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Statutory Accounting Principles Working Group
Maintenance Agenda Submission Form
Form A
Issue: Definition of Notional
Check (applicable entity):
P/C
Life
Health
Modification of existing SSAP
New Issue or SSAP
Description of Issue:
Questions have been received regarding the term “notional” for derivative contracts. Although questions have
been received regarding all derivatives, issues with the use of the term for futures has specifically been noted.
In researching these questions, the term “notional” was identified 15 times within SSAP No. 86—Derivatives
(SSAP No. 86), but no explicit definition is included. Although there are instances in which a definition may
be implied, these instances are noted as vague and inconsistent throughout the guidance. For example, in one
disclosure, reporting entities are requested to provide the “number of contracts or notional amount.” In
another disclosure, reporting entities are requested to provide the “notional or contract amounts”. The term
“notional” is considered significant in the reporting of derivatives as it is used in calculating other reported
amounts (e.g., per SSAP No. 86, unrealized gains and losses, foreign currency premiums, etc.)
With regards to futures, although the term “notional” is a reported element in Schedule DB-Part B, it has been
communicated to staff that it is not a standard industry term for these types of contracts. In reviewing contract
specifications for these contracts, reference is given to the contract size and the number of contracts.
The term “notional” is defined in the blanks reporting instructions for Schedule DB – Part A (options, caps,
floors, collars, swaps and forwards), but there is no definition for Schedule DB – Part B (futures). The A/S
blanks definition seems to be in-line with the Commodity Futures Trading Commission (CFTC) definition. In
reviewing the FASB definition, it seems to be fairly generic, without providing clarity as to calculation.
As part of the research of this item, staff identified a survey completed in 2013 on the calculation of “notional
value” used in complying with regulatory requirements for over-the counter derivatives under the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Although this survey focused on energy
companies and swap transactions, staff noted the following:



The term notional value is commonly used, but in practice there is not a single accepted definition.
There is uncertainty in the application of notional value.
There are different approaches used to calculate notional value.
As a result of the questions received regarding the term “notional” as well as the use of the notional amount in
calculating reported amounts for derivative contracts, this agenda item proposes to incorporate a definition in
SSAP No. 86, with subsequent revisions to clarify the guidance involving use of the term.
Existing Authoritative Literature:
FASB Definition:
Notional Amount: A number of currency units, shares, bushels, pounds, or other units specified in a
derivative instrument. Sometimes other names are used. For example, the notional amount is called a
face amount in some contracts.
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CFTC Definition:
Notional Principal: In an interest rate swap, forward rate agreement, or other derivative instrument,
the amount or, in a currency swap, each of the amounts to which interest rates are applied in order to
calculate periodic payment obligations. Also called the notional amount, the contract amount, the
reference amount, and the currency amount.
Annual Statement Instructions:
Schedule DB – Part A – Sections 1 &2 (Options, Caps, Floors, Collars, Swaps and Forwards)
Notional / Contracts Definition
Notional Value:
The principal value upon which future payments are based in a derivative transaction
as at a specific period in time (the “as of” reporting date) in the reporting currency.
Converting the notional into reporting currency should be done in accordance with
SSAP No. 23, Foreign Currency Transactions and Translations.
Swaps, Forwards, Collars, Floors and Caps:
All use a “notional” amount to calculate future payments. If there is a notional
schedule, the reported notional would be that notional amount that is used to
calculate the next payment.
Options (Calls, Puts, Warrants):
All use notional amount [or number of contracts for exchange-traded instruments] to
calculate future payments. Both notional amount and number of contracts are
reported.
Value of One (1) Point:
The monetary value of a one (1) point move in a futures position published by the exchange.
May also be referred to as “Lot Size,” “Lots” or “Points” by the exchange.
Interest rate and currency swaps (where receive/(pay) notional amounts are denominated in different
currencies), are filed under the “Foreign Exchange” swap subcategory.
Schedule DB – Part A – Section 1: (Owned on Dec. 31 of Current Year)
Column 9
– Notional Amount
Show the notional amount (i.e., the amount upon which the next cash payment is based).
Notional amounts are to be reported as an absolute (non-negative) value.
If the replication (synthetic asset) transactions are not denominated in U.S. dollar, convert it
into U.S. dollar equivalent in accordance with SSAP No. 23, Foreign Currency Transactions
and Translations.
Column 21 – Potential Exposure
Potential Exposure is a statistically derived measure of the potential increase in derivative
instrument risk exposure, for derivative instruments that generally do not have an initial cost
paid or consideration received, resulting from future fluctuations in the underlying interests
upon which derivative instruments are based.
