Editor's letter

International Accounting Standard 39 (IAS 39) has posed unprecedented challenges for corporate treasurers and banks in Asia. While Asian corporates are certainly seasoned users of derivatives, the same can't be said when it comes to accounting for them. One effect of implementing the new standard has been that corporates in Hong Kong and Singapore, for example, have become much more conservative in using derivatives, opting for plain-vanilla contracts and shying away from exotic structures because accounting for the embedded options can be a headache.

The standard has also made the job of a derivatives salesperson much more difficult. Selling a product nowadays requires the seller to be well-versed on IAS 39 issues and its implications on the balance sheet. Some banks have set up specialist accounting units to deal with IAS 39 issues and provide such advice to clients. We're likely to see banks placing yet more focus on this area.

Another effect of IAS 39 has been a surge in restructuring by banks of constant maturity swap (CMS) spread products that have incurred mark-to-market losses due to an inversion of the US swap curve. In this issue's cover story, we look at how dealers have been helping clients to stem losses from these trades.

The spotlight this month is also on India, where the government is debating on a proposed amendment to the Reserve Bank of India Act to legalise over-the-counter (OTC) derivatives. Despite a growing rupee swaps and options market, OTC derivatives are technically illegal under the Indian Contract Act.

China had faced a similar issue when the derivatives market first started, but resolved the problem early on with derivatives guidelines issued by the banking regulator in 2004 that gave legal certainty to OTC transactions.

Bankers are still awaiting clarification from regulators in India, which hopefully will come soon. The Reserve Bank of India will also be making its annual policy statement in mid-April, which may reveal more on the regulatory front.

The rupee options market is tiny, with daily trading volume estimated at $150 million onshore and $50 million offshore. But once a framework is in place, the OTC market may well see explosive growth. That potential has been seen in turnover on the National Stock Exchange, the world's busiest stock futures exchange. Hedging requirements are huge and growing, and demand for structured products could potentially be enormous when the derivatives market opens up.