Counting the Beans

Article excerpt

Capitalize on the evolution of bond accounting systems

Over the years, some bond accounting systems underwent major changes to keep up with an increasing number of complex investment products, regulatory policies and management practices. Microcomputers and online service providers also changed the way bond accounting services are delivered.

This column outlines major changes that have occurred and the impact these changes have on today's bond accounting and management systems.


Beginning in the mid-1980s, bankers and other investors looking for higher portfolio income took advantage of growth in mortgagerelated securities. That trend continued in the 1990s, first through the expansion of mortgage-related securities and then by the growth in structured notes offered by the Federal Home Loan Bank, Fannie Mae, Freddie Mac, etc.

While the industry recognized the income advantages of these new investment products, it also learned that the new products created new accounting, management and regulatory challenges. Proper accounting for mortgage-related securities requires average life and amortization and accretion schedules to be estimated, and periodically re-estimated, due to their variable prepayments. Consequently, managing investment portfolio yield and cash flows became even more complex in both mortgage-related securities and callable bonds.

New regulatory issues included the development of average lives; of stress tests to evaluate securities' yields; and of price fluctuations under rate changes of plus or minus 300 basis points. Then the Financial Accounting Standards Board approved new rules to place each security into one of three categories: held to maturity, available for sale or trading. The FASB rules also dictate the accounting treatment of securities that are moved from one of these categories to another.

Some bankers are concerned that their lagging bond-accounting services might offset some of the income advantages of the newer investments. They are worried about letting the tail (bond accounting) wag the dog (portfolio income and objectives). As a result, prominent bond accounting software providers-such as Sungard Trust Systems Inc. in Charlotte, N.C., and Thomson Financial Services in Boston, Mass.-developed modern accounting systems tailored to address these various issues.


While some banks still rely on computer systems dating from as far back as the 1970s, most bankers have either converted to newer software or are considering such upgrades. Most of today's modern accounting systems track investments-including mortgage-related securities-accurately and almost painlessly. The real news in investment portfolio and bond accounting services is the improvement of management information, flexibility, customization, electronic delivery and customer service.

What should you expect from an up-to-date bond accounting management system? …