AIMR's proposed testimony will include the following topics:
Importance of Derivatives and Other Market Risk Sensitive Instruments
The AIMR representative will present the view of experienced practicing investment professionals on uses of derivatives in managing the corporation's exposure to market risk and emphasize that derivatives are important to U.S. corporations and the U.S. economy. AIMR appreciates that the SEC and the FASB have a difficult and delicate balancing act to perform: they are to improve the understandability and transparency of corporate risk exposures, through accounting and disclosure, while at the same time maintaining the viability of derivatives as cost-effective risk management tools. AIMR, through its Financial Accounting Policy Committee and its Task Force on Market Risk Disclosure, firmly supports the efforts of the SEC and the FASB to accomplish this objective.
Importance of Accounting and Disclosures about Market Risk Sensitive Instruments
AIMR believes that, despite its complexity, sufficient information to assess an enterprise's overall market risk exposure, whether using derivatives or not, is critical to an investor's ability to perform high quality and correct financial analysis. Such analysis is a cornerstone of investor confidence in U.S. stocks and sets the U.S. market apart as the premier financial market. Although existing disclosure requirements (FAS 119) have had a positive effect on the quality and informativeness of a firm's market risk disclosures, AIMR members observed that the information was often too general and so dispersed throughout the financial statements that they could be incomplete or misleading. AIMR strongly endorses the view that firms should be knowledgeable about the nature and risks associated with the market risk sensitive instruments they use and they must communicate information about these instruments in a succinct and meaningful manner so that investors can better understand a firm's profitability.
Accounting Issues related to the FASB's Exposure Draft
AIMR believes that any standard on account for derivatives and hedging activities should apply to all derivatives and supports recognition of all derivatives on the balance sheet with measurement at fair value. Transactions that can be accounted for as hedges should be clearly delineated from those that cannot. Only such accounting will meet our suggested criteria for disclosure effectiveness, understandability and transparency, and maximize the usefulness of the information.
Hedge accounting should be available for any transaction that effectively hedges a specific risk associated with an asset, liability, firm commitment, or forecasted transaction (including portfolios of such items). Even for portfolios of dissimilar assets, if there is an acceptable degree of correlation between changes in the value of the derivatives and the risk being hedged, the hedge is effective and hedge accounting should apply. Since portfolio hedging creates difficult accounting issues within the traditional historical cost framework, we believe that fair value accounting is the preferred solution to those problems. Disclosures related to both the FASB's Exposure Draft and the SEC's Final Rule
Understandability and transparency will only be accomplished with strong disclosure requirements. Specifically, financial statement users need more information about the risk exposures faced by firms whether or not they use derivatives to modify those risks. In order to be helpful to 'investors, however, these disclosures must be informative, not boilerplate.
Information about a firm's risk management policies is essential for understanding what a firm is trying to accomplish with its derivatives activities. To assess how well or how poorly a firm manages its risk exposures, it is helpful to know what a firm intended to do. Information about accounting policies for derivatives makes it easier for investors to assess the potential economic and financial statement effects. Information about both risk management and accounting policies is also useful for comparisons across companies, permitting investors to understand why companies have different strategies to manage the same risks or to question why the same instrument, used to hedge the same underlying asset or liability, can receive different accounting treatments. AIMR believes that, in making these assessments, investors will develop a better understanding of the role of derivatives in managing corporate risk.
AIMR believes that the SEC's requirement for disclosure of additional quantitative and qualitative inform-nation about market risk Will improve 'investors' understanding of a firm's market risks. AIMR also believes that the scope of these disclosures is appropriate. Since we know that risk management technologies are not fully developed, we do not believe, however, that firms should have a free choice to select one of the three alternative disclosure formats: tabular presentation, sensitivity analysis, or value at-risk. We believe that the SEC should develop specific criteria to determine which format is most appropriate for a particular firm, given the market risk sensitive instruments used. For example, the tabular presentation format will not provide useful information for firms using non-linear derivatives with contingent cash flows, such as options or swaps with imbedded options.
Of the three alternatives, the AIMR Task Force on Market Risk Disclosure believes strongly that sensitivity analysis is the superior disclosure. Sensitivity analysis is a kind of "stress test" of the registrant's risk exposure and is a more reliable and useful reporting mechanism than value-at-risk disclosures. We also believe that sensitivity analysis will be the most cost-effective alternative for most firms. Information from such analysis should be available quickly and can be presented with comparatively simple charts that will be easily understandable by most investors.
