Don’t shoot the messenger

We are only a week or so past 30 June (a common balance date for many Hedgebook clients) and already we are fielding questions/comments regarding the big movements in the mark-to-market valuations of our clients’ portfolios. The questions have nothing to do with the accuracy of the valuations but mostly around, “why has this happened?” Many of the big movements relate to our clients that hedge their interest rate risk via interest rate swaps.

It is no surprise given the sharp downward movements we have seen in the New Zealand and Australian yield curves over the last few months (see charts). A 1% move on a 5 year $5 million swap will result in a $250,000 move in the mark-to-market. Depending on the size of your swap portfolio, and the tenor of the swaps, the moves can be material.

NZD swap movements

AUD swap movements

An interest rate swap is a valuable hedging tool which helps companies manage their interest rate risk. Many companies have treasury policies which force them to have a proportion of fixed and floating interest rate risk which helps with certainty of interest cost as well as smoothing sharp interest rate movements, both up and down. However, there is also a requirement to mark-to-market swaps, and for many to post these changes to their profit and loss account. Some companies negate this profit and loss volatility by hedge accounting, but many don’t which often requires some explanation to senior management, directors and investors.

For publicly listed companies the impact, both real and perceived, of large movements in financial instrument valuations is even more critical. The requirement for continuous disclosure means that a large move in these valuations may require the issue of a profit warning, as we have recently seen from Team Talk, the telecommunications company. Team Talk’s shares dropped 6.3% on the back of the hit taken by a revaluation of interest rate swaps. The company noted that the change in the value of the interest rate swap portfolio was due to “wholesale interest rates falling significantly in the period”.

Equally we have a number of private companies and local governments who have been concerned at the change in their valuations and how they are going to be explained further up the tree. Having constant visibility over these changes will at least forearm any difficult conversations, as opposed to relying on the bank’s month end valuations.

Whilst Hedgebook won’t help improve mark-to-market valuations, it does assist with companies keeping abreast of changes in the value of swap portfolios on any given day. This is pretty much a “must have” for publicly listed companies that have the responsibility of continuous disclosure but forewarned is forearmed and many others are also seeing the benefit of having access to mark-to-market valuations at any time.

Hedge accounting has never been easier

It seems like a lifetime ago since hedge accounting was first introduced, nearly ten years ago now. My how auditors loved it. How complicated could they make it? Very, ,was the answer. How about insisting on regression testing for simple foreign exchange forward contracts or forcing options to be split between time and intrinsic value? No doubt the fees were good for a while but after a decade of hedge accounting the bleeding obvious is that it isn’t, and shouldn’t be, that hard.

Because auditors did over complicate the process the perception was that to hedge account was a time consuming and difficult process to follow and so unless there were very good reasons for doing so many shied away from it. The reality is obviously somewhat different.

Hedge accounting can be simple if you are using plain vanilla instruments and follow some simple, good treasury practices.

We will look at the FX Forwards, FX Options and Interest Rate Swaps to show that anyone can hedge account if they want and it doesn’t need to be difficult or time consuming.

FX Forwards

Let’s take the most simple and commonly used financial instrument, FX Forwards. To achieve hedge accounting you need to match off your expected cashflow or exposure with the FX Forward you have used to hedge this. Given that one of the underlying reasons for hedge accounting is to recognise the difference between hedging and speculating it makes sense that you can identify a cashflow that matches your hedge. More simply than that, assuming you haven’t hedged more than you expect to buy or sell in the foreign currency, the cashflow can be matched exactly against the FX Forward.

Under the standard currently, you need to do a quantitative test to prove the effectiveness of the hedge, ie ensure that the hedge falls between 80% and 125% effectiveness. In practical terms all you need to do is value the FX Forward, which can be easily done through Hedgebook, and then value the cashflow that is allocated against the hedge. To value the cashflow, you create a hypothetical FX Forward which matches the same attributes as the original FX Forward, ie is an exact match. So by valuing the original FX Forward you also have the value of the hypothetical and lo and behold by comparing one to the other the hedge relationship is 100% effective.

If you need to pre-deliver or extend the FX Forward then, as long as this is within a reasonable period (45 days either way is generally accepted) this won’t affect the effectiveness of the hedge.

