Macro-hedging – why now?

06 May 2014

By John Hitchins

The IASB has finally taken the first step in the last phase of the project to replace IFRS financial instruments guidance. It has published the discussion paper (DP) Accounting for Dynamic Risk Management: a Portfolio Revaluation Approach to Macro Hedging.

Macro hedging has been treated as a separate project from IFRS 9. Why? Because the IASB wants it to be broader than just replacing the fair value hedge accounting model for a portfolio hedge of interest rate risk in IAS 39. It is therefore seeking to gather views from a wider range of constituents on how they manage risks on a dynamic basis. Yes, I agree that banks are already engaged and it would be useful to get views from others. Unfortunately, I have suspicions that this approach might not work. Here are a few reasons why.

Reason 1: The name ‘Dynamic risk management’ sounds a bit like a black box – something technical that banks do but others avoid. It doesn’t invite non-banks to pick up the DP.

Reason 2: Non-financial institutions interested in hedging are still revelling in the success of IFRS 9’s new general hedging model and looking forward to implementation. Use of general hedge accounting has so far been considerably low outside the financial services sector. We can probably blame this on IAS 39 which is seen to be too restrictive and complicated. Will non-financial entities rather bask in the simplified general rules and not worry about macro-hedging? Maybe.

Reason 3: Timing. Non-financial institutions are eagerly awaiting final standards on leasing and revenue as well as the full suite of IFRS 9 (particularly in Europe as they cannot apply the new general hedging model until the entire standard is endorsed). Macro-hedging may not get much attention against this background.

Reason 4: The DP is focused on banks. The DP proposes a portfolio revaluation approach (PRA) and presents an example of an approach commonly applied by banks. Is this not a contradiction to the DP’s objective? If the goal is to gather views from the non-financial services sectors, why did they not include a non-financial services example?

Even if we accept that financial institutions are the only ones that will be interested, I’m not sure how many of them will really focus on this DP. It only addresses aspects of an overall risk management strategy and implementing the model will require some significant systems changes at a time when banks have a lot of regulator-imposed systems change to cope with. Many banks are comfortable with their existing hedge accounting and may not feel the change offered in the DP is worth the effort.

So back to the DP’s objective. Perhaps I have been harsh on the IASB. The objective itself seems appropriate and well-intended. I’d like to see both the financial and non-financial worlds prove me wrong by responding to the IASB’s request for views. 

As ever I’d welcome your thoughts, or even better, you can respond to the DP. The deadline is 17 October 2014.

John Hitchins:
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