IFRS 9 - Dynamic Risk Management (DRM) Overview

With an exposure draft anticipated from the IASB in Q1 or Q2 2025, significant developments are expected in the area of Dynamic Risk Management (DRM) under IFRS 9. 

This post summarises recent discussions from the IASB's working group on the presentation and scope of DRM, a model designed to simplify and standardise the approach to dynamic interest rate risk hedging, particularly within the banking sector.

Key IASB Decisions on DRM Scope and Applicability

Given the fluid nature of banks’ complex asset-liability management, the IASB's initial focus for DRM is for the banking sector only. This focus will allow the IASB to address a controlled scope before potentially expanding applicability to other industries that may also engage in active interest rate risk management. The IASB has clarified that adopting the DRM model will be optional, providing entities with the flexibility to choose their hedging framework.

Simplified Approach to Hedged Items

A central objective of the DRM model is to mitigate the complexities associated with hedge accounting under IAS 39. Instead of requiring the designation of all financial assets and liabilities within the portfolio, the DRM model focuses solely on the open net position. Here, the ‘open net position’ or ‘hypothetical position’ becomes the hedged item, creating a simplified, benchmarked view that doesn’t necessitate designating every asset or liability.

Accounting under the DRM model is similar to a cash flow hedge, where a “Lower of” test compares the cumulative gains or losses from the actual derivatives portfolio against the hypothetical derivative book designed under the DRM. This streamlines hedge effectiveness testing, minimizing the need for extensive calculations.

Operational Complexities and Practical Application

Despite the DRM model’s streamlined framework, operational considerations remain, particularly regarding the frequency with which entities must reset their net open positions. This adjustment process will vary based on the specific characteristics of each reporting entity’s exposure. For example, if an entity’s net open position fluctuates often and necessitates frequent hedging adjustments, the benchmark position or ‘hypo’ position will need recalibration. This process can add layers of operational complexity, especially for entities managing high-frequency exposure changes.

Looking Ahead

HEA will continue to monitor developments as the IASB explores broader applications of the DRM model, potentially opening the framework to other industries and types of risk management activities in the future. The upcoming exposure draft is a promising step toward a more accessible, effective hedge accounting model under IFRS 9.

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