Pre-reform prevalence of final-sale accounting for repos

Ascertain the prevalence of final-sale accounting treatment for repo transactions prior to the post-2008 FASB reforms, quantifying how frequently institutions classified first-leg repos as sales rather than secured borrowings across the U.S. repo market before ASU 2011-03 and ASU 2014-11.

Background

Before the 2008 crisis, certain repo structures could be treated as first-leg final sales with the second-leg recognized as a forward contract, enabling removal of securities from balance sheets temporarily. High-profile cases such as Lehman’s Repo 105 and MF Global’s repo-to-maturity highlighted abuses and motivated FASB reforms that largely eliminated final-sale accounting for repos.

The paper indicates that despite these case studies, comprehensive evidence on how widespread final-sale accounting was across institutions and transactions prior to the reforms is lacking, making the historical prevalence an unresolved empirical question.