ISDA Urges IASB to Incorporate IBOR Reform "Phase-Two" Issues in Exposure Draft

ISDA urged the International Accounting Standards Board ("IASB") to address forthcoming Interbank Offered Rate ("IBOR") reform issues in its exposure draft on interest rate benchmark reform.

In a comment letter, ISDA stated that, while the IASB's amendments to the International Financial Reporting Standards ("IFRS") took into consideration the "uncertainty caused by the IFRS's hedge accounting forward-looking rules" (a/k/a, "phase one"), they do not address issues concerning phase two. To remedy this, ISDA advised IASB to prioritize:

• ensuring the continuity of hedge relationships by clarifying that entities may "future proof their hedge designations to reference a transition from an IBOR to a [risk-free rate, or "RFR"]";

• providing guidance that, during the transition from IBOR to an RFR, a change to the hedge designation will not interrupt the hedging relationship; and

• granting relief to hedging relationships affected by IBOR reform from the retrospective hedge effectiveness test under IAS 39 (Financial Instruments: Recognition and Measurement).

Additionally, ISDA recommended that IASB amend its exposure draft to:

• extend relief to all hedging relationships that are affected by interest rate benchmark reform;

• issue guidance on how relief for macro cash flow and portfolio fair-value hedging models would be applied;

• clarify that, "when relief ceases due to there no longer being uncertainty with respect to the timing and amount of the interest rate benchmark cash flows, this includes that any spread adjustment above the replacement [RFR] has been determined";

• provide examples of how relief will operate; and

• refrain from mandating further disclosure requirements beyond those already required by IFRS 7 (Financial Instruments: Disclosures).