Can Accountants Demystify Derivatives?

• Date: 01 September 2014
• Author: Louis P. Le Guyader
• DOI: http://doi.org/10.1002/jcaf.21988
• Published date: 01 September 2014

49

© 2014 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.21988

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Louis P. Le Guyader

This article is the second of a two-part series

that addresses the claim that accountants do

not understand derivatives. It provides pointers

accountants can use to record derivatives even

when actual mastery over them is elusive. The

author then proposes a generalized “derivatives

knowledge process” for accountants—to truly

demystify derivatives.

© 2014 Wiley Periodicals, Inc.

C an Accountants Demystify Derivatives?

The Obama admin-

istration has

marked the WIN

column in its regulatory

playbook based on the

activation of Dodd-

Frank rules for certain

derivatives.

As a new president,

Mr. Obama had rued

the role of derivatives

traders in creating the

2008 credit crisis. His

efforts to rein them in under

Dodd-Frank included a new

clearinghouse mechanism for

certain over-the-counter deriva-

tives. The Commodity Futures

Trading Commission (CFTC),

which oversees these rules,

recently asserted a role as the

putative “global derivatives reg-

ulator,” to the chagrin of many

in the global capital markets.

The formation of the CFTC

clearinghouses highlighted the

difficulty of corralling deriva-

tives, and their traders and users,

into order. The CFTC experi-

ence helps accountants under-

stand what knowledge they need

about derivatives.

This article is the second of a

two-part series that addresses the

claim that accountants do not

understand derivatives. It pro-

vides pointers accountants can

used to record derivatives even

when actual mastery over them

is elusive. The article proposes a

generalized “derivatives knowl-

edge” process for accountants.

THE KNOWLEDGE THAT IS

NEEDED

There remains a vast

“knowledge chasm” between

derivative experts and the

accounting profession. Three

aspects of derivatives seem

to dominate this knowledge

problem: first and foremost,

the setting for derivatives is not

uniform; second, the training of

derivatives experts in accounting

is limited; and third, expertise

gained in the regulatory setting

about derivatives may not be

well known by the derivative

contract writers, the legal com-

munity.

It is an understandable mis-

take to believe that the market

and regulatory

infrastructure that

supports derivatives

is uniform. It is not.

Gaining knowledge

about derivatives can

still occur through

a cohesive process,

even though their

setting is fragmen-

tary. In this article,

I suggest the items

that accountants

should master themselves, and I

provide break points where most

accountants should preferably

rely on expertise outside the pro-

fession.

Discussions about deriva-

tives are generally silent on the

vast differences in derivative

types depending on the market

in which they are found and the

geography in which they are cre-

ated, traded, valued, and settled.

THE DERIVATIVE CONTRACT

Accountants must always

read the derivative contract. An

exchanged-traded or clearing-

house derivative will normally

be documented under uniform

rules. Such was also the case

for swaps prior to Dodd-Frank

clearinghouses, where global

market practice demanded

International Swaps and