Rule 133 of the US Financial Accounting Standards Board (FASB) hangs over the heads of all American borrowers. It states that from June 15 2000 they must report swap transactions and mark-to-market on a quarterly basis. Many issuers do not relish the thought of this extra work and are pressing for a review. Dealers predict a hasty retreat from non-dollar issuance by US borrowers if the regulation is enforced. And if other countries decide to follow FASB's lead, the impact on the Euromarket will be dramatic. Peter Jackson, managing director, Euro-MTNs at Salomon Smith Barney (SSB), has noticed a change in the funding behaviour of US issuers. He says: "Most borrowers are taking rule 133 very seriously. It has had a big impact on the market already with many US issuers driven to fund in euros or yen only when they have a natural need for that currency, they don't want the risk and accounting implications and are sticking with dollars." And there are wider implications. Jackson, at SSB, continues: "There is talk that the rule 133 framework may be adopted internationally. Further down the road every borrower in the market could share the same concerns." FASB is keen to standardize the market and US issuers appreciate this. Adrian Grigg, assistant vice-president, institutional products at Pacific Life, says: "The benefit of 133 is for disclosure. Everyone will be on an equal playing field, which is not true now." But if there is too much research and administration involved with rule 133 many issuers will shy away from cross-currency swaps. Anthony Averill, head of Euro-MTN trading at Merrill Lynch, says: "Smaller lightly structured deals and private placements will suffer most. Issuers will be reluctant to issue notes of less than euro50 million ($53.24 million) unless the price is exceptionally good because reporting everything in the bifurcation process is time consuming." American borrowers say they will not be deterred from obtaining funding in the Euromarket. Yet most express concerns about rule 133, particularly as it is not grandfathered, meaning it works retrospectively. Grigg, at Pacific Life, says: "The biggest thing we're facing is having to restructure our existing swaps to make them comply. We also need more swap contracts because under rule 133 we have to split all swaps to declare everything." Jackson, at SSB, agrees that splitting up swaps in order to report them will highlight ineffective transactions. But he says that it is not the most economical method for borrowers. He says: "This results from FASB's attempt to reduce risky structures, but in practice the most efficient hedge for a market professional is to put the new trade into its existing portfolio of trades and hedge this risk on a macro, not a trade specific basis." This practice is a thorn in the side of most US borrowers. Averill, at Merrill Lynch, says: "In addition to the burden of reporting swaps, US issuers are concerned about the timing mismatch on swap and bond valuations. This will result in unwelcomed earnings volatility in the income statement." There is a knock-on effect for dealing banks who provide the underlying hedge for transactions by US issuers. A bank which lumps swaps together and finds the best possible match will not be acceptable to FASB. Under rule 133 US issuers will have to provide a perfect hedge for every deal. FASB was established in 1973 to maintain standards of accounting and reporting in the private sector. It is made up of chief executive and financial officers from public accounting firms and is recognised by SEC. FASB's aims to establish the generally accepted accounting principles (GAAP), as SEC regulates for public financial reporting. Bob Wilkins, senior project manager at FASB, says of rule 133: "It will provide more information for the investor. And more information will lead to a more efficient market." The original start date for rule 133 was June 15 of this year. But FASB was forced to defer until 2000 after issuers complained of insufficient time to customize information systems and brief their managers. There were also concerns about the millennium bug. Wilkins, at FASB, says the rule is inevitable. He is critical of borrowers who are unwilling to adapt. He says: "Some issuers were not geared up for implementation. It's taking time to get some up to speed. Some would like to avoid change because it means effort." Yet for smaller, less experienced borrowers there are practicalities involved. Implementing rule 133 will be time consuming. And there could be costs too if special technology is required. Some issuers are resentful of FASB's interference. Grigg, at Pacific Life, points out that FASB has to make rules for a wide spectrum of companies. He says: "There is some animosity towards FASB from some issuers. The standards set have to cross all industry types from electronics and computer companies to insurance. What's right for one industry isn't necessarily going to suit another." Many issuers still hope the rule will be overturned, or at least modified. Jackson, at SSB, says: "The rule has not been adopted yet and for now is possibly on hold. The standard does have logic in limiting inappropriate derivative risk, but its extension to derivatives used solely as hedges to neutralize risk is one that many view as wrong. One thing for sure is that rule 133 does not help US corporates to tap the most cost-effective funding."
September 08, 2000
