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IFRS Dynamic Risk Management (DRM)

Over the past few years, the International Accounting Standards Board (IASB) has made considerable progress with its Dynamic Risk Management project. Ahead of an expected exposure draft in 2025, now is the time for banks and building societies to be considering what this might mean for their business.

DRM: All you need to know

DRM in brief

  • The IASB's Dynamic Risk Management (DRM) project represents the development of a new accounting standard to replace the existing requirements of IAS 39 on portfolio hedge accounting.
  • The DRM model provides for a significantly stronger interaction between asset/liability and internal risk management.
  • Important amendments include the addition of risk limits derived from the risk management strategy along with the balancing of fair value changes and net interest income of derivatives through a new balance sheet position “DRM adjustment”.
  • The transition from IAS 39 portfolio hedge accounting to the DRM framework will require considerable work and collaboration across multiple functions of an organisation in order to ensure that the new model is implemented correctly.

“The DRM model is likely to have a significant impact on how banks apply hedge accounting and therefore should be in the scope of every bank trying to manage their profit and loss volatility through the application of hedge accounting.”

Alex Armstrong, Partner Corporate Treasury

How will the proposed DRM model work?

A period of prioritisation

The DRM model still foresees repricing periods in the form of pre-defined hedge periods and follows a sequential approach. In contrast to hedge accounting under IAS 39 or IFRS 9, no de-designation at the end of the hedge period and (re)designation at the beginning of the subsequent hedge period is required due to the nature of the current net open risk position.

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Six substages

The process model for DRM can be divided into six sub-stages, which in turn can be sub-divided into process steps performed at the beginning (prospective assessment) and end of the hedge period (retrospective assessment).

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Comparison with Benchmarks

The mechanics of the DRM model are determined by comparing the designated derivatives with hypothetical benchmark derivatives. They represent the optimal hedge in terms of risk mitigation intention and are constructed with a fixed ruleset from “building block” on-market derivatives.

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DRM adjustment calculation

For the calculation of the DRM adjustment, the fair value changes of the benchmark derivatives and the designated derivatives are determined based on the “lower-of” test.

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An overview of the DRM framework

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"The DRM model is likely to have a significant impact on the way in which financial institutions apply hedge accounting and should therefore be very firmly on the agenda of those organisations intending to manage P&L volatility using hedge accounting strategies".

- Alex Armstrong, Partner Treasury Assurance

How can Deloitte support?

  • Knowledge exchange: Continuous information exchange with our experienced specialists on the mechanism and innovations of DRM
  • Implementation support: Identification of data, process and methodology gaps and derivation of optimisation measures
  • DRM simulation: Simulation of potential balance sheet and P&L effects calculated by the Deloitte DRM simulation tool.
  • DRM roadmap: Joint development of a governance structure and roadmap for a potential DRM preliminary study
  • Management analysis: Evaluation of different steering and control approaches and derivation of implementation requirements

1. What is Dynamic Risk Management (DRM)?

Dynamic Risk Management (DRM) is a proactive, continuous approach to identifying, assessing, and mitigating risks in real time. Unlike traditional risk management, which relies on static frameworks, DRM continuously adapts to changes in the business environment, market conditions, and emerging threats to enhance resilience and decision-making.

2. Is DRM mandatory to apply?

Organisations currently using macro hedge accounting under IAS 39 are required to adopt the Dynamic Risk Management (DRM) approach. This is necessary because the updated DRM guidance will be integrated into the forthcoming IFRS 9 standard.

3. From which period is DRM applicable?

(TBD)

4. Does DRM require significant changes in Treasury & risk management system/applications?

While the specific changes depend on an organisation's existing infrastructure and the complexity of its hedging activities, DRM implementation often entails substantial system and application upgrades or replacements.

5. How does Dynamic Risk Management differ from traditional risk management?

Traditional risk management typically follows a static, periodic assessment approach, often relying on historical data. DRM, on the other hand, leverages real-time analytics, scenario-modelling, and automated monitoring to dynamically adjust risk strategies based on emerging threats and opportunities.

6. What are the key components of a DRM framework?

A robust DRM framework includes:

  • Risk identification & monitoring, risk measurement & assessment, risk mitigation strategies, technology & automation, governance & compliance. 

7. How can Dynamic Risk Management improve financial risk management?

DRM helps financial institutions and businesses proactively manage market risks, credit risks, and liquidity risks by using real-time risk exposure assessments and stress testing. This improves capital allocation, enhances regulatory compliance, and ensures more effective hedging strategies.

8. How does Dynamic Risk Management support/affect regulatory compliance?

Regulatory environments are constantly evolving, requiring organisations to be agile. DRM frameworks integrate real-time regulatory updates, automate compliance reporting, and ensure risk mitigation strategies align with new requirements, reducing the likelihood of non-compliance penalties.

9. Is Dynamic Risk Management applicable to all industries?

While Dynamic Risk Management (DRM) is particularly relevant for financial institutions like banks due to their significant exposure to interest rate risk, its ongoing development aims to expand its applicability to other sectors. These include healthcare, manufacturing & supply chain, and energy & utilities, demonstrating DRM's growing relevance across diverse industries. 

10. What are the key challenges in implementing Dynamic Risk Management?

Organisations may face challenges such as resistance to change from traditional risk management approaches, integration complexities with existing systems and data sources, high initial investment in technology and analytics capabilities, a need for skilled personnel to interpret real-time risk data effectively and last but not the least, collaboration with cross verticals such as IT, finance, risk, treasury within the organisation.

11. How can Deloitte help organisations implement Dynamic Risk Management?

At Deloitte, we provide end-to-end DRM solutions, including:

  • Risk strategy development tailored to industry-specific challenges.
  • Technology integration leveraging AI, ML, and real-time analytics.
  • Regulatory compliance alignment to ensure governance adherence.
  • Training & change management for seamless adoption.

We help organisations build resilient, adaptive, and data-driven risk management frameworks to navigate uncertainty and drive sustainable growth.

12. What is the biggest benefit of using DRM? 

Organisations get better visibility and faster responses. DRM helps to spot issues early, make confident decisions, and reduce the impact of surprises whether that’s a market crash, supply delay, or data breach.

Our thinking

DRM - Overview and timelines

Aligning Economic Hedging with Financial Reporting

Corporate Treasury

In today's ever-changing business environment, the Treasury function plays a pivotal role in managing financial risk and driving business strategy. From complex market conditions to increasingly stringent regulatory and reporting requirements, Treasurers are managing a greater number of risks and uncertainties than ever before.
Service

IASB Dynamic Risk Management Project

The International Accounting Standards Board (“IASB”) has made considerable progress over the last two years with its Dynamic Risk Management (“DRM”) project and is planning to issue an exposure draft in 2025.

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Awards and recognition

Get in touch

Alex Armstrong

Alex Armstrong

Partner
+44 (0)14 1304 6991
Dilip Menon

Dilip Menon

Partner
+44 (0) 20 7007 0482
Vitor Hugo Alves Gomes

Vitor Hugo Alves Gomes

Director
+44 (0)77 1608 0713