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Isda says hedge accounting ED lacks clarity

Thursday 10 March 2011 – by Nicola York

The International Swaps and Derivatives Association has expressed concerns over key parts of the exposure draft on hedge accounting saying there is a lack of clarity in the wording of the document.

In a letter to the International Accounting Standards Board chairman Sir David Tweedie, Isda says it disagrees with the approach on some topics but hopes its concerns will be resolved before the final standard is reached.

The letter, signed by HSBC Bank chair of accounting policy committee Tom Wise and Isda tax and accounting member Antonio Corbi, raises concerns over the linkage between hedge accounting and risk management saying that although it supports the proposal, it is not sure how this will work in practice.

It says: “In particular, the ED includes certain rules that could preclude hedge accounting that reflects actual risk management activity. We would welcome confirmation that where this is the case, it would be acceptable under the ED to make hedge accounting designations that best represent the actual risk management strategy, as is the approach under IAS39.

“In addition, we are concerned that the ED has been written on the assumption that risk management activities are undertaken at a micro level and that risks management policies can forecast every eventuality. Whilst financial institutions may make transactional decisions at a micro level, risk management is usually applied at a higher, macro or portfolio level. Indeed, it is common for daily (or more frequent) changes to the profile of hedging transactions to occur as the underlying hedged portfolio changes, without any amendment to risk management strategy.”

Related articles:

EU accountants urge IASB ‘flexibility’

ISDA chair returns in new role

IASB to loosen hedge accounting rules

Trichet: Lack of ‘boldness’ in Council’s plans

ISDA: ‘Derivs clearing will increase risk’

Meanwhile, the Japanese Bankers Association wants the IASB to reconsider some aspects so that financial statements better reflect the realities of enterprise risk management behaviour.

The JBA also pushes for the IASB to rethink the timing of implementing the exposure draft due to the continuation of its discussions on the hedge accounting applied to open portfolios.

It says: “We believe this raises the need to reconsider the timing with which the exposure draft is applied because banks will need to conduct comparative investigations of the proposed hedge accounting model in light of the discussion on macro hedge accounting.

“There is also the potential for the content of the exposure draft to be inconsistent with the discussion on macro hedge accounting, which we believe will necessitate a reconsideration of the exposure draft in light of that discussion.”

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