Interest rate risk, Sweden, and FAS 157 (ASC 820)

London, Sweden, Finland, all in five days.    My travels last week took me to all of those cities in order to share best practices regarding interest rate risk management.  Accompanying me on my “roadshow” were several different expert speakers from leading financial institutions and Big 4 accounting firms.    We held multiple events in Sweden and Finland, and what stood out to me the most from all of those meetings was the commonly shared concept of including non-performance (i.e. credit) risk in valuing derivatives.

I felt an acute sense of déjà vu as many of the discussions that are going on in the Scandinavian countries are similar to the ones that I was hearing in the United States two to three years ago with the advent of FAS 157 (now ASC 820).   While the discussions in the Scandinavian countries still seem to be in the relatively early stages, they seem to be focusing on all the things that have come to the forefront with regards to the global financial crisis.   Everything from zero threshold CSA’s,  discounting using OIS, and all related impacts on hedge accounting.

IFRS doesn’t currently have a devoted accounting standard to the measurement of fair value like FAS 157 under US GAAP. However, the application guidance of IAS 39 does require entities to use the same valuation techniques employed by market participants, and this could include adjustments for credit. Many of the audit firms and leading corporates seem to be taking the lead from US GAAP and incorporating non-performance risk in the valuation of derivatives. The IASB has an exposure draft on Fair Value Measurement which is almost identical to FAS 157 – with the new standard due in 2011, it appears that a clear, consistent, and comprehensive model for valuing OTC derivatives would seem to be a welcomed sight for auditors’ sore eyes.

1 Comment

  1. Rahul Magan on November 24, 2010 at 12:58 pm

    zero threshold CSA’s , CVA they are the things that neds to get discussed in great detail once you are referring to FAS 157. Having CSA is very easy but when it comes to execution and placement of the Collateral then it matters !!!!!!!!!!!!!!.

    CVA ( Credit Value Adjustment ) is very easy to calcute but we should know cva is alos negative hence it will affaect our P&L as well.