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IAS 39/IFRS 9 — Novation of OTC derivatives and continuing designation for hedge accounting

Background

A narrow scope project to amend IAS 39 Financial Instruments: Recognition and Measurement and IFRS 9 Financial Instruments to allow a novation of an over the counter (OTC) derivative that is designated as a hedging instrument, where that novation is required by legislation/regulation of an otherwise unchanged hedging instrument, to be deemed to be a continuation of the existing hedging relationship.

This project arose out of a request to the IFRS Interpretations Committee.  In July 2012, the Regulation on OTC derivatives, central counterparties and trade repositories (the so-called European Market Infrastructure Regulation - EMIR) was adopted by the European Commission and published in the Official Journal.  One of the effects of the EMIR was the implementation of central clearing for certain classes of OTC derivatives and the original request to the Committee concerned the impact on hedge accounting from when an OTC derivative is novated to a central counterparty (CCP) in accordance with EMIR.

The legislation in Europe giving rise to the IFRS Interpretations Committee request arose out of a commitment from the G20, in response to the global financial crisis, to implement new requirements for  centralised clearing for standardised OTC derivative contracts.  Specifically, in September 2009, the G20 leaders agreed that:

All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the FSB [Financial Stability Board] and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.

The Committee considered the issue of the impact of these reforms on hedge accounting and recommended a limited scope amendment to the IASB.  The IASB agreed to add this project to its active agenda at its January 2013 meeting.

As the proposed amendment is expected to be short, be broadly supported and the topic is exceptionally urgent following the introduction of new regulations in certain jurisdictions, the project is expected to be expedited and will likely only have a minimum exposure period of 30 days.

 

Current status of the project

The IASB issued narrow-scope amendments to IAS 39, Novation of Derivatives and Continuation of Hedge Accounting, on 27 June 2013, effective for annual periods beginning on or after 1 January 2014. 

 

Project milestones

DateDevelopmentComments
January 2013 Narrow scope project added to the IASB's active agenda
28 February 2013 ED/2013/2 Novation of Derivatives and Continuation of Hedge Accounting issued Comment deadline 2 April 2013
27 June 2013 Novation of Derivatives and Continuation of Hedge Accounting (Amendments to IAS 39) issued Effective for annual periods beginning on or after 1 January 2014

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