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Financial instruments — Macro hedge accounting

Date recorded:

The Board continued their discussion around development of a macro hedge accounting model. The staff held an education session for the Board where they presented a summary of the topics covered during previous education sessions and how they interrelate. During those prior sessions, the staff have covered steps one through six of the eleven steps identified in their workplan. The staff noted that steps seven through eleven will be discussed at future meetings.

The focus of the discussion at this meeting was on the development of a revaluation model for the hedged item for changes in the hedged risk. The approach aims to revalue the entire risk portfolio of assets and liabilities (including demand deposits) that make up the risk position hedged by risk management (a 'net designation' approach). Under this approach, the hedged position would be revalued through profit or loss for changes in the hedged risk (e.g., the benchmark interest rate) and as a result a mismatch would arise in profit or loss to the extent under or overhedging arose when compared to the hedging derivatives. The staff provided the Boards with an illustrative example of a financial institution managing interest rate risk for their net risk position comprised of loan assets offset by deposit liabilities and debt. The example highlighted how the effectiveness of a risk management objective of stabilising net interest margin could be transparent under a net portfolio valuation approach.

One of the Board members highlighted the table included in the staff example and questioned whether such a table would be part of the proposed disclosure requirements. The staff responded that they would be bringing separate papers on presentation and disclosure during future meetings but that such a table could be part of that package. Another Board member suggested that important information was missing from the table, that being the gain or loss on items prepaid and the gain or loss associated with differences in the benchmark interest rate for the assets and liabilities.

One IASB member told the staff he wanted to better understand how the macro hedge accounting model being developed would be linked to the general hedge accounting model. This comment transitioned into a discussion on the operationality of the model and whether individual items in the portfolio would require tracking.

Another IASB member suggested that at some point the Board needs to consider the model being developed to other portfolio hedging strategies outside of managing interest rate risk. The staff responded that other strategies (e.g., foreign currency, commodities, etc.) would work in a similar manner but the staff will address other strategies during future meetings.

The staff indicated that the next meeting will focus on the behaviour and modelling of core demand deposits and some of the implications for the hedging model being developed.