The use of derivatives among U.S. companies is widespread, although an overwhelming majority of the exposure is concentrated among financial institutions, according to a Fitch Ratings review of first-quarter financial statements. The first-quarter 2009 (1Q'09) financial reports marked the first time that comprehensive derivatives disclosure was mandated for all U.S. companies.

"The new derivative disclosures are a welcome addition for analysts and investors and they bring much needed transparency to financial reporting," said Olu Sonola, Director, Fitch Ratings. "The disclosures reveal plenty but careful analysis and additional scrutiny must be applied."

Fitch reviewed 1Q'09 filings of 100 companies from a range of industries representing nearly US$6.4 trillion in aggregate outstanding debt and a total notional amount of derivative positions in excess of $296 trillion. Fitch sought to: ascertain the degree to which new disclosure practices provide insight into how entities are using derivatives and for what purpose; determine the effect of derivatives on the financial statements of reviewed entities; and compare disclosures across companies and industries to see if entities have achieved transparency, consistency, and comparability in their disclosures related to derivatives.

Fitch's analysis found that approximately 80% of the derivative assets and liabilities carried on the balance sheet of the companies reviewed were concentrated in five financial services firms: JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley. Approximately 52% of the companies reviewed disclosed the presence of credit risk-related contingent features in their derivative positions. These contingent features generally require a company to post collateral or settle any outstanding derivative liability in the event of a downgrade of the company's credit rating.

Fitch found limited use of both credit and equity derivatives as a proportion of total derivatives, with the primary concentration being among financial institutions. Also, non-financial companies appear to use derivatives only for hedging specific risks.