Accounting for Derivatives with Initial Margin Under IFRS 13

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Accounting for Derivatives with Initial Margin Under IFRS 13

Richard David Kenyon
Birmingham City University

Chris Kenyon
Lloyds Banking Group

November 23, 2016


Abstract:
Initial margin is required by central counterparties (CCPs) and under regulatory Bilateral Initial Margin (BCBS-317). This initial margin is contractually defined in Clearing Arrangements (CA) or Collateral Support Deeds (CSD) respectively. We investigate whether the cost of this initial margin over the life of the affected trades (known as Margin Valuation Adjustment, MVA) should be accounted for in Accounting Fair Value under IFRS 13. We find strong indications that MVA should be reflected in Fair Value given that to exit the affected trades any financial institution taking them over would face the same costs from the trades and additional required contracts (CA or CSD) that the first financial institution already faced. In addition the CA/CSD that give rise to MVA are contractually connected to the related trades and contribute to the overall project costs of the trades. These CA/CSD project costs are analogous to costs from cashflows due to Collateral Support Agreements (CSAs) which have a similar contractual relation to trades and CSAs are routinely included in trade pricing. Whether MVA is reported separately or as part of desk activity depends on the applicable unit of account given the internal setup of the financial institution and specific trading patterns following IFRS 9 and IFRS 13.

Number of Pages in PDF File: 13

papers.ssrn.com/sol3/papers.cfm?abstract_id=2874703