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Interest rate swaps were first offered by large money center banks well over three decades ago to help their clients hedge interest rate risk separate and distinct from an underlying borrowing or investing instrument. The product has grown in popularity over the last three decades and is now routinely offered to eligible commercial clients by banks with less than $1 billion in assets.
Long term interest rates falling again along with the inverted yield curve present an opportunity for financial institutions to hedge floating rate liabilities on their balance sheet. Hedging against rising rates on floating rate debt has become a simpler strategy to pursue under the simplified hedge accounting rules. Under the new rules, qualifying cash flow relationships with some basis difference no longer produce income statement volatility and allows financial institutions to focus on the economics of a hedging strategy.
When an entity is acquired in a purchased business combination, that entity ceases to exist and the acquiring entity survives. We provide a summary below of what happens to both existing fair value and cash flow hedges of the acquired entity under ASC 815 and a framework for a path forward for the acquiring entity.
On March 5th, 2019, Derivative Path's Head of Sales and Structuring, Chris Slusher addressed the key differences between LIBOR and SOFR. Melanie Wheeler, General Counsel & Chief Compliance Officer at Derivative Path Inc., discussed the legal and compliance impact of the LIBOR transition on a financial institution’s interest rate management operations. Derivative Path's Head of Hedge Accounting, Rob Baer described the impact of the transition on hedge accounting for firms hedging interest rate risk.
Converting fixed rate assets to floating in a rising interest rate environment can be a proactive balance sheet risk management strategy for liability-sensitive financial institutions. The new hedge accounting rules, ASU 2017-12 Derivatives and Hedging, published in August 2017 expand the range of accounting-friendly hedging strategies to accomplish this goal, but most dramatically under the new Last of Layer portfolio hedging approach. In this piece, we provide a summary of how to construct a portfolio hedge using the Last of Layer approach.
The hedge accounting rules were materially simplified by the Financial Accounting Standards Board when they published ASU 2017-12 in August 2017. Many companies have early-adopted these new rules before the mandatory effective date of 2019 to take advantage of the new provisions. Given the significant changes promulgated last year, it is not surprising that several issues requiring additional FASB guidance have surfaced. In the FASB’s September 5, 2018 meeting, several of these issues were clarified and some deferred for future clarification.
On May 23, 2018, Derivative Path, Inc's. General Counsel & CCO Melanie Wheeler, along with Michael Best and Friedrich Partner Alexander P. Fraser, and Senior Counsel Cheryl Isaac Aaron presented a very timely discussion on LIBOR replacement. They shared a lot of information that is pertinent to banks engaged in back-to-back derivatives as well as those who use LIBOR to do any type of lending.
Late last year, Derivative Path sent out a Compliance Update with some thoughts on what could take place in 2017. As the year wraps up and we start looking forward to 2018, it is a good time to assess what progress, has been made and what potential changes are anticipated going forward.
The Financial Accounting Standards Board (FASB) issued their Derivatives and Hedging Update on August 28, 2017. The new rules will simplify compliance, allow more hedging strategies to qualify and will more closely align the fair value measurements of a hedge with the underlying exposure. Robert Baer, Derivative Path's Head of Derivative Accounting lead a panel discussion on how the new hedge accounting provisions will impact a financial institution’s interest rate risk management policies and compliance processes. You can review the presentation here.
As expected, the Financial Accounting Standards Board (the FASB) issued their Derivatives and Hedging Update on August 28, 2017. The new rules simplify derivative accounting compliance, allow more hedging strategies to qualify for hedge accounting treatment, and more closely align the fair value measurements of a hedge with the underlying exposure. We present our thoughts on the final rules.
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