The Debts of the Spenders: New Legal Developments In OTC Derivatives

Some interesting developments that I received from the ABA's Committee on Law and Accounting. (The ABA stands for the American Bar Association)

Dear Members of the Law and Accounting Committee: Here is an update on some interesting recent developments:

1. The Obama Administration today released its proposed legislation regarding regulation of over-the-counter derivatives. Here is a link to Treasury's press release: http://www.treas.gov/press/releases/tg261.htm

The legislation would subject swap dealers and "major swap participants" to sweeping regulation. Notably, the term "major swap participant" is defined by reference to accounting concepts:

MAJOR SWAP PARTICIPANT.—The term ‘major swap participant’ means any person who is not a swap dealer and who maintains a substantial net position in outstanding swaps, other than to create and maintain an effective hedge under generally accepted accounting principles, as the Commission and the Securities and Exchange Commission may further jointly define by rule or regulation."

The intent obviously is to exclude entities engaged in "legitimate" hedging transactions from the new law. However, the idea that this will be determined by reference to the complex standards of hedge accounting under GAAP is rather remarkable.

2. The Financial Accounting Foundation and the Financial Accounting Standards Board issued a response on August 1 to the Recommendations of the Advisory Committee on Improvements to Financial Reporting. A link to its response is attached:

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176156398040