Q&A 2014_1000 states that there are only two accepted ways in FINREP to report interest income and expenses from financial instruments held for trading, interest income and expenses (“clean price”) or as part of the gains and losses from these assets (“dirty price”), and that for economic hedge there is the possibility to report the amounts separately as financial income or expenses.

How should this answer be understood in the case of credit institutions applying “dirty price convention”? The possibility to report the amounts separately as interest income or expenses (mentioned in the last sentence of the answer) envisages only the items “Interest income. Financial assets held for trading” and “Interest expenses. Financial liabilities held for trading”?

If this is the case, for credit institutions applying “dirty price convention”, reporting the amounts related to the economic hedges in the above-mentioned items will be the only use of the respective items.

In order for the profit and loss statement to reflect correctly interest income and expenses from the financial instruments that are hedged, paragraph 24 of Part 2 of Annex V of Regulation (EU) No 680/2014 – ITS on Supervisory Reporting of institutions, ITS) – allows – when an institution has chosen to use the ‘clean price’ approach – to present interest income and expenses of economic hedge derivatives in the P&L as interest income or expense in ‘Interest income. Financial assets held for trading’ and ‘Interest expenses. Financial liabilities held for trading’ (rows 020 and 100 of template F 02.00). This option is intended to avoid to the ‘mismatch’ created when the income or expenses of the hedged instruments are presented as ‘interest’ but the gains or losses of the derivatives that hedge interest rate are presented in other line items.

Therefore, when an institution has chosen to use the ‘dirty price’ for presenting interest income and expense on hedged instruments measured at fair value through profit and loss, it is not allowed to report gains and losses from hedging instruments in ‘Interest income. Financial assets held for trading’ and ‘Interest expenses. Financial liabilities held for trading’. In this case, the hedged instruments do not generate interest income or expenses in the P&L and, thus, there is no reason to correct the amount of interest income or expenses by including gains or losses from economic hedging instruments. Instead, the interest gains and losses on both hedged items and hedging instruments in economic hedges shall be reported in row 280 ‘Gains or (-) losses on financial assets and liabilities held for trading, net’ in template F 02.00.