Derivatives Implementation Group

Statement 133 Implementation Issue No. J6

QUESTION

Upon initial application of Statement 133, may a company separate a currency swap that has two fixed legs (for example, a receive-fixed-EUR-amount, pay-fixed-USD-amount swap) into derivative components in applying paragraph 49 and related footnote 13?

BACKGROUND

Footnote 13 to paragraph 49 of Statement 133 states:

     For a compound derivative that has a foreign currency exchange risk component (such as a foreign currency interest rate swap), an entity is permitted at the date of initial application to separate the compound derivative into two parts: the foreign currency derivative and the remaining derivative.

The tentative guidance on Statement 133 Implementation Issue No. J5, "Floating-Rate Currency Swaps," provides that, only upon initial application of Statement 133, a company may separate a currency swap that has two floating-rate legs into three derivative components: a fixed-to-fixed currency swap and two interest rate swaps (one in each currency). By analogy, it is suggested that, upon initial application of Statement 133, a currency swap that has two fixed legs could be separated into three derivative components: a currency swap that has two floating-rate legs and two interest rate swaps (one in each currency).

RESPONSE

The guidance in footnote 13 to paragraph 49 of Statement 133 and Issue J5 applies only to the transition provisions for compound derivatives. Unlike a currency swap that has two floating legs, , a currency swap that has two fixed legs is not a compound derivative as that term is used in footnote 13. For a currency swap with two fixed legs, changes in interest rates do not directly impact the cash flows under the contract because the interest rates that determine the amount of each currency that is payable are fixed at the inception of the contract. Therefore, a currency swap that has two fixed legs may not be decomposed into two interest-rate-based derivatives and a foreign-exchange-rate-based derivative.

The above response has been authored by the FASB staff and represents the staff's views, although the Board has discussed the above response at a public meeting and chosen not to object to dissemination of that response. Official positions of the FASB are determined only after extensive due process and deliberation.