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Derivatives and Hedging: Good News for Dealers and Brokers From FASB

Posted by Viola Funk on Wed, Nov 27, 2013 and brokers seeking hedging exposures to the Overnight Index Swap rate (OIS) are in luck. The Financial Accounting Standards Board (FASB) recently issued final guidance that allows dealer-brokers to designate the US OIS, the Fed Funds Effective Swap Rate, as a benchmark interest rate for hedge accounting purposes.

The change had been in the making for some time, as a result of market factors including regulations that increasingly require collateralization and central clearing of over-the-counter derivatives. Wider spreads between the London Interbank Offered Rate and the Fed Funds rate were also driving demand for the switch. Use of the Fed Funds rate in this context had been expressly prohibited under earlier guidance.

The Accounting Standards Update that brought in the change, No. 2013-10, Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes — a consensus of the FASB Emerging Issues Task Force, is effective immediately. Dealer-brokers can apply it prospectively to qualifying new or redesignated hedging relationships entered into on or after July 17, 2013.

Dealer-brokers should note that although they can use the rate to create new means of hedging, according to an EY bulletin, “the new guidance does not resolve ineffectiveness issues that arise in existing LIBOR hedges when the OIS rate is used to discount future cash flows.”

STP has recently published an update to Derivatives and Hedging: Interpretations of U.S. GAAP and also publishes the following related publications:

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Tags: Business & Legal, SEC, Accounting & Tax, Accountants, US GAAP, GAAP