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Derivatives

FASB Offers ABS Exemption

The Financial Accounting Standards Board last week proposed a limited-scope exception to mortgage-backed and asset-backed securities from FAS 133.

The Financial Accounting Standards Board last week proposed a limited-scope exception to mortgage-backed and asset-backed securities from FAS 133. The issue at hand was the requirement to either bifurcate embedded derivatives used to hedge prepayment risk or mark to market the entire security through earnings. FASB decided to revisit the issue due to requests from market participants.

The proposed exception applies only to securitized interests containing an embedded derivative, such as an interest-rate swap, tied to the prepayment risk of the underlying financial assets, and over which the investor does not control the right to accelerate the settlement.

The FASB is expected to offer a 30-day comment period on the proposal in early November. Once the comment period ends, re-deliberations would likely occur in mid-December and a final document would be expected in early 2007.

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