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Asset and liability offsetting

Date recorded:

Education session with representatives of ISDA

The IASB and FASB hosted an educational session where members of the International Swaps and Derivatives Association (ISDA) and members of clearinghouses presented on the topic of collateral and the forms of collateral posting and settlements that occur through various clearing houses as well as through OTC contracts. No decisions were made as part of the education session.

The educational sessions was followed by a joint meeting where the Boards discussed the unit of account for offsetting and collateral arrangements.

Unit of account

Constituents have raised questions on the unit of account for applying the offsetting proposals in the exposure draft as the exposure draft did not specify unit of account guidance. The staff noted that this issue was of particular importance for the utility industry. Constituents have raised several ways in which the guidance in the exposure draft could be applied including:

  • To a portfolio of financial assets and financial liabilities (when each of the instruments comprise a single cash flow)
  • To identifiable cash flows of financial assets and liabilities (a portion of a financial asset and a portion of a financial liability)
  • To individual financial asset and financial liabilities (i.e., offsetting a portion of a financial asset against an entire financial liability and vice versa)
  • To a portfolio of financial instruments (each comprising of multiple cash flows) with coinciding payment dates
  • To a portfolio of financial assets and financial liabilities when the instruments consist of multiple cash flows (without a variation margin system) and non coinciding payment dates
  • To a portfolio of financial assets and financial liabilities and the instruments consist of multiple cash flows (with a variation margin system) and non coinciding payment dates
  • To a portfolio of derivative financial assets and financial liabilities (under a master netting agreement).

 

Various Board members had differing views with how the offsetting criteria should be applied, some believing it should be at the financial instrument level with others feeling it should be at the individual cash flows level. However, those who believed that the individual cash flow level acknowledged that there may be operational difficulties in requiring application at this level. The Board made no decisions during this session, the staff acknowledged they would bring detailed papers to discuss the issue of individual cash flows vs. individual instruments and that portfolios would be considered separately.

Collateral

The IASB staff introduced the various types of collateral and how they may or may not be eligible for offsetting under application of the exposure draft should the general prohibition of offsetting collateral be amended. The IASB staff mentioned that both initial margin and contribution to default margin were forms of conditional right settlement (i.e., collateral held to protect against counterparty default) whereas the variation margin may be a form of legal settlement and therefore potentially eligible for the offsetting criteria. The Boards made no decisions during this session; it was simply an introductory session to set the basis for future discussions.

Correction list for hyphenation

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