Bank One Corporation - Page 155

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          significantly off-market to the advantage of the dealer.  Duffie            
          stated similarly to Parsons that there should be no credit                  
          adjustment at the inception of a swap with a counterparty rated             
          AA, but that a downward credit adjustment would subsequently be             
          warranted if changes in interest rates caused the value of the              
          swap to become positive.                                                    
               We agree with the testimony of Duffie and Parsons.  Given              
          that FNBC discounted at an AA rate, the midmarket values being              
          reduced by credit adjustments already were discounted by a factor           
          reflecting the risk of nonpayment by an AA-rated counterparty.              
          The impact of the AA discount rate coupled with the claimed                 
          credit adjustments is that FNBC is taking two adjustments for the           
          risk of default by AA-rated counterparties.  FNBC did not                   
          increase the value of swaps with A and above A-rated                        
          counterparties to take into account the impact of FNBC’s credit             
          rating of A-.77                                                             
                    5.  Credit Enhancements                                           
               Whereas many of FNBC’s swaps were supported by credit                  
          enhancements such as credit triggers, guarantees, collateral, and           
          credit agreements, FNBC did not take those enhancements into                
          account in computing its credit adjustments.  We believe that               
          collateral and other types of credit enhancements must be                   


          77 Duffie testified that it would be unusual to see a                       
          difference in prices between counterparties rated AAA and AA.               




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Last modified: May 25, 2011