In KGAAP(Korean Generally Accepted Accounting Principles), the seller of CDS(Credit Default Swap) should treat the transaction as either a guarantee or a derivative instrument depending on the terms and conditions of the trade. A protection seller shall pay the final payment to recoup the loss of a protection buyer incurred by default of reference obligations, then the CDS is recorded as a guarantee by the seller on his balance sheet. If the final payment, on the other hand, shall be made depending on such variables as creditworthiness, the transaction is recorded as a derivative product which shall be subject to marking to market and evaluated as its fair value.
In US (SFAS 133) and Japan (Practical Guideline 226), credit derivatives basically should be evaluated as their fair value. Thus, some argue that KGAAP should follow its counterparts in U.S. and Japan as treating credit derivatives as a guarantee may cause the financial statements not to reflect the protection seller's obligation correctly.
Recent credit crunch in the capital markets make this argument sound even more plausible. Let me take an example. Suppose X bank invests in a AAA-rated Ambrose CDO(Collateralized Debt Obligation) and another Y bank sells a protection in a credit default swap where reference asset is the same Ambrose CDO as X bank buys. Setting conterparty risk related to the CDS aside, the two banks are exposed to almost identical credit risk as the risk mainly involves Ambrose CDO
What if the value of Ambrose CDO falls sharply but its credit ratings do not change? The X Bank has to reflect the impairment on its financial statements as much as the CDO deteriorates because it shall adjust the CDO's book value to the then fair value; however, Y Bank may not even reserve for the impairment. In Korea, a guarantee with its reference asset' rating untouched do not require making additional provision for the potential loss.
In my opinion, all credit default swaps should be treated as credit derivatives and be marked to market. This change will help to enhance transparency of accounting.
Subscribe to:
Post Comments (Atom)
3 comments:
Oi, achei seu blog pelo google está bem interessante gostei desse post. Gostaria de falar sobre o CresceNet. O CresceNet é um provedor de internet discada que remunera seus usuários pelo tempo conectado. Exatamente isso que você leu, estão pagando para você conectar. O provedor paga 20 centavos por hora de conexão discada com ligação local para mais de 2100 cidades do Brasil. O CresceNet tem um acelerador de conexão, que deixa sua conexão até 10 vezes mais rápida. Quem utiliza banda larga pode lucrar também, basta se cadastrar no CresceNet e quando for dormir conectar por discada, é possível pagar a ADSL só com o dinheiro da discada. Nos horários de minuto único o gasto com telefone é mínimo e a remuneração do CresceNet generosa. Se você quiser linkar o Cresce.Net(www.provedorcrescenet.com) no seu blog eu ficaria agradecido, até mais e sucesso. If is possible add the CresceNet(www.provedorcrescenet.com) in your blogroll, I thank. Good bye friend.
Hello. This post is likeable, and your blog is very interesting, congratulations :-). I will add in my blogroll =). If possible gives a last there on my blog, it is about the DVD e CD, I hope you enjoy. The address is http://dvd-e-cd.blogspot.com. A hug.
After I posted this last November, there was change in accounting treatment of credit default swap. As of end 2007, KGAAP reflects any CDS trade as a derivative transaction and, hence, the transactions should be marked to market.
Post a Comment