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FASB Proposes Update to List of Permissible U.S. Benchmark Interest Rates for Hedge Accounting

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The FASB has issued an Exposure Draft that would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting.
April 2, 2018

The FASB has issued an Exposure Draft that would expand the list of U.S. benchmark interest rates permitted in the application of hedge accounting.

Currently, Topic 815, Derivatives and Hedging, provides guidance on the risks associated with financial assets or liabilities that are permitted to be hedged. Among those risks is 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 United States, eligible benchmark interest rates under Topic 815 are interest rates on direct Treasury obligations of the U.S. government (UST), the London Interbank Offered Rate (LIBOR) swap rate, the Overnight Index Swap (OIS) 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 financing rate referred to as the Secured Overnight Financing Rate (SOFR) as its preferred alternative reference rate.

The Exposure Draft would add the OIS rate based on SOFR as a fifth U.S. benchmark interest rate to help companies and other organizations avoid the potential cost and complexity associated with using different cash flows and discount rates to measure the hedged item and the hedging instrument.

The full text of the Exposure Draft is available here.

 

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