Dynamic Risk Management

Date recorded:

Cover note (Agenda Paper 4)

In this session, the IASB discussed illustrative examples to the Dynamic Risk Management (DRM) model. The paper presented further examples of the application of the current DRM model to support stakeholders in their analysis of the model requirements. The staff developed the examples based on the feedback gathered during the ongoing informal outreach on the DRM model.

DRM Model—Illustrative Examples (Agenda Paper 4A)

This paper provided an illustration of the designation and application of the DRM model through a series of scenarios, each scenario adding a level of complexity to the previous one.

The staff aimed to demonstrate:

  • The information that will be provided in the statement of profit or loss and statement of financial position
  • How the various scenarios affect the designation of the risk mitigation intention and the construction of the benchmark derivative(s)
  • How the DRM model provides a faithful representation of the risk management activities an entity has undertaken to achieve its risk management strategy

However, the paper excluded the capacity assessment as discussed by the IASB in its February 2023 meeting as this is still subject to further development.

The application of the DRM Model is illustrated using three simple scenarios and three complex scenarios. In the simple scenarios, the risk position is comprised of a single financial asset and a single financial liability with aligned notional. In the complex scenarios, the risk position is comprised of multiple financial assets and financial liabilities, and the entity has decided to partially mitigate its risk or mitigate its risks in an adjacent repricing period (i.e. notional not aligned).

The paper did not ask for decisions from the IASB.

IASB discussion

IASB members were supportive of the staff paper and emphasised the quality of the illustrative examples. Some IASB members highlighted that the DRM model is still a work in progress. For instance, the model is at the current stage restricted to interest rate risk, and the examples being discussed are focused on the banking industry. One IASB member mentioned that a few refinements would be needed at some stage, for instance whether the terminology should be revisited in light of the terminology used by users and also the terminology already in place in current standards, and whether the DRM requirements should be mandatory or voluntary.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.