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6. FNBC’s Use of Netting Provisions
FNBC went to great lengths to include netting provisions in
all its swap agreements, and most of FNBC’s swaps were subject to
enforceable netting agreements.
XII. FNBC’s Adjustments Were Designed To Defer Income
A. Overview
FNBC’s credit and administrative costs adjustments were
designed to defer expenses to match income, not for valuation
purposes. FNBC’s adjustments were made to defer its compensation
and to allocate the compensation over the life of the swap.
B. FNBC’s Policy Statements
FNBC’s policy statement on credit adjustments for swaps was
contained in FNBC’s draft Financial Accounting Policies Manual
(FAPM) No. 397. FAPM 397 characterizes credit adjustments as
deferral accounting to prevent all income from being recognized
up front. According to that document: “By marking-to-market VEP
transactions at the mid-point between market bid and offer, all
income that results from the bid/offer price differential would
be recognized at the inception of the transactions, unless
deferral accounting is used to properly recognize certain
income.” Thus, as to the credit adjustment, “An appropriate
amount of income is calculated and deferred at the inception of
each VEP transaction * * * to provide for compensation for
inherent credit risk over its life.”
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