Financial Trade Groups Back FASB Hedge Accounting Proposals

The International Swaps and Derivatives Association ("ISDA"), the American Bankers Association ("ABA"), and America's Credit Unions urged the Financial Accounting Standards Board ("FASB") to adopt proposed hedge accounting amendments, saying they would better align reported results with how institutions manage interest rate and foreign currency risk.

In separate letters regarding the Proposed Accounting Standards Update (see prior coverage), the groups backed three changes: (i) allowing hedges of interest rate risk on held-to-maturity debt securities, (ii) permitting any tenor of the Secured Overnight Financing Rate ("SOFR") to qualify as a benchmark rate, and (iii) expanding net investment hedge eligibility to float-to-float cross-currency swaps with different reset dates.

ISDA said the changes would provide meaningful operational relief. It urged FASB to allow one-time transition relief so that entities could add held-to-maturity securities to existing portfolio-layer-method hedges without de-designating them, and to permit a modified retrospective adoption option so that entities using Term SOFR derivatives in fair value hedge accounting relationships could qualify for the shortcut method for existing hedges.

The ABA said it supports each of the specific proposals and that the changes would remove unnecessary constraints on hedging, better aligning financial reporting with how institutions actually manage risk, particularly for those hedging securities portfolios or using cross-currency swaps.

America's Credit Unions said the current model discourages the use of hedge accounting for otherwise effective risk management strategies because a credit union that hedges a real economic exposure may still have to run the derivative's fair value changes through earnings with no offsetting adjustment to the hedged position. The association said that federally insured credit unions with over $500 million in assets must use GAAP and often rely on interest rate derivatives, and the amendments would let more hedging strategies qualify for hedge accounting.