ISDA Issues Response to IASB Draft on Interest Rate Benchmark Reform
ISDA issued a response to the IASB exposure draft on interest rate benchmark reform (ED/2019/1). The letter welcomes the steps taken by IASB to amend old and new standards on financial instruments, namely IAS 39 and IFRS 9. IASB had, in May 2019, proposed the Phase I amendments in response to the challenges posed by the interbank offered rates (IBOR) reform in relation to the uncertainty caused by the hedge accounting forward-looking rules of IFRS. The response of ISDA points out that IASB should accelerate the work to address the next phase of issues arising from IBOR reform.
The detailed responses are included as an appendix to the response letter. The response letter highlights that, while it will be necessary to provide some disclosure of how entities apply the relief, ISDA suggests any incremental disclosure over the one already required by IFRS 7 (Financial instruments: Disclosures) should be kept to a minimum. Quantitative disclosure should relate only to the nominal value of hedging instruments and hedged items to which the relief is applied.
ISDA requests IASB to consider Phase II in parallel with completing the Phase I amendments. The Phase II issues that are especially urgent are as follows:
- Clarification that entities can future-proof their hedge designations to reference a transition from an IBOR to a risk-free rate (RFR), so as to allow continuity of the hedge relationship.
- On transition from IBOR to a RFR, guidance that the consequential change to the hedge designation will not trigger the discontinuance of the hedging relationship.
- Relief from the retrospective hedge effectiveness test under IAS 39 for hedging relationships affected by IBOR reform. A condition for applying the relief would be that the underlying economic relationship between the hedged item and the hedging instrument is expected to continue until the transition is complete, similar to the requirements of IFRS 9. The relief would be helpful for the entities that are unable to change their hedge accounting approach to IFRS 9 due to the need to continue operating a macro cash flow or portfolio fair value hedge accounting model, which IFRS 9 cannot presently accommodate.
Keywords: International, Accounting, Banking, IFRS 9, IAS 39, Financial Instruments, Hedge Accounting, IBOR, Phase I, Phase II, Interest Rate Benchmarks, IASB, ISDA
Scott is a Director in the Regulatory and Accounting Solutions team responsible for providing accounting expertise across solutions, products, and services offered by Moody’s Analytics in the US. He has over 15 years of experience leading auditing, consulting and accounting policy initiatives for financial institutions.
CECL, IFRS 9, and IFRS 17 expert; credit risk and insurance risk specialist; strategic planning and credit analytics solutions consultant
CECL adoption expert; engagement manager for loss estimation, internal risk capability enhancement, and counterparty credit risk management
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