Cleaning up repo-to-maturity accounting (and adding liquidity risk reporting too)

In US Congressional testimony yesterday, Susan Cosper, Technical Director of the Financial Accounting Standards Board, discussed the FASB’s intention to change repo-to-maturity accounting procedures in order to avoid future loopholes. These changes could also be called the MF Global Rules after the implosion brought on by that firm’s use of repo-to-maturity transactions. The accounting change is one of several that we expect will happen in the repo world over the next few years. Below are excerpts from Ms. Cosper’s testimony. Check out in particular the last paragraph on the FASB’s ideas for reporting on liquidity risk.

“Current accounting guidance and current transaction structures result in most repurchase agreements being accounted for as secured borrowing transactions with only certain types of transactions being accounted for as sale transactions.”

“Our outreach indicates that users broadly view repurchase agreements involving the same or similar securities as financing transactions whether or not the securities are held to maturity. While the conclusion under the accounting literature makes a distinction between repurchases before maturity and at maturity, users make no such distinction and cite the transferor’s retention of both the credit risk of the transferred financial assets and other important benefits of those assets in both types of transactions.”

“In March 2012, the FASB considered these issues at a public Board meeting and unanimously agreed that a project should be added to the FASB’s agenda to reconsider the accounting and disclosure guidance for repurchase agreements and similar transactions. In adding the project to the agenda, the Chairman cited the need to revisit the accounting guidance to address application issues and changes in the marketplace, and to ensure that investors obtain useful information about these transactions. For example, while repurchase agreements historically have involved mostly U.S. Treasury and agency securities, the range of debt instruments involved has broadened to include other types of debt securities, which may be less creditworthy and consequently affect how these transactions operate and how investors consider the risks associated with them.”

“The liquidity risk disclosures being developed are intended to provide quantitative information about an entity’s liquidity risk that the reporting entity will encounter difficulty meeting its financial obligations. For a financial institution, the Board’s tentative decisions reached to date in this project would require tabular disclosure of the carrying amounts of classes of financial assets and financial liabilities segregated by their expected maturities. These tentative decisions also would require a financial institution to provide tabular disclosure of its available liquid funds to meet obligations.”

A number of other articles and resources hit the web yesterday on this topic. Here are some that are by turns fun and useful.

Securities Lending Times’ article is here.

Fitch’s press release is here.

The full testimony from Susan Casper is here.

Securities Finance Monitor’s articles on MF Global are here.

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