19×4 19×5 19×6 Thereafter

(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

2Similar tabular information would be provided for other functional currencies.

3Pursuant 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.
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 597

December 31, 19×1 Carrying

amount Fair value

(In millions)

On Balance Sheet Commodity Position and Related Derivatives:

Corn Inventory .......................................................................................................................................................... $XXX $XXX4

Expected

maturity

1992

Fair value

Related Derivatives:

Futures Contracts (Short):

Contract Volumes (100,000 bushels) ................................................................................................................ XXX ....................

Weighted Average Price (Per 100,000 bushels) .............................................................................................. $X.XX ....................

Contract Amount ($US in millions) .................................................................................................................... $XXX $XXX

4Pursuant 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 (§ 229.305 of this chapter),

quantitative and qualitative disclosures about

market risk.

* * * * *

9. By amending Form S–2 (referenced

in § 239.12) by adding paragraph (9) to

Item 11(b), removing ‘‘and’’ at the end

of Item 12(a)(3)(vii), removing the

period at the end of Item 12(a)(3)(viii)

and in its place adding ‘‘; and’’, and

adding paragraph (ix) to Item 12(a)(3) to

read as follows:

Note—The text of Form S–2 does not, and

this amendment will not, appear in the Code

of Federal Regulations.

Form S–2

Registration Statement Under the Securities

Act of 1933

* * * * *

Item 11. Information With Respect to the

Registrant

(a) * * *

(b) * * *

(9) Furnish quantitative and qualitative

disclosures about market risk required by

Item 305 of Regulation S–K (§ 229.305 of this

chapter).

* * * * *

Item 12. Incorporation of Certain Information

by Reference.

(a) * * *

(3) * * *

(ix) quantitative and qualitative disclosures

about market risk as required by Item 305 of

Regulation S–K (§ 229.305 of this chapter).

* * * * *

10. By amending Form S–4

(referenced in § 239.25) by removing

‘‘and’’ at the end of Item 12(b)(3)(v) and

the period at the end of Item 12(b)(3)(vi)

and in its place adding ‘‘; and’’, adding

paragraph (vii) to Item 12(b)(3),

removing ‘‘and’’ at the end of Item

13(a)(3)(v) and the period at the end of

Item 13(a)(3)(vi) and in its place adding

‘‘; and’’, adding paragraph (vii) to Item

13(a)(3), removing ‘‘and’’ at the end of

Item 14(h) and the period at the end of

Item 14(i) and in its place adding ‘‘;

and’’, adding paragraph (j) to Item 14,

and adding paragraph (10) to Item 17(b)

to read as follows:

Note—The text of Form S–4 does not, and

this amendment will not, appear in the Code

of Federal Regulations.

Form S–4

Registration Statement Under the Securities

Act of 1933

* * * * *

Item 12. Information With Respect to S–2 or

S–3 Registrants

* * * * *

(b) * * *

(3) * * *

(vii) Item 305 of Regulation S–K (§ 229.305

of this chapter), quantitative and qualitative

disclosures about market risk.

* * * * *

Item 13. Incorporation of Certain Information

by Reference

* * * * *

(a) * * *

(3) * * *

(vii) Item 305 of Regulation S–K (§ 229.305

of this chapter) quantitative and qualitative

disclosures about market risk.

* * * * *

Item 14. Information With Respect to

Registrants Other Than S–3 or S–2

Registrants

* * * * *

(j) Item 305 of Regulation S–K (§ 229.305

of this chapter), quantitative and qualitative

disclosures about market risk.

* * * * *

Item 17. Information With Respect to

Companies Other Than S–3 or S–2

Companies

* * * * *

(b) * * *

(10) Item 305 of Regulation S–K (§ 229.305

of this chapter), quantitative and qualitative

disclosures about market risk.

* * * * *

11. By amending Form S–11

(referenced in § 239.18) to redesignate

Items 30 through 36 as Items 31 through

37 and to add Item 30 to Part I to read

as follows:

Note—The text of Form S–11 does not, and

this amendment will not, appear in the Code

of Federal Regulations.

Form S–11

Registration Statement Under the Securities

Act of 1933

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

Item 30. Quantitative and Qualitative

Disclosures About Market Risk

Furnish the information required by Item

305 of Regulation S–K (§ 229.305 of this

chapter).

* * * * *

12. By amending Form F–4

(referenced in § 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 § 240.14a–3 by

adding paragraph (b)(5)(iii) to read as

follows:

§ 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 (§ 229.305 of this

chapter).

