Hedge Accounting Technology: Evolution, Growth and Maturity

By H Kane | 16 January 2015

The increasing pace of technological change is impacting every aspect of the business world. At every company, in every department, things are simply different than they were a decade, a year or even a few months ago.

As a case in point, let’s consider hedge accounting. The space – a core competency of Hedge Trackers – is an ideal example of how a decade-long, multiphase technological evolution has transformed workflows and created new efficiencies through the simplification and automation of complex manual tasks.

A decade ago, hedge accounting was, almost exclusively, the domain of inflexible, complicated, multi-tabbed and frequently cross-linked spreadsheets. Designations, effectiveness testing, exposure gathering, hedging activity and trade management were all handled via gargantuan Excel files, often understandable to only one or two people in the entire enterprise.

In that same era, derivative trading was a time-intensive, manual process. Pre-trade approvals required hand signatures or multiple email messages, traders bid multiple banks over the phone, designation documentation filled binders and confirmation cycles required even more correspondence. After all this was finished, trade details still needed to be logged in at least one, perhaps multiple spreadsheets and that didn’t even start to deal with the accounting, disclosure or performance reporting requirements.

Hedge accounting software solutions began to spring up around this time in response to the inefficiencies and frustrations inherent to these manual systems. Designed to integrate Treasury and Accounting practices, track exposures, ensure compliance with designation requirements, meet effectiveness testing mandates,  streamline recordkeeping, improve reporting capabilities, and simplify journal entry preparation, these software offerings gave treasury departments the opportunity to move away from some and in a few cases all of their spreadsheets and into a more efficient methodology.

As hedge accounting regulations matured, more and more Treasury and Accounting departments began to turn to software. In turn, providers recognising the need and wanting to meet customer demands began to offer hedge accounting “solutions.” Choosing the right solution became increasingly difficult as vendors made increasingly optimistic promises about their products’ capabilities without the attendant investment. Terms like “all-in-one” were being thrown around seemingly at random, and its meaning – if there ever was one – became diluted.

Fortunately, technology democratisation and evolving distribution methods have also allowed true domain experts – not just traditional software vendors – to rewrite the way that hedging and the related accounting, disclosure and performance reporting are managed. This paradigm shift has led to a wave of new-generation SaaS apps that are quickly and easily implemented and deliver a delightful user experience for both treasury and accounting personnel.

Hedge Accounting Software in 2015: Beyond Buzzwords

As acceptance of hedge accounting software has grown, tolerance for mediocre solutions has diminished. Simply “replacing the spreadsheets” is no longer enough; rather, the best derivative management solutions provide value from a review of past performance and insights into the impact your hedge program will deliver in the coming and future quarters.   

But which solutions do so? What sets a high-end suite apart from its middling competitors? In our experience, there are three critical factors that exemplify the solutions that Treasury and Accounting should be seeking out if they are in the market for hedge accounting software.

1. Integration Capabilities

As stated above, it’s common for vendors to market their cash management software as an “all-in-one” solution for derivative accounting, investments, and innumerable other functions of the Treasury department. The shallow ability to fair value a derivative is touted as derivative accounting capability and the kluging together of various and sundry technologies is considered “one.” All-in-one has more to do with the ability to deliver an all-in-one invoice rather than all-in-one solution functionality or scalability. How about the Treasury of the future using a constