9.3 Multiple-Layer Hedges of a Single Closed Portfolio

Entities that apply the last-of-layer method designate, as the hedged item in a fair value hedge of interest rate risk, a stated amount of the asset or assets that are not expected to be affected by prepayments, defaults, or other factors influencing the timing or amount of cash flows. The hedged item represents a single layer in the closed portfolio. ASU 2022-01 expands the current model to explicitly allow entities to designate multiple layers in a single portfolio as individual hedged items. Because entities can designate multiple hedging relationships with a single closed portfolio, a larger portion of the interest rate risk associated with such a portfolio is eligible to be hedged under ASU 2022-01 than under current guidance, which does not address multiple-layer hedges.

ASU 2022-01 also addresses questions about the types of derivatives that could be used as the hedging instrument in potential multiple-layer hedges. Under the ASU, an entity has the flexibility to use any type of derivative or combination of derivatives (e.g., spot-starting constant-notional swaps with different term lengths, a combination of spot-starting and forward-starting constant-notional swaps, amortizing-notional swaps) by applying the multiple-layer model that aligns with its risk management strategy.

In its guidance on multiple-layer hedges of a single closed portfolio, the ASU also clarifies that no assets may be added to a closed portfolio once it is designated in a portfolio layer method hedge. However, at any time after the initial hedge designation, new hedging relationships associated with the portfolio may be designated and existing hedging relationships associated with the portfolio may be dedesignated to align with an entity’s evolving strategy for managing interest rate risk on a timely basis.

In a manner consistent with the guidance established by ASU 2017-12 on single-layer hedges, ASU 2022-01 requires an entity to perform a documented analysis in each period to support an expectation that the aggregate amount of the multiple hedged items (i.e., the hedged layers) will be outstanding for the periods hedged. ASU 2022-01 also requires the partial or full dedesignation of a hedged layer or layers upon an anticipated or actual breach (i.e., when the aggregate amount of the hedged layers exceeds the amount of the closed portfolio). In either case, the ASU requires an entity to determine which layer or layers to dedesignate or partially dedesignate in accordance with its entity-wide accounting policy election that specifies a systematic and rational approach for making such a determination.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.