This method can be used for both the retrospective and prospective methodology.

FX Options

The process is the same for FX Options as it is for FX Forwards in terms of matching the hedge (ie the option) with the cashflow. Again there is only the requirement to value the underlying FX Option and replicate this with the cashflow by creating a hypothetical deal which exactly reflects the details of the original option. As with the FX Forward you then just compare the value of the underlying hedge with the value of the hypothetical option and again it will be 100% effective.

Those sneaky auditors have managed to complicate things by interpreting the current standard as requiring to split out the intrinsic value of the option from the time value. Again Hedgebook can do this calculation automatically which takes the pain away from trying to calculate this rather complex computation. The value of the time value will need to be posted to the Profit and Loss account.

Interest Rate Swaps

Interest rate swaps can be treated largely the same as FX Forwards and options in as much as you need to match the hedge against the exposure. In this case this means matching the swap against the underlying borrowing or investment. Again good treasury management should dictate that the reason you have taken out a swap is to match against the same details of the debt or the investment, in terms of amount and rate set dates.

Assuming that this match is occurring it is again a matter of valuing the swap and creating a hypothetical, in this case of the debt or investment but mirroring the details of the swap. Again this would mean that the relationship is 100%, assuming the hedge matches the exposure.

If there is a difference between the rate set dates and the rollover of the debt or investment then the hypothetical swap can reflect these changes and this means that the two valuations are slightly different but hopefully still well within the 80% to 125% relationship.

Documentation

It is important that the relationship is properly documented. There are plenty of places where you can source the appropriate documentation, with Google being a good place to start. In most cases it is a matter of copying and pasting the specific details of the underlying hedge but the vast majority of the documentation won’t change from deal to deal. A bit of admin but not too hard or onerous.

Summary

Our experience, somewhat surprisingly, has been that more organisations are moving towards hedge accounting. Probably because many are realising that it doesn’t have to be that hard as hopefully we have demonstrated above. This has also been recognised as the introduction of IFRS9 in a few years’ time is simplifying some of the rules which should push more down this path as most would probably prefer not to have the volatility of financial instruments flowing through their Profit and Loss account if they can help it.

It should be noted that hedge accounting can be complex if you are using more exotic instruments or if you are leaning more towards speculation than hedging, however, if you are keeping it simple then it doesn’t need to be onerous. Sure you need to value the financial instruments but if you can do that pretty much you can hedge account. Hedgebook has a number of clients, including publicly listed companies, using this approach. So why don’t you give it a try it might not be the beast you once thought it was.

Quantifying bank counterparty credit spread inputs for CVA

At Hedgebook we are often asked by our clients what the appropriate credit spreads are when calculating CVA (Credit Value Adjustment) under the current exposure method. The current exposure method requires a credit spread over the risk-free rate (swap rates) to determine the discount factor for future Cashflows. The current exposure method is appropriate for calculating credit adjustments for vanilla financial instruments such as foreign exchange forwards and options, and interest rate swaps. If your derivatives are in-the-money then the credit valuation adjustment quantifies the risk of your counterparty defaulting.

One appropriate source for quantifying appropriate credit spreads is the secondary bond market where bank/corporate bonds are traded amongst fixed income participants. The banks are active issuers into this market and as such provide a useful guide to how the market views their credit worthiness. By looking at spreads over swap we can derive a credit term structure to use in the calculation of CVA.

The following table shows the spread over swap for senior bank bonds in the NZ fixed income market. The data has been extracted using the January 2015 month-end corporate bond pricing information from one of the four Australian owned NZ registered trading banks.

