March 27, 2012 / 6:45 PM / in 6 years

US FASB weighs reform to accounting used by MF Global

WASHINGTON, March 27 (Reuters) - The U.S. accounting standard-setting board could this year revamp the accounting treatment that MF Global used to mask risky European sovereign debt exposure, an official at the board will tell lawmakers on Wednesday.

“Moving forward with this project will involve a series of public education and decision-making meetings and the exposure of a proposed standard for public comment,” said Financial Accounting Standards Board Technical Director Susan Cosper in prepared testimony.

“Subject to the board’s deliberations, we currently anticipate that any resulting amendments from this project could be issued in 2012.”

Cosper is due to appear on Wednesday before a House Financial Services panel that is investigating the collapse of brokerage firm MF Global and the ongoing search for roughly $1 billion in missing customer funds.

The firm filed for bankruptcy on Oct. 31 last year after investors and customers became rattled over the firm’s $6.3 billion bet on European sovereign debt.

Securities and Exchange Commission Chairman Mary Schapiro has previously said her agency is probing MF Global’s accounting treatments and disclosures.


In the months leading up to MF Global’s collapse, the first regulator to flag problems was the Financial Industry Regulatory Authority, th e self-regulatory organization that po lices securities brokers.

In June 2011 , FINRA raised concerns that the firm had a substantial position in European sovereign debt and was not appropriately holding capital against it.

FINRA also questioned whether it was appropriate for MF Global to use Generally Accepted Accounting Principles to park the exposure off balance sheet.

MF Global was financing its European sovereign debt bets through “repo-to-maturity” transactions, which allowed it to move the exposure off its balance sheet, even though the firm still faced enormous risk in the case of a default.

FINRA and the SEC ultimately forced MF Global to increase its capital. The firm later disclosed the capital infusion in September.

Since then, lawmakers and regulators have raised questions about whether the accounting treatment used by MF Global for its repo-to-maturity transactions is appropriate, or whether it may have hindered regulators from catching problems sooner.

“That is a loophole so big you could drive a Mack Truck through it,” Democratic Senator Kent Conrad told Schapiro during a hearing in December. “If that’s not closed down, we really got to ask ourselves what we’re doing.”

Cosper said that the FASB met with the SEC’s Office of the Chief Accountant in January to evaluate the concerns surrounding repo-to-maturity accounting. Input from interested parties so far has also “confirmed that users of financial statements broadly believe that disclosures for repurchase agreements should be improved,” she said.

The FASB held a public meeting on the issue earlier this month to get the process moving.

Cosper noted that while historically most repo-to-maturity transactions have involved U.S. Treasury securities, the range of instruments involved has broadened over the years to include other debt instruments such as those seen in the MF Global case.

Those instruments, she said, “may be less creditworthy and consequently affect how these transactions operate and how investors consider the risks associated with them.”

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