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On March 20, 2020, the FASB issued ASC 848, “Reference Rate Reform” which offers institutions more practical and lenient hedge accounting rules through the end of 2022. While ASC 848 is primarily intended to help institutions transition away from LIBOR, banks with excess liquidity can use the flexibility offered by the guidance to modify funding tied to existing hedges without a de-designation event.
On March 20, 2020, the Financial Accounting Standards Board (the “FASB”) issued ASC 848, “Reference Rate Reform” which offers institutions more simplified and lenient hedge accounting rules through the end of 2022 to help ease reference rate transition.
Throughout this piece, we describe the relief available under ASC 848 to counterparties who have previously qualified for hedge accounting. We also describe the changes that must be made to hedge documentation and pitfalls to avoid for contract modifications.
By: Von Garces, Rachel Parks, Chris Slusher
Many banks are modifying commercial loans as they and their commercial borrowers grapple with the economic fallout of the Covid-19 pandemic.
Read the full article here
Debt capital takes a variety of forms and can be priced relative to Treasury yields, benchmark interest rates or swap rates at the time of issuance. Once an issuer decides to issue debt, they are exposed to the risk of rising interest rates until that new debt is priced. Pre-issuance hedging of fixed rate debt with forward starting swaps and swaptions can mitigate that risk, while hedge accounting can be employed to minimize earnings volatility during the hedging period.
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.
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