  6 mths to
1 yr
1 to 2 yrs 2 to 3 yrs 3 to 4 yrs 4 to 5 yrs
ANZ 20 to 30 bp N/A 42 bp 52 to 59 bp 60 to 61 bp
ASB 22 bp N/A 41 to 50 bp 55 bp N/A
BNZ 21 bp N/A N/A 55 to 60 bp 63 bp
Westpac N/A N/A 41 bp 57 bp 64 bp

* bp = basis points per annum. 1bp = 0.01%

As each of these banks is rated AA- by S&P it is intuitive that their senior bonds trade within close proximity to each other. From the information we can generalise and build a credit term structure that can be plugged into valuation models to determine CVA. An estimated AA- credit curve could be:

  • 1 year = 25 bp
  • 2 year = 35 bp (linearly interpolated between 1 and 3 year points)
  • 3 year = 45 bp
  • 4 year = 55 bp
  • 5 year = 65 bp

The reality is that the CVA calculation is not very sensitive to these inputs so it is not necessary for a corporate with vanilla instruments to agonise over the credit assumptions. That said, the assumptions must be defensible and, more importantly from an IFRS 13 perspective, observable.

Furthermore, we would argue that if you are a corporate banked by more than one of the four banks in the table above then there is little added value in creating a curve for each counterparty. As we have shown, there is little difference in the market’s credit view between one AA- NZ bank and another.

The CVA module within the HedgebookPro app allows the user to create multiple credit curves and assign them appropriately to the relevant instruments. However, creating multiple curves will only be of added value if the counterparties are of materially different credit standing.

Lies, damned lies and valuations

With the passing of 30 June we have entered another busy period for year-end valuations. One of the most common questions we are asked at these important balance dates is “why is there a difference between the bank valuation and the Hedgebook valuation (or any other system’s valuation for that matter)?” The question is most commonly posed by auditors. It is probably not surprising that auditors want a perfect reconciliation between the client’s information and their own independent check but alas it will never come to pass. In this article we consider a selection of reasons that can lead to differences in valuations.

Although the modelling of interest rate swap valuations is relatively unchanged over many, many years there are subtle differences that will result in no two valuations being the same. From an interest rate swap perspective the most likely source of valuation differences is the construction of the zero curve. The zero curve is used to estimate the future cashflows of the floating leg of the swap, as well as the discount factors used to net present value the future values of the cashflows (both fixed and floating legs).

The underlying interest rate inputs into the zero curve construction (deposit rates, bank bills, LIBOR, futures, swap rates, etc.) may be slightly different between one system and another. Unlike official rate-sets such as BKBM, BBSW, LIBOR, EURIBOR, CDOR, etc. there is no one source for zero curves.

The mathematical technique to combine the various inputs into a zero curve can also differ (linear interpolation, cubic spline). These types of differences can lead to discrepancies between one valuation and another. Although on a percentage of notional basis the discrepancies are small, the monetary differences can become material if the notional of the swap is big enough i.e. a $500 difference on a $1 million interest rate swap becomes a $50,000 difference on a $100 million swap – a number that will draw attention but in reality is still immaterial.

The timing of the market snapshot for closing rates can be different, too. For example, Hedgebook uses New York 5pm as the end of day for valuation purposes, therefore, if the Hedgebook valuation is compared to a system that uses, say, Australia 5pm as its rate feed, then any movement in the intervening period will cause differences in valuations.

What we have talked about above is premised on the fact that two identical deals are being valued against each other. By far the most common reason for different valuations lies in human error around the inputting of a deal. From an interest rate swap perspective, the rate-set frequency (monthly, quarterly), accrual basis, business day conventions, margins on the floating leg are all possible areas which can result in valuation differences. The most common input error we come across relates to amortising interest rate swaps (changing face value and/or interest rate over the life of the swap). Very often there is no way for an auditor to realise that a swap is an amortising structure just by looking at the bank valuation. Often it is just the face value of the swap at the current valuation date that is shown on the bank valuation. It is the schedule at the end of the original bank confirmation that is required to accurately input and value such a structure.

Of course the true valuation of a derivative is determined by the price at which it can be sold/closed out which will be different to a valuation for accounting purposes. Valuations for accounting purposes are based on mid rates and, therefore, take no account of bid/offer spreads. Some of the changes we are seeing in the International Financial Reporting Standards are trying to provide greater consistency and more explicit definitions of fair value (IFRS 13). At least the “risk-free” component of an interest rate swap is a well-established methodology. The same cannot be said for the credit component (CVA), for which there is a myriad of approaches. It will be interesting to see how differences are reconciled and treated by auditors, as there is even less likelihood of two valuations being the same.

