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Banks are happy with the proposed addition of a benchmark interest rate that the Fed and accounting rulemakers pitched to replace the problematic Libor for derivatives meant to cut the risk from interest rate changes.
Michael Gullette, senior vice president for tax and accounting at the Washington-based American Bankers Association, told Bloomberg Tax Feb. 21 that ABA is “very pleased” that the Financial Accounting Standards Board issued draft rules Feb. 20 to allow an additional, specific benchmark rate for hedge accounting purposes.
“We are especially pleased by their responsiveness to consider updating the list of benchmarks in a timely fashion,” Gullette said of FASB members. “As markets continue to evolve, so does the need for banks to hedge the related interest rate risks.”
“Libor is going away,” Fran Mordi, assistant vice president for financial management, tax, and accounting at the Washington-based Mortgage Bankers Association, said of the London Interbank Offered Rate. Permitting the added benchmark affords banks the level of flexibility and number of options that they have had, Mordi suggested.
A committee of the Federal Reserve Board and the New York Fed picked the additional benchmark rate last year. The newly endorsed benchmark is the overnight index swap, or OIS rate, based on a Treasury repurchase-agreement financing rate called the secured overnight financing rate, or SOFR.
FASB plans to add the new benchmark rate to the existing list of four rates in hedge accounting rules, ASC 815, which are used in the business-friendly form of deferral accounting that aims to prevent unwelcome earnings impacts. The four rates are:
U.K. financial regulators have slated Libor, which has been susceptible to manipulation, for demise by the end of 2021. More than $350 trillion in securities are pegged to that rate.
FASB wants comments on its proposal by March 30.
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The FASB rate proposal is at http://src.bna.com/wx5.
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