Public companies soon will be required to disclose greater details about their derivatives dealings including the risks, the Securities and Exchange Commission's top officer says.
Arthur Levitt Jr. said the agency is developing new rules that also would require companies to tell investors "the objectives and strategies" behind their use of the complex financial instruments.He emphasized the SEC would remain flexible in regulating derivatives and that the agency expects companies and Wall Street firms to take extra precautions in understanding the risks of derivatives.
Derivatives are a popular, fast-growing financial tool that enables large corporations to insure against sudden changes in foreign currencies, interest rates and other markets. They also can be used to speculate in the markets.
Derivatives are so-named because they "derive" their value from an underlying investment, such as a group of bonds.
Misuse of derivatives has been blamed for enormous losses in the past 11/2 years because investors didn't fully understand how the investments would react to a sudden jump in interest rates in 1994. Derivatives were partly to blame for the $1.7 billion in losses suffered by the Orange County, Calif., investment fund in late 1994.
In a speech before an Inter-American Development Bank conference, Levitt provided an extensive update of the SEC's approach to derivatives.
"We must resist the siren call for stringent regulation that occurs in the wake of every new loss - especially since the typical derivatives loss is less a failure of regulation, than a failure of oversight by the parties involves," Levitt said.
"You have on one hand, dealers opting for a caveat emptor view.
"And on the other hand, even sophisticated institutions taking the position that we're but babes in the woods."
"Somewhere between these two rather ridiculous poles should lie a rational view of where responsibility should be," he said.