THE CLEARING HOUSE
June 30, 2004
Office of the Comptroller of the Currency
Public Information Room
250 E Street, S.W.
Washington, DC 20219
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Steven F. Hanft
Clearance Officer, Legal Division
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429
Office of Thrift Supervision
Information Collection Comments
Chief Counsel’s Office
1700 G Street, N.W.
Washington, DC 20552
Re: Consolidated Reports of Condition and Income (Call Report)
Revisions Joint Notice and Request for Comment
Ladies and Gentlemen:
The New York Clearing House Association L.L.C. (“The Clearing House”),
an association of major commercial banks1, appreciates the opportunity to comment
on the proposed revisions (the “Proposal”) to the Consolidated Reports
of Condition and Income (“Call Report”) jointly published by the
Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation,
the Federal Reserve Board and the Office of Thrift Supervision (the “Agencies”)
in the April 29, 2004, Federal Register. With regard to this proposal, The Clearing
House members are particularly concerned about the Agencies’ proposed change
to the reporting of “when-issued” securities transactions in
the Call Report from settlement date accounting to trade date accounting.
on this issue are set forth below.
The Agencies refer in the Proposal to a “potential difference in the accounting
for ‘when-issued’ securities between the Call Report instructions
and generally accepted accounting standards,” noting that the American
Institute of Certified Public Accountants’ Audit and Accounting Guide for
Banks and Savings Institutions (the Bank Audit Guide) indicates that purchases
and sales of securities are to be recorded on the balance sheet as of the trade
date. The Proposal further states that “GAAP and industry practice
seem to predominately follow trade date accounting for such securities.”
The members of The Clearing House feel the reference to industry practice is
not indicative of what true industry practice is. Among The Clearing House banks
themselves, there is a diversity of practice regarding the accounting for when-issued
securities. Additionally, the members believe a statement that US GAAP requires
accounting for when-issued securities on a trade-date basis is not true.
The US GAAP reference in the Bank Audit Guide is for treatment of securities
in general and does not specifically address when-issued securities. In fact,
there is no specific accounting guidance for when-issued securities that do not
fall within derivative guidance. Many of the members of The Clearing House feel
a when-issued security is different than a security as defined in specific accounting
literature (Statement of Financial Accounting Standards (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities) because of its contingent
nature and its similarities to a forward contract.
Because of these factors, the application of this guidance in practice follows
different forms, particularly for the balance sheet presentation of the when-issued
securities. In certain situations, an institution may record the when-issued
security as an asset at trade date and will record a liability for the related
obligation to the seller. In other situations, the obligation may be recorded
as a contra-asset. In both of these situations, market value changes for securities
classified as trading are reflected in the income statement from trade date;
for securities classified as available for sale, market value changes are reflected
in other comprehensive income from the trade date. Alternatively, the same impact
of the latter treatment may be achieved by recording the asset only after settlement,
but reflecting market value changes from trade date.
To further clarify these thoughts, we summarize below certain accounting literature
that does relate to when-issued instruments.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, provides a scope exception in paragraph 59a for when-issued securities “as
a regular-way security trade if (1) there is no other way to purchase or sell
that security, (2) delivery of that security and settlement will occur within
the shortest period possible for that type of security, and (3) it is probably
at inception and throughout the term on the individual contract that the contract
will not settle net and will result in physical delivery of a security when it
is issued.” Thus, when-issued transactions that do not meet these criteria
are accounted for as derivatives and subject to the other accounting guidance
in SFAS 133 and the normal treatment of derivatives in the Call Report.
The 2003 edition of the Depository and Lending Institutions Audit Guide notes
in paragraph 7.92 that “regular-way purchases and sales of securities should
be recorded on the trade date. Gains and losses from regular-way security sales
or disposals should be recognized as of the trade date in the statement of operations
for the period in which securities are sold or otherwise disposed of.” However,
SFAS No. 133, paragraph 58(a) notes that “This Statement does not change
whether an entity recognizes regular-way security trades on the trade date
or the settlement date.”
As noted earlier, the Bank Audit Guide does not specifically address when-issued
securities. However, the 2003 Broker and Dealers in Securities Audit and
Accounting Guide (the Broker-Dealer Guide) does and notes the conditional
nature of these
instruments in paragraph 1.59, which states that when-issued transactions
upon the issuance of the securities.” Further, in Paragraph 7.36, the
Broker-Dealer Guide notes:
Certain transactions (for example, those for when-issued securities) are, by
their nature, conditional; that is, their completion is dependent on the occurrence
of a future event or events… For those transactions in which completion
is assured beyond a reasonable doubt, the recording of the transactions
and related profit and loss should be the same as for unconditional transactions.
transactions in which completion is not assured beyond a reasonable doubt,
only mark-to-market losses should be provided, while market-value gains
deferred until the uncertainty is eliminated.”
In summary, because of the lack of specific US GAAP guidance and the nature of
when-issued securities, many industry participants do follow settlement date
accounting for the balance sheet. In fact, a majority of the members of The Clearing
House follow settlement date accounting for when-issued securities.
Therefore, we suggest the Agencies revisit their conclusion for the treatment
of when-issued securities, as we do not believe it is consistent with US GAAP
and industry accounting practices.
We would be happy to meet with the Agencies
to discuss this issue further.
Thank you for considering the views expressed in this letter. If you have any
questions, please contact Norman R. Nelson, General Counsel of The Clearing House,
at 212 612-9205.
1 The members of The Clearing House are Bank of America,
National Association, The Bank of New York, Bank One, National Association,
Citibank, N.A., Deutsche Bank Trust Company Americas, Fleet National
Bank, HSBC Bank USA, JPMorgan Chase Bank, LaSalle Bank National Association,
U.S. Bank National Association, Wachovia Bank, National Association,
and Wells Fargo Bank, National Association.