Industry Groups Ask FASB to Go Slow on Derivatives Valuation

An accounting rule proposed for derivatives could destroy many tools financial institutions use to manage market risk, a coalition of banking and securities groups warned.

The Financial Accounting Standards Board's proposal, which was released in April, would require companies to value derivatives and other hedged instruments at their market value, rather than acquisition price.

The accounting board has said the change would not distort a company's balance sheet because the firm would mark to market both the derivative and the instrument hedging it. The two actions should cancel each other out, according to the board.

But the trade group coalition said Tuesday that accounting techniques needed to balance the derivative with its hedge are too expensive and too complex for most institutions. Some might have to stop using hedges altogether to reduce their risk exposure, the groups said.

"The ability of companies to manage risk must not be impaired," a letter signed by coalition members stated. "We urge FASB to reconsider its plans to finalize its newly developed approach, and we urge the (Securities and Exchange Commission) to exercise restraint so that the FASB is not pressed to issue rules until a more effective approach is found."

The coalition includes the American Bankers Association, the ABA Securities Association, the Bankers Roundtable, the International Swaps and Derivatives Association, the Securities Industry Association, and the New York Clearing House Association.