-243-
reflect its swaps income clearly. First, the method did not
value FNBC’s swaps as of yearend. Second, the method was not
applied to FNBC’s nonperforming swaps. Third, the method did not
reflect the creditworthiness of both parties. Fourth, the method
did not reflect the applicability of netting and other credit
enhancements. Fifth, the method used a 1-month lag in
ascertaining the applicable credit adjustments. Sixth, the
method used a static rather than dynamic procedure to ascertain
the applicable credit adjustments. Seventh, the method
inappropriately ascertained credit adjustments as to swaps which
were no longer in existence. Eighth, the method did not
ascertain administrative costs adjustments by using incremental
costs. Ninth, the method did not ascertain credit and
administrative costs adjustments as to each swap.81
We also conclude that respondent’s method of accounting for
FNBC’s swaps income did not clearly reflect that income.
Respondent’s method failed to reflect the need to adjust each
swap’s midmarket value by credit and administrative costs
adjustments in order to arrive at fair market value.
81 Of course, in lieu of the adjusted midmarket method, FNBC
could have valued its swaps using bid or ask rate, as applicable.
Bid prices would be used to value a long position (swaps where
the dealer received the fixed rate), and ask prices would be used
to value a short position (swaps where the dealer paid the fixed
rate).
Page: Previous 233 234 235 236 237 238 239 240 241 242 243 244 245 246 247 248 249 250 251 252 NextLast modified: May 25, 2011