ESMA responds to the IASB's Discussion Paper ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’

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16 Oct, 2014

The European Securities and Markets Authority (ESMA) has published its response to the IASB Discussion Paper ‘Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging’. ESMA welcomes the IASB's initiative to explore the possible application of hedge accounting principles to open portfolios, as there is a genuine need to address the problem of divergent accounting practices in this area.

In its letter, ESMA expresses the view that the objective of the proposed macro hedging model should be kept narrow, in order to address the issues that led to the current European carve-out of certain requirements of IAS 39.  In developing a macro-hedge model, ESMA considers that the IASB needs to find a balance between aligning accounting with risk management activities and the complexity and conceptual difficulties that arise from any proposals.

ESMA has several concerns about the Portfolio Revaluation Approach (PRA) proposed by the IASB, in particular the need to address:

  • the issue of core demand deposits;
  • treatment of prepayment risk at portfolio level;
  • designation of sub-benchmark instruments; and
  • the interaction of the scope of macro hedging with other standards, for example IAS 37 (in the context of pipeline transactions).

It is also concerned that any practical expedient in the PRA could only be used to the extent that it represents a faithful proxy to the managed exposures. In its view, neither of the proposed approaches in the discussion paper (dynamic risk management or risk mitigation) is fully satisfactory.

ESMA disagrees with the proposal that ineffectiveness as a result of the PRA should be deferred in other comprehensive income.  It is also concerned that application of PRA to risks other than interest rate risk as this may create a range of audit and enforcement challenges, as well as further conceptual issues and so does not support this.

In conjunction with its response to the IASB, ESMA has also submitted a response to the European Financial Reporting Advisory Group (EFRAG)'s consultation on its draft comment letter to the IASB on this discussion paper.

Both the response to the IASB and the response to EFRAG can be downloaded from the ESMA website.

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