Question: On March 3, 2000, the Financial Accounting Standards Board, a crucial player in financial engineering problems, published a series of important new proposals concerning the accounting of certain derivatives. It is known as Statement 133 and affects the daily lives of risk managers and financial engineers significantly. One of the treasurers who is affected by the new rules had the following comment on these new rules: Statement 133 in and of itself will make it a problem from an accounting point of view to do swaps. The amendment does not allow for a distinction to be made between users of aggressive swap hedges and those involved in more typical swaps. According to Thomson Reuters IFR, this treasurer has used synthetic swaps to get around [the FAS 133].

a. Ignoring the details of swaps as an instrument, what is the main point in FAS 133 that disturbs this market participant?

b. How does the treasurer expect to get around this problem by constructing synthetics?