THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, September 25, 1994 TAG: 9409240126
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY TOM SHEAN, STAFF WRITER
LENGTH: Medium: 67 lines
For advocates of tougher regulation, the General Accounting Office report could not have arrived at a better time.
The GAO's study, which was released in May, called for closer supervision of derivatives dealers and better reporting by users of the financial contracts.
Meanwhile, the Financial Accounting Standards Board, an independent body that writes accounting standards for the nation's businesses and nonprofit organizations, has drafted rules for greater disclosure by derivatives users.
Congress may even get into the act.
``There are four or five bills before Congress, but the likelihood that any of them will emerge in this session is pretty slim,'' says Robert J. Mackay, a Virginia Tech finance professor and director of the university's Center for the Study of Futures and Options. ``I don't think the case has been made for added regulation.''
What triggered all of the talk of reform were the derivative-related losses last spring. The sizes of some losses suggest that several companies had purchased derivatives to speculate on movements of interest rates or commodities prices.
In the wake of widespread publicity, American corporations now appear to be using these contracts more sparingly.
``I know from talking with treasurers and assistant treasurers that they are working under stricter guidelines,'' says Mark R. Eaker, a finance professor at the University of Virginia's Darden Graduate School of Business Administration.
Guy W. Ford, an analyst with the securities firm Scott & Stringfellow Inc., says Procter & Gamble's announcement of losses on derivatives ``was a healthy warning to every corporate manager and director to examine their policies and make sure their institutions are not speculating.''
Federal regulators have responded to concerns of abuse by monitoring corporate use of derivatives more closely. Earlier this year, the Securities and Exchange Commission sent letters to several large companies seeking information about the ways they use the contracts.
Also, the SEC urged managers of money market mutual funds to avoid certain types of derivatives that the commission considers too risky for money market funds. Managers of those funds using the targeted derivatives were told to dispose of them in an orderly fashion.
Yet some regulatory bodies, including the SEC and the Federal Reserve, have told Congress that they have sufficient supervisory powers and do not need additional authority.
What could prompt Congress to impose tougher regulations would be especially heavy losses in a mutual fund that is sold to individual investors, says Eaker of the Darden business school.
In an attempt to boost the yields of their funds in recent years, some money managers have loaded up on derivatives, including volatile mortgage-backed derivatives.
Since the beginning of the year, Kidder, Peabody & Co., PaineWebber Inc., Piper Jaffray Inc. and other securities firms have reported losses from buying back derivatives from their mutual funds or injecting additional capital to protect the funds' shareholders.
But investors must bear some responsibility for monitoring the results of their mutual funds rather than expect additional regulation, says Eaker.
``Even an unsophisticated person should always ask the question, `Why am I getting a return that is above average?' '' by CNB