Bank One Corporation - Page 149

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          position in the swap given that the counterparty has a worse                
          credit rating than FNBC.  Whereas petitioner is correct that                
          credit risk is normally negligible at the inception of a swap,              
          and that interest rate movements after inception may produce an             
          incremental credit risk warranting a downward adjustment at a               
          revaluation date, petitioner ignores the reality of the converse            
          of this principle; i.e., that an upward credit adjustment might             
          be justified when changes in interest rates have caused the                 
          market value of the swap to become negative.                                
                    2.  One-Month Lag in Recording Swaps                              
               Whereas FNBC calculated its credit adjustments quarterly,              
          those quarterly periods did not coincide with the calendar                  
          quarters in which its swaps actually arose.  FNBC treated each of           
          its swaps as arising 1 month after the date that the swap                   
          actually arose.  FNBC’s 1-month lag for determining the swaps               
          which it included in its credit adjustment for a quarter was                
          inconsistent with the section 475 mark-to-market requirement that           
          value be determined as of the last business day in the taxable              
          year.  FNBC’s 1-month lag resulted inappropriately in FNBC’s                
          postponing the recognition of some of its credit adjustments for            
          1 whole year; e.g., the credit adjustments for 32 swaps which               
          FNBC initiated in December 1993 were actually claimed in 1994.              









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