Plan for US capital markets reform

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27 May 2009

The Committee on Capital Markets Regulation has published The Global Financial Crisis: A Plan for Regulatory Reform.

The Committee is an independent and nonpartisan research organisation dedicated to improving the regulation of US capital markets. The Committee comprises 25 leaders from the investor community, business, finance, law, accounting, and academia. Two IASC Foundation Trustees (Samuel A DiPiazza, Jr and Robert R Glauber) serve on the Committee. The 25 members also include William C Freda, Vice Chairman and US Managing Partner of Deloitte, and William G Parrett, former Global CEO of Deloitte. The report is the result of a year-long examination into the global financial crisis and the key deficiencies in the regulatory system. Critical topics addressed include capital requirements, resolution procedures, the regulation of hedge fund and private equity, the securitisation process, credit default swaps and other derivatives, disclosure and accounting standards, credit rating agency practices, and the overall US regulatory architecture. The report makes 57 practical and specific recommendations for regulatory reform, several of which refer to the IASB and the FASB. Chapter 4 Enhancing Accounting Standards examines two accounting issues raised by the financial crisis: the use of fair value accounting and the requirements for consolidation. Click to download: Presented below are summaries of the four accounting-related recommendations.

Recommendation 43. Study How FVA Can Be Improved. The Committee believes 'fair value' accounting is a problematic standard in inactive or distressed markets because it conflates the concepts of market value and credit model value and may confuse investors. We do not believe the problem has been solved by FASB's latest guidance. We recommend continuing to study how 'fair value' accounting can be improved. We further recommend that this be done on a joint basis by FASB and IASB, so the two major accounting standard setters are consistent in their approach.

Recommendation 44. Supplement FVA with Dual Presentation of Market and Credit Values. To supplement fair value reporting, the Committee proposes that FASB require an additional dual presentation of the balance sheet for Level 2 and Level 3 assets using credit value and market value independently of each other. Accompanying this dual presentation, firms should also disclose their underlying valuation methodologies. In the case of credit value, this includes sharing modeling techniques, estimates, assumptions, and risk factors. In the case of market value, the disclosures should reveal what market prices were actually relied on.

Recommendation 45. Allow The Fed to Use a Non-GAAP Methodology. As for regulatory accounting, the Committee believes the Fed should not be limited to following US GAAP and should instead be free to choose another method (credit value, market value, or some combination of both) it deems appropriate.

Recommendation 46. Implement FIN46R. As for consolidation, we agree with the FIN 46R approach because it focuses on the issue of control. [FIN 46R is FASB's revised standard on consolidation of special purpose vehicles.]

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