AIMR is sensitive to the needs of firms to protect proprietary information. We do not believe that the SEC's required disclosures provide sufficient detail so that trading positions would be disclosed directly or be inferred. Companies who can show that readers could develop specific information about trading positions from the disclosures should be able to file with the SEC for an exemption.
Cost-Benefit Considerations
AIMR does not believe that the costs to firms of providing these disclosures outweigh the benefits to investors or the firms themselves. Firms with market risk sensitive instruments should already be using one or more of the SEC's required analyses as part of their internal control procedures. If they are not, the benefit to the firms from increased knowledge about their market risk exposures and their ability to manage these exposures is invaluable. With an increased ability to understand and evaluate the overall risk exposures of firms, investors will more accurately value firms, with the result that capital will be more efficiently and effectively allocated.
AIMR welcomes the opportunity to explore the assumptions underlying the different views with the Subcommittee on Securities and the other participants in the oversight hearing. Our representative would be pleased to discuss the efficacy and potential effects of different accounting and disclosure options and other issues raised at the hearing.
Mr. Chairman and members of the Committee, I am William P. Miller, II. I am the Independent Risk Oversight Officer for The Common Fund. Located in Connecticut, the Common Fund is a not-for-profit membership organization of approximately 1,400 member educational institutions. The Common Fund provides investment management services for its members and currently manages approximately $17 billion of their endowment and operating funds. These funds are used to produce tomorrow's responsible citizens and leaders. I also hold the Chartered Financial Analyst, or CFA, designation and am here today on behalf of the Association for Investment Management and-Research (AIMR). I have been a member of AIMR for over 10 years.
AIMR is a global not-for-profit membership organization with more than 70,000 members and candidates comprised of investment analysts, portfolio managers, and other investment decision-makers employed by investment management firms, banks, broker-dealers, investment company complexes, and insurance companies. AIMR members and candidates manage, directly and through their firms, over six trillion dollars in assets. The Association's mission is to serve investors through its membership by providing global leadership in education on investment knowledge, sustaining high standards of professional conduct, and administering the Chartered Financial Analyst (CFA) designation program.
The focus of today's hearing is financial reporting and disclosure initiatives by the U.S. Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB), primarily related to derivatives. These two bodies have solicited comments from a wide spectrum of industry participants on these initiatives. AIMR, through the AIMR Financial Accounting Policy Committee (AIMR FAPC) and the AIMR Task Force on Market Risk Disclosure (AIMR Task Force), responded to the SEC and FASB's requests, representing the views of users of financial statements, both investment professionals and the investing public.
AIMR has long recognized the value and importance of derivatives. The responsible use of derivatives has been a part of AIMR's educational material for close to 20 years and the emphasis on derivatives has increased as their use has evolved and grown. Our members and candidates regularly receive materials on investment management developments, including the growth and expanded use of derivatives and other market risk sensitive instruments.
Regular monitoring of standard-setting and regulatory initiatives related to financial reporting and disclosure is an integral part of AIMR's advocacy programs. In responding to those initiatives, AIMR expresses the views of investors, both investment professionals and the investing public. In addition to commenting on the initiatives of the FASB and SEC, AIMR through the AIMR FAPC and other committees, also expresses its views to the American Institute of Certified Public Accountants, the International Accounting Standards Committee and the Canadian Institute of Chartered Accountants.
The AIMR Task Force was formed specifically to comment on the SEC rule proposal on derivatives disclosures. Its members were selected for their interest in financial reporting and disclosure and their expertise in derivatives and risk management.
I am pleased to offer the views of experienced practicing financial analysts and investment professionals about both the FASB's Exposure Draft, Accounting for Derivatives and Similar Financial Instruments and for Hedging Activities, and the SEC's recent rule making on disclosures about market risk sensitive instruments.
Importance of Derivatives and Other Market Risk Sensitive Instruments
Derivatives span the spectrum from the very simple to the very complex. They are an integral thread in the fabric of the financial markets. The notional value of these instruments is placed at roughly $70 trillion (see Footnote II in the SEC rule). It's a big number - roughly three times the GNP of the largest 20 industrial countries.
