-223-
Petitioner also contended that the carve-outs were used for
pricing. The facts, however, show that pricing of swaps was
market-driven; i.e., FNBC’s traders quoted swap spreads based on
where the market was at the time, and where they thought it would
go. Nor were the bonuses for swap personnel ascertained strictly
on profitability. The size of the bonus pool for swap personnel
depended on many factors, including how the bank performed as a
whole, and did not depend on any adjustment taken by FNBC. To
the extent that swap profitability was a consideration in
determining the bonuses, compensation for traders and marketers
was based upon unadjusted mark-to-market revenues raised by each
trader or marketer, as well as certain other subjective factors.
Nor did FNBC rely upon adjusted midmarket values for buyout
purposes; it required that the buyout prices be (and effected its
buyouts) at the midmarket value.
D. Credit Adjustment
1. Need for a Credit Adjustment
Petitioner argues that FNBC’s calculation of credit
adjustments was necessary to reflect the fair market values of
its swaps.75 Respondent acknowledges that the midmarket value of
an interest rate swap may have to be adjusted for credit risk in
order to arrive at its fair market value when: (1) The
75 Petitioner concedes that FNBC could determine its current
exposure at any point.
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