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New compliance rulesThe global financial crisis was the catalyst for a myriad of changes in the regulatory environment of derivatives. From Hedgebook’s perspective it is the changes that relate to the fair value of financial instruments that is particularly of interest. Although banks have been reporting CVA and DVA for a number of years, it is only over the last couple of years that we have seen greater numbers of end users/companies doing so.

Alongside CVA and DVA within the family of derivative valuation adjustments sits FVA (Funding Valuation Adjustments). FVA is an adjustment to the risk-free valuation of financial instruments and reflects the bank’s funding and liquidity cost of a trade. Until recently, the reporting of FVA was only for the bank side and not included in mark-to-markets sent to the customer. However, as of March 2016 Westpac has been including FVA within the valuations of interest rate swaps sent to the customer.

Hedgebook’s understanding of the accounting standard (IFRS 13) is that end users are not required to report FVA in the accounts, therefore, for those companies relying on Westpac’s valuations they may be reporting incorrect valuations. It is a question for the auditors, although it is fair to say that there is even less audit consensus (understanding?) on FVA than there is on CVA/DVA. It will be interesting to see if any of the other trading banks follow Westpac’s lead and include FVA into derivative valuations and what it means for companies relying on these valuations for financial reporting purposes.

Kapiti Coast District Council (KCDC) has been a Hedgebook client for almost two years. Originally Council’s requirement for Hedgebook was to perform the independent valuations of its interest rate swap portfolio at 30 June financial year-end, including the sensitivity analysis for +/- 100bps. Independent valuations are required by KCDC’s auditor hence reliance on bank valuations is not acceptable. Beyond valuations the finance team has taken advantage of some of Hedgebook’s other functionality such as interest accrual and cashflow reports to assist in the day-to-day management of derivatives and debt. Says Mark de Haast (Financial Controller), “I am super impressed with Hedgebook and cannot wait to see the new developments.”

At Hedgebook we listen to the feedback of our users to ensure future development is practical, useful and simple to use.

It was a fantastic two days rubbing shoulders with the Local Government finance community at the recent SOLGM Strategic Finance Forum in Wellington. It was an opportunity to listen to some of the inspiring initiatives going on in the sector such as the Hamilton City Council/Downer Waikato Infrastructure Alliance and the Gisborne District Council presentation on its business intelligence software.

Gisborne DC’s presentation resonated particularly strongly with us at Hedgebook as it was a practical example of how Councils can leverage technology to work smarter.

Hedgebook is designed with a strong focus on the New Zealand Local Government sector. Our latest update to the software adds the ability to include LGFA Borrower Notes as a companion to the LGFA Loans functionality that was completed in January.

Councils now record all debt information (LGFA, bank, private placements, term borrowings), including LGFA borrower notes, alongside the interest rate swaps used to manage the fixed interest rate profile.

Councils use the simple and intuitive Hedgebook system to:

  • Confirm BKBM rate-sets against bank notices = better internal controls
  • Manage cashflows arising from debt and interest rate swaps = better internal controls, improved efficiency
  • Calculate month-end interest accruals = saves time
  • Calculate interest rate swap valuations for key reporting dates = improves compliance, know your position
  • Run sensitivity analysis for financial year-end reporting = improves compliance reporting
  • Compare hedging against Treasury Policy limits = strategic decision making, closer collaboration with advisors
  • Move away from error prone spreadsheets

At SOLGM we met many existing Hedgebook clients and many potential new ones too. Hedgebook is already the most widely used treasury management system in NZ from both a Local Government and corporate perspective.

North Island Quote3

If you would like one of the Hedgebook team to take you through a 20 minute on-line demo of the system then just click here and we will be in touch to arrange it. Alternatively, if you would rather explore the functionality for yourself click here for your free trial.

The introduction of IFRS 13 in January 2013 was, in part, recognition of the mispricing of market credit risk that had resulted in the near collapse of financial markets in 2008. IFRS 13 requires “fair value” to include a credit adjustment for financial instruments such as FX forwards, FX options and interest rate swaps representing the credit worthiness of each counterparty to the transaction. It makes sense to adjust valuations by a credit component. IFRS 13 bases fair value on an “exit price” of the security i.e. the price at which you can go to the bank and close out an existing transaction. Whether you are buying or selling a financial instrument the bank will naturally add a margin so it is counter-intuitive to mark-to-market a position without a credit component.

What has been most surprising about the introduction of IFRS 13 has been the lack of engagement by auditors to champion the credit adjustment component of valuations. Often lack of materiality is cited as the reason for not asking companies to provide the credit adjustment when put in context of other risks within the business, but how can the adjustment be deemed non-material if the calculation is never done?

Given the deterioration of credit conditions over the last few months it will be interesting to see if auditors continue to stand-by the “non-material” argument or whether there is a move towards compliance of the IFRS 13 accounting standard.

Aussie Bank Big 4 CDS 3 -year

At Hedgebook we do not dispute that the credit adjustment adds little value to a business and is another thing to ensure year-end financial reporting is dragged on, however, we have made it easy and low-cost to achieve. The CVA module within the HedgebookPro app allows the user to create credit curves, assign them appropriately to the relevant instruments and produce a report to satisfy audit requirements.

For a demo of Hedgebook’s CVA/DVA functionality, register your interest here.

 

Just like Kathmandu, who recently became a Hedgebook client, we are pleased to announce the signing of another iconic New Zealand brand, Skellerup.

Many people know Skellerup as being the leading producer of gumboots, however, there is much more to Skellerup; the Group designs and manufactures a variety of Agri and Industrial polymer products for dairy, infrastructure, plumbing, water, automotive, marine, waste, gas and mining applications.

Skellerup was founded by George Skellerup in 1910 and has grown to employ almost 800 people in New Zealand, Australia, the United Kingdom, Italy, USA and China. As a listed company on the NZX, Skellerup is focused on the compliance reporting aspects that Hedgebook brings to its foreign exchange and interest rate derivatives. However, as Graham Leaming, CFO noted, “Hedgebook also gives Skellerup good visibility of its fx risks across multiple entities and multiple currencies”.

Hedgebook is pleased to welcome Skellerup as a client.

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