As companies implement and run foreign currency (FX) risk management programs, they need to be aware of some common mistakes. Not all treasuries will encounter every mistake, but they are sure to encounter at least one of these—if not now, then in the not-too-distant future.
In unexpected news today, the end of USD LIBOR has been extended to June 30, 2023.
Late last week, the Financial Accounting Standards Board (FASB) issued an exposure draft expanding the scope of Topic 848 to include derivatives that are discounted, but not reset, using rates subject to reference rate reform (RRR). The proposed amendments target contracts with calculations (other than resets) referencing IBOR rates, e.g. margining, discounting or price alignment.
The eagerly anticipated ISDA IBOR Fallback Protocol was released on Friday, October 23, 2020. The effective date of the protocol has been set for January 25, 2021.
The drop in rates in Q1 has increased the net cash payments on pay-fixed, receive-variable interest rate swaps and at the same time increased the derivative losses. What does this mean for your hedge accounting?
We always encourage hedgers to consider the economics of a transaction before looking at the accounting. If the economics don’t make sense, it doesn’t matter how favorable the accounting treatment is, it probably isn’t a good idea!
The direct impacts of the transition away from LIBOR to the use of an alternative reference rate such as the Secured Overnight Financing Rate (SOFR) have been well publicized. ISDA and ARRC have been releasing regular updates and suggested fallback language to determine how LIBOR rates will be replaced in derivative and loan agreements, once LIBOR is no longer available.
While the derivatives market had been changing fairly rapidly prior to COVID-19, 2020 market dynamics have not closed the gap between expected and observed market prices. It’s critical that corporations and institutions address the coming reference rate changes related to their derivatives and debt instruments tied to LIBOR.
Once a company establishes a balance sheet program, it likely runs on auto-pilot from then on. Exposures are gathered, forecasted, netted, hedged and adjusted inter-month, and the results of the program are reported — but rarely is there a “review” of the hedge program from top to bottom.
Businesses mired down by the impacts of COVID-19 are facing enough difficulties. But the march to LIBOR’s end has continued unabated.
As many of our readers already know, SOFR (Secured Overnight Financing Rate) has been selected by the Alternative Reference Rates Committee of the Federal Reserve to replace LIBOR in 2021.
To implement a successful hedge program, it’s important that all parties involved know exactly what the hedge program will provide. This prevents disappointment and level sets expectations with management.
Lenders such as banks, mortgage lenders, and credit unions manage large portfolios of fixed-rate loans. Typically, these assets are funded with floating-rate liabilities. This mismatch between fixed-rate assets and floating-rate liabilities can cause unwelcome earnings volatility.
The translation process converts local currency financial statements of subsidiaries into USD based financials for consolidation and reporting purposes.
Using a Net Investment hedge strategy to boost income has been around for decades, but the ultra-low interest rate environment in Europe combined with the new rules under ASU 2017-12 has renewed curiosity in this approach.