-239-
3. Use of Own Costs
FNBC’s adjustments for administrative costs are based on
FNBC’s own costs and cost allocation rules rather than on market
data. We believe that such an approach was correct for purposes
of section 475. As mentioned above, we value FNBC’s swaps as the
difference in value between the legs. We believe that the
administrative costs must be taken into account in determining
the value of FNBC’s leg in that the inherent value of that leg
includes FNBC’s forecast of its administrative costs related
thereto. In this regard, we agree with the experts that the best
approach to valuation in these cases is the income approach.80
F. Other
Petitioner argues that FNBC did not include all of the
adjustments to midmarket value that may have been appropriate.
According to petitioner, the industry allows many adjustments,
and FNBC took adjustments only for administrative costs and
credit risks. Petitioner observes that the G-30 report and OCC
also recommended adjustments for (1) investing and funding costs,
(2) greater credit adjustments (e.g., FNBC did not take an
adjustment for compensation for credit exposure), and (3)
anticipated profit.
80 The record does not indicate that property similar to any
of FNBC’s swaps was sold near the valuation dates so as to use
the market approach. Nor does the record support applying the
asset-based approach to those swaps.
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