BOCA RATON, Fla. -- Disclosure involving the over-the-counter derivatives market is an important issue for the securities industry to address, the incoming chairman of the Securities Industry Association said yesterday.

"The issue of disclosure of derivatives I think is very important," John Steffens, the executive vice president for private clients at Merrill Lynch & Co., told a press conference at the association's annual conference here in Florida.

"I think disclosure is probably more critical in derivatives than almost anything else, so the people really understand what they have purchased," Steffens said.

Meanwhile, Marc Lackritz, the association's president, said suitability standards and how they apply to municipalities is a critical issue the industry is addressing.

"It's a very tough issue; we've been looking at it for a while," Lackritz said. "It's a very tough issue because OTC derivatives are primarily institutional products; they don't get sold to individuals."

"If you put on too onerous a suitability requirement then you really are going to slow down the opportunities for small communities and small institutions to take advantage of some of the most effective risks management techniques."

Lackritz said setting qualification levels doesn't necessarily make sense. "Then you start putting a scarlet letter on people saying 'You're a dummy and you're not qualified,'" he said.

The Securities and Exchange Commission is currently working with top securities industry representatives on voluntary guidelines for affiliated derivatives firms that are expected to address suitability standards.

The SEC is expected to report to Congress on its progress in that area this month, and the commission agrees that improved disclosure is an important issue.

"Disclosure about the risk and uses of derivatives must be accurate, informative, timely, and understandable," said Mary Ann Gadziala, associate director of the SEC's market regulation division.

"This information is essential for market participants to make investments and credit decisions," Gadziala said. "While progress has been made, the dramatic proliferation of diverse complex derivatives has clearly outpaced disclosure; therefore, improvements in disclosure and accounting are high priorities."

Gadziala was a speaker on a panel at the Securities Industry Association's annual conference. She said a move for improved disclosure is even more important as a wide variety of participants are entering the over-the-counter derivatives market.

"Attention to this area has increased recently as a more diverse group including less sophisticated investors have begun buying derivatives," Gadziala said. "Much work needs to be done to be sure that counterparties continue to be educated about the nature and risks of over-the-counter derivatives products they are purchasing."

With respect to suitability standards, Zachary Snow, a managing director at Salomon Brothers Inc. and chairman of the Securities Industry Association's swap and over-the-counter derivative products committee, expressed concerns.

Snow said setting standards is a risky and difficult task.

"There is a real risk of creating a pattern of customer abuse," Snow said. "Legal risk is actually the biggest risk."


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