Impact of the OIS discounting on the macro fair value hedge accounting effectiveness

Impact of the OIS discounting on the macro fair value hedge accounting effectiveness

Financial institutions and banks are nowadays using the overnight index swap (OIS) curve for the valuation of the collateralized financial derivatives.


These derivatives are often used in a macro (portfolio) fair value hedge accounting relation in order to reduce/ avoid profit & loss volatility arising from the change in the mark to market value (MtM) of the derivatives. In the past the same curve (EURIBOR) was used for the valuation of the hedged item and hedge instrument, such as an interest rate swap (IRS). Nowadays, the EURIBOR curve must be used for discounting the hedged item while the IRS is using the OIS curve. This difference of market convention will lead to MtM differences between the two instruments which will cause ineffectiveness in the hedge relation and P&L impact.

Hedge relation

Under hedge accounting, the hedge relation has to be tested regularly (at least at each reporting date) to calculate the potential ineffectiveness of the hedge. The test is comparing the variation, on a certain period, of the MtM of the IRS and the hedged item. The amount of ineffectiveness coming from the use of different curves will depend of the volatility of the spread between the two curves (average 25 basis points (bp) with a peak of 60bp in the last two years) and of the test used. The dollar off set method is expected to be more impacted compared to the regression method since it uses more historical evaluations points which will smooth the differences over time.

Regression test

Only a partial solution can be found to reduce the MtM difference between the two instruments. The use of an OIS as a hedge instrument is a possibility (it will remove the MtM of the floating leg of the IRS) but it should fit in the hedging policy of the company (maturity, rate hedged). Looking at the future, the new IFRS 91 standard will replace the actual IAS39 with an effective date as per 1 January 2015. But in May 2012, the IAS board (IASB) decided to separate the macro hedge accounting project from IFRS9. Until this new macro hedge accounting project is finalized and becomes effective, the IASB has decided that entities applying macro hedge should continue to apply IAS39. A discussion paper on macro hedge is planned by the IASB for Q2 2013. Unfortunately, companies applying macro fair value hedge will have to wait the discussion paper and its propositions. In these circumstances, we recommend, if possible, using the regression test in case of macro fair value hedge in order to minimize this new source of ineffectiveness.

1 The final draft has been published by the IASB in September 2012 and the official release is expected for this month (December).