FlexFinance Hedge Manager

FlexFinance Hedge Manager - Advantages

Step-by-step guided workflow with the option of returning to a previous step if required.
IFRS-compliant prospective and retrospective effectiveness tests.
Workflow-based support for each situation that appears in the lifecycle of a hedge.
Hedge history shows hedge-related events according to the workflow of the hedge maintenance and effectiveness test in the past.
Easy-to-use GUI with powerful graphical support.
Comprehensive hedging documentation throughout the entire lifecycle of a hedge as well as an audit trail which fully complies with audit requirements.

A total of four hedge types are provided in IAS 39 and supported by the FlexFinance Hedge Manager.

Visualisation of effectiveness test showing in parallel whether a prospective or a retrospective effectiveness is available.

Documentation and audit trail for the full lifecycle: The history of each hedge relationship and any documentation is stored in FlexFinance Hedge Manager.

IFRS-compliant hedge effectiveness testing provided in FlexFinance Hedge Manager.

Solve the Challenges of the Mixed Model Approach with Hedge Management

When entering financial instruments into the balance sheet, financial institutions have to enter a number of those instruments (e.g. loans) with the amortised costs, while other financial instruments (e.g. derivatives for economic hedge relationships) are to be valued at fair value (Mixed Model Approach).

The different financial instrument valuations lead to inconsistencies in the profit and loss account because:

bonds/loans in the IFRS-category that are valued with amortised costs do not show up with their FV-changes in the P&L
whereas derivatives like IRS show up with FV-changes in the P&L.

In order to avoid such inconsistencies in the profit and loss account, IAS 39 provides the following options:

Micro Fair Value Hedges
Cash Flow Hedges
Hedge of a Net Investment
In addition to the hedging strategy, fair value options can also be used

These options present financial institutions with an opportunity to compare the economic value adjustments in value of the hedged items with the economic value adjustments of the hedging instruments. The value adjustments can either be compensated with one another by:

considering the value adjustments of hedged items that are found within the hedge result and are related to the hedged risk (fair value hedge) or through
neutral handling of the value adjustments of the hedging derivatives (cash flow hedge).

This way, both hedging and fair value options contribute to reducing P&L volatility, which would result from simply applying the valuation methods of the Mixed Model Approach.

Hedge Management:
Workflow-Based Support for the Entire Lifecycle of a Hedge

FlexFinance Hedge Manager fully supports the hedge management requirements of IAS 39 and reduces the P&L-effects of the Mixed Model Approach faced by financial institutes.

Workflow-driven hedge designation including a complete double check
IFRS-compliant effectiveness testing
Traceability of calculation results
Automatic event-driven messaging when ineffectiveness occurs
Possibility of manual interaction
Industrialised interface to an accounting generator

State-of-the-Art Integrated Hedge Manager Module

The FlexFinance Hedge Manager provides users with a hedge management solution that can map the full lifecycle of a hedge from designation to termination. The FERNBACH solution can be used in both real-time mode as well as in batch mode and also fully supports IFRS requirements for documentation and the audit trail of a hedge relationship. The effectiveness test can be carried out daily, depending on the posting, and its results can be tracked to the individual deal level using drill-down. The effectiveness tests can also be manually overridden if ineffectiveness should occur.

Hedge Designation in FlexFinance Hedge Manager

Support of identification and designation of hedged items and hedging instruments for a hedging relationship
Inclusion of a financial instrument with only a portion of its cash flows or fair value into the hedging relationship is possible
Freely definable hedge names
Choice of used hedge type and risk type
Deal search with a wide range of filter criteria for finding perfectly fitting hedging instruments
Portfolio assembly and time bucketing in the context of portfolio hedges
Documentation of risk purpose and risk strategy as well as additional documentation set up in PDF, Word, Excel etc.

Effectiveness Test in FlexFinance Hedge Manager

FlexFinance measures the effectiveness of a hedge relationship according to a pre-defined measurement schedule, which is configured according to the bank’s risk management strategy. At the most rudimentary level, the measurement takes place at the initial valuation of the deal and when the bank prepares its financial statements (IAS 39.AG106). The measurement takes place automatically.

FlexFinance supports the following prospective and retrospective effectiveness tests:

1. Prospective test:

Critical Term Match
Market Data Shift Method

2. Retrospective test:

Dollar Offset Method (ratio analysis)
Advanced Dollar Offset Method (threshold test + ratio analysis)
Regression
Analysis
Benchmark Interest Rate Method
Compared to the more popular Dollar Offset Methods, the Benchmark Interest Rate Method ensures that economically effective hedges also prove to be effective hedges in terms of regulations. The Benchmark Interest Rate Method combines efficiency, ease of implementation and transparency with a high degree of compliance.

Effectiveness Monitoring in FlexFinance Hedge Manager

IAS 39 requires that the prospective and retrospective effectiveness of the hedging relationship are checked both at the beginning of and during the deal term. The following must therefore be checked:

Whether the expected highly-effective compensation of future value changes for the hedged item and the hedging instrument is to be valued (prospective effectiveness test).
Whether the actual compensation lies in the range between ‘80% and 125%’ (retrospective effectiveness test).

In addition to the range of ‘80% to 125%’ required by regulators, FlexFinance also enables users to define an internal range that can, in turn, be used as an early warning system. If a hedge becomes ineffective over time, it is considered terminated.

The results for each run of the effectiveness testing are stored and remain accessible for more granular and deeper checks in the graphical user interface.

Hedge Accounting in FlexFinance Hedge Manager

Hedge-specific accounting events are fully supported by the double-entry bookkeeping approach of FlexFinance IFRS. For hedge designation, valuation and dissolution FlexFinance runs specific accounting events.