Regulatory Reporting and Capital Treatment of Derivatives under FAS 133
February 4, 1999
Circular No. 11134

To the Chief Executive Officers of All State Member Banks and Bank Holding Companies in the Second Federal Reserve District:

On December 29, 1998, the Board of Governors of the Federal Reserve System and the other federal banking agencies ("Agencies") issued a joint release and interim regulatory reporting and capital guidance on the Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133) for banks, bank holding companies, and thrift institutions that adopt FAS 133 early. (Banking organizations are not required to adopt FAS 133 until fiscal years beginning after June 15, 1999.)

This new accounting standard requires that all derivatives be recorded on the balance sheet as assets or liabilities at fair value. It also significantly alters the accounting for derivatives used for hedging purposes and for financial instruments with specific types of embedded derivatives. The requirements set forth in FAS 133 may affect a banking organization's recorded amount of assets, liabilities, and equity capital.

The joint release and interim guidance (pdf - 21kb) , explain how derivatives should be reported by early adopters of FAS 133 in the December 1998 Reports of Condition and Income (Call Reports), Consolidated Financial Statements for Bank Holding Companies (FR Y-9C), and Thrift Financial Reports (TFR). The interim guidance also describes how derivatives should be treated under the Agencies' existing capital standards by banking organizations that adopt FAS 133 early and how the implementation of this accounting standard may affect the risk-based and tier 1 leverage capital ratios.

Questions on this matter may be directed, at this Bank, to Wendy Grant-Mungroo or Kim Olson.