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For collars, swaps other than credit default swaps and forwards, the Potential Exposure =
0.5% x “Notional Amount” x Square Root of (Remaining Years to Maturity).
For credit default swaps, enter the larger of notional amount or maximum potential payment.
For purchased credit default swaps bought for protection, the amount reported will be zero.
If the maximum potential exposure cannot be determined, enter zero and explain in the Notes
to Financial Statement.
Disclose in the footnotes to the annual statement any assets, held either as collateral or by
third parties that the reporting entity can obtain and liquidate to recover all or a portion of the
amounts paid under the derivative.
Schedule DB – Part A – Section 2: (Terminated During Current Year)
Column 11 – Notional Amount
Show the notional amount (e.g., the amount upon which the next cash payment is based).
Notional amounts are to be reported as an absolute (non-negative) value.
If the replication (synthetic asset) transaction is not denominated in U.S. dollar, convert it into
U.S. dollar equivalent in accordance with SSAP No. 23, Foreign Currency Transactions and
Translations.
Schedule DB – Part B – Section 1: (Futures Open Dec. 31 of Current Year)
Column 3
– Notional Amount
Show the total notional amount of the futures position on December 31 of the reporting year
as absolute (non-negative) value.
Schedule DB – Part B – Section 2: (Futures Terminated During Current Year)
Column 3
– Notional Amount
Show the total notional amount of the futures position terminated during the current year as
absolute (non-negative) value.
SSAP No. 86 – Derivatives (Only Paragraphs that Reference “Notional” are Included):
5.
Derivative instruments include, but are not limited to; options, warrants used in a hedging
transaction and not attached to another financial instrument, caps, floors, collars, swaps, forwards,
futures and any other agreements or instruments substantially similar thereto or any series or
combination thereof.
a.
“Caps” are option contracts in which the cap writer (seller), in return for a premium,
agrees to limit, or cap, the cap holder’s (purchaser) risk associated with an increase
in a reference rate or index. For example, in an interest rate cap, if rates go above a
specified interest rate level (the strike price or the cap rate), the cap holder is entitled
to receive cash payments equal to the excess of the market rate over the strike price
multiplied by the notional principal amount. Because a cap is an option-based
contract, the cap holder has the right but not the obligation to exercise the option. If
rates move down, the cap holder has lost only the premium paid. A cap writer has
virtually unlimited risk resulting from increases in interest rates above the cap rate;
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c.
36.
“Floors” are option contracts in which the floor writer (seller), in return for a premium,
agrees to limit the risk associated with a decline in a reference rate or index. For
example, in an interest rate floor, if rates fall below an agreed rate, the floor holder
(purchaser) will receive cash payments from the floor writer equal to the difference
between the market rate and an agreed rate multiplied by the notional principal
amount;
For all derivatives terminated, expired, or exercised during the year:
b.
A description, for each instrument, of the nature of the transaction, including:
iii.
54.
Number of contracts or notional amount;
Reporting entities shall disclose the following for all derivative contracts used:
b.
Disclosures by type of instrument outstanding, e.g., call options, floors, etc.:
i.
Notional or contract amounts;
SSAP No. 86 - Exhibit B - Assessing Hedge Effectiveness
5.
However, assessing hedge effectiveness can be more complex. For example, hedge
effectiveness would be reduced by the following circumstances, among others:
b.
Differences in critical terms of the hedging instrument and hedged item or hedged
transaction, such as differences in notional amounts, maturities, quantity, location, or
delivery dates.
Assuming Effectiveness in a Hedge with an Interest Rate Swap
7.
An entity may assume effectiveness in a hedging relationship of interest rate risk involving an
interest-bearing asset or liability and an interest rate swap (or a compound hedging instrument
composed of an interest rate swap and a mirror-image call or put option as discussed in paragraph
7.d.) if all of the applicable conditions in the following list are met:
Conditions applicable to both fair value hedges and cash flow hedges
a.
The notional amount of the swap matches the principal amount of the interestbearing asset or liability being hedged.
Exhibit C – Specific Hedge Accounting Procedures For Derivatives
2.
Swaps, Collars, and Forwards (see also discussion in Introduction above):
a.
Accounting at Date of Opening Position:
iii.
Open foreign currency swap and forward contracts hedging foreign currency
exposure on items denominated in a foreign currency and translated into U.S. dollars
where fair value accounting is not being used:
(a)
The foreign exchange premium (discount) on the currency contract shall be
amortized into income over the life of the contract or hedge program. The
foreign exchange premium (discount) is defined as the foreign currency
(notional) amount to be received (paid) times the net of the forward rate
minus the spot rate at the time the contract was opened.
