Dynamic Risk Management – Proposed project plan - Agenda paper 4

Background

In this paper, the Staff present a project plan for the development of an accounting model for dynamic risk management (DRM). As a reminder, one of the main objectives of the model is to provide better information about an entity’s DRM activities and to communicate management’s performance in this regard.

Proposed project plan

The Staff intend to develop the model in two phases. The first phase will focus on developing the core areas that are central to the model while the second phase will address areas that are extensions of concepts developed in the first phase. The Staff will test the core model at the end of the first phase with external stakeholders before proceeding onto the second phase.

Phase one will cover the following core areas:

1. Target profile. This will include defining the target profile, establishing the corresponding qualifying criteria and how the target profile is consistent with an entity’s risk management. The Staff will focus on using demand deposits and term loans as sources of funding for the target profile.
2. Asset profile. This will include defining the asset profile, establishing the corresponding qualifying criteria and designating items as part of the asset profile. The focus will be on financial assets measured at amortised cost.
3. DRM derivative instruments. The Staff will consider the criteria for designating derivatives as qualifying DRM hedging instruments and whether voluntary de-designation of DRM derivatives should be allowed. The focus will be on interest rate swaps.
4. Performance assessment and recycling. One of the key focus will be on how to communicate imperfect alignment of the target profile and asset profile (i.e. hedge ineffectiveness) in the financial statements through recognition, measurement and disclosures.

Phase two will extend the model developed in phase one to cover the following non-core areas:

1. Financial assets at FVTOCI;
2. Derivative instruments other than interest rate swaps, e.g. options; and
3. Equity as a source of funding for the target profile.

Discussion

No significant comments were raised by the Board. The Staff expect that the discussion of the core model will take between six to eight sessions.