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 Issues Erratum for Phase 2 Package of Reporting Framework 3.0

    EBA published an erratum for the technical package on phase 2 of the reporting framework 3.0.

    April 08, 2021 WebPage Regulatory News
    News

    MAS Amends Notice on Related Party Transactions of Banks

    MAS amended Notice 643A that addresses requirements for banks to prepare statements of exposures and credit facilities to related concerns or parties.

    April 08, 2021 WebPage Regulatory News
    News

    ECB Amends Guideline on Euro Short-Term Rate

    ECB has published, in the Official Journal of the European Union, the Guideline 2021/565 on the euro short-term rate (€STR) and this guideline amends the previous ECB Guideline 2019/1265.

    April 07, 2021 WebPage Regulatory News
    News

    EBA Consults on Standards Related to FRTB-SA

    EBA launched a consultation on the draft regulatory technical standards on the list of countries with an advanced economy for calculating the equity risk under the alternative standardized approach (FRTB-SA).

    April 07, 2021 WebPage Regulatory News
    News

    PRA Proposes Rules Related to IRB Approach for Credit Risk

    PRA is proposing, via CP7/21, the approach to implementing new requirements related to the specification of the nature, severity, and duration of an economic downturn in the internal ratings-based (IRB) approach to credit risk.

    April 07, 2021 WebPage Regulatory News
    News

    BoE Outlines Regulatory Treatment of Recovery Loan Scheme of UK

    The UK government launched the Recovery Loan Scheme (RLS) as part of its continued COVID-19 support for UK businesses, as announced by HM Treasury on March 03, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    FSB Addresses G20 on COVID Measures, TBTF Reforms, and Climate Risks

    FSB published a letter, from its Chair Randal K. Quarles, to the G20 Finance Ministers and Central Bank Governors, ahead of their virtual meeting on April 07, 2021.

    April 06, 2021 WebPage Regulatory News
    News

    OSFI Unwinds Temporary Increase to Covered Bond Limit for Banks

    OSFI issued a letter to the deposit-taking institutions issuing covered bonds and announced the unwinding of the temporary increase to the covered bond limit for deposit-taking institutions, effective immediately.

    April 06, 2021 WebPage Regulatory News
    News

    EU Amends CRR and Securitization Regulation in Response to Pandemic

    To support recovery from the COVID-19 crisis, EU has published two regulations to amend the securitization framework, as set out in the Securitization Regulation (2017/2402) and the Capital Requirements Regulation or CRR (575/2013).

    April 06, 2021 WebPage Regulatory News
    News

    HM Treasury Announces G7 Agreement on Green Agenda Ahead of COP26

    HM Treasury announced that G7 Finance Ministers and Central Bank Governors met ahead of COP 26, the 2021 UN Climate Change Conference, and agreed on green agenda.

    April 06, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6821