(c)
The unrealized gain/loss for the period equals the foreign currency (notional)
amount to be received (paid) times the net of the current spot rate minus the
prior period end spot rate;
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3.
(d)
The statement value of the derivative equals the amortized (premium)
discount plus the cumulative unrealized gain/(loss) on the contract. The
cumulative unrealized gain/(loss) equals the foreign currency (notional)
amount to be received (paid) times the net of the current spot rate minus the
spot rate at the time the contract was opened;
(g)
If during the life of the currency contract it or a designated portion of the
currency contract is not effective as a hedge, valuation at amortized cost
shall cease. To the extent it ceased to be an effective hedge, a cumulative
unrealized gain/loss (surplus adjustment) will be recognized equal to the
notional amount or designated notional amount times the difference between
the forward rate available for the remaining maturity of the contract (i.e., the
forward rate as of the balance sheet date) and the forward rate at the time it
ceased to be an effective hedge.
Futures (see also discussion in Introduction above):
iii.
Open foreign currency futures contracts hedging foreign currency exposure on
item(s) denominated in a foreign currency and translated into U.S. dollars (where fair
value accounting is not being used):
(a)
The foreign exchange premium (discount) on the currency contract will be
amortized into net investment income over the life of the contract or hedge
program. The foreign exchange premium (discount) is defined as the foreign
currency (notional) amount to be received (paid) times the net of the forward
rate minus the spot rate at the time the contract was opened.
(b)
A foreign currency translation adjustment shall be reflected as an unrealized
gain/loss (unassigned funds (surplus) adjustment) using the same
procedures as is done to translate the hedged item. The cumulative
unrealized gain/(loss) which equals the foreign currency (notional) amount to
be received (paid) times the net of the current spot rate minus the spot rate
at the time the contract was opened shall be reported as recognized variation
margin;
(f)
If during the life of the currency contract it or a designated portion of the
currency contract is not effective as a hedge, valuation at amortized cost
ceases. To the extent it ceases to be an effective hedge, an unrealized
gain/loss will be recognized equal to the notional amount or a designated
portion of the notional amount times the difference between the forward rate
available for the remaining maturity of the contract (i.e., the forward rate as of
the balance sheet date) and the forward rate at the time it ceased to be an
effective hedge.
Activity to Date (issues previously addressed by SAPWG, Emerging Accounting Issues WG, SEC,
FASB, other State Departments of Insurance or other NAIC groups): None
Information or issues (included in Description of Issue) not previously contemplated by the SAPWG:
None
Recommendation:
It is recommended that the Working Group move this item to the nonsubstantive active listing and
expose a proposed definition of “notional principal” based on the CFTC definition for inclusion in
SSAP No. 86—Derivatives. Staff believes further consideration will need to occur on the impact of the
definition in SSAP No. 86 and in the Annual Statement instructions, however, staff recommends that
the initial exposure focus on the definition, with subsequent consideration of changes after determining
the appropriate definition.
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(Staff specifically requests the involvement of those involved in derivative transactions to review the
proposed definition and communicate their suggestions to SSAP No. 86.)
13.
The term “notional principal/notional” shall apply to derivative transactions as follows:
a.
In an interest rate swap, forward rate agreement, or other non-future derivative
instrument, is the amount or, in a currency swap, each of the amounts to which
interest rates are applied in order to calculate periodic payment obligations. The term
is also referred to the contract amount, the reference amount, and the currency
amount.
b.
For futures contracts, with a U.S. dollar-denominated contract size (e.g., Treasury
note and bond contracts, Eurodollar futures) or underlying, the notional amount is
contract size times the number of contracts.
c.
For equity index and similar futures, the number of contracts is multiplied by the
dollars-per-point-value multiplied by the index points at reporting date. Non-US dollar
contracts must be multiplied or divided by the appropriate foreign currency rate.
Staff Review Completed by:
Julie Gann – October 2015
Status:
On November 19, 2015, the Statutory Accounting Principles (E) Working Group moved this item to the
nonsubstantive active listing and exposed nonsubstantive revisions to SSAP No. 86, as illustrated above, to
incorporate a definition of “notional principal.” In exposing the proposed definition, it was identified that
subsequent consideration would need to occur on the impact that the definition ultimately adopted has on the
existing guidance and Annual Statement Instructions, but it was requested that the focus first occur on
establishing an appropriate definition. Additionally, the involvement of those in derivative transactions was
specifically requested in reviewing the proposed definition, and in subsequent review of the impact to SSAP
No. 86 and the reporting instructions.
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