FASB Rejects Preset Coverage Ratios

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The Financial Accounting Standards Board has rejected the use of preset hedging coverage ratios, or matrixes, a method that has been preferred by many hedging professionals.

The matrix approach, favored by mortgage service providers, allows mortgage companies to hedge a percentage of their servicing portfolios and increase their heding positions in response to changing interest rates.

The FASB has announced that this hedging approach is not acceptable under FASB statement number 133, which governs accounting for derivative instruments and heding activities.

The FASB has agreed to move forward on a project that will allow mark-to-market accounting for mortgage servicing rights, and approach that the board feels will "eliminate the need for hedge accounting under Statement 133," according to a letter written by the FASB staff. It is expected that implementation of this project will occur late in 2001.

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