Instruction No. 94-04 of March 14, 1994, on the Accounting for Interest Rate Financial Derivative Transactions (Consolidated Version)

OFFICIAL TEXTS OF THE BANKING COMMISSION
Instruction No. 94-04 of March 14, 1994 (Consolidated Version as of 19/06/2009)

Article 1
"Covered hedging operations referred to in Article 4 of the aforementioned Regulation No. 88-02 may relate to assets, liabilities, off-balance sheet items, or future operations whose probability of realization is high" (Banking Commission Instruction No. 2003-03 of July 24, 2003).

Article 2
To qualify a transaction as a covered hedging operation within the meaning of Article 4 of the aforementioned Regulation No. 88-02, a correlation must be observed between the value changes of the "hedged item or group of items" (Banking Commission Instruction No. 2003-03 of July 24, 2003) and those of the contract underlying the transaction. However, when the transaction involves the purchase of option contracts, this correlation must be established between the value changes of the "hedged item or group of items" (Banking Commission Instruction No. 2003-03 of July 24, 2003) and those of the underlying financial instrument. The absence or disappearance of the correlation described above implies the immediate recognition in the income statement of the value changes of the financial instrument contracts. Credit institutions retain the information allowing them to consider an operation as a covered hedging operation, notably the description of the method used to measure the correlation described above. To the extent that they comply with the rules set forth in Article 4 of the aforementioned Regulation No. 88-02 and the conditions recalled above, the sale of option contracts may be treated, on an exceptional basis, as covered hedging operations.

Article 3
For the application of the rules set forth in Article 6 of the aforementioned Regulation No. 88-02 regarding the definition of over-the-counter markets assimilated to organized markets, liquidity is assessed based on the operating conditions of these over-the-counter markets over a period of at least equal to that of a fiscal year.

Article 4
"Premiums related to the purchase and sale of interest rate option contracts are respectively included in the elements 'Purchased conditional instruments' and 'Sold conditional instruments'."

Article 5
Results arising from value changes of financial instrument contracts of a firm or conditional nature, determined in application of Articles 3 and 5 of the aforementioned Regulation No. 88-02, are recorded "in the CPTE_RESU table respectively in the elements" "Charges on interest rate instruments" and "Income on interest rate instruments". The results of transactions on financial derivatives are also broken down "in the RESU_IFT_ table". Upon resale, repurchase, exercise, or expiration of an option operation, the institution records

OFFICIAL TEXTS OF THE BANKING COMMISSION
Instruction No. 94-04 of March 14, 1994 (Consolidated Version as of 19/06/2009)

"in the elements of charges or income on interest rate instruments", as applicable, the premium recorded "in the elements 'Purchased interest rate conditional instruments' or 'Sold interest rate conditional instruments'". When it is a covered hedging operation, the premium is charged to the suspense account opened in application of Article 6 of this instruction. However, when it involves interest rate 'cap' or 'floor' guarantee operations, the premium must be recognized on a phased basis over the life of the guarantee as charges or income, respectively, for the buyer and the seller. In the event of exercise of an option operation, the underlying instrument delivered is subject to its own recording and valuation rules.

Article 6
Value changes of financial instrument contracts qualified as covered hedging operations are recorded until their settlement, pursuant to Article 5 of the aforementioned Regulation No. 88-02, in an element attached to the "regularization account" element named "Potential losses or gains on unsettled interest rate financial derivative hedging contracts" opened for each of the elements or "groups of items that have been the subject of a covered hedging operation". (Banking Commission Instruction No. 2003-03 of July 24, 2003) Upon settlement of a covered hedging operation, the balance of the suspense sub-account related to this operation is transferred, according to its sign, to the element "Losses or gains to be spread over settled interest rate financial derivative hedging contracts" attached to the "regularization account" element. It is reported to the income statement under the conditions provided for in Article 5 of the aforementioned Regulation No. 88-02. However, when the "hedged item or group of items" (Banking Commission Instruction No. 2003-03 of July 24, 2003) is valued at market price, covered hedging results arising from financial instruments traded on organized or assimilated markets are reported to the income statement from the inception of the hedging operation, as the value of the "hedged item or group of items" (Banking Commission Instruction No. 2003-03 of July 24, 2003) changes, under the conditions described in the first two paragraphs of Article 5 of this instruction. The balances of the accounts "Potential losses or gains on unsettled or settled interest rate financial derivative hedging contracts" related to covered hedging operations are included "in the RESU_IFT_ table".

Article 7
Margin deposits received by an institution, pursuant to Article 25 of the General Regulations of MATIF, are recorded by this institution "in the element 'Various creditors', included in the SITUATION table".
Margin deposits paid by a credit institution, in application of Articles 25 and 30 of the General Regulations of MATIF, are recorded by this institution "in the element 'Various debtors', included in the SITUATION table". The accounting organization of institutions must allow for a clear distinction between margin deposits constituted for client transactions and margin deposits constituted for the institution's own transactions. Margin deposits paid by option sellers are recorded according to the rules set forth above.

Article 8
The calculation of provisions for depreciation of asset elements subject to the rule of valuation at the lower of cost or market price is performed after taking into account gains, recorded in the regularization account, resulting from the valuation of covered hedging contracts negotiated on an organized or assimilated market within the meaning of Article 6 of the aforementioned Regulation No. 88-02 and allocated to these same asset elements.

OFFICIAL TEXTS OF THE BANKING COMMISSION
Instruction No. 94-04 of March 14, 1994 (Consolidated Version as of 19/06/2009)

Article 9
The unnetted cumulative nominal values of financial instrument contracts concluded by an institution are recorded by this institution on the "IFT_ENGAG table".

Article 10
Institutions must be able to identify the different commitments resulting from financial derivative transactions, for their nominal value and according to their maturity date, at least according to the following criteria: transactions executed on organized and assimilated markets or over-the-counter, contract underlying assets, purchases or sales of contracts, speculation or covered hedging operations, firm operations or conditional operations. Institutions record commitments related to financial derivative transactions in the appropriate sub-accounts of the "Commitments on financial derivative instruments" account.

Article 11
This instruction repeals and replaces Banking Commission Instruction No. 88-01 of March 7, 1988, modified by Instruction No. 90-03 of July 12, 1990.