Structured finance arrangements

  • News default Image

21 Apr 2005

In his Remarks before the Bond Market Association in New York yesterday, SEC Chairman William H.

Donaldson discussed, among other things, accounting issues relating to structured finance arrangements. Mr. Donaldson's comments are relevant under IFRSs as well as under US GAAP:

Structured finance

The final regulatory initiative I'd like to touch on concerns the complex structured finance activities that financial institutions engage in with their corporate clients. Last May, the Commission joined with federal banking regulators in requesting public comment on a proposed interagency statement concerning these activities. This guidance emphasized the need for financial intermediaries to be diligent in avoiding involvement with products that are designed to evade an accounting or legal requirement.

Let's be clear where the common ground is. I think we all agree that we cannot go back to the days of Nigerian barge transactions, Raptors and Jedi's, with bankers, lawyers and accountants working feverishly to design exquisitely complicated transactions that serve no legitimate business purpose, but that achieve a favorable financial statement result. There is now a widespread understanding that financial services professionals are accountable, reputationally and sometimes legally, for the transactions they help their corporate clients design and execute.

Structured finance transactions pose no problem for the markets or market participants when they are properly disclosed and serve legitimate business ends - such as effecting a real transfer of risk, a real hedge of a liability, or a real influx of third-party capital. Corporations often need complicated structures to achieve these goals in the most efficient manner possible, and there is nothing wrong with bringing together the brightest financial, legal and accounting minds to create the optimal strategy for a corporate client. These same professionals simply must realize that they cannot ignore the corporation's real reason for wanting to do the transaction. We need to be clear that engineering a particular accounting result is not by itself a legitimate business objective.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.