Magazine article American Banker

Bankers: SEC Derivatives Rule May Stunt Risk Management

Magazine article American Banker

Bankers: SEC Derivatives Rule May Stunt Risk Management

Article excerpt

Bankers are worried that a recent government rule requiring them to disclose more information about their derivatives portfolios will stifle the development of new risk management techniques. In addition to disclosing data about the types of derivatives held, the new Securities and Exchange Commission rule will require financial institutions to use at least one of three specific methods to compute risk. The results must be reported in institutions' financial statements.

International Swaps and Derivatives Association chairman Gay Evans said the regulation may limit the development of new ways to manage and measure risk.

"Locking in a specific standard today could inhibit the continuing evolution of risk management," said Ms. Evans, who is also senior managing director of Bankers Trust International.

"The SEC didn't take into consideration that corporate disclosures are improving so rapidly that shareholders today receive information that wasn't available to management five years ago."

The rule has caught the attention of Congress. Sen. Phil Gramm, R-Tex., has scheduled a hearing on it Tuesday that which will also address a broader Financial Accounting Standards Board proposal that would force banks to report the fair market value of derivatives in their financial statements.

Bankers have been arguing that the FASB proposal-which is expected to be finalized by June-would distort financial statements by making earnings appear more volatile than they really are.

Both the FASB proposal and the SEC rule are designed to give investors a more accurate picture of corporations' financial condition and the ability to compare performance. But Sen. Gramm, who leads the Senate Banking Committee's securities subcommittee, has received so many complaints from derivatives dealers and users during the last year that a hearing is warranted, according to a subcommittee staffer. …

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