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Dynamic risk management

Date recorded:

For the project background and a summary of the Board’s discussions to date, see the July meeting summary.

Outreach plan (Agenda Paper 4)

Background

The aim of the proposed dynamic risk management (DRM) model is for financial statements to represent faithfully the effect of DRM activities undertaken by an entity. It aims to help users assess management’s performance by focusing on how well management was able to align the asset profile with the target profile using derivatives.

The Board has already tentatively decided that the DRM model be: based on cash flow hedge mechanics (Nov 2017) and developed in two phases (Dec 2017). This first phase focuses on ‘core areas’ such as: (i) asset profile; (ii) target profile; (iii) derivative instruments used for DRM purposes; and (iv) performance assessment and recycling. The Board thinks these areas shape the fundamentals of the core DRM accounting model and will capture a significant portion of the DRM activities. They think it is important to gather external feedback on the core model before developing the second phase. 

Proposed outreach plan

  • (1) Objective of the outreach—the staff say the objectives of the outreach are:
    • Perform preliminary assessment of the viability and operability of the DRM model.
    • Determine whether the DRM model will enable better reflection of the entities’ risk management strategy and activities in the financial statement.
    • Identify any areas of the core model that would need further consideration and improvement.
  • (2) Target audience—the outreach will focus exclusively on financial institutions, mainly banks who manage their interest rate risk using dynamic risk management strategies.
  • (3) Format of the outreach and the material to be used—individual meetings with participating banks, to obtain direct feedback and allow to keep gathered information confidential. Furthermore, the staff proposes to reach out to the banks operating in different economic and regulatory environments, with different balance sheet structures, different interest risk management strategies and using different hedge accounting strategies. The staff plan to use Agenda Paper 4B DRM Model Demonstrations from the July 2019 meeting to facilitate the discussions.
  • (4) Timing of the outreach—the staff proposed the following time table:

    Define outreach participants—December 2019

    Perform outreach—January–April 2020

    Feedback to the Board—June 2020

The staff asked the Board for any comments or views on the proposed DRM outreach plan.

Board’s comments on the proposed outreach plan

One Board member observed that it may be difficult the get contributions from the preparers during the first quarter of the year and he asked about the possibility of extending the timing of this phase until June. The staff explained that banks from different jurisdictions will be involved in outreach. They provided an example of Canadian banks that have their reporting period at the end of October. It was confirmed that the workload of the preparers will be taken into account.

Another Board member agreed with the format of the smaller groups and indicated that the challenge will be to ask the right questions, so the right feedback is received. Therefore, preparation is fundamental for the outreach.

A Board member indicated that the objective stated in the agenda paper carries the risk that it could be misinterpreted as the Board asking to comment on the proposal and not to test the functionality of the model. The staff was asked to consider whether it is possible to request that the preparers apply the proposed DRM model to their portfolio and then ask them how the accounting outcome changed in comparison with their current accounting treatment. The conclusion of whether the DRM model better reflects risk management activities than the current accounting treatment should be subsequently reached by the staff. This was rebutted by another Board member who stated that the purpose of the outreach should be to check whether preparers like the DRM model to avoid the situations experienced with the previous proposal (DP/2014/1). The staff clarified that the wording of the objective for the outreach stated in the agenda paper does not mean that those specific questions will be asked. Finally, it was suggested by a Board member to take out word ‘better’ when asking whether the model reflects risk management strategy because the fundamental objective of the DRM model is to ‘reflect the risk management strategy’ in a reasonable way.

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