Risk-free rates may fail liquidity test for hedge accounting

Experts fear trades referencing SOFR and €STR will not be eligible for hedging relief

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Benchmarks that are in line to replace Libor are in danger of not achieving the required liquidity to meet new hedge accounting standards, bankers warn.

Under IFRS 9, which came into effect at the start of 2019, hedging activity must have a risk component that is “separately identifiable and reliably measurable” to qualify for hedge accounting status.

For benchmarks, this means the rate must be liquid enough to have an easily observable market within 24 months from the date it is designated as

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