Template F 16.01 - Interest income and expenses by instrument and counterparty sector

Question

Template 16.01 requires the interest to be broken down by interest income and expense and also by financial instrument. Institutions use derivatives to manage financial instruments designated at fair value. For those that do not qualify for hedge accounting they act as an economic hedge with changes in the fair value of the hedged item. Typically, derivatives are used to manage fair value movements of debt securities issued, which are designated at fair value. One part of this economic hedge is the recording of net interest income. In IFRS the derivative interest income is netted within interest expense against the debt security issued as these balances are managed together. As FINREP requires the interest to be split out by instrument there would be a negative derivative expense. This negative amount should be presented in interest income so that total interest income is disclosed correctly in row 270. However the amount in row 010 column 020 would cause EBA v3951_s signage validation to fail as it requires a positive balance. Please can EBA advise on whether FINREP can permit a negative derivative expense for derivatives (row 010, column 020).

European Banking Authority · Accepted Answer

Institutions that use derivatives to hedge interest rate risk in a way that this derivative forms an economic hedge, but does not qualify for hedge accounting, shall present the interest income or expense on the derivative in row 010 (Derivatives - Trading) of template F 16.01 of Annexes III and IV to Regulation (EU) No 680/2014 (ITS on Supervisory Reporting). The presentation has to be done according to the contribution of the derivative to profit and loss, i.e. in the column corresponding to the interest income / expense of the hedging instrument (not the hedged instrument). In other words, the interest income / expense from the derivative must not be netted against the interest expense / income reported in respect of the hedged instrument, in this instance a debt security. It is therefore not necessary to amend v3950_s and v3951_s (applicable up to version V2.6 of the reporting framework) neither v5693_s (applicable as of version V2.7 of the reporting framework) with regard to row 010 of F 16.01. The same applies to the reporting of interest income/expense of derivatives hedging interest rate risk (economic hedges) in template F 02.00 of Annexes III and IV to the ITS on Supervisory Reporting (rows 020 and 100 of F 02.00). Please see Q&A 2014_1203 for the treatment of hedge accounting derivatives.

Template F 16.01 - Interest income and expenses by instrument and counterparty sector

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