AFP Blogs

The Financial Accounting Standards Board (FASB) released on their website an Exposure Draft (ED) of a proposed Accounting Standards Update (ASU) intended to develop common requirements for measuring fair value and for disclosing information about fair value measurements in U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRSs). AFP will be reviewing this ED and making a decision on whether to issue a comment letter on behalf of our members in the upcoming weeks. Feel free to reach out to our staff should you have any issues with the propoasl.

The proposed ASU sets forth amendments that the Boards believe would improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments would apply to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in shareholders’ equity in the financial statements.

The IASB is publishing a measurement uncertainty analysis disclosure proposal, Measurement Uncertainty Analysis Disclosure for Fair Value Measurements, which is the same as a proposed disclosure requirement in the proposed Update

The comment period for the proposed ASU extends through September 7, 2010. The ED is available at www.fasb.org.

The Supreme Court held that the Sarbanes-Oxley Act’s provisions making PCAOB Board members removable by the Securities and Exchange Commission (SEC) only for good cause were inconsistent with the Constitution’s separation of powers. However, the operation of the PCAOB will not be interrupted. The courts rectified this inconsistency by changing the SEC’s power to language that now states that the SEC can remove a PCAOB Board member “at will” rather than “for good cause.” All other aspects of the PCAOB’s structure and design remains unchanged including registration, inspection, enforcement, and standard-setting activities.

The accounting issues discussed last week were on leases, revenue recognition and GASB preliminary views on certain aspects of pension accounting and new guidance on accounting for financial instruments. (more…)

This was another week of no particular big news. The stories of the past two months continue to develop, but nothing really occurred that would cause us to think our current situation won’t continue for the foreseeable future. We keep hoping that a robust job recovery is just around the corner, but it may prove more elusive then we have imagined.

The economic situation in Europe continues to be a stable but weak story.  Greece was cut to “junk” status by Moody’s this week. It really wasn’t much of a story. It was a four-notch bump down for Greece, from A3 to Ba1. Greece is the first member of the EU to be cut to non-investment grade. S&P had already reduced Greece to non-investment grade back in April.

There were worries in the beginning of the week that Spain might be facing some imminent financial event. Those rumors turned out to be false and Spain was able to issue $3.7 billion of 10-year debt at spreads slightly tighter than the market was expecting. While absolute and CDS spreads are still very wide for the PIGs (Portugal, Ireland, Italy, Greece, and Spain), the feeling that they are about to fall into the abyss, has subsided.

Evidence of a more positive outlook that Europe had at least stabilized, were the movements, or lack thereof, of the Euro and the 3-month LIBOR rate. The Euro finished the week on a positive note with the currency trading as high as $1.2417. The 3-month LIBOR rate was unchanged on the week, while still at a near one-year high of 54bps.

One interesting note from all the turmoil in Europe is that those companies that are issuing debt are choosing to issue in non-Euro currencies. The desire to diversify on the part of issuers has never been greater. This week witnessed the highest percentage of non-US dollar and non-Euro issuance on record. Organizations are utilizing currencies such as the Swiss franc and the Canadian dollar to meet their funding needs. This is yet another example of how mobile capital is and how inter-connected the world’s economies have become. If you are concerned about the particular risk in one currency, you can simply issue in other currency.

The issuance of covered bonds continues to grow in popularity with New Zealand issuing its first covered bond, executed by the Bank of New Zealand. The second covered bond to be issued by Asia seems to be in the works. The Korea Housing Finance Corp announced a planned sale. The pace of covered bond issuance is up 72 percent YTD compared to 2009 over the same time period.

In addition to the added safety of a secured note, demand for covered bonds may be benefiting from filling a gap in the credit curve for investors. As government supported debt programs have wound down, covered bonds provide investors with a yield pickup relative to government securities, while not being as risky as unsecured debt.

As we look forward, we are heading into the potential summer doldrums. While not that major of an event in the US, the World Cup games do have an effect on the ROW (Rest of the World). School is out in most of the US, summer vacations are occurring and the 4^th of July holiday is just around the corner.

That all being said, we will still be receiving some economic insights this coming week, highlighted by the FOMC meeting on Wednesday. The Fed is not expected to change either the target rate for Fed Funds, or to substantially change the outlook statement. It is now likely that the Fed Funds target won’t be raised until at least early 2011.

Stay tuned.

Here’s what Wolfgang Koester, CEO of FiREapps, had to say:

“The U.S. is the largest destination for Chinese goods, taking about 20 percent of China’s exports. As the Chinese government points out, the bulk of the profit on the $321 billion in products the U.S. imported from China last year went to the multinational companies whose names are on the product labels. For U.S. companies whose payment terms are in Chinese renminbi for these goods, this presents a significant exposure. At the same time, U.S. companies with foreign subsidiaries (e.g. in Europe) who conduct business in their local currencies will continue to expose their company to FX risks.

