Derivatives Accounting Law Compliance Is Not Global

April 7, 2003 ( - Compliance with internationally-mandated accounting standards for interest-rate derivatives valuation remains as varied as the regions of the globe.

Full compliance is seen in the United States, where Financial Accounting Standard 133, better known as FAS 133, is the standard measure.   However its international counterpart, International Accounting Standard (IAS) 39, is less commonly practiced, ranging from compliance by 89% of Japanese institutions to only 36% of continental European institutions, according to a Greenwich Associates report.

Greenwich Associates consultant Frank Feenstra said this is a reflection of some markets moving above and beyond compliance while others tend to do just enough. “In Asia outside Japan, compliance levels rose from about 45% to 55%, with nearly 20% saying they will do the same soon,” he reported. “But in continental Europe, by contrast, just 14% beyond the 36% already compliant say they plan to be compliant soon.”

However, some of the impact may be due to different implementation schedules for market-to-market valuations – adjustments of the book value or collateral value of a security to reflect current market value.   FAS 133 became mandatory in June 2000, and IAS 39 will take effect in Europe in 2005.

Volume Down

The low compliance figures come despite little negative impact on derivatives trading being reported by those using FAS 133 or IAS 39. “Only 10% of institutions say the regulations have caused ‘significant’ reductions in their derivatives activity, and less than that report ‘modest’ reductions,” consultant Tim Sangston said. “Four-fifths of those we talked to reported no change at all.”

Instead derivatives trading simply declined slightly in 2002, to $2.9 billion from $3 billion. Swimming against the flow was average volume in the Americas, rising slightly to $2.9 billion from $2.8 billion.   Comparatively in Europe it fell to $3.6 billion from $3.9 billion and in Asia-Pacific, average volume stayed level at just under $1 billion. 

Primarily, corporate derivatives activity continues to be concentrated in swaps and almost one-half is driven by their need to manage their existing assets and liabilities.   Showing business to a dealer on a non-competitive basis continues to be a less prevalent practice in derivatives than in foreign exchange, despite a modest pickup over last year. Almost one-third of derivatives users, up from one-quarter in 2001, show at least some of their business to just one of their dealers. The proportion of derivatives that these companies traded non-competitively is essentially unchanged at 15%.

Further, more than one half of larger derivatives users prefer sales coverage by a derivatives specialist, 31% prefer a generalist supported by a specialist, and just 15% prefer a generalist covering a range of projects.

These positions are earning more as well.    Average total compensation for derivatives professionals rose globally in 2002, to $111,000 from $104,000.  The United States paid substantially better than other markets,increasing their average total compensation to $172,000 from $164,000.Professionals in Canada, the United Kingdom, and continental Europe arepaid on average $90,000 to $99,000 in total compensation.

But the decision may come from other factors as well, as 40% of the 1,118 companies surveyed award more of their derivatives business to banks that have committed to support them with credit.  

This includes almost two-thirds of US institutions and roughly 60% of those in Australia/New Zealand and Canada.   However, these numbers drop sharply in Asian and European countries, where only 40% to 45% of Asian companies overall award on this basis and less than 30% in many European countries.