Dataline: Accounting for derivative instruments -- Treasury and financial reporting implications of using an OIS (not LIBOR) curve in the valuation of certain derivatives (No. 2011-30)

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Dataline 10/27/2011 by Assurance services
Dataline: Accounting for derivative instruments -- Treasury and financial reporting implications of using an OIS (not LIBOR) curve in the valuation of certain derivatives (No. 2011-30)

At a glance

Methodologies utilized to value derivative instruments continue to evolve, even for "plain vanilla" products. Some derivatives dealers have begun exploring valuing certain derivatives using an overnight index swap ("OIS") curve to discount the cash flows, rather than the LIBOR swap curve that has been used in the past. Derivatives to be valued using the OIS curve include collateralized derivatives and derivatives cleared through a central clearing house. This new method of valuation is the latest in a series of changes in recent years, which if implemented will result in changes for derivatives dealers across all aspects of their organizations and also for the counterparties to these trades. This Dataline addresses...

Methodologies utilized to value derivative instruments continue to evolve, even for "plain vanilla" products. Some derivatives dealers have begun exploring valuing certain derivatives using an overnight index swap ("OIS") curve to discount the cash flows, rather than the London Interbank Offered Rate ("LIBOR") swap curve that has been used in the past. Derivatives to be valued using the OIS curve include collateralized derivatives and derivatives cleared through a central clearing house. Because of the Dodd-Frank Act and Basel III, an increased number of swaps and options will be centrally-cleared or collateralized.

This new method of valuation is the latest in a series of changes in recent years, which if implemented will result in changes for derivatives dealers across all aspects of their organizations and also for the counterparties to these trades. End-users often rely on dealer quotations for their own valuations and also may be expected to post additional collateral as the new valuations become standard in the market. This Dataline addresses some of the key treasury and financial reporting implications for both dealers and end-users. Treasury, risk management, and financial reporting departments of companies with centrally-cleared or collateralized derivatives should assess the impact of the change to OIS discounting.