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Many corporates and all banks use derivatives to hedge their fixed interest rate exposure on a portfolio ("MACRO") basis, and would like to apply IAS 39 Fair Value hedge accounting to these hedges.
In August 2003, the IASB issued draft guidance for applying so-called "macrohedging" to a portfolio of fixed-rate assets or liabilities. While the guidance provides increased flexibility, macrohedging appears to still generate some strange results and lingering questions.Key features
>>Individual items no longer need to be identified;
>>Hedged items in the portfolio are allocated into time buckets based on 'expected' maturities;
>>Hedges may be prospectively dedesignated and redesignated to amend, for example, (a) the revised expected maturities and estimate of amount in a time bucket (b) the hedged percentage, or (c) the derivative amount.Example
A four-year time bucket has 100 of fixed assets and 80 of fixed liabilities. The hedged portfolio is defined as the 100 assets, 20% of which is designated as hedged with a four-year, 20 notional swap. One month later, more assets have prepaid than expected. The bucket now has assets of 80 and the treasury had reduced offsetting liabilities to 60, so the net exposure remains at 20.Assessing hedge effectiveness
The hedged exposure decreased from 20 ( 20% of 100) to 16 (20% of 80), though the net exposure remained the same. A retrospective hedge assessment focuses on the revised amount that was actually hedged (16), rather than the originally expected initial amount. The swap notional of 20 did not change.
So, the gain/loss due to interest rates on the 16 notional hedged is compared to the fair value change on the 20 notional swap (A36 of the draft).
The difference is hedge ineffectivensss. If the offset is outside the acceptable range of 80-125%, hedge accounting may not be applied, and the swap will impact earnings for the current and future periods without any offset. (Note that the Exposure Draft now defines an effective hedge the same for prospective and retrospective hedge assessments. A hedging offset of within 80-125% is generally acceptable for both.)Flexibility and dynamic hedging
The proposed guidance does not prescribe a dynamic designation and redesignation of hedging relationships. For some managers, however, it is closer to dynamic practice than before. However, redesignation is permitted such...