WASHINGTON - The marketplace, rather than the SEC, should determine the success or failure of derivative products, Commissioner Richard Roberts said at a derivatives conference in New York City on Thursday.
One of the top priority issues for the Securities and Exchange Commission, he said, is to make sure that the disclosure standards for derivatives are improved so that investors have the information they need to make decisions about such products or about firms than engage in derivatives activities.
Roberts said the Financial Accounting Standards Board's proposed disclosure guidelines for derivatives are an improvement over existing standards, but he said they can be improved further.
Roberts discussed the SEC's role in the market after noting that the Comptroller of the Currency is considering restricting national banks' ability to use, or engage in proprietary trading of exotic and complex derivatives.
"That probably makes a great deal of sense in the banking area where federal deposit insurance is on the line," he said. But "it is not applicable in the securities area where market forces and market discipline are largely the rule, at least insofar as potential investment alternatives are concerned," Roberts said.
"I am inclined to believe that as a general proposition, the marketplace and not the commission should determine the success or failure of the various potential investment products available," he said.
Roberts said that derivatives are an integral part of the financial markets, not a fad that will soon disappear.
"Therefore, it is incumbent upon all regulators to adjust their regulatory systems, where applicable, in recognition of the continued presence and growth of derivative financial products in our capital markets," he said.
Two weeks ago, the Financial Accounting Standards Board proposed standards that would require derivatives dealers and users to disclose more and better information about their activities. The proposals, which contain amendments of two of the board's existing standards and some additional measures, are available for public comment until July 1.
Roberts said that while the board's proposed standards "will improve substantially the current state of derivatives disclosure, more could and should be required by the FASB in the derivatives disclosure area."
He said, for example, that the board's proposed standards should require firms to disclose quantitative, as well as qualitative, information about derivatives that are held or issued for the purposes other than trading.
The current proposal only requires the disclosure of qualitative information, he said.
In addition, the proposed standards should require firms to disclose information about the impact on income of derivatives held issued or purposes other than trading, Roberts said.
The current proposal does not require disclosure of the "current period impact" of derivates on either net interest income or income from continuing operations, he said.
Roberts also called on the board to define the term "class of derivative financial instruments" and to give examples of such classes.
The proposed standards require disclosure by class of derivative financial instruments, but these are often "not meaningful because different types of financial instruments are aggregated and presented under one general caption," Roberts said.
Roberts said the board should consider expanding its proposed standards to cover disclosure of other types of derivatives, such as those that are, or can be, settled in a commodity such as oil or gold.