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Market Research

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During 1994, in response, in part, to the concerns of investors, regulators, and private sector entities, the SEC staff reviewed the annual reports of approximately 500 registrants. In addition, during 1995 the SEC staff reviewed more recent annual reports to assess the effect of FAS 119 on disclosures about market risk sensitive instruments. In comparing the 1994 and 1995 annual reports, the SEC staff observed that FAS 119 had a positive effect on the quality of disclosures about derivative financial instruments. However, the staff concluded that investors still needed improved disclosures about market risk sensitive instruments. In particular, the SEC staff identified three primary disclosure issues prior to 1994:

1. Footnote disclosures of accounting policies for derivatives often were too general to convey adequately the diversity in accounting that exists for derivatives. Thus, it often was difficult to determine the impact of derivatives on registrants' statements of financial position, cash flows, and results of operations.

2. Disclosures about different types of market risk sensitive instruments often were reported separately. Thus, it was difficult to assess the aggregate market risk exposures inherent in these instruments.

3. Disclosure about reported items in the footnotes to the financial statements, MD&A, schedules, and selected financial data may not have reflected adequately the effect of derivatives on such reported items. Thus, information about the reported items may have been incomplete and could be misleading.

For disclosures, the Commission used the following guiding principles:

ù Disclosures should make transparent the impact of derivatives on a registrant's statements of financial position, cash flows, and results of operations;

ù Disclosures should provide information about a registrant's exposures to market risk;

ù Disclosures should explain how market risk...

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