Acumen Hedge Accounting Technology. Ian Argue, CFA Managing Partner Sept. 10, 2014

Transcription

1 Acumen Hedge Accounting Technology Ian Argue, CFA Managing Partner Sept. 10, 2014

2 Agenda Defining a technology strategy System selection process overview Hedge accounting key considerations Conclusion

3 Technology Strategy Definition

4 Treasury Technology External Systems Function Scope General Ledger Market Data Provider Confirmation Services Trading Systems Banks Rates Trade Data Bank Stmts Confirmations Payments Accounting Entries Back Office Middle Office Front Office Cash and Liquidity Management Settlement Accounting Position Mgmt Limit Mgmt Valuation Trade Capture Pricing Position Mgmt Cash Mgmt Cash Fcst Payments Hedge accounting solutions need to fit into existing trade operations framework

5 Technology Strategy Op>ons Op>mize Comprehensive Efficeincy/Capability Comply Simplify Manual/Excel Outsourced Best of Breed Build Cost

6 HA Technology Option Analysis Pro s Con s Comprehensive Integrated workflow within ETRM/TMS Support for high volume environments Support a wide variety of scenarios Vendor capabilities/commitment differ greatly Often specialized in on asset class Cost Deep support in terms of asset scenarios and processing functionality Require significant integration to existing systems Best of Breed Vendors are committed to space Complement existing systems May not offer full trade processing capabilities Represent an additional cost Outsourced Obtain access to expertise and systems Can support fringe scenarios Reduce operational burden May not be cost effective at higher volumes Still need oversight within company Cost effective More complicated workflow/integration Excel flexibility High controllership risk Manual/Excel Low initial cost Requires deep subject matter expertise High risk of obsolescence

7 Strategy Determination Driver Details Impact Functional Scope The number of programs and HA scenarios will drive your functional scope Complex requirements will often point to specialist systems (BoB, Comprehensive) Selection Process Volume Asset Class Coverage Domain Expertise High volume environments (e.g. FX) will require greater degree of automation Different asset classes impose different requirements (FX Volume, IR complexity, CM processing) Ability to articulate requirements, implement a solution, operate the system and keep abreast of changing rules should impact your decision High volume environments require automation and system integration in specialist systems Companies with several asset classes may find they need a blended strategy (e.g. BoB and Outsourced) Outsourced solutions are a good alternative for organizations that don t have in-house expertise or capacity Existing Technology Platform The preferred strategy should fit in with your existing technology platform Companies undergoing a transformation or with no existing platform have more flexibility in terms of strategy

8 System Selection Overview

9 Step 1 Future State Selection Process Step 1 Future State Definition Step 2 Expression of Interest Step 3 Vendor Demonstrations Step 4 Selection Step 5 Statement of Work Definition Summary The future state definition phase builds on as-is requirements and sets out what is to be implemented, provides framework for evaluating vendors and the parameters for testing. It is critical to set this framework in advance. Do s and Don ts ü Do focus on desired state, not replicating current processes ü Do be detailed and descriptive ü Do prioritize critical requirements ü Do identify show-stoppers ü Do work to understand endto-end process Approach 1. Meet with business, treasury, finance and IT stakeholders 2. Identify data integration points 3. Document and prioritize business requirements 4. Identify gaps from existing processes 5. Make changes to environment where possible Deliverables 1. Prioritized business requirements document 2. System architecture 3. Data flow diagram 4. Business process maps

10 Step 2 Expression of Interest Selection Process Step 1 Future State Definition Step 2 Expression of Interest Step 3 Vendor Demonstrations Step 4 Selection Step 5 Statement of Work Definition Summary The EOI is intended to focus on 2 things with a goal of creating a very targeted short list for demos. Focus on 1) vendor fit and 2) your critical requirements at this stage of the process. Long RFP s don t focus the vendors appropriately. Do s and Don ts ü Do focus on vendor fit at this stage X Don t over emphasize price at this point X Don t send a comprehensive, unprioritized RFP ü Do use this opportunity to weed out vendors based on show-stoppers Approach 1. Use business requirements to identify key functional needs 2. Create Request for Information that focuses on: a. Key requirements (func.+it) b. Product strategy c. Implementation approach d. Vendor stability and scalability Deliverables 1. Request for information document 2. Completed RFI s 3. Narrowed down vendor set

