While the Office of Federal Housing Enterprise Oversight takes an up-close look at Fannie Maes use of derivatives (see story Page 1), Fannie is also examining the instruments and has made recommendations on a proposed accounting rule that would alter the way institutions provide disclosures for them.
The Financial Accounting Standards Board released an exposure draft April 14 that made slight alterations to FAS 107, Disclosure about Fair Value of Financial Instruments, and also made additions to FAS 105, Disclosures of Information about Financial Instruments with Off- Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk. The comment period for the proposal ended July 1, and, if approved, could become effective Dec. 15, 1994.
But the draft drew criticism from heavy hitters in the mortgage securities industry, including Fannie Mae and the Public Securities Association. Freddie Mac, whose derivative position reached notional amount of nearly $20 billion at the end of 1993, had not commented on the rule yet, although FASB said comments are still arriving.
Fannie Mae, a major end-user of nonmortgage derivatives, particularly interest rate swaps, has seen the notional amount of its derivative position grow to $51.2 billion at the end of 1993 from $5.5 billion at the end of 1989. Al-though Fannie approved of the boards proposals, it politely took issue with a provision in the rule that would split derivative disclosures into two categories: those held for trading, and those for all other purposes.
We do not believe this distinction clearly reflects the nature and intent of all derivative financial instruments, wrote James T. Parks, vice president and controller of Fannies multifamily division, in a comment letter to FASB. Parks added under the proposed rules two-category approach derivative financial instruments held for speculative purposes rather than in trading account would fall inappropriately into the second category of disclosures.
Under FASBs trading category, the disclosed data must detail the average, maximum and minimum aggregate fair values during the reporting period of each class of derivative financial instruments, distinguishing between assets and liabilities, as well as net gains and losses from derivative activities.
Under the second categoryderivatives held for other purposesthe required disclosure would include a description of the entities objectives and how derivative financial instruments are reported in their financial statements. For derivative financial instruments held or issued for hedging, disclosure requirements would include:
A description of the anticipated transactions whose risks are hedged;
The amount of hedging gains and losses explicitly deferred; and
A description of transactions or other events that result in recognition in income gains or losses deferred by hedge accounting.