CVA is here to stay

Nine months ago we at Hedgebook engaged audit firms, banks and corporates to discuss Credit Value Adjustment (CVA) and Debit Value Adjustment (DVA) as the introduction of IFRS 13 loomed. The overwhelming response was one of ignorance and/or disinterest. Either they didn’t know about it or they didn’t want to know. On my recent business trip to Europe an audit firm in France recounted a story about a get together they had with their clients to explain the requirement for CVA. The whole room burst out laughing. Adjust the financial instrument valuations for my credit worthiness – you must be kidding.

In some ways this wasn’t surprising as IFRS 13 really only began to impact corporates for their 31 December 2013 annual results, even though their half year results should have included the adjustment. Now six months down the track and the requirement to adjust for credit worthiness can’t be ignored.

Whether we like it or not the valuation of financial instruments has become more complex as the regulators are now focusing more closely on this area. In fact when we talk about valuations for financial instruments the understanding is that it includes the credit adjustment under the new standard. CVA is part of this change in focus and is here to stay. The question for corporates therefore is how do I calculate these values accurately but in a simple and cost-effective way?

Although this isn’t new for the US it is new for the rest of the world and it appears that Australia and New Zealand are leading the charge. Europe has been pre-occupied with the new regulatory changes, especially the reporting requirements under EMIR and so it is only now that it has come on their radar.

Of course CVA and DVA are not new. The banks have been adjusting for credit for a number of years but in the corporate space it is new and many have tried to over complicate the calculation. Monte-Carlo simulations might be appropriate for companies that have cross currency swaps or more exotic option hedging strategies but the vast majority of corporates globally are using vanilla products – fx forwards, options and interest rate swaps. For these instruments a simple methodology to calculate CVA is not just acceptable but also appropriate.

It appears that common sense is already coming to the fore with the current exposure method gaining common acceptance, where the discount curve is flexed to adjust for the credit worthiness of both parties. Although a more simplified method it is still not straightforward, requiring two valuations and an adjustment of the yield curves for credit margin. Not something the banks will be providing and so therefore there is the requirement to source this from someone who specialises in financial market valuations. It doesn’t need to be expensive though and there are low cost solutions available.

Given the numbers are mostly small there is a natural reluctance to pay very much for what are in some cases reasonably immaterial numbers. However the audit firms are insisting on its inclusion and rightly so – it is a requirement under the accounting standards and the materiality or immateriality needs to be proven. Of course credit conditions are benign at the moment but as we know this can change quickly and it won’t take much to make the credit adjustment more material.

CVA is here to stay

Six months ago we at Hedgebook engaged audit firms, banks and corporates to discuss Credit Value Adjustment (CVA) and Debit Value Adjustment (DVA) as the introduction of IFRS 13 loomed. The overwhelming response was one of ignorance and/or disinterest. Either they didn’t know about it or they didn’t want to know. On my recent business trip to Europe an audit firm in France recounted a story about a get together they had with their clients to explain the requirement for CVA. The whole room burst out laughing. Adjust the financial instrument valuations for my credit worthiness – you must be kidding.

In some ways this wasn’t surprising as IFRS 13 really only began to impact corporates for their 31 December 2013 annual results, even though their half year results should have included the adjustment. Now six months down the track and the requirement to adjust for credit worthiness can’t be ignored.

Although this isn’t new for the US it is new for the rest of the world and it appears that Australia and New Zealand are leading the charge. Europe has been pre-occupied with the new regulatory changes, especially the reporting requirements under EMIR and so it is only now that it has come on their radar.

Of course CVA and DVA are not new. The banks have been adjusting for credit for a number of years but in the corporate space it is new and many have tried to over complicate the calculation. Monte-Carlo simulations might be appropriate for companies that have cross currency swaps or more exotic option hedging strategies but the vast majority of corporates globally are using vanilla products – fx forwards, options and interest rate swaps. For these instruments a simple methodology to calculate CVA is not just acceptable but also appropriate.

