WASHINGTON -- Federal Reserve Board governor Susan Phillips said yesterday that more work needs to be done on derivatives in the areas of disclosure and accounting.

"Accounting and financial disclosure are areas in which intensive efforts are under way, but there are also areas where much more progress needs to be made," Phillips said yesterday in a speech before the American Institute of Certified Public Accountants' annual conference on banking.

"Financial statements are a key source of information to market participants for making their investment and credit decisions," Phillips said."Market transparency is of great interest to the Federal Reserve, and is an area that other public policymakers, both in the United States and abroad, will continue to emphasize." Phillips said that trading and risk management techniques in derivatives have evolved at a faster pace than public disclosure of these activities. She added that one of the financial market's greatest challenges is to the accounting profession.

While there is widespread interest in improved disclosure, Phillips said there isn't a consensus on the precise form and content these added disclosures should take.

"This gap between management's ability to assess the firm's financial risks and the capability of outsiders to accurately estimate those risks could lead to inefficient allocation of capital," Phillips said.

She noted that many firms active in financial markets made improvements to their 1993 annual reports and have found that increased disclosure is in their own best interest as one part of an effort to better communicate with investors and the public at large. Phillips said the Federal Reserve Board was encouraged with the Financial Accounting Standards Board's but recently released disclosure guidelines but indicated that they didn't go far enough.

"Frankly, I was disappointed that the FASB did not require quantitative disclosure about risk management practices and results," Phillips said. "It is not sufficient to describe strategies without also reporting how successful the strategies were in achieving the firm's objectives."

Phillips noted, however, that the accounting standards board's most recent release was an initial response to heightened public concerns.

"i view it as just the latest step in improving the quality of disclosure about derivatives and strategies for risk management," she said. "Future steps could be taken to improve disclosure as risk management practices evolve and meaningful, voluntary disclosures are worked out," she said.

The accounting standards board last month came out with broad disclosure standards that will be required in financial statements issued for fiscal years ended after Dec. 15 of this year. The most recent accounting board guidelines ask companies to disclose the amounts, nature, and terms of derivatives holdings,

For derivatives held for trading purposes, the standards require disclosure of the average fair-value balance of positions during the reporting period and the net gains or losses occurring from trading and where those amounts are reported in the income statement.

A separate accounting board group is working on guidelines to recognize and measure the risks of derivatives investments used in hedging. Staff members working on the hedge accounting proposal say the guidelines may not come out until the middle of next year.

A board official said the hedge project is facing problems in coming up with a model that measures current risk exposure as well as one that forecasts exposure in derivatives investments used as a hedge.

Staff at the Securities and Exchange Commission also recognize the need for more disclosure and accounting. The agency's chief accountant said SEC staff members, while recognizing the big step the accounting standards board has taken, are considering plans to supplement the board's most recent guidelines.

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