U.S. Accounting Group Plans to Tighten Repo Deal Rules

The U.S. Financial Accounting Standards Board proposed tightening rules for repurchase agreements after investors raised concerns that borrowers can use the transactions to conceal risks.

Under the proposals, almost all repurchase agreements would be treated as borrowings, the Norwalk, Connecticut-based board said in a statement yesterday. The plan, which is open to public feedback, narrows the transactions that can be treated as sales.

Repurchase agreements are contracts where one investor agrees to sell a security and then buy it back at a future date and a fixed price. Lehman Brothers Holdings Inc. and MF Global Holdings Ltd. used a type of repo before their failures to appear healthier than they were, bankruptcy officials and lawmakers have said.

“Investors have raised concerns that current accounting and disclosures for repurchase agreements do not appropriately reflect the transferor’s obligations and risks resulting from those transactions in certain circumstances,” FASB Chairman Leslie Seidman said in the statement.

The proposal would eliminate the distinction between agreements that settle before maturity and those that settle at the same time as the transferred asset matures. As a result, both types of transactions would be accounted for as secured borrowings, according to the statement.

Shadow Banking

Global financial regulators have sought to rein in so-called shadow-banking activities, which include repos.

The Financial Stability Board, a global financial policy group comprised of regulators and central bankers that reports to the Group of 20 nations, estimated last year that the U.S. repo market may be worth as much as $2.6 trillion.

Repo trades “can pose a risk to financial stability by aiding the build-up of excessive leverage and maturity transformation outside the reach of prudential liquidity and capital regulation,” the FSB said in a report published in November.

The board proposed that regulators implement minimum standards for calculating losses on the different types of collateral used in the transactions.

MF Global, the U.S. brokerage that collapsed last year, bought European sovereign debt to use as collateral for borrowings in repurchase-to-maturity transactions. Under current accounting rules, the New York-based firm didn’t have to show the assets on its balance sheet because it no longer had control of them, according to a November report by Republicans in the U.S. House of Representatives.

A bankruptcy examiner found that Lehman Brothers, the U.S. investment bank that collapsed in 2008 sparking a global credit contraction, used so-called Repo 105 transactions to move as much as $50 billion temporarily off its balance sheet to convince investors it wasn’t carrying too much debt.

The accounting board’s move is its second attempt at tightening the rules and follows a revamp in April 2011. The proposal called for public comments by March 29 and may still be changed.

Before it's here, it's on the Bloomberg Terminal.