It appears that common sense is already coming to the fore with the current exposure method gaining common acceptance, where the discount curve is flexed to adjust for the credit worthiness of both parties. Although a more simplified method it is still not straightforward, requiring two valuations and an adjustment of the yield curves for credit margin. Not something the banks will be providing and so therefore there is the requirement to source this from someone who specialises in financial market valuations. It doesn’t need to be expensive though and there are low cost solutions available.

Given the numbers are mostly small there is a natural reluctance to pay very much for what are in some cases reasonably immaterial numbers. However the audit firms are insisting on its inclusion and rightly so – it is a requirement under the accounting standards and the materiality or immateriality needs to be proven. Of course credit conditions are benign at the moment but as we know this can change quickly and it won’t take much to make the credit adjustment more material.

Whether we like it or not the valuation of financial instruments has become more complex as the regulators are now focusing more closely on this area. CVA is part of this change in focus and is here to stay. The question for corporates therefore is how do I calculate these values accurately but in a simple and cost-effective way?

End of year derivative valuations improve for borrowers

The increase in interest rates over 2013 means that the 31 December 2013 valuations of borrower derivatives such as interest rate swaps will look much healthier compared to a year ago. The global economy certainly appears to have turned a corner through 2013 and this is being reflected in financial markets expectations for future interest rates i.e. yield curves are higher. As interest rates collapsed after the onset of the GFC many borrowers took advantage of what were, at the time, historically low levels. Base interest rates i.e. ignoring credit, were compelling and borrowers increased their fixed rate hedging percentages locking in swap rates for terms out to ten years. Unfortunately, as the global economy sank further into recession, interest rates fell further than most market participants expected. Consequently, derivatives such as interest rate swaps moved further out-of-the-money creating large negative mark-to-market positions.

The unprecedented steps taken by central banks in an effort to shore up business and consumer confidence, protect/create jobs and jump start lack lustre economies pushed interest rates lower for much longer. Through 2013 the aggressive monetary policy easing undertaken since 2008 (by the US in particular) has started to show signs that the worst of the Great Recession is behind us. The Quantitative Easing experiment from the US Federal Reserve’s Chairman Ben Bernanke appears to be a success (only time will confirm this). The labour market has strengthened, as well as GDP, in 2013 allowing a gradual reduction in Quantitative Easing to begin. Although the US Central Bank has been at pains to point out that the scaling back of QE does not equate to monetary policy tightening, merely marginally “less loose”,           the financial markets were very quick to reverse the ultra low yields that had prevailed since 2008.   The US 10-year treasury yield is the benchmark that drives long end yields across every other country so when bond markets in the US started to aggressively sell bond positions, prices dropped and yields increased globally. As the charts below show all the major economies of the world now have a higher/steeper yield curve than they did a year ago reflecting expectations for the outlook for interest rates. For existing borrower derivative positions the negative mark-to-markets that have prevailed for so long are either much less out-of-the-money, or are moving into positive mark-to-market territory.

Of the seven currencies that are included in the charts below, all display increases in the mid to long end of the curve i.e. three years and beyond, to varying degrees. Japan continues to struggle having been in an economic stalemate for 15-years so the upward movement in interest rates has been muted. The other interesting point is the Australian yield curve which shows that yields at the short end are actually lower at the end of the year than they were at the start of the year. Australia managed to avoid recession after the GFC, a beneficiary of the massive stimulus undertaken by China and the ensuing demand for Australia’s hard commodities. However, as China’s economy subsequently slowed and commodity prices fell, the recession finally caught up with Australia and the Official Cash Rate (OCR) has been slashed in 2013, hence short-term rates are lower than where they started the year.

As 31 December 2013 Financial Statements are completed there will be many CFOs relieved to see the turning of the tide in regards to the revaluation of borrower derivatives.

2012 to 2013 yield curve movements

IFRS 13: Fair value measurement – Credit Value Adjustment

The purpose of this blog is to examine IFRS 13 as it relates to the Credit Value Adjustment (CVA) of a financial instrument. In the post GFC environment, greater focus has been given to the impact of counterparty credit risk. IFRS 13 requires the valuation of counterparty credit risk to be quantified and separated from the risk-free valuation of the financial instrument. There are two broad methodologies that can be considered for calculating CVA: simple and complex. For a number of pragmatic reasons, when considering the appropriate methodology for corporates, the preference is for a simple methodology to be used, the rationale for which is set out below.

