FASB proposes hedge accounting interest rate tweak

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The Financial Accounting Standards Board issued a proposal Tuesday to expand the list of benchmark interest rates allowed for hedge accounting.

The proposed accounting standards update would permit the use of the Overnight Index Swap Rate based on the Secured Overnight Financing Rate for hedge accounting.

Topic 815, Derivatives and Hedging, in the FASB Accounting Standards Codification offers guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. They include the risk of changes in fair values or cash flows of existing or forecasted issuances or purchases of fixed-rate financial assets or liabilities attributable to the designated benchmark interest rate (referred to as interest rate risk).

In the U.S., the eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (known as UST), the London Interbank Offered Rate (or LIBOR) swap rate, the Overnight Index Swap (OIS for short) Rate based on the Fed Funds Effective Rate, and the Securities industry and Financial Markets Association (SIFMA) Municipal Swap Rate.

Based on concerns about the sustainability of LIBOR, a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York recently identified a broad Treasury repurchase agreement (repo) financing rate referred to as the Secured Overnight Financing Rate as the alternative reference rate it would prefer. In 2012, a financial scandal erupted over revelations that a small group of banks were manipulating LIBOR.

The proposed accounting standards update would add the OIS rate based on SOFR as a fifth U.S. benchmark interest rate to help companies and organizations avoid the potential cost and complexity of using different cash flows and discount rates to measure hedged items and hedging instruments.

FASB is asking for comments on the proposal by March 30, 2018.

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Accounting standards Hedging Interest rates Interest rate risk Financial reporting FASB SIFMA