Hedge accounting of interest rate risk according to IAS 39 is applied to avoid P&L volatility resulting from accounting mismatch, and it is a common practice. However, issues concerning hedge accounting have not ceased to be items of topical interest. This analysis will show that hedge accounting of interest rate risk relies upon modern approaches of financial economics which are related to the pricing of interest rate derivatives. Derivative markets play a fundamental role for hedge accounting and are used to derive the valuation model used under IAS 39.

A common way of quoting a swaption price is referring to its 'implied volatility' rather than the price itself. The implied volatility for the swaption is the volatility parameter required in a benchmark pricing model, which allows for closed-form prices, for the modelled price to replicate the market price of the swaption. The benefit of this method of quotation is that it removes the effect of the parameters not related to volatility that are contributing to the swaption price, such as the underlying yield curve, its strike, maturity, and tenor.

On 19 July 2018, the European Banking Authority (EBA) published the new Guideline on the Management of Interest Rate Risks in the Banking Book (IRRBB). In mid-2019, the new guidelines will replace the previous EBA IRRBB Guideline published in 2015. Starting on 30 June 2019, the new Guideline will apply to all financial institutions and regulators in the European Union. By means of the new guideline, the EBA implements the Basel paper BCBS 368 requirements regarding banks’internal IRRBB management and the regulatory outlier test in Europe.

The payment protection insurance (PPI) mis-selling scandal has already cost a number of banks more than £18 billion in provisions. Many other examples of customer mistreatment have made the headlines: IT problems that have led to banking customers being unable to access their funds and pay their bills; charging customers unlawful fees for late payments; even charging customers higher rates because of their race. Not to mention the LIBOR rate-fixing scandal, which has seen numerous multi-million dollar fines imposed on offenders in Europe and the US.

Conduct risk (or misconduct risk) refers to the risk arising from inappropriate or unethical behavior of employees with regard to customer welfare or market integrity. In the past, it was treated as part of operational risk, but given its enormous implications, most economies now consider it a standalone risk. UK’s Financial Conduct Authority (FCA) monitors the conduct of banks with the twin objectives of protecting consumers and enhancing the integrity of the financial system.

Financial institutions have become quite advanced in dealing with classical risks, controlling losses and protecting their balance sheet. But contrary to any of the classical risks, Conduct Risk forces a complete change in paradigm, since it requires financial institutions to put themselves in the shoes of their customers or stakeholders, and protect their customers ? balance sheets (in some cases against the financial institution’s own short term interests). Financial institutions now need to concentrate on protecting their indirect assets, i.e. their customers.

Slides from a 2016 Actuaries Institute of Australia presentation

Slides from a 2015 Actuaries Institute of Australia presentation

Slides from the 2016 Actuaries Institute of Australia Financial Services Forum

Widespread misconduct in Financial Services organisations prior to and since 2008 has put organisational culture centre stage in the minds of regulators. There is no one definition of Conduct Risk across the regulatory requirements for Financial Services organisations. This paper presents a research in progress development that provides the various groups and stakeholders in an organisation with a shared conceptualisation of what conduct culture is, along with a common language to communicate canonical accepted behaviours.