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it is earned, (i.e., a portion up front and a portion
over time). Based on an analysis of what the bid/offer
rate differential represents, the Bank values its swap
contracts using the mid-point between market bid and
offer rates. The difference between this valuation and
a bid or offer price paid or received by the Bank is
treated as deferred income designed to provide
compensation for inherent credit risk and periodic
administrative costs related to the swaps.
(s-3) The basis for making an allocation between
current and deferred income recognition is that a
reasonable estimate can be made of the amount allocable
to the inherent credit risk and periodic administrative
costs associated with the swap transaction.
(s-4) At the inception of each swap, the Bank
defers an appropriate amount of income to account for
inherent credit risks and periodic administrative costs
related to the swap. The amount deferred to account
for interest credit risks is determined by multiplying
the Credit Strategy Committee’s (CRESCO) loss reserve
factor times the credit exposure amount of the swap.
The result is restated as a per annum credit deferral
and is deferred via the swap revaluation process. The
Bank revalues interest rate swaps which are used in
trading strategies to market value at least once a
month. The per annum credit deferral is recognized in
income on a straight line basis over the life of the
swap agreement. The rationale for the income deferral
for the inherent credit risk is to defer an appropriate
amount of income to match compensation paid to assume
credit risk over the period of the risk.
(s-5) An additional amount of income is deferred
on the entire swap portfolio to match compensation paid
to assume periodic administrative costs.
Administrative costs include an allocation of direct
and indirect expenses of the swap management, trading
and operations areas.
Petitioner’s petition as to 1993 also set forth facts in
support of its allegations of error as to that year. In relevant
part, petitioner’s petition for 1993 repeated the facts set forth
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