What is GASB’s definition of a derivative?
Jim–Under GASB 53 a derivative is defined as a financial arrangement in which two parties agree to exchange payments with one another. They define four characteristics that must occur for the item to be considered a derivative. Number one, one or more reference rates have to be used in the contract. So something like in an interest rate derivate, LIBOR, SIFMA, MMD. In a commodity derivative there’s the Henry Hub National Gas Index, or the New York Harbor Index for heating oil. Those are typical type reference rates. The second item is notional amounts. Notional amounts can be dollars in an interest rate derivative, or currency units in a currency hedge, or commodity quantities like barrels of oil, for example, if the governmental entity is hedging that particular commodity. Third is leverage. In other words in order to enter into the contract no cash or initial investment is required. The transactions occur on paper for the purpose of hedging a particular risk. And the fourth or last i
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