FER examined the external reporting requirements for financial assets and liabilities as well as derivatives. We conclude that the informational content and comparability of financial statements would be enhanced by adoption of the following external reporting requirements:

All financial assets and liabilities should be recorded at "fair value", i.e. marked to market, except for derivative positions established to hedge cash flows related to non-financial assets or to future expenditures. When prices cannot be directly observed in the market by reference to liquid instruments, marking to market entails the use of models to infer fair value.

The FER is skeptical that an effective and sustainable collusive arrangement is possible among Nasdaq dealers. Both economic theory and history provide substantial support for the belief that effective collusive arrangements generally require that two conditions be met: (1) there be a small number of firms, and (2) there exist significant barriers to entry. Neither of these conditions is met in Nasdaq. The number of dealers is large (as many as 60 dealers trade the more active stocks) and entry is easy (any existing securities firm that meets minimum capital requirements can become a dealer in any stock by merely notifying Nasdaq).

Current concern about derivatives centers on the expanding use of customized off- exchange (or OTC) derivative instruments, the largest component of which are interest rate and currency swaps. Although acknowledging that the growth of derivatives is a reflection of the market's demand for better instruments with which to manage risk, both the Congress and regulators remain uneasy about the misuse of derivative instruments and the potential consequences that might flow from a major default in derivatives markets.

The FER proposes that American investors be allowed to trade the shares of major foreign companies as easily as they now trade the shares of U.S. companies. Our proposal should be viewed as a first step towards eliminating the regulatory impediments that now preclude the securities of most foreign firms from being traded on the principal U.S. equity markets.