11 Step 3 Vendor Demonstrations Selection Process Step 1 Future State Definition Step 2 Expression of Interest Step 3 Vendor Demonstrations Step 4 Selection Step 5 Statement of Work Definition Summary This is the opportunity to have the vendors show how they meet your requirements. Develop a detailed script that requires vendors to show how system will work. 80% of TMS functionality is straightforward, ensure you include your key 20% Do s and Don ts ü Do ensure key requirements are the focus ü Do take notes its easy to confuse vendors after the second or third X Don t let the bells and whistles (e.g. dashboards) take priority ü Do ensure that the vendor shows you how script is met Approach 1. Create demonstration script based on requirement 2. Schedule demo s with 2-3 vendors 3. Conduct demo s 4. Score demo s Deliverables 1. Demonstration script 2. Demonstration schedule 3. Scoring worksheet 4. Demonstration notes

12 Step 4 Selection Selection Process Step 1 Future State Definition Step 2 Expression of Interest Step 3 Vendor Demonstrations Step 4 Selection Step 5 Statement of Work Definition ü ü ü ü ü X Summary The selection and contracting phase sounds simple but can take a long time to complete. Price and contract negotiation can take time. Do s and Don ts Do negotiate price - Understand the leverage you have Do include pricing for potential future scope Do work with legal team early Do look at vendor viability Do check informal references Don t try to completely re-write agreement Approach 1. Rank vendors based on RFI, demonstrations and other information received 2. Check references 3. Negotiate key terms including price 4. Finalize contract terms Deliverables 1. Vendor prioritization list 2. Summary comparative document across all aspects of the selection 3. Contract

13 Step 5 Statement of Work Selection Process Step 1 Future State Definition Step 2 Expression of Interest Step 3 Vendor Demonstrations Step 4 Selection Step 5 Statement of Work Definition X ü ü Don t accept generic SOW! Do define SOW before contract Do be specific to avoid scope surprises later on ü Do name project resources know who will be working with you ü Summary The SOW is the most critical link between your expectations and what will be delivered. It is the opportunity for you and the vendor to discuss requirements and provides a framework for finalizing how the implementation will take place. Do s and Don ts Do make sure you are clear on your organization s roles and responsibilities Approach 1. Document functional scope to be included in project 2. Document your organization s roles and responsibilities 3. Document the vendor roles and responsibilities Deliverables 1. Signed Statement of Work

14 Hedge Accounting Key Considerations

15 Key HA Requirements Valuations Market Data Need to ensure that derivatives you transact can be properly valued in the system Straightforward for vanilla FX but can be more complicated for interest rate derivatives and option based instruments Sourcing appropriate curves is important and more difficult for commodities Complicated area due to FAS157 and credit considerations (e.g. could need 5 curves for FX fwd) Need to ensure controllership over market data management

16 Key HA Requirements Cont. Documentation Hedges require documentation and there should be tools to simplify this step and ensure completeness Processing Represents the ability process a hedge over its lifecycle Prospective/retrospective effectiveness testing Measurement OCI management Each scenario will have its own processing requirements Need to ensure current requirements are met as well as potential future changes Many stakeholders to work with here

17 Key HA Requirements Cont. Automation Reporting Automation is key for high volume environments. Key areas to focus on: Documentation (linking derivatives, exposures and creating hypotheticals) Effectiveness testing OCI management Regression Exception cases can require a lot of manual intervention There are considerable reporting requirements Want to ensure that key disclosures are automatically created without having offline spreadsheets

18 Conclusion

19 Final Thoughts The benefits of HA require considerable operational expertise and investment Outsourcing is a great alternative for unique scenarios (e.g. 1 IR swap) Beware of solution providers who don t have references or are new to HA Make sure you conduct search with current and likely future requirements in mind