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Novations Will No Longer Trigger Automatic Dedesignation

This month, FASB ratified the Nov. 12 consensus on EITF 15-D, “Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The consensus, essentially, means that a change in the counterparty of a derivative instrument designed as a hedging instrument does not automatically require dedesignation and redesignation – eliminating a major headache for corporate hedgers.

Details on the consensus are scheduled to be published to the FASB website soon. A final standard is expected in Q1 2016.

The new decision – which does require that the new bank or counterparty meet all hedge accounting criteria – clarifies interpretations of an SEC letter clarifying that novations as a result of clearing requirements (i.e., Dodd-Frank) did not automatically mean dedesignation and redesignation. Other novations, however, were widely interpreted to require a new hedge accounting designation since they were not spelled out in the SEC letter. These dedesignation/redesignations were required even when there were no changes to the critical terms of the derivative.

Corporations that had a counterparty novate their liability to a new counterparty were adversely impacted because a dedesignation/redesignation was often required – a hassle that seems likely to no longer exist.

Corporations with syndicated debt that refinance and lose a member of the syndication will also be positively affected by the result of Issue No. 15-D. Previously, a single bank leaving a syndicated debt scenario would have triggered dedesignation and redesignation. Now, it will not.

Stay tuned to the Hedge Trackers blog and our email updates for more on FASB changes and how they affect the corporate hedger.