Throughout the Brexit process, Chatham Financial has prepared for all likely eventualities, including a potential “no-deal” scenario. Uncertainties surrounding Brexit remain, and we continue to monitor the situation. Regardless of the outcome of these developments, we are committed to ensuring continuity of our investment and transaction advisory services to our clients. Chatham Financial has offices in both the UK and the EU, and we are confident that the provision of our services will be largely undisrupted by Brexit negotiation and implementation.
Hedge Accounting Impacts of a Hard Brexit
A novation of a trade to a different counterparty can impact the application of hedge accounting depending on the nature of the novation and the accounting framework being applied.
Under US GAAP (ASC 815-25-40-1A), a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument. As a result, we do not expect a Brexit-related novation to disrupt the application of hedge accounting to an existing hedging relationship under US GAAP.
Under IFRS, in paragraphs 91 and 101 of IAS 39 (as amended by "Novation of Derivatives and Continuation of Hedge Accounting - Amendments to IAS 39") and carried forward into IFRS 9 paragraph 6.5.6, the IASB indicated that a novation would not cause the cessation of a hedge accounting relationship only in limited circumstances where, as a consequence of laws or regulation, a derivative is novated to a central clearing counterparty. No other explicit relief to continue hedge accounting is given for other changes of derivative counterparty arising from novations that are not part of, and consistent with, the entity’s documented risk management objective.
Consequently, the impact of a Brexit-related novation on hedge accounting under IFRS is likely to be more nuanced and dependent on the facts and circumstances specific to the transaction in question. As a result, if you have designated a derivative in a hedge accounting relationship under IFRS and the transaction is novated as a result of Brexit, we invite you to contact your hedge accounting representative at Chatham to further discuss the ramifications.
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit https://www.chathamfinancial.com/legal-notices/.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved. 19-0088