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Hedge Accounting to be Lost on Novation to CCP?

This is a link to a Risk article highlighting concerns within the market regarding the possibility that transactions cleared voluntarily would cease to benefit from hedge accounting rules under International Accounting Standards Board (IASB) proposals.

The article explains that, to benefit from hedge accounting treatment and so avoid the need to be marked-to-market, a derivative needs to be paired with an underlying exposure in a hedging relationship.  However, in its exposure draft published in February 2013 entitled “Novation of Derivatives and Continuation of Hedge Accounting”, the IASB proposed that hedge accounting will be lost in the event of a novation because the original hedging instrument no longer exists.  An exception applies with respect to trades that are novated to a CCP, but only where the novation is required by law or regulation.  However, it remains unclear whether existing trades, many of which are novated to CCPs by a desire to reduce risk and capital charges rather than out of legal necessity, will be grandfathered.

Apparently a number of market participants regard the IASB’s technical analysis as incorrect.  The IASB is reported to be aware of these concerns and is looking into the issue.

The comment period for the exposure draft ended on April 2, and the IASB estimates it will finalise its guidance in Q2/Q3 of 2013.

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