“The impacts of the un-pegging of the Chinese renminbi will vary from company to company, but few companies truly have the visibility, understanding and agility they need to adjust their business models to capitalize on these kinds of dramatic shifts. A growing number of companies realize that effective foreign exchange exposure definition and management are going to be the key to competitiveness going forward. They are putting proper systems in place, so they can protect their earnings and protect or improve their profit margins.”

Visit AFP’s FX Risk Management Resource Center for more thought leadership and peer advice on China’s decision.

Jiro Okochi, CEO of Reval and an authority on FX, had this to say about China’s decision to un-peg its currency to the USD:

“Clearly it’s good for business for U.S. companies who export to China, especially consumer-related products, and bad for those who import in Chinese goods or commodities or those who outsource to China.

“Good or bad, companies need to make sure they proactively hedge their exposure to the yuan, just like any other currency exposure, albeit it’s more difficult with this non-deliverable forward. Companies should also watch for the knock-on effect there may be with other currencies in the region, like the Aussie dollar, South Korean won, Thai baht and Malaysian ringgit, which should strengthen as well. However, given the political forces behind this currency, the future is always unpredictable.”

Okochi will speak about risk management at AFP’s Annual Conference, November 7-10, in San Antonio, Texas.

Visit AFP’s FX Risk Management Resource Center for more commentary on China’s decision.

That’s the opinion of John Galanek, CTP, Chief Operating Officer of FX Transparency. Here’s what Galanek told AFP about China’s decision over the weekend to let the renminbi float:

“We don’t think this is as big of a deal as many are making it out to be,” Galanek said. “The one-year CNY forward on Friday before the announcement had a 1.80% appreciation priced in, and now it’s around 2.50%, and the spot rate is basically unchanged from Friday’s levels. What has been obvious to me for years is that the Central Bank is never going to reward speculators that are long CNY. This will be a painfully slow and gradual appreciation that will never outpace what is priced into the forward market.

“The key to note is that this change happened because of the move lower in the EUR/USD exchange rate which has caused CNY to appreciate 15% vs. the EUR this year. This is just about keeping China’s goods fairly priced in Europe, and throwing the US a bone in the meantime. What they actually do with the spot price vs. the USD over the next 12 months will be the real story.”

Visit AFP’s FX Risk Management Resource Center for more commentary on China’s decision.

As we await the opening match of the 2010 World Cup, a battle between Mexico and host nation South Africa, I can’t help but think how much the world has changed since Italy beat France 5-3, in a penalty shootout, to win the 2006 World Cup in Berlin, Germany.

It was a world pre-Bear, pre-Lehman, pre-subprime, pre-housing crisis, pre-sovereign debt crisis, pre-financial crisis, and pre-The Great Recession. Hopefully, as we pass through and beyond our current financial and economic challenges, we will remember the lessons we have learned about risk, liquidity and black swan events.

It’s been a strange week in that we didn’t receive any really earth-shattering news, but the general tone was more or less negative. Last week ended on a down note due to a weaker than expected U.S. employment report, concerns about the financial viability of Hungary, and greatest environmental disaster in U.S. history: the BP oil spill in the Gulf of Mexico.

European concerns remain in the forefront. The euro fell to a four-year low, touching $1.1917 before rebounding slightly as the week progressed to the $1.21 area. Investors showed their concern about the European economy as credit spreads widened the most in 10 months, CDS spreads increased, and the spread of European debt widened to a record, relative to U.S. corporate debt. As recently as February, European bonds traded tighter than U.S. bonds. Between 1998 and 2009, European bonds have traded an average 64bps tight to U.S. bonds. The main reason for this reversal in the relationship is the belief that the U.S. economy will outperform the European economy going forward. One beneficiary of this flight-to-quality has been the German bund. The 10-year bund touched a 21 year low yield of 2.50% this week.

There is still great uncertainty in Europe. Even though the 3-month LIBOR rate remained relatively unchanged this week at 54bps, the amount of money banks are parking at the ECB is unprecedented. European banks still aren’t leading to each other. Overnight deposits at the ECB rose to a record $445 billion.

The world’s economies seem to be falling into three groups: North America, Europe and the rest of the world. North America seems to be doing relatively OK. The U.S. economy seems to have stabilized and at some point in the future interest rates are expected to rise. Canada became the first G-7 country to actually raise interest rates. As a function of its economic strength, Canada boosted its target rate from a record low 0.25% to 0.50%. This was the first time Canada has raised interest rates since July 2007, and they are expected to continue the increases.

Europe continues to be a basket case. Not only is Europe not poised to raise interest rates, they may have to cut them further in an attempt to stimulate their economies. Both the ECB and the BOE met this week and both central banks left their interest rates unchanged at historically low levels. The ECB is at 1% and the BOE is at 0.50%.

The rest of the world is showing significant strength. New Zealand raised its benchmark rate for the first time in three years. The rate was raised by 25bps from a record low of 2.50% to 2.75%. Peru raised its benchmark rate for the second straight month. The rate was raised to 1.75% from 1.50%, a month after they unexpectedly raised their rate 25bps from a record low 1.25%.  It is expected that next week Chile with join Brazil and Peru in raising their interest rates as a way to cool off their expanding economies.

The U.S. Securities and Exchange Commission (SEC), Quebec Autorité des marchés financiers (AMF) and Ontario Securities Commission (OSC) today announced a comprehensive arrangement to facilitate their supervision of regulated entities that operate across the U.S.-Canadian border. SEC Chairman Mary L. Schapiro, AMF President and CEO Jean St-Gelais and OSC Chair David Wilson executed a memorandum of understanding (MOU) that provides a clear mechanism for consultation, cooperation, and exchange of information among the SEC, AMF and OSC in the context of supervision.

The MOU sets forth the terms and conditions for the sharing of information about regulated entities, such as broker-dealers and investment advisers, which operate in the U.S., Quebec and Ontario.This MOU is the first comprehensive supervisory MOU to be signed by the SEC since the start of the financial crisis. The SEC currently has comprehensive supervisory MOUs with the securities regulators in the United Kingdom, Germany and Australia.

3. The Regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers.

4. The Regulator should adopt clear and consistent regulatory processes.

5. The staff of the Regulator should observe the highest professional standards, including appropriate standards of confidentiality.

6. The Regulator should have or contribute to a process to monitor, mitigate and manage systemic risk, appropriate to its mandate.

7. The Regulator should have or contribute to a process to review the perimeter of regulation regularly.

B. Principles for Self-Regulation

9. Where the regulatory system makes use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, such SROs should be subject to the oversight of the Regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities.

C. Principles for the Enforcement of Securities Regulation

10. The Regulator should have comprehensive inspection, investigation and surveillance powers.

11. The Regulator should have comprehensive enforcement powers.

12. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program.

D. Principles for Cooperation in Regulation

13. The Regulator should have authority to share both public and non-public information with domestic and foreign counterparts.

14. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts.

15. The regulatory system should allow for assistance to be provided to foreign Regulators who need to make inquiries in the discharge of their functions and exercise of their powers.

E. Principles for Issuers

16. There should be full, accurate and timely disclosure of financial results, risk and other information which is material to investors’ decisions.

17. Holders of securities in a company should be treated in a fair and equitable manner.

18. Accounting standards used by issuers to prepare financial statements should be of a high and internationally acceptable quality.

F. Principles for Auditors, Credit Ratings Agencies, and other information service providers

19. Auditors should be subject to adequate levels of oversight. 21. Audit standards should be of a high and internationally acceptable quality.

22. Credit rating agencies should be subject to adequate levels of oversight. The regulatory system should ensure that credit rating agencies whose ratings are used for regulatory purposes are subject to registration and ongoing supervision. G. Principles for Collective Investment Schemes

23. Other entities that offer investors analytical or evaluative services should be subject to oversight and regulation appropriate to the impact their activities have on the market or the degree to which the regulatory system relies on them.

24. The regulatory system should set standards for the eligibility, governance, organization and operational conduct of those who wish to market or operate a collective investment scheme.

25. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets.

26. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme.

27. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme.

28. Regulation should ensure that hedge funds and/or hedge funds managers/advisers are subject to appropriate oversight.

H. Principles for Market Intermediaries

29. Regulation should provide for minimum entry standards for market intermediaries.

30. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.

31. Market intermediaries should be required to establish an internal function that delivers compliance with standards for internal organization and operational conduct, with the aim of protecting the interests of clients and their assets and ensuring proper management of risk, through which management of the intermediary accepts primary responsibility for these matters.

32. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk.

I. Principles for Secondary Markets

33. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight.

34. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants.

35. Regulation should promote transparency of trading.

36. Regulation should be designed to detect and deter manipulation and other unfair trading practices.

37. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption.

38. Securities settlement systems and central counterparties should be subject to regulatory and supervisory requirements that are designed to ensure that they are fair, effective and efficient and that they reduce systemic risk