Dynamic Risk Management

The Phase-Out of IAS 39 Portfolio Hedge Accounting Is Approaching

With the introduction of IFRS 9 “Financial Instruments” on 1 January 2018, the accounting rules for financial instruments — including hedge accounting — were fundamentally revised. However, one area was excluded from the new requirements: portfolio hedge accounting. Although the IASB had been working since 2013 on an update to portfolio hedge accounting as part of the so-called “portfolio revaluation approach”, widespread criticism of the 2014 discussion paper and several unresolved technical issues meant that no final guidance was included in IFRS 9. As a result, the existing IAS 39 provisions for portfolio (macro) hedging may continue to be applied for the time being. This option also extends to micro and group hedges where relevant. In addition, the EU-specific carve-out, which permits bottom-layer hedging, remains applicable under EU-endorsed IFRS.

DRM Core Model and Transition into a Standard-Setting Project

Since the publication of the “Core Model” in July 2019, the IASB has been working intensively on developing a new approach to portfolio hedge accounting under the project titled “Dynamic Risk Management (DRM)”. The initiative was elevated to a standard-setting project in July 2022. With the release of the agenda paper on transition upon initial application (AP4A, 10/24), it has become clear that the DRM model is intended to be incorporated into IFRS 9. While the implementation timeline has not yet been finalized, first-time application — and the resulting replacement of IAS 39 — could occur by 2030.

Planned Publication of the DRM Exposure Draft

The IASB’s project on Dynamic Risk Management (DRM) has now reached an advanced stage. In October 2024, the IASB decided to proceed with the balloting of an Exposure Draft, the publication of which is expected in Q4 2025 (AP4B, 10/24).

Interest Rate Management as a Central Aspect of Hedge Accounting

With the DRM project, the IASB aims to achieve a more realistic representation of risk management activities within financial reporting (AP4C, para. 1, 06/24). The DRM approach is therefore derived from the risk management strategy of the respective institution, resulting in different perspectives depending on the primary interest rate risk management view applied (EVE vs. NII perspective). In all cases, the key metrics — Current Net Open Position (CNOP) and Risk Mitigation Intention (RMI) — must be determined consistently with the entity’s risk management framework (AP4A, paras. 10–26, 11/21). This, in turn, raises architectural considerations for a system-based implementation of DRM processes.

The closer alignment with the entity’s risk management strategy, as mentioned earlier, also entails certain limitations — for instance, the elimination of voluntary and period-specific (de-)designations. While under IAS 39 strategic derivative positions may currently be included in portfolio hedge accounting — a practice that is applied in practice depending on prevailing market expectations — such a flexible interpretation will not readily be possible under the DRM model.

Elements and Standard Process of DRM

The Regular DRM Process
The future DRM process represents an interaction between the treasury’s risk management activities and the accounting perspective within financial reporting. The Risk Management Strategy (RMS) provides the decisive framework for the DRM, as it defines how the entity manages its (interest rate) risks (AP4B, paras. 16 – 18, 09/24). Key components of risk management – such as governance structures, the managed interest rate, the primary risk metric applied for management purposes, and the risk limits relevant to DRM – are determined by the RMS. […]

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