What’s on International Treasurers’ radar this week.
Topping the list of topics discussed at this week’s editorial meeting were rumors that the FASB was considering new language for the Financial Instruments ED pertaining to hedging accounting that would place curbs on the eligibility for anticipated intercompany FX transactions to get such accounting treatment.
FASB’s move could amount to the reinsertion of the controversial language of referring to intercompany royalties that was in past FAS133(R) ED, however, there are concerns that the language might even go further or that the interpretation as before might lump in hedges of all sorts of intercompany transactions. At issue is the FASBs desire to disallow abuse of hedge accounting in situations where related-entity exposures net out upon consolidation.
For example, Deloitte was said to have raised the issues several years ago in the context of corporate treasury hedging of interest payments on foreign currency intercompany loans, whereas the interest accrual nets out upon consolidation there is exposure on the foreign currency denominated interest payable/receivable (even if just FAS 152 accounting risk due to daily accrued interest). For the FASB to insert something so controversial in at this stage, and without public discussion, will anger a lot constituents—not least of which corporate derivatives desks that base a significant portion of their business on intercompany hedges.
Further signs of ISDA focus
Another topic of note, and related to corporate derivatives use, is the emerging practice of corporate treasuries circulating RFPs for ISDA attorneys. Whereas this may have been seen in the past, it certainly was not commonplace, as ISDA attorneys have confirmed. This is just another sign of how much more intensely corporates are viewing the importance of ISDA’s in the wake of the financial crisis. And with a big round of ISDA changes to come in response to Dodd-Frank and OTC derivative market reforms generally, corporates that want any ISDA lawyers to choose from better get on the case soon as their time is likely to be booked up quickly.
Sec lending worth the risk?
Discussion amongst The NeuGroup’s Treasury Investment Managers’ Peer Group members on securities lending suggest a further pullback on the practice by corporates since we last touched on the topic a few years back. While sec lending was never a widespread practice for corporate cash portfolios, it appears even less likely to become more common now as several members who once allowed custodians to lend on their behalf now view the extra return as not worth the risk or hassle. Although corporate were always marginal players here, such risk aversion cannot be good for repo markets that already face strong headwinds in new regulation.