Eris Exchange and RJ O’Brien fixed income group release second hedge accounting paper

Newest case study illustrates how to successfully obtain fair value hedge accounting treatment when using Eris Swap Futures


Eris Exchange (Eris) and an institutional fixed income brokerage group at R.J. O’Brien & Associates (RJO), the oldest and largest independent futures brokerage and clearing firm in the United States today released another third-party accounting case study outlining how Eris Interest Rate Swap Futures can receive the same favorable hedge accounting treatment as that applied to over-the-counter (OTC) swaps. Following up on the case study released last month addressing cash flow hedge treatment, the RJO Fixed Income Group commissioned the latest study, concluding that Eris Swap Futures may successfully receive fair value hedge accounting treatment and providing a concrete example of how to achieve hedge effectiveness.

“The use of Swap Futures as an eligible and effective hedge can produce millions of dollars in cost savings for institutional investors, and fair value treatment is even more popular than cash flow among investors trading OTC swaps,” said Rob Powell, Senior Managing Director of the Fixed Income Group & Senior Vice President of RJO. “Many end users have stringent internal accounting practices that have made them reluctant in the past to move from OTC to Swap Futures, even though they find appealing the liquidity and transparency associated with futures. By demonstrating with specificity how to obtain fair value hedge accounting treatment, this independent study opens the door for a whole new set of investors to incorporate this cost-effective hedging tool into their arsenals.”

In the new case study, author Charles Brobst, Managing Partner at GFM Solutions, illustrates the use of swap futures as a hedge for changes in the fair value of fixed-rate debt, attributable to changes in the LIBOR benchmark interest rate. The case study uses regression analysis to assess hedge effectiveness. Brobst said: “Once we established the effectiveness of the Eris Swap Futures from a fair value hedge accounting perspective, we provided a blueprint for accountants to map out their own hedge accounting treatment. By doing so, we demonstrated that the process is really quite straightforward, eliminating the perceived barriers to entry for a wide range of end users.”

As in the cash flow hedge accounting study, the fair value case study includes journal entries and sample designation documentation, providing RJO clients with the detail needed to incorporate Eris Interest Rate Swap Futures into their hedging strategies.

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