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FAS 133 has generated substantial confusion and expense, especially for end-users acquiring derivatives as hedges. This article will give a general overview, whilst next week's will focus on hedge accounting. FAS 133, or Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as it is more formally known, was issued by the Financial Accounting Standards Board (FASB) in June 1998, but the board delayed its effective date to mid 2000 and twice made substantive amendments. Because of its complexity, FASB established the Derivatives Implementation Group (DIG) to address issues about its implementation and interpretation. To date, DIG has issued guidance on over 175 distinct topics with respect to FAS 133.

Collateralized debt obligation professionals are requesting Standard & Poor's rate structures that give them more discretion to trade long/short strategies. Nik Khakee, director in New York, explained that while many structures already allow managers to take short positions, these are typically restricted to buckets of 5%-10% of the deal. Managers are increasingly seeking to break out of these restrictions, which is encouraging more discussions on how this may be achieved in rated deals, he said.

Patricia Donoghue, project manager at the Financial Accounting Standards Board, admitted that its rules regarding consolidating special-purpose entities may work as a catch-all and that some CDOs do not need to be consolidated. The statements came as FASB officials participating in a panel came under fire from CDO professionals angry at the accounting rule. The so-called FIN (Financial Interpretation Number) 46 requires VIEs, which may include CDOs, be consolidated onto the balance sheet of the primary beneficiary. In the case of CDOs this would likely be the asset manager.

As investors turn their attention to rising interest rates, Deutsche Bank and BNP Paribas have separately come up with a novel way to punt on rates rising more slowly than the forward market is predicting. The notes are structured as a standard leveraged inverse-floating rate note, but the derivatives houses have added a call which means the issuer can buy back the note. The investor is compensated for the call via a higher yield, said Patrik Sandin, head of interest rate structuring at BNP Paribas in London

Dresdner Kleinwort Wasserstein has integrated its portfolio trading group into its U.S. equity operation and formed a committee comprising four U.S. equity heads briefed with formulating a strategy to develop and grow the firm's U.S. equity franchise. Meanwhile Tim Clorite, global head of portfolio trading and head of U.S. equities in New York, has exited the firm, said Karen Laureano-Rikardsen, spokeswoman in New York. Tom Jardine, head of U.S. distribution of derivative products and programs, is taking over Clorite's portfolio trading responsibilities as global coordinator for portfolio products, in addition to being a member of the committee.

Dresdner Kleinwort Wasserstein has promoted two equity heads to become co-heads of equity in Japan. James Hong was head of equity derivatives for Asia and Japan in Tokyo, while Ben Hao was both global head of quantitative trading and the head of equity cash trading for Japan. Hong said the purpose of the reorganization is to combine the strengthens of both desks.

One-month implied volatility on the euro/dollar jumped to 9.8% last Wednesday from 9.6% where it had traded the previous Thursday. The volatility move came as the euro rallied against the greenback, in spite of positive employment data released by the U.S. the previous Friday, noted a trader. The euro was trading over USD1.16 last Thursday, a two cent increase from before the data was released, he said.

The Financial Accounting Standards Board is developing guidelines which may make it less likely that CDOs will have to be consolidated onto an institution's balance sheet. The rule change will apply to the so-called FIN 46 accounting rule.

Bank Nederlandse Gemeenten, a Dutch bank that only lends to the public sector, has entered a foreign exchange and interest rate swap to convert a recent USD250 million 10-year bond into a floating-rate euro denominated liability.

Europe has led the charge in structured synthetic issuance over the past year although global volumes in the structures are down on last year. David Tesher, managing director at Standard & Poor's in New York, explained that in the year to Oct. 31 the ratings agency saw 190 rated synthetic deals come to market in Europe, compared with 43 in the U.S. and 33 in Asia. Of this number, however, 101 deals in Europe consisted of single tranches of less than USD20 million and in the U.S. the number includes 28 single tranche deals, he said. Synthetic volumes for this year so far stand at USD28.15 billion, compared with USD47.84 billion for last year.

The Financial Services Authority has amended its rules on first-to-default baskets to mean that protection sellers will have to hold less regulatory capital against some first-to-default baskets. Bankers said this could be a huge boon for the credit derivatives market. "If they are in the U.K., protection sellers will hold less capital against these instruments, so this increases the potential market for them," said Claude Brown, partner at Clifford Chance in London.