Thank you Mr. Chairman. Before we begin today's hearing - our first of the 105th Congress - let me say how pleased I am that we will again have the opportunity to work together on this Subcommittee; we've covered some very important ground in past congresses and I have no doubt that we will hold a number of interesting and provocative hearings in this session.

We are certainly starting the session off with one of the financial world's most difficult and complex issues: regulation and disclosure of derivatives.

While almost every aspect of derivatives prompts some sort of debate - even the definition of what derivatives are! - there is little doubt that by any measure or any definition the use of market sensitive financial instruments has increased dramatically over the past decade.

One figure that was quoted by the SEC illustrate this rise is that the "notional" value of derivatives contracts $7.1 trillion in 1989 trillion in 1995.

Of course, notional value bears little relation to actual market exposure, or even the worth of the derivatives themselves, but it is the very fact that we can be discussing trillions of dollars in any context, is a strong indicator of why derivatives have attracted regulatory and congressional interest over the past few years.

I believe that our normal interest in derivatives was escalated to a fever pitch, however, by the spectacularly public derivative losses that both companies and governments suffered in 1994. Had Orange County not declared bankruptcy, had Proctor & Gamble not lost $70 million, today's debate over disclosure would have a very different tenor, if we were having it at all.

One of the critical things we have learned since excitement over those losses died down, was that the size of the loss was due as much to poor investment and trading decisions as to the derivatives themselves. In fact, I find it very simplistic that the initial blame was put solely on the financial instruments, as if they, independent of any human participation, were solely responsible for causing these losses.

One of the root causes of the size of these losses was the fact that either the trader at the company or the financial controller at the government level tried to make up for the first losses by essentially doubling down -- which increased the initial loss exponentially. One might argue that it was when decision makers stopped using derivatives as a hedge but instead as a speculative investment, hoping for immediate high returns to offset earlier losses, that the adverse results occurred. And so it was with that in mind that I examined both the SEC's and FASB's derivatives disclosure rules.

I certainly applaud the effort by the SEC to create greater Openness and provide more information to investors and I think that there is broad support for the commission's disclosure rules as they pertain to both revealing accounting methodologies And trying to provide some measure of "qualitative risk." But it is in the commission's attempt to provide quantitative disclosure That I find grounds for concern.

This is not to say that regulatory agencies should not strive to find some means to have compaies quantify their potential risk from market-sensitive financial interests. Far from it. Nor would I want my concerns interpreted to mean That I believe that the SEC's disclosure rule is fatally flawed.

But I do believe that in a courageous attempt to provide a means for quantitative disclosure, the comission may have opened the door to some adverse consequences that have the potential, over time, to surpass the benefits of the mandated disclosure.

We need to remind ousrselves about what kind of information the commission is attempting to provide investors through these disclosure rules. To paraphrase the commission's own release, "in the aggregate, these amendments are designed to provide additional information about market risk sensitive instruments, which investors can use to better understand and evaluate the market risk exposure of a company".

I do not believe that investors are suddenly focused solely on the use of certain financial instruments as part of a company's traditional risk management or hedging strategies. What investors seem to be concerned with, and I believe are most concerned with, is the use of derivatives as a speculative investment by a company.

It is when a company predicates its future earnings upon success in these potentially volatile instruments that investors should be informed and quite honestly should be wary.

This, of course, goes to the heart of qualitative disclosure: are derivatives being used for traditional hedging, or are they being used as an investment?

Investors also have a right to know whether a company has changed its risk management strategy in such a way that in the aggregate it enhances the company risk rather than minimizing it. Again, these are qualitative disclosures that we would all hope A company would make to its investors. But the quantitative rules, in my opinion, do not add significantly to answering the fundamental question of the investor about threats to the corporation. My concern is that traditional risk management strategies under these quantitatuve disclosures will make the company appear more volatile than it actually is.

I am not sure that the quantitative disclosures take into adequate consideration the purpose for which the company invested in market-sensitive financial instruments. If an investor sees From these quantitative statements that an industrial company, for example, has a significant position in currency derivatives, will they also see that the investment was made in order to ensure a stable rate of exchange into the future? I don't know that this is so.

I am also concerned about the idea of singling out derivatives for quantitative treatment. Again, a non-financial company might have many more material risks stemming from its line of business than from derivatives. Again,an automotive company, Ford for example, might have more of a risk from future earnings from increased japanese competition than from its hedging positions in derivatives. And while we would all want and continue to encourage companies to make full and frank disclosures about potential risks, we seem to have singled out one particular area of potential risk in a manner that might distort its true importance in assessing the overall risks to a company's future performance.

And one final point that concerns me. There is also the possibility that we are fragmenting the perception of a company's risk management strategy. An investor might not be most concerned about seeing if every individual derivative investment matches up with a particular hedge in the company's line of business, but whether - overall - a company is protected from market fluctuations, be they interest rate changes or swings in foreign currency prices.

Investors should be encouraged not only to look obviously at the details of a company, but at the big picture of a company's risk management strategy. Some of the proposals that have been floated for these disclosure rules could be so fragmented in terms of reporting to investors a company's risk management strategy that it would become difficult to discern the forest for the trees.

And so I would encourage the commission, when it reevaluates this rule, and FASB, as it drafts its final rule, to try to make disclosure focus not only details which may distort the picture but on the overall risk management which is at the heart of what an investor needs to know about the company he or she wants to invest in.

With that, mr. Chairman, I look forward to the testimony of the witnesses and again thank you for your scheduling today's hearing in such a timely manner.

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