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2. First Method
Under the first method, FNBC calculated and recorded a
credit adjustment for each swap. FNBC amortized each swap’s
credit adjustment over the life of the swap as ascertained by its
maturity date. In the event that a swap was terminated or bought
out, FNBC included in income all of the remaining credit
adjustment attributable to that swap.
3. Second Method
Under the second method, FNBC stopped amortizing the credit
adjustments on a per-swap basis over the life of the swap and
began applying an aggregate approach of amortization based upon
the life of all of the swaps considered initiated in each
quarter. For this calculation, FNBC considered each swap to be
initiated 1 month after the date when it was actually initiated.
Each quarter, FNBC amortized the credit risk into income on
the basis of the life of all the swaps considered initiated
during the quarter. FNBC did not make any adjustments in the
case of occurrences such as early terminations, changes in
mark-to-market amounts, or changes (positive or negative) in the
credit rating of a swap counterparty.
a. Methodology
Under the second method, FNBC ascertained its initial credit
adjustment through a three-step process. First, as to each swap,
FNBC calculated a credit exposure measurement (CEM) amount as of
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