FASB proposal to report more repo detail

Reporting on repurchase agreements could get more accurate under a proposal from U.S. and European accounting boards that would require more detailed disclosure.

Currently U.S. companies can net repo borrowing with repo lending and report only the difference, when the deals are made with the same party. Under the new proposal, most of that netting would not be allowed. The company would have to report its gross amount of repo borrowing and lending.

This regulation could potentially reveal for the first time the true size of the U.S. repurchase market. The new rule would also restrict netting of derivatives.

The Financial Accounting Standards Board and the International Accounting Standards Board released the proposal January 28 and are seeking comments until April 28.

Even though the repurchase market is one of the largest financial markets in the world, was the site of the most virulent systemic panic during the financial crisis of 2007 and 2008, and supplies much of the leverage in the shadow banking system, companies don’t have to report their full repo activity and in the U.S. no one tracks it regularly. In Europe, the European Repo Council of the International Capital Market Association surveys the European repo market twice a year.

It’s “still unclear” how many assets and liabilities would be unveiled with the elimination of repo netting, according to a report by Credit Suisse analysts. The analysts said netting of derivatives would add $7 trillion to company balance sheets, increasing assets by 26 percent and liabilities by 33 percent, mainly at derivatives giants Bank of America, Citigroup, Goldman Sachs, JP Morgan and Morgan Stanley.

“We are not big fans of netting on the balance sheet, as we have highlighted in past research on a number of topics (e.g., pensions),” the Credit Suisse analysts reported. “From our perspective it’s simple, assets should be reported as assets to give investors a better idea as to the resources available to generate cash flow and liabilities should be reported as liabilities so that investors understand the potential claims on cash flow. In our view netting of assets and liabilities on the balance sheet obscures the amount of leverage a company may have taken on and the amount of risk that it is exposed to. That said, we do think the net information is helpful in understanding credit risk and should be disclosed.”

The Wall Street Journal reported the proposal but focused entirely on derivatives and never mentioned that the repurchase market would be affected.