-123-
lag)42 and correspondingly reduced the value of assets on the
balance sheet. Second, FNBC amortized the credit adjustment back
into income on a straight-line basis. FNBC’s stated policy was
that, on schedules before June 1993, it would amortize the credit
adjustments into income over the average term of deals executed
during the quarter for the applicable product.43 For June 1993
and after, FNBC’s stated policy was that it would amortize the
credit adjustments into income over the weighted average term of
deals executed during the quarter for the applicable product in
the quarter. FNBC actually computed the weighted average term
for the applicable product only in the fourth quarter of 1993.
For the remaining quarters of 1993, FNBC calculated the weighted
average term for all products combined.
b. Effect of Methodology
Under FNBC’s procedure, the credit adjustments for swaps
with shorter-than-average lives, relative to others originated in
the same quarter, were amortized into income over a longer term
than the life of the swap. The converse was true for swaps with
longer-than-average lives. For example, as to the first point,
FNBC had a swap with an individual amortization period of 4
42 The December 1993 credit adjustment to the swap portfolio
did not include 32 swaps that FNBC actually originated in
December 1993. The inclusion of those swaps would have added
$106,769 to the credit adjustment calculation.
43 Examples of FNBC’s applicable products were interest rate
derivatives, currency derivatives, and foreign exchange options.
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