ESMA has considered the IASBs ED Novation of Derivatives and Continuation of Hedge Accounting: Proposed Amendments to IAS 39 and IFRS 9. ESMA supports the proposed amendments to IAS 39 and IFRS 9 so that the novation of a hedging instrument does not cause an entity to discontinue hedge accounting if a number of conditions are met. The discontinuation of a hedge relationship following the novation of a derivative contract resulting from it being cleared through a central counterparty without changing other major terms would not reflect the objective of the clearing requirement introduced by the EMIR or similar legislation in other jurisdictions and would not provide useful information to users of financial statements.
Nonetheless, ESMA is concerned that by limiting the continuation of hedge accounting to novation resulting from central clearing that is “required by laws or regulations", the amendment would not capture all novations of derivatives resulting from central clearing that are concluded with the aim to reduce counterparty risks and could dis-incentivise central clearing on a voluntary basis.
Therefore, ESMA would support the approach that all novations of derivative contracts resulting from clearing through a central counterparty without changing the other major terms of the contracts benefit from the proposed exception.
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