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risk, future administrative costs, hedging costs, investing and
funding costs, closeout costs, and liquidity (each discussed
infra p. 81). During the relevant years, there was no standard
practice in the market as to the specific adjustments taken by
dealers.
H. Nontax Purposes for Which Dealers Value Swaps
1. Overview
Swaps are valued for a number of nontax purposes. These
purposes include regulatory reporting, risk management,
management reporting, financial reporting, and pricing.
2. Regulatory Reporting
National banks such as FNBC had to value their financial
derivative portfolios in reports submitted to their principal
regulator, the OCC. During the relevant years, the primary focus
of an OCC examination of a bank dealer department was to
determine whether the risk management systems employed by the
bank assured timely recognition of risk-taking and losses and did
not permit an overstatement of income. In contrast with the
Commissioner’s audits of a taxpayer’s Federal income tax return,
OCC examinations did not focus on understatements of income or of
value. OCC examiners were instructed to examine closely the
recognition of income associated with financial derivatives
positions to ascertain that the bank under examination had not
overstated its income. The OCC preferred valuation methodologies
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