* U.S. derivatives accounting at odds with foreign rules
* Some bank balance sheets could nearly double
* Changes on FASB's board cloud proposal's future
By Dena Aubin
NEW YORK, May 6 Wall Street's biggest banks are
urging rule-makers to scrap a derivative accounting proposal
that could inflate their balance sheets by trillions of
The draft rules, unveiled by the Financial Accounting
Standards Board in January, would force banks to report their
full exposure for most derivatives on their balance sheets,
instead of net amounts.
In a worst-case scenario, S&P 500 companies might have to
bring nearly $7 trillion in derivatives onto their balance
sheets if no netting is allowed, according to a report by
About 97 percent of that would come from five big banks:
Bank of America Corp (BAC.N), JP Morgan Chase & Co (JPM.N),
Citigroup Inc (C.N), Goldman Sachs Group Inc (GS.N) and Morgan
Stanley (MS.N), according to the report. Derivatives are a big
source of revenue for banks.
The proposed rules are meant to harmonize U.S. accounting
standards with their international counterparts. But with new
board members at FASB, the future of the proposal is
In letters to FASB, banks complained that the change would
exaggerate risks. In practice, banks typically have legal
agreements in place that allow them to net, or offset their
derivative positions against one another, so they are not
exposed to losses on gross amounts, banks said.
"The flawed offsetting model in the exposure draft will
either obscure or create nonexistent risks which will
ultimately mislead financial statement users," Robert
Traficanti, deputy controller at Citigroup, wrote last week.
The accounting proposal could also make it hard to net
derivatives traded on clearinghouses, banks complained. One
requirement for netting is that derivatives be settled
simultaneously; but on a clearinghouse, derivatives are often
settled in batches throughout the day.
"There is certainly concern right now about how those rules
are written, and justly because there are significant
implications," said Lisa Filomia-Atkas, a partner at Ernst &
U.S., INTERNATIONAL RULES AT ODDS
Derivatives have come under scrutiny by regulators
worldwide since the global financial crisis. Many investors
complain that banks' exposures are opaque, making it difficult
to determine exactly how safe a lender is.
Accounting treatment for derivatives differs sharply, with
netting allowed for most derivatives in the United States but
not under International Financial Reporting Standards.
Leaders of the top 20 world economies have been pushing
rule-makers to iron out accounting differences.
The proposed rewrite, a joint effort of FASB and the
International Accounting Standards Board, would restrict
netting to limited circumstances.
"It certainly will be very onerous to meet all the netting
requirements in the proposal," said Olu Sonola, director of
credit policy at Fitch Ratings. "In its current form, the bar
is very high."
The American Bankers Association, a lobbying group, argued
that banking analysts rarely use gross amounts to figure out a
company's risks. Balance sheets should report the net
information, with gross amounts in footnotes, it said.
Some accounting experts, however, said it is important to
see the total derivative amount on the balance sheet.
"Netting just doesn't give you a fair representation of
what the company's full asset and liability exposure is," said
Charles Mulford, accounting professor at Georgia Institute of
Changes on FASB's board have clouded the future of the
proposed rule, which passed by a 3-2 vote. Former FASB Chairman
Robert Herz, who voted for it, has resigned and been replaced
as chair by Leslie Seidman, who opposed it. The board also has
three new members, "so anything could happen," Fitch's Sonola
(Reporting by Dena Aubin; editing by John Wallace)