IFRS 13 objectives

Before considering CVA it is worthwhile re-capping the objectives of IFRS 13. The objectives are to provide:

–          greater clarity on the definition of fair value

–          the framework for measuring fair value

–          the disclosures required about fair value measurements.

Importantly, from a CVA perspective, IFRS 13 requires the fair value of a liability/asset to take into account the effect of credit risk, including an entity’s own credit risk. The notion of counterparty credit risk is defined by the risk that a party to a financial contract will fail to fulfil their side of the contractual agreement.

Factors that influence credit risk

When considering credit risk there are a number of factors that can influence the valuation including:

–          time: the longer to the maturity date the greater the risk of default

–          the instrument: a forward exchange contract or a vanilla interest rate swap will carry less credit risk than a cross currency swap due to the exchange of principal at maturity

–          collateral: if collateral is posted over the life of a financial instrument then counterparty credit risk is reduced

–          netting: if counterparty credit risk can be netted through a netting arrangement with the counterparty i.e. out-of-the money valuations are netted with in-the-money valuations overall exposure is reduced

CVA calculation: simple versus complex

There are two generally accepted methodologies when considering the calculation of CVA with each having advantages and disadvantages.

The simple methodology is a current exposure model whereby the Net Present Value (NPV) of the future cashflows of the financial instrument on a risk-free basis is compared to the NPV following the inclusion of a credit spread. The difference between the two NPVs is CVA.  The zero curve for discounting purposes is simply shifted by an appropriate credit spread such as that implied by observable credit default swaps.

Zero curve

To give a sense of materiality, a NZD10 million swap at a pay fixed rate of 4.00% with five years to maturity has a positive mark-to-market of +NZD250,215 based on the risk-free zero curve (swaps). Using a 200 basis point spread to represent the credit quality of the bank/counterparty the mark-to-market reduces to +NZD232,377. The difference of -NZD17,838 is the CVA adjustment. The difference expressed in annual basis point terms is approximately 3.5 bp i.e. relatively immaterial. In the example we have used an arbitrary +200 bp as the credit spread used to shift the zero curve. In reality the observable credit default swap market for the counterparty at valuation date would be used.

The advantages of the simple methodology is it is easy to calculate and easy to explain/demonstrate. The disadvantage of the simple methodology is takes no account of volatility or that a position can move between being an asset and a liability as determined by the outlook for interest rates/foreign exchange.

The complex methodology is a potential future exposure model and takes account of factors such as volatility (i.e. what the instrument may be worth in the future through Monte Carlo simulation), likelihood of counterparty defaulting (default probability) and how much may be recovered in the event of default (recovery rate). The models used under a complex methodology are by their nature harder to explain, harder to understand and less transparent (black box). Arguably the complex methodology is unnecessary for “less sophisticated” market participants such as corporate borrowers using vanilla products, but more appropriate for market participants such as banks.

Fit for purpose

An important consideration of the appropriate methodology is the nature of the reporting entity. For example, a small to medium sized corporate with a portfolio of vanilla interest rate swaps or Forward Exchange Contracts (FECs) should not require the same level of sophistication in calculating CVA as a large organisation that is funding in overseas markets and entering complex derivatives such as cross currency swaps. Cross currency swaps are a credit intensive instrument and as such the CVA component can be material.

Valuation techniques

Fair value measurement requires an entity to explain the appropriate valuation techniques used to measure fair value. The valuation techniques used should maximise the use of relevant observable inputs and minimise unobservable inputs. Those inputs should be consistent with the inputs a market participant would use when pricing the asset or liability. In other words, the reporting entity needs to be able to explain the models and inputs/assumptions used to calculate the fair value of a financial instrument including the CVA component. Explaining the valuations of derivatives including the CVA component is not a straightforward process, however, it is relatively easier under the simple methodology.

