Fitch Backs FASB to Outlaw Repo Agreements

Friday, March 30, 2012 Print Email

Ratings giant Fitch has backed a decision by the Financial Accounting Standards Board's (FASB) to add an item to its agenda to revise the accounting standards for repurchase, or repo, agreements.

The FASB decision comes after the recent collapse of derivatives broker MF Global through ‘repo-to-maturity’ transactions. Back in 2011, the FASB revised its standards for repurchase agreements in response to the use of repurchase transactions which helped cause the collapse of financial-services firm Lehman Brothers.

A Fitch Ratings spokesman said: ‘We continue to believe that greater transparency in this area of accounting is important. FASB is once again examining repo accounting and disclosure requirements following the collapse of MF Global. The standard setter had visited the subject after the Lehman bankruptcy to address and eliminate the repo transactions dubbed repo 105.

‘Some firms are known to have used repo-to-maturity (RTM) transactions to transfer assets and liabilities off balance sheets while retaining both credit and market risk. This effectively masks the overall financial risk the firm is actually taking and could also set regulators off track.’

Lehman Brothers used ‘Repo 105’- a repurchase agreement where a short-term loan is classified as a sale. The money obtained through this ‘sale’ is used to pay off debt, enabling the company to look like it has reduced its leverage by temporarily paying down liabilities, to reflect on the company’s published balance sheet. After its financial reports are published, the company borrows more cash and repurchases the original assets.

Fitch said the accounting model for repo to maturity is flawed and it expected the FASB to ‘change the assessment of effective control and will likely disallow RTMs in the future’.

A decision is expected within the year.

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