Corporations use derivatives to cost-effectively manage the asset and liability structure of their balance sheets. For example, a firm can modify its ratio of fixed rate to floating rate debt quickly, and at a much lower cost, than if it had to retire one form of debt and issue another. Similarly, a firm can also change its portfolio's exposure from predominantly equities to predominately bonds more efficiently using derivatives than if it sold the equities and physically purchased the bonds. Foreign currency hedging, through bank-offered forward or exchange traded futures contracts, is another excellent example of U.S. multinational companies using derivatives, possibly the only tool, to manage currency risk while keeping their focus on their main business.
We believe that American corporations use derivatives effectively to manage both their balance sheets and earnings volatility at the same time they are adding value through their main business operations. Both activities are aimed at maximizing shareholder value. In addition, U. S. financial institutions have been leaders in providing derivatives products to corporations around the world. Of the 20 major derivatives dealers worldwide, half are U.S. enterprises, with approximately 60% of the outstanding notional value.
We appreciate that the SEC and the FASB have a difficult and delicate balancing act to perform if they are to improve the understandability and transparency of corporate risk exposures, through accounting and disclosure, while at the same time maintaining the viability of derivatives as cost-effective tools in managing market risks. We believe it can be done and that the SEC and FASB are taking the appropriate steps.
Importance of Accounting and Disclosures about Market Risk Sensitive Instruments
AIMR continues to believe that, despite its complexity, sufficient information to assess an enterprise's overall market risk exposure, whether using derivatives or not, is critical to an investor's ability to perform high quality and correct financial analysis. Such analysis has been and remains a cornerstone of investor confidence in U.S. stocks and sets the U.S. market apart as the premier financial market. Therefore, as noted earlier, we firmly support both the SEC and FASB in undertaking the difficult task of improving standards for accounting and disclosure of financial instruments and derivative instruments, including financial and commodity derivatives ("market risk sensitive instruments"). We cannot overemphasize the need for accounting standards that require appropriate recognition and measurement of market risk sensitive instruments and for adequate supplemental disclosures so that investors can have a thorough understanding of an enterprise's use of these instruments.
In it's 1993 report, Financial Reporting in the 1990's and Beyond, the AIMR addressed specifically the particular problems users of financial statements currently face in analyzing financial service firms resulting from the proliferation of market risk sensitive instruments.
The AIMR concluded these remarks by praising the FASB for undertaking its "gargantuan" financial instruments project, of which the current exposure draft on derivatives and hedging is a significant part. We view this exposure draft as an important step forward for the FASB because accounting for derivatives and hedging activities remains a significant deficiency in current GAAP.
Since we recognize that there are few easy solutions to the complex issues involved in accounting for derivatives, in our comment letter to the FASB we identified two criteria that must be met in order for the proposed standard to pass the test of disclosure effectiveness: understandability and transparency. Accounting and disclosure requirements must be understandable to financial statement users. Therefore, it is incumbent upon preparers to make a greater effort to explain the risks inherent in their business, the hedging strategies they use and the outcome(s) of these activities. To achieve transparency, we believe that disclosures must report the market values of all derivative instruments and the accounting treatment for gains and losses (whether realized or unrealized) must be clear. Financial reports that meet these two criteria are most helpful to investors.
Similarly, in our comment letter on the SEC's rule proposal, the AIMR Task Force commended the SEC on its efforts to improve disclosure of information about the market risks associated with an enterprise's business activities and its use of risk sensitive instruments to manage those risks. Our observations about the quality and informativeness of current market risk disclosures are similar to those of the SEC staff. Our views are that: (1) although FAS 119 had a positive effect on such disclosures, information about accounting policies for derivatives was too general to indicate the different accounting treatments that were available; (2) separation of the disclosures about different types of market risk made developing an overall assessment of the Firm's exposure difficult or impossible; and (3) information about the various reported items were so scattered throughout the financial statements, footnotes, MI&A, schedules, etc., that they could be incomplete or misleading.
Many of us, in our capacity as portfolio managers, also use market risk sensitive instruments both as investment vehicles and to modify and control market risk. We are absolutely convinced that our ability to use market risk sensitive instruments appropriately increases our ability to compete globally. We are also convinced, however, that sufficient disclosure of information about our use of these instruments is critical to mitigating the "surprises" that can occur from their use. We believe that evenhanded accounting coupled with understandable, transparent disclosures will result in few surprises about firms' market risk exposure and less concern about volatility. This will result in lower risk premiums and a lower cost of capital for those firms who provide this disclosure. Certainly, a lower cost of capital will increase a firm's ability to compete as well as enable the market to more accurately value publicly traded securities.
