The Financial Accounting Standards Board (FASB) lifted a huge burden from MBS and ABS investors' shoulders last week by exempting those bonds from mark to market accounting requirements under FAS 155. Industry participants were concerned that FAS 155 contained accounting implications that would affect market liquidity and spreads for those securities.
Last week, the FASB voted 6-1 to approve an exception for ABS and MBS in tests for FAS 155, which govern accounting for certain hybrid financial instruments. The accounting rule required investors to perform tests on ABS and MBS to determine if they contained embedded derivatives as defined by FAS 133, the previous version of the rule. If the securities met those tests, then companies might have been required to apply mark to market accounting on prepayable MBS and ABS purchased at a discount, or apply mark to market on the embedded derivatives in the securities.