Summary

IFRS 13 requires financial instruments to be fair valued and provides much greater guidance on definitions, frameworks and disclosures. There is a requirement to calculate the credit component of a financial instrument and two generally accepted methodologies are available. For market participants such as banks, or sophisticated borrowers funding offshore and using cross currency swaps, there is a strong argument for applying the complex methodology. However, for the less sophisticated user of financial instruments such as borrowers using vanilla interest rate swaps or FECs then an easily explainable methodology that simply discounts future cashflows using a zero curve that is shifted by an appropriate margin that represents the counterparty’s credit should suffice.

The GFC, Corporate Governance and Hedgebook…

In the wake of the Global Financial Crisis (GFC), Corporate Governance has become a key focus, not just for large organisations but for small to medium sized entities as well.

Corporate Governance relates to the rules around how a company is controlled, whether it is by processes, policies, laws or customs.

Two of the key areas of Corporate Governance are reporting & disclosure, and risk management.

Reporting and disclosure means demanding integrity both in financial reporting and in the timeliness and balance of disclosures relating to the entity’s affairs. Risk management is regularly verifying that the entity has appropriate processes in place to identify and manage potential and relevant risks.

Hedgebook is ideally suited to assist in both these areas of Corporate Governance and is designed specifically to help any business better manage its foreign exchange and interest rate risks. From a reporting and disclosure point of view, it enhances the reporting around treasury giving more visibility to “what if” scenarios as well as better defining an organisation’s current position

For risk management, Hedgebook assists with not only the areas mentioned above but also in compliance with treasury policies, which is a key plank of any organisation’s risk management process. With having online access to valuations for financial instruments, Hedgebook gives greater transparency over risk management issues as well as assisting in making better business decisions. Hedgebook also tells an organisation not only what their risk position is today, but given current market conditions, what their position is in the future.

As we see increased awareness of corporate governance amongst small to medium sized companies, a tool like Hedgebook is putting information in the hands of these organisations at an affordable price.

This not only makes better corporate governance possible for these organisations, while at the same time enabling better decision making in a crucial area of business.

Look out for our next article on better Reporting and Disclosure coming soon.

Some things never change – especially in financial risk management…

It always surprises me with treasury management how much changes and yet how much stays the same. Having been in the treasury game for almost 25 years the basics remain the same – it’s all about risk management stupid. And by risk management I really mean risk minimization. The hedging instruments haven’t changed very much over the years. We still favour the plain vanilla of forwards, swaps and options. Sure the exotic instruments have come and gone and some have learnt the hard way about understanding what you are getting into, but even large organisations favour the simple approach, especially after the events of the last few years.

The basic controls surrounding treasury haven’t changed much either, even if not everyone complies the way they should. No – you can’t do the deal, check the bank confirmation and then provide the reporting as well. And, yes you should have a treasury policy too outlines the rules you have to abide by (identify your exposures and have sensible parameters about when and how much you should cover.)

What has changed though, and not just in the treasury space, is those small and medium enterprises (SME’s) now have access to the same tools and the same technology that larger organizations have, at an affordable price.  Going back not so long, treasury management systems were expensive and the domain of only the very large organizations.

In more recent years we have seen a number of mid-tier systems come to market, many of which are saas (software as a service) solutions giving access to valuations, smart reporting and increasing the controls around the foreign exchange and interest rate management.

No longer can organizations argue that spreadsheets are their only option. Sure spreadsheets are great but we all know the issues with them – lack of controls, key man risk, backups, corruption of data, the list goes on. But everyone uses them for the flexibility and there is still a place for them when it comes to specific reporting reqirements. However now that there are systems like Hedgebook available, “SME” sized organizations have access to the tools that will allow then to record, report and value their treasury transactions and can manage their treasury exposures with the same technology and confidence that much larger organisations can – at an affordable price.

Because there’s one other thing that hasn’t changed over the years and that is financial markets are volatile and so knowing your position with confidence is the most important part of good risk management – and that won’t change either.

Richard Eaddy is the CEO and founder of Hedgebook and the Managing Director of ETOS Ltd, specialists in treasury outsourcing services. Richard has worked in the corporate treasury risk management industry for more than 20 years. He has held senior roles in large corporate treasury departments in both New Zealand and Europe, provided treasury risk management advice to major corporations and for the last ten years has headed up the largest treasury outsourcing company in Australasia. Richard can be contacted at richard.eaddy@myhedgebook.com.