All of the following are common steps in derivative class except for: Making the final decision that information needs protection from unauthorized disclosure for the purpose of national security. The term “national security” has a more specific meaning than “securities.” You need to make the final decision about the classification of your commercial mortgage loan based on whether or not the interest of protecting the information is more important than the current financial condition. This is one of the few areas where an attorney can act as an advisor to you.
There are four steps in the derivative classification process: Determination, Selection, Duling and Approval. They apply equally to all of the following statements except for: The second step of determining which of the underlying instruments in a transaction is to be valued and recorded at the time of making the initial determination. The third step of selecting an appropriate system to use in computing the values is usually referred to as pricing and the fourth step of applying the pricing method and principles to the data from which the valuation is calculated. Of course, each of these steps will be necessary regardless of what instrument is being valued.
The first step of determining is generally referred to as the identification process. This includes determining what the instruments actually are and all of the other relevant facts necessary to make an informed decision as to whether they should be included in the transaction. This step also involves making the initial determination. The national security clause, if it is applicable, is the next step in the derivative classification process. Subsequently, there is the determination of the financial instruments.
The second step of the process is relatively easy to determine. The fact that all of the following are steps in derivative classification process means that all of the following are necessary. The second step includes determining the economic viability of each of the underlying instruments and other relevant factors such as credit risk.
The third step in determining the order in which the information must be reported is called the discovery procedure. The term “procedure” is used to describe the steps that are involved in gathering the information needed for making the final determination as to whether or not it is in fact protected by the confidential or proprietary information rights laws. The next step in this sequence is the analysis stage. In order to determine if all of the underlying financial instruments are protected by these laws, an analysis of the individual instruments must be conducted. The identification of the key risk factors associated with each of the underlying financial instruments is an aspect of this analysis.
Next, all of the following are steps in derivative classification except as otherwise noted: (a) The identification of the sources for the international accounts; (b) The determination of whether the information needed to make the determination is actually available in the internal accounting records of the company; (c) Whether there are any controls in place to ensure the protection of the foreign currency exposure; (d) Whether the entity has any established procedures for maintaining an accurate inventory of its inventory; and (e) Whether there are known or suspected intentional practices that would constitute an unfair and deceptive act in violation of the securities laws. If all of the steps outlined in this section apply to you, then you are classifying your derivative instrument correctly. However, if you do not meet all of the above requirements and your derivatives are not classified correctly, your account could be considered a private placement agreement, or PPA, in which case it would not be protected under the securities laws.
Derivative Classifiers must apply the rules of ordinary paralegal principles in order to classify information. Simple things like similarities and differences between two instruments or even the fact that the same information is being presented in two different formats (paper and electronic) will not necessarily be enough to classify the information. In order to classify information in a way that allows it to be protected from the unauthorized disclosure of company secrets, an accountant or an attorney must make the initial determining factor that the information required to be classified is legally classified as corporate or private information, or both.
All of the above steps in derivative classifiers except the last statement. In order for a given entity to be subjected to a derivative reporting provision, it must have met all of the other steps in classification. If it has failed to do so, it will not be subjected to the additional reporting provisions. The next time you are reading your financial statements, ask yourself, “Does all of the following apply to my business?”