Cover paper (Agenda Paper 4)

Following the decision to add the Dynamic Risk Management (DRM) project to its standard-setting programme in May 2022, the IASB discussed in July 2022 a list of outstanding topics to be considered further to complete the development of the DRM model. This month, the staff brought two papers to the IASB meeting covering the first two topics for deliberations.

Managing equity (Agenda Paper 4A)

The IASB introduced the concept of current net open risk position in November 2021 as the net open interest rate risk position (by time bucket) derived from the combination of an entity’s assets and liabilities (including core demand deposits) and eligible future transactions over the period the entity is managing such risk. Despite the new name, the current net open risk position is simply the net risk position derived from assets that were previous in the assets profile, as well as the liabilities that were previously part of the target profile.

At this meeting, the IASB discussed whether equity should be eligible to be included in the current net open risk position, and the implications of a such decision to the DRM model. In the paper, the staff summarised the discussions to date and stakeholders’ feedback on this topic and provided the staff analysis and the staff view on the inclusion of equity in the DRM model.

Staff recommendation

The staff concluded that designating equity is not necessary in the DRM model in order to reflect the actual repricing risk exposures, and the staff therefore did not recommend that the IASB includes equity as an eligible item in the DRM model.

IASB discussion

IASB members generally agreed with the staff recommendation. Many supported the view that the exposure arises from financial assets and liabilities with one IASB member saying that using equity would be inconsistent with the Conceptual Framework.

It was noted that some banks are currently including equity and how this would affect them. The staff replied that they are using equity as a proxy but they could just as well use financial assets and liabilities, so it should not be too onerous for them.

IASB decision

All IASB members voted in favour of the staff recommendation.

Notional alignment of designated assets and liabilities (Agenda Paper 4B)

At this meeting, the IASB was asked to reconsider its tentative decision taken during the development of the DRM core model that the notionals (of what was originally called the asset and the target profile) are required to be the same. This is because of feedback received during the outreach on the DRM core model.

The staff analysed three approaches in the paper. The staff concluded that although none of the three approaches provides the perfect solution with regards to notional alignment, faithful representation of the economic phenomena and provision of relevant information about an entity’s interest rate risk management activities can be best achieved by not requiring notional alignment for the current net open risk position.

Staff recommendation

The staff recommended that the IASB amends its original tentative decision to not require the notionals of eligible assets, liabilities and future transaction for designation in the current net open risk position to be the same.

IASB discussion

IASB members agreed with the staff recommendation pointing out the consistency with Agenda Paper 4A.

IASB decision

All IASB members voted in favour of the staff recommendation.