In commenting on the SEC's disclosure requirements, we stated that the desire for increased disclosures must be qualified by at least three constraints: (1) the potential risk of misleading users of the information, (2) the possible damage to the enterprise from inappropriate disclosure, and (3) the cost of compliance. The recently promulgated SEC rule provides for three alternative disclosure approaches leaving it to the disclosing entity to choose the approach that does not mislead, does not forfeit confidential hedging details, and does not entail significant cost to comply.
AIMR strongly endorses the view that firms should be knowledgeable about the nature and risks associated with all the market risk sensitive instruments they use. It is AIMR's view that such information should be communicated in a succinct and meaningful manner so that investors can better understand a firm's profitability.
AIMR also believes that the SEC disclosures should improve investors' ability to make meaningful comparisons of companies' relative risk exposures. Although we agree that it is too early in the development of risk management technologies for the Commission to require standardization of models or assumptions, we believe that comparability is a necessity and should be one of the Commission's long term goals.
Although the AIMR FAPC strongly supported the fundamental decisions in the FASB's Exposure Draft, we had several concerns. First, we believe that the standard should apply to all derivatives, including contracts that require ownership of the underlying item or settlement by delivery of the underlying item, whether exchange-traded or not. This would bring commodity derivatives within the scope of the standard. Second, we support recognition of all derivatives in the balance sheet with measurement at fair value. Third, ideally, the standard should also clearly delineate transactions that can be accounted for as hedges from those that cannot. Only such accounting can enable the standard to meet our suggested objectives of understandability and transparency.
Although we agree with the FASB that it is impractical to require an assessment of an enterprise's overall risk exposure as a criteria for hedge accounting, we believe that these criteria should. depend on the substance of the transactions rather than arbitrary deflections. We firmly believe that any transaction that effectively hedges a specific risk associated with an asset, liability, firm commitment, or forecasted transaction (including portfolios of such items) should be accounted for as a hedge. With respect to hedges of portfolios of dissimilar assets, we believe that these hedges should be eligible for hedge accounting whenever a derivative is an effective hedge of an identified risk applicable to the hedged portfolio. If there is an acceptable degree of correlation between changes in the value of the derivatives and in the risk being hedged, the hedge is effective and hedge accounting should apply. Since we recognize that portfolio hedging creates difficult accounting issues within the historical cost framework, we believe that fair value accounting is the preferred solution to those problems.
We also believe that full mark-to-market treatment offers several advantages over partial fair value adjustments. Full mark-to-market treatment makes clear the extent to which hedging activities are effective in offsetting fair value changes. We do not believe that balance sheet amounts restated from historical cost to historical cost plus hedging gains and losses are useful in financial statement analysis. It would be far more useful to display the fair values of both the hedged item and the hedge in a statement of comprehensive income (as defined by the FASB in its exposure draft, Reporting Comprehensive Income), for example, where financial statement users could clearly see them. Certainly, if the current proposal prevails, hedging gains and losses must be disclosed separately from the hedged item.
A firm may designate a derivative as a hedge for an exposure to variable cash flows of existing assets and liabilities or of a forecasted transaction. With respect to such forecasted transactions, we believe the definition of those transactions that can qualify as cash flow hedges should be tightened. We suggest two criteria: (1) the transaction must be highly likely to occur, and (2) in the absence of a contractual commitment, a firm's use of hedge accounting for forecasted transactions more than one year ahead would require additional disclosures regarding the nature, amounts, timing, and risks of the transaction. The second criteria should act to limit abuse of hedge accounting and to enable users to evaluate the uncertainties associated with hedges of such transactions.
The FASB originally proposed that hedging gains and losses should be recognized in earnings when the hedged transaction takes place. We disagreed with that treatment because we believe that these gains and losses should be linked to the hedged item until its earnings impact takes place. For example, if a copper fabricator purchases copper call options to hedge an expected inventory purchase, the carrying amount of the eventual copper inventory should equal the purchase cost alone. The gain or loss on the option transaction should be reported in comprehensive income and included in operating income only when the fabricated inventory is sold. At that time, cost of goods sold would include both the copper purchase cost and the option gain. We believe that this treatment reflects the substance of the transaction better than recognition of the option result on the date of inventory purchase and would be more useful for financial analysis. We believe that the FASB's original proposal would have resulted in a non-operating gain or loss in the period of inventory purchase and misstatement of the gross margin in the (subsequent) period when the finished goods are sold. It is our understanding that the FASB has recently amended the proposed standard in accordance with these suggestions.
