Featured Product

    ECB on Addressing Accounting Impact of Euro Risk-Free Rates Transition

    November 05, 2019

    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

    Related Articles
    News

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News
    News

    EP Reaches Agreement on Corporate Sustainability Reporting Directive

    The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).

    June 21, 2022 WebPage Regulatory News
    News

    PRA Consults on Model Risk Management Principles for Banks

    The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.

    June 21, 2022 WebPage Regulatory News
    News

    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    June 21, 2022 WebPage Regulatory News
    News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News
    News

    EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.

    June 17, 2022 WebPage Regulatory News
    News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News
    News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News
    News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News
    News

    BCBS Issues Climate Risk Principles while HKMA Expresses Its Support

    The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.

    June 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8280