* * * * *

15. By amending § 240.14a–101 to

remove the word ‘‘and’’ at the end of

Item 13(a)(4), redesignate Item 13(a)(5)

as Item 13(a)(6), add Item 13(a)(5), add

Instruction 6 to Item 13, remove ‘‘and’’

at the end of Item 14(b)(2)(i)(B)(3)(vi)

and the period at the end of Item

14(b)(2)(i)(B)(3)(vii) and in its place add

‘‘; and’’, add paragraph (viii) to Item

14(b)(2)(i)(B)(3), remove ‘‘and’’ at the

end of Item 14(b)(2)(ii)(A)(3)(v) and the

period at the end of Item

14(b)(2)(ii)(A)(3)(vi) and in its place add

‘‘; and’’, add paragraph (vii) to Item

14(b)(2)(ii)(A)(3), remove ‘‘and’’ at the

end of Item 14(b)(3)(i)(H) and the period

at the end of Item 14(b)(3)(i)(I) and in its

place add ‘‘; and’’, add paragraph (J) to

Item 14(b)(3)(i), and add Instructions 8,

9, and 10 to Item 14 to read as follows:

§ 240.14a–101 Schedule 14A. Information

required in proxy statement.

* * * * *

Item 13. Financial and Other Information

(a) Information required. * * *

(5) Item 305 of Regulation S–K,

quantitative and qualitative disclosures about

market risk; and

* * * * *

Instructions to Item 13.

* * * * *

6. A registered investment company need

not comply with items (a)(2), (a)(3), and (a)(5)

of this Item 13.

* * * * *

Item 14. Mergers, Consolidations,

Acquisitions and Similar Matters

* * * * *

(b) Information about the registrant and the

other person.

* * * * *

(2) Information with respect to S–2 or S–

3 registrants.

(i) Information required to be furnished.

* * *

(B) * * *

(3) * * *

(viii) Item 305 of Regulation S–K (§ 229.305

of this chapter), quantitative and qualitative

disclosures about market risk.

(ii) Incorporation of certain information by

reference.

* * * * *

(A) * * *

(3) * * *

(vii) Item 305 of Regulation S–K,

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 § 249.210) by revising Item 2 to read

as follows:

Note—The text of Form 10 does not, and

this amendment will not, appear in the Code

of Federal Regulations.

Form 10

General Form for Registration of Securities

* * * * *

Item 2. Financial Information

Furnish the information required by Items

301, 303, and 305 of Regulation S–K

(§§ 229.301, 229.303, and 229.305 of this

chapter).

* * * * *

18. By amending Form 20–F

(referenced in § 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

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

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 nonfinancial 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
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 601

1The information is presented in U.S. dollars

because that is the registrant’s reporting currency.

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.

December 31, 19×1

Expected maturity date

Total Fair

Value 19×2 19×3 19×4 19×5 19×6 Thereafter

(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 value

19×2 19×3 19×4 19×5 19×6 Thereafter

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

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.

December 31, 19×1

Expected maturity date

Total Fair value

19×2 19×3 19×4 19×5 19×6 Thereafter

(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 ................

2Similar tabular information would be provided for other functional currencies.

Expected maturity or transaction date Thereafter Total Fair value

19×2 19×3 19×4 19×5 19×6

(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 ................

3Pursuant 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, 19×1

Carrying

amount

Fair Value

On Balance Sheet Commodity Position and Related Derivatives: (In millions)

Corn Inventory .................................................................................................................................................................. $XXX . $XXX4

4Pursuant 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

1992

Fair value

Related Derivatives:

Futures Contracts (Short):

Contract Volumes (100,000 bushels) ................................................................................................................ XXX ....................

Weighted Average Price (Per 100,000 bushels) .............................................................................................. $X.XX

Contract Amount ($US in millions) .................................................................................................................... $XXX $XXX

* * * * *

19. By amending Form 10–Q

(referenced in § 249.308a) by removing

references to ‘‘Items 1 and 2 of Part I of

this form’’ and adding in their place

references to ‘‘Items 1, 2, and 3 of Part

I of this form’’ in paragraphs 1 and 2 of

General Instruction F, adding paragraph

2.c. to General Instruction H and Item 3

to Part I to read as follows:

Note—The text of Form 10–Q does not, and

this amendment will not, appear in the Code

of Federal Regulations.

Form 10–Q
Federal Register / Vol. 61, No. 5 / Monday, January 8, 1996 / Proposed Rules 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 (§ 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 § 249.310) by adding Item

7A to be inserted after Item 7 and before

Item 8 in Part II to read as follows:

Note—The text of Form 10–K does not, and

this amendment will not, appear in the Code

of Federal Regulations.

Form 10–K

Annual Report Pursuant to Section 13 or

15(d) of the Securities Exchange Act of 1934

or Transition Report Pursuant to Section 13

or 15(d) of the Securities Exchange Act of

1934

* * * * *

Part II

* * * * *

Item 7A. Quantitative and Qualitative

Disclosures About Market Risk.

Furnish the information required by Item

305 of Regulation S–K (§ 229.305 of this

chapter).

* * * * *

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