Centrally cleared derivatives — Agenda Paper 10

Background

Following the financial crisis in 2008, regulators in both the US and Europe require that entities executing particular derivative products clear these products through a central clearing counterparty (CCP). To be able to do so, an entity must be a clearing member, which requires a significant capital contribution as well as other legal requirements. Most major international financial institutions offer their clients services to clear their transactions, either in their capacity as a direct Clearing Member at the CCP or through relationships they have with other Clearing Members.

The Interpretations Committee received a request to clarify whether a clearing broker for centrally cleared derivatives reflects these activities on a principal or agent basis in their financial statements when applying IFRS 9 Financial Instruments.

The submitter states that whether a financial institution considers itself as principal or as an agent in those transactions has implications for the statement of financial position of those entities.

The submission refers to IFRS 9.3.1.1, which states that an entity “shall recognise a financial asset or a financial liability in its statement of financial position when, and only when, the entity becomes party to the contractual provisions of the instrument.” IFRS 9 does not use the term principal or agent in relation to determining the capacity in which an entity is acting. Nevertheless, the submitter uses the IAS 8 hierarchy to consider how the terms principal and agent are defined in other IFRSs to assess whether a clearing broker is responsible for delivery, clearing and settlement and is a principal, or whether they are an agent. In the former case each transaction results in a financial instrument. The submitter then draws on the discussions in IAS 18 Revenue, IFRS 10 Consolidated Financial Statements and IFRS 15 Revenue from Contracts with Customers on principal and agent relationships.

Staff analysis

The staff assessment was that the appropriate question to ask is whether the contractual arrangement referred to in the submission meets the definition of a financial instrument. The staff also stated that their outreach indicated that although there is some diversity in practice, their assessment was that the diversity reflects different fact patterns rather than from a misunderstanding of the requirements in IFRS.

Staff recommendation

The Staff recommended that the Committee not add this issue to its agenda.

Discussion

The IC approved the Staff’s recommendation subject to redrafting the tentative agenda decision.

The members agreed with the Staff’s analysis and believed that the reference to agent and principal in this case is a red-herring – if the contract is within the scope of IAS 39/IFRS 9, the entity should assess whether the IAS 32 offsetting criteria are met to determine whether the contract should be presented gross or net.