1.2 Financial markets function most efficiently when market participants have sufficient information about risks and returns to make informed investment and trading decisions. However, the evolution of financial trading and risk management practices has moved ahead of the public disclosures that most firms make of information that is relevant for such decisions. As a result, a gap exists between the precision with which a firm's management can assess its financial risks and the information available to outsiders. This asymmetry of information can cause a mix-allocation of capital among firms and can also amplify market disturbances. During episodes of market stress, this lack of transparency can contribute to an environment in which rumours alone can cause a firm's market access and funding to be impaired.

1.3 To improve the transparency of financial risk exposures, market participants should strive to disclose more meaningful information about risks and risk management performance. Current accounting conventions do not provide a sufficient means of presenting such information. However, financial risks are already measured and expressed in many firms' internal risk management systems. This paper recommends that information generated by such systems be adapted for public disclosure purposes. Such information would complement, but not substitute for, disclosures based on traditional accounting conventions because it would provide answers to questions about risks and risk management on which balance sheet and income statements are silent.

1.4 In an environment that lacks transparency, a firm that discloses more information about its risks than others may fear that outsiders will erroneously perceive its riskiness to be greater than that of other firms. Such concern may have hampered progress in voluntary disclosures of risk exposures. However, if consensus developed on an appropriate framework for understanding such disclosures, enhanced disclosures could be seen as an indication of strength. An approach based on each firm's own methods of assessing and managing risks should provide the flexibility that will make it easier for firms to communicate their risk management practices and performance.

1.5 Recommendation: The Euro-currency Standing, Committee suggests that all financial intermediaries - regulated and unregulated - should . move in the direction of publicly disclosing periodic quantitative information which expresses, in summary form, the estimates relied upon by the firm's management of:

• the market risks in the relevant portfolio or portfolios, as well as the firm's actual performance in managing the market risks in these portfolios;

• the counterparty credit risks arising from its trading and risk management activities, including current and potential future credit exposure as well as counterparty credit worthiness, in a form which permits evaluation of the firm's performance in managing credit risk.

1.6 Disclosures based on this recommendation would have the advantage of providing information about risks as they are managed by each firm. Moreover, by contrasting individual firms' prior risk assessment with subsequent outcomes, such disclosures would provide scope for comparison of firms' relative risk management performance over time. Because the information required for such disclosures is already generated for internal risk management purposes, the approach should not be burdensome.

1.7 While comparability of disclosures is desirable and should be an ultimate goal, at present no consensus on best practice for the measurement of risk exists. For example, the technical details of the models used for risk measurement differ between firms; strict comparability would require consensus on such details. Given such differences, an insistence on immediate comparability would be impractical. Recognizing that consensus on best practice, and thus comparability, cannot be achieved immediately, the benefits to be gained from improved transparency recommend an evolutionary approach. To that end, flexibility in disclosure methods is desirable, at least for some time.

1.8 The Basle Committee on Banking Supervision is currently developing a framework for the measurement of market risk for capital purposes at commercial banks. Once finalised, the procedures, methods and parameters of that framework could be a basis for increasing the comparability of commercial banks' public disclosures.

1.9 This discussion paper, however, serves the more general purpose of stimulating debate about the purpose and scope of public disclosures by all financial intermediaries and encouraging an evolution of disclosures practices that will improve the functioning of financial markets. Although this paper's recommendation is directed at financial intermediaries, the process it encourages could be of value for non-financial firms as well, especially those with active treasury units.