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Capital Markets

IASB rules could curtail sales of complex derivatives

by John Ferry

International Accounting Standards Board (IASB) rules that require financial instruments to be accounted for at fair value, known as IAS 39, could have a detrimental effect on sales of complex derivatives products, traders have warned.

“A disconnect could develop between the accounts used for day-to-day management and to compensate staff, and the profits that are being reported to shareholders”
Tony Cliffortd, Ernst & Young

For any profits on a trade to be recognized on the balance sheet on a ‘day one’ basis (as soon as the trade is done) IAS 39 requires that all input variables to the pricing model be recognizable measurements. “One of the rules in IAS 39 is that you’re only allowed to take profit on day one, when you first enter into a trade, to the extent that all the inputs into your model are observable,” says Tony Clifford, London-based partner and IAS 39 expert at Ernst & Young. Problems occur when banks have to put a value on complex structured products where there is no clear market for some of the numbers that go into pricing them.

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