A "rolling" or "rollover" hedge is a strategy in which a series of futures or options positions in consecutive contract months is used to hedge an item or transaction. As one position expires, the gains or losses are "rolled into," or combined with those from each successive position that is established. Rollover hedges are effectively precluded from receiving hedge accounting treatment as a result of the FASB's requirement that the contractual maturity or repricing date occur on or about the projected date of the forecasted transaction. As we stated previously, we believe that hedge accounting should be available for all combinations of derivatives meeting the criteria of effective hedges of identified risks. Since rolling hedges may be the preferred hedging vehicles due to factors such as the relative pricing of a series of short-term hedges versus a long-term hedge (i.e., four consecutive 3-month hedges compared to a one year hedge) or market conditions (e.g., greater liquidity) for short- versus long-hedges, we believe that such hedges should qualify for hedge accounting.
From a competitive business perspective, should "rolling" or "rollover" strategies not qualify for hedge accounting, the effect on the U.S. futures exchanges will be devastating. These exchanges provide products for many firms to manage their risks and serve as "lay-off' markets for over-the-counter financial and non-financial transactions. As a consequence, not permitting such strategies to qualify for hedge accounting treatment will negatively impact the derivatives markets. This negative impact will flow back to U. S. corporations in the form of higher risk management costs and higher costs of raising capital.
We believe that the criteria of understandability and transparency will only be accomplished with strong disclosure requirements. Specifically, financial statement users need more information about the risk exposures faced by firms, whether or not they use derivatives to modify those risks. In order to be helpful to investors, however, these disclosures must be informative, not boilerplate.
In its exposure draft, the FASB is carrying forward from FAS 119 the requirement for firms to provide a description of the objectives, context, and strategies for holding or issuing derivatives. This disclosure has been helpful to investors in understanding what a firm is trying to accomplish with its derivatives' activity. In assessing how well, or how poorly, a firm manages its risk exposures, it goes without saying that it is helpful to know what the firm intended to do. We are particularly concerned that these disclosures will devolve into boilerplate.
The SEC's requirement for disclosure of accounting policies will make it easier for investors to assess the potential, economic and financial statement effects of market risk sensitive instruments. When analyzing an enterprise's financial statements, it is helpful for investors to know, for example, that gains and losses on forward contracts on inventory transactions are reported in cost of goods sold rather than another expense item. Unless an investor knows how an entity accounts for unrealized gains and losses, they cannot know what other financial statement items will be affected. For example, do unrealized gains and losses affect income for the period? Will a gain or loss be capitalized on the balance sheet? Detailed and meaningful disclosure of accounting policies is essential to understanding the reported results.
Information about both risk management and accounting policies is also useful for comparisons across companies. Risk management policy disclosures allow investors to understand why companies with similar risk exposures have different strategies or objectives in managing theserisks. Accounting policy disclosures allow investors to question why the same instrument, used to hedge the same underlying asset or liability, can receive different accounting treatments and would permit analysts to adjust reported earnings accordingly.
The SEC's requirement for disclosure of additional quantitative and qualitative information about market risk will improve investors' understanding of the market risks associated with firms' business activities. Given the current state of risk management technology, we think the scope of the SEC's disclosures is appropriate. Investors who can utilize fully the quantitative disclosures will initially be those individuals with sufficient skills and knowledge to understand the relevant statistics, correlation concepts, etc. We also believe that, given the competitive nature of the market, other investment professionals will soon realize the need to understand these disclosures and acquire the requisite skills.
Since risk management technologies are not well developed, we do not believe that firms should have a free choice to select one of the three alternative disclosure formats: tabular presentation, sensitivity analysis, and value-at-risk. As we suggested in our comment letter on the SEC's rule proposal, and continue to suggest, the SEC should develop some specific criteria to determine which format is appropriate for a particular firm, given the type(s) of market risk sensitive instruments used.
We believe that the tabular presentation is only meaningful for firms that use nothing but linear derivatives, such as "plain vanilla" swaps, forwards or futures. This format does not provide systematic information about optionally and will not provide useful information for analysis of firms using non-linear instruments with contingent cash flows, such as options or swaps with imbedded options. Because it is difficult for us to believe that firms using complex derivatives would use this presentation to assess risks internally, information that is more representative of the kind of information actually used by management would be more useful to investors.
In our view, sensitivity analysis is the superior disclosure. Unless they qualify for a tabular presentation, all firms should be required to use this presentation. Sensitivity analysis is a kind of "stress test" of the registrant's risk exposure, quantifying the potential loss in earnings, fair values, or cash flows from hypothetical changes in market rates and prices. We believe that the value-at-risk methodology is only a first step in understanding the impact of a firm's risk modification activities on its underlying risk and may inhibit comparability across firms. We also believe that all companies, even those using the value-at-risk methodology internally, should use sensitivity analysis as part of their monitoring procedures.
In our judgment, sensitivity analysis is the more reliable and useful reporting mechanism. Although there may still be opportunities for firms to provide misleading formation if they provide the sensitivity analysis disclosures, we believe the probability of this occurring would be minimized by requiring disclosure under specific scenarios and requiring certain specific tests. We proposed an initial list of standard stress tests for the SEC's consideration; for example, a 15% adverse move in a long equity portfolio or a 10% adverse change in any currency when the firm has a material or 10% or more, balance sheet or earnings exposure to that currency.
We also believe that sensitivity analysis will be the most cost-effective alternative for most firms. Information from such analysis should be available quickly and can be presented in comparatively simple charts that will be easily understandable by most investors.
Although we believe that the general qualitative disclosures already required by FAS 119 are adequate, we support extending these disclosure requirements beyond derivatives to the other instruments covered by the SEC rule. In line with our remarks concerning the risk of boilerplate disclosure about a firm's risk management policy, we are similarly pleased that the SEC is requiring firms to evaluate and describe material changes in their primary risk exposures and their risk management activities. An informative, candid discussion of these issues would be particularly helpful.
With respect to the assumptions underlying the quantitative results, firms must be required to disclose known limitations to the methodologies they select. We agree that it is too early in the development of risk management technologies to require standardization of models or assumptions, but the financial statement disclosures should at least reflect the internal control procedures used to manage market risk.
We agree with the SEC's decision that the quantitative and qualitative disclosures be placed outside of the financial statements. Although we believe that auditors should already be able to audit sensitivity to price changes, at this stage in the development of risk management technologies, there is much information available on which auditors may not want, or be qualified, to express an opinion. We also hope that not requiring these disclosures be audited will foster a more open expression of information.
We are sensitive to the needs of registrants to protect proprietary information. Clearly, firms could be harmed if detailed information about trading positions were disclosed directly or could be inferred from the disclosures. We do not believe that the required disclosures should contain this level of detail. Indeed, under the sensitivity analysis or value-at-risk approaches detailed information would not be disclosed. Companies who can show that readers could use the disclosures to develop specific information about trading positions that could cause competitive harm should be able to file with the SEC for an exemption from that disclosure. Certainly, no disclosure of derivatives or hedging positions in a physical commodity should be required in a format that exposes the firm to commodity rollover risk or other trading risk.
Firms with market risk sensitive instruments should already be performing one or more of the SEC's required analyses as part of their internal control procedures. If they are not, the SEC's rule will provide them with the invaluable benefit of increased knowledge about these instruments and their ability to manage the associated risks. Therefore, we do not believe the incremental costs to firms outweigh the benefits of additional disclosure. The benefit to the markets should also be obvious. With an increased ability to understand and evaluate the overall risk exposures of firms, investors will more accurately value these firms, with the result that capital will be more efficiently and effectively allocated. As noted previously, we believe that the sensitivity analysis disclosure to be the most cost-effective alternative from the firm's perspective and the most informative from the investor's perspective.
In essence, we believe that lack of adequate accounting and disclosure of derivative instruments and hedging activities has been a significant deficiency in GAAP. Both the FASB and the SEC have undertaken a difficult, and for some constituents an unpopular, task to reduce that deficiency. We applaud the SEC and FASB's efforts. AIMR supports the SEC's additional disclosure requirements and encourages the SEC to assist corporations in moving toward greater disclosure of information about their use of market risk sensitive instruments in a manner that does not forfeit competitive advantages or impede effective risk management. AIMR also supports the FASB's efforts to improve accounting and disclosure for these instruments which will increase the understandability and transparency of corporate financial reporting. We also believe such efforts will help to educate the investing public in the virtues of responsible use of derivatives as effective risk management tools.
Thank you for the opportunity to comment on the SEC and FASB's initiatives regarding
accounting and disclosure for derivatives and other market risk sensitive instruments and to
testify today. I welcome your questions.
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