ECB on Addressing Accounting Impact of Euro Risk-Free Rates Transition
ECB published a report that presents recommendations, from an accounting perspective, on the transition to new risk-free rates. This report by the private-sector working group on euro risk-free rates focuses on the implications, for IFRS and IAS, of the transition from the current euro overnight index average (EONIA) to euro short-term rate (€STR). It also focuses on the inclusion of fallback rates for EURIBOR based on a €STR-based term structure methodology. The recommendations cover three areas: the impact of the transition from EONIA to the €STR on the modification of contracts and hedge accounting, fallbacks for EURIBOR and hedge accounting, and general accounting and financial reporting.
While the report primarily focuses on the EU Benchmarks Regulation implications for hedge accounting related topics, it also touches on challenges for non-hedge related topics. Implications for national generally accepted accounting principles (GAAP) do not fall within the scope of the report. The key recommendations of the working group include the following:
- Preparers of financial statements should qualitatively and quantitatively assess whether changes to contracts resulting from the transition from EONIA to the €STR are substantial or non-substantial modifications.
- IASB should address the issue of modifications of contracts and the potential risk of derecognition owing to the benchmark regulation and provide preparers of financial statements with specific guidance on how to treat changes of contracts driven by the reforms in the light of the existing IASB guidance on modifications of floating rate instruments.
- Preparers of financial statements should assess whether EONIA component designated in hedge relationships is still reliably measurable throughout the transition.
- Preparers of financial statements should evaluate whether the change in hedged risk from the transition from EONIA to the €STR will lead to the discontinuation of existing hedging relationships.
- Preparers of financial statements should analyze the effect that a potential timing mismatch between the transition of the hedged item and the transition of the hedging instrument—as regards the switching of either the floating rate option or the discounting curve from EONIA to the €STR—would have on the effectiveness of the hedge relationship affected by the transition.
- From a financial accounting perspective, market participants should try to reduce variability in fallbacks between different product classes (including derivatives) to a minimum as this would reduce technical implementation challenges and accounting complexity.
- Preparers of financial statements should analyze if there are fallback scenarios under which hedge relationships need to be discontinued. They should also consider incorporating a provision for replacing benchmark interest rates in their hedge documentations for new contracts, and also, the risk of inconsistency when developing fallback provision triggers. This should be taken into account when amending existing contracts and setting up new contracts.
- Where EONIA or EURIBOR-based valuation curves are replaced by the €STR curve or a curve based on a €STR-based term structure methodology, the preparers of financial statements should assess the potential impact of a change in value for financial instruments measured at fair value on the day of transition.
- Preparers of financial statements should closely monitor the IASB project on IBOR reforms and any amendments or clarifications to the standards resulting from it.
To ensure that these recommendations are adopted by all market participants, the working group has created a financial accounting and risk management sub-group that comprises representatives from European and international credit institutions, consulting and accounting firms, clearing houses, and investment management firms and associations. ECB, ESMA, EC, and Financial Services and Markets Authority (FSMA) all act as observers in the sub-group. The recommendations of the working group are not legally binding. They nevertheless provide guidance for market participants preparing for the transition to risk-free rates.
Related Links
Keywords: Europe, EU, Accounting, Banking, Securities, €STR, EONIA, Risk-free Rates, Benchmark Fallbacks, EURIBOR, Hedge Accounting, Interest Rate Benchmarks, Benchmarks Regulation, IFRS, IASB, ECB
Previous Article
Bank of Finland Updates Supporting Documents for AnaCredit ReportingRelated Articles
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
ESMA Publishes 2022 ESEF XBRL Taxonomy and Conformance Suite
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
FCA Sets up ESG Committee, Imposes Penalties, and Issues Other Updates
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
FSB Reports Assess NBFI Sector and Progress on LIBOR Transition
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.
