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Professor to Wall Street: You're Doing Swaps Accounting Wrong

  • Banks use a broken method for derivative trades, paper argues
  • `If you follow the math you can’t reach any other conclusion'
A Wall Street sign is displayed outside the New York Stock Exchange (NYSE) in New York.
Photographer: Michael Nagle/Bloomberg

The world’s largest banks are incorrectly accounting for their swaps trades, locking up money that could otherwise be paid out as dividends to their shareholders, according to a bold new academic paper.

The transactions are funded with money that’s borrowed from the bank’s treasury, and currently that lending cost is deducted from the value of the derivatives. That’s a mistake, according to Darrell Duffie, one of the report’s authors who argues banks should instead charge their trading partners more up-front for the deals, freeing up cash.