Some dealers said they are close to getting around a set of accounting rules that have put a damper on bespoke collateralized debt obligations. According to Derivatives Week, a CIN sister publication, the Financial Accounting Standards Board FAS 155 amendment exempts funded synthetic CDOs from the FAS 133 requirement that investors bifurcate embedded derivatives from the host contract. It removes mark-to-market balance sheet accounting so long as investors bear a minority of the credit risk. But it applies only to multi-investor CDOs. Bespoke deals don't qualify because of a separate standard requiring a majority risk-holding investor to consolidate the special-purpose vehicle issuer and take derivatives back on their books. "There is no logic to it," complained one official. "There is no overarching theory, it's just rules."
In the traditional cat and mouse game between structurers and the Financial Accounting Standards Board--and between firms themselves--dealers are keeping the details of potential structures close to their chests. However, two avenues appear to be being pursued: lining up two investors to avoid majority ownership by splitting a bespoke deal; and selling the majority equity position in a bespoke deal to a hedge fund.
"Derivatives accounting has been the worst morass in all of accounting since the creation of FAS 133," said one analyst. "It's a nightmare."
