Disclosures about Derivatives

By Barlas, Stephen | Strategic Finance, June 2000 | Go to article overview

Disclosures about Derivatives


Barlas, Stephen, Strategic Finance


CORPORATE FINANCIAL TYPES ARE a little worried about a bill (H.R. 2924) that would require companies to disclose a summary of direct material exposures to significantly leveraged financial institutions. Rep. Richard Baker (R.-La.), chairman of the House Banking Subcommittee on Capital Markets, Securities and Government Sponsored Enterprises, is the sponsor of the bill. William Miller, a spokesman for the Association for Financial Professionals (AFP), says companies probably won't mind making disclosures about their investments in hedge funds--which are Baker's targets-if a couple of things happen. First, Miller says the SEC will have to clearly define what "significantly leveraged institutions" and "direct material exposures" are. What is also obvious is that the publicly traded companies who invest in hedge funds--and there are a lot of them--would have to get the information they need from the hedge funds themselves. Currently, hedge funds are essentially unregulated and do not have to disclose anything. Ba ker's bill would force them to make disclosures. Congress has not passed the bill, and it is unclear if it will. However, in the meantime, Annette Nazareth, director of the Division of Market Regulation at the SEC, says her agency will be putting out proposed guidance "in the near future" on what public companies should disclose about "material" investments in hedge funds. Given that hedge funds themselves disclose little information, it may be hard for the SEC to go very far in its guidance.

Disclosure from Financial Companies

In the wake of the approval of financial conglomerations by the Gramm-Leach-Bliley financial modernization bill of 1999, bank regulatory agencies are worried that current financial disclosure requirements may not be adequate for the new behemoths. This is where a new working group created by the Federal Reserve comes in. The group, composed of private industry executives and headed by Walter Shipley, recently retired as chairman of Chase Manhattan Bank, will make recommendations to the Fed, the Comptroller of the Currency, and the SEC on what if any "enhanced" public disclosure by financial institutions is needed. One issue the group is sure to address is how much shareholders should know about a company's risk exposure.

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Disclosures about Derivatives
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