The Financial Accounting Standards Board will iron out the last few details in the proposed amendment to its controversial new standard to account for transfers of assets, including what one staffer called "subtle but important refinements" to the language on accounting for pledged collateral.

The changes come in the wake of several letters from key players in the industry, including Chase, J.P. Morgan, and Merrill Lynch, which said the changes could have more significance than previously suspected.

In the case of deals where collateral is pledged and the party holding the collateral is in a position to utilize it by repledging it to yet another party or selling it with the expectation of buying it back, statement 125 requires that in certain circumstances the pledged collateral has to be recorded as an asset by the secured party and the obligation to return it as a liability. Although the two balance each other out, it inflates the balance sheet. However, sometimes the party pledging the collateral requests that it be available for return on short notice. If this is the case, the party holding the collateral is constrained from utilizing the asset and does not have to record it on its balance sheet. To take advantage of this loophole, most securitizers have structured their deals to include the short-notice requirement. In reality, however, the party holding the asset was not really constrained, according to FASB. Securitizers often used the asset and simply charged the other party whatever the cost was of getting the asset back.

The FASB proposed to close this loophole by requiring the party holding the collateral to record the asset. Wall Street protested the proposed revision, which would affect the repo, securities lending and the mortgagebacked securities markets. The Wall Street firms cited unforeseen effects on other types of collateral arrangements that the board had not considered affected, including overnight collateral arrangements, open collateral arrangements, which roll over every day, and securities posted on margin. The board will discuss those issues March 24, which is expected to be the last meeting on the project to amend Financial Accounting Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. After that meeting, the board is expected to pass a draft of the amendment, which will be released for public comment.