burgeoning derivatives industry, bank derivatives dealers are sure to be faced with mixed messages. A case in point is the generic risk disclosures that derivatives dealers have prepared in conjunction with securities and futures regulators. Bankers are learning that the disclosures may not go far enough to satisfy banking regulators. The disclosure statements were developed in response to the high-profile disputes over complex transactions involving Bankers Trust New York Corp. and other derivatives dealers over the past 18 months. As part of an agreement reached with the Securities and Exchange Commission and the Commodities Futures Trading Commission, a derivatives policy group consisting of six investment banks agreed to develop and use the disclosure statements in future derivatives transactions. The group also agreed to provide the exchange regulators with technical information, improve control systems, and develop risk measurement systems for their derivatives operations. Since the agreement was reached in March, group members have worked to develop disclosure statements to fulfill this commitment. The goal is to have a document that not only clarifies the relationships between dealers and counterparties, but also informs clients of the potential risks involved with these instruments. In one such disclosure statement drafted by Credit Suisse Financial Products, an affiliate of policy group member CS First Boston, the company warns that derivative products are often customized to suit a client's particular needs. As such, customization can "introduce significant liquidity risk and other risk factors of a complex character." The statement is in keeping with the policy group's commitment to securities and futures regulators. But according to Douglas Harris, senior deputy comptroller for capital markets with the Office of the Comptroller of the Currency, the disclosure does not go far enough. In a letter to Stephen Greene, Credit Suisse Financial Products' managing director and general counsel in London, Mr. Harris commented on the company's draft statement, saying such disclosures should not replace the typical level of communication expected in a banking relationship. "Including further discussion of the risks associated with particular transactions" may be necessary, he wrote. Mr. Harris pointed out in an interview that banks can and should do a much better job of understanding what their clients need. "Our guidance would suggest that dealer banks satisfy themselves that their counterparties understand the risks involved in a particular transaction," he said. "There is no way that a generic risk disclosure is going to accurately describe these risks because it does not relate to a specific transaction." Mr. Greene could not be reached for comment. Credit Suisse Financial Products went on to warn clients against reading too much into the professional relationship. Only if the parties agree in writing will the dealer also act as an adviser. Otherwise, the disclosure says, "CSFP is acting solely in the capacity of an arm's- length contractual counterparty." But such a disclosure may not accomplish the desired goal of limiting liability should the deal result in a dispute, Mr. Harris said. Worse, a bank dealer may come to rely on such a disclaimer, instead of satisfying itself that the customer understands the risks of a specific instrument. Mr. Harris warned in his letter to Mr. Greene that the legal system may overlook such a disclaimer. "While this statement is useful in educating counterparties as to CSFP's view of the relationship, courts may look beyond the statement in evaluating the nature of the relationship between the parties," Mr. Harris wrote.
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