-71-
of the relevant years, and it did not prescribe specific methods
for arriving at fair value.
d. SFAS No. 133
In June 1998, the FASB issued SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”. SFAS No. 133
required non-hedging derivative instruments such as swaps to be
reported at fair value on the balance sheet, with gains and
losses included in current earnings. SFAS No. 133 was not
effective for any of the relevant years, and it did not prescribe
specific methods for arriving at fair value.
G. Methods of Valuing Swaps
During the relevant years, the three main methods which
dealers used to value their swaps portfolios were the bid-ask
method, the midmarket method, and the adjusted midmarket method.
1. Bid-Ask Method
The bid-ask method was essentially a market comparables
approach to valuation. Some dealers used this method, and it was
recognized as a valid method by the Group of Thirty (G-30)
(discussed infra p. 76) and the OCC. Under the bid-ask method,
each swap generally was valued by (1) identifying the generic
swap to which it was most comparable, (2) ascertaining the bid or
ask price for that generic swap, and (3) adjusting the
ascertained price to reflect any differences between the generic
swap and the swap being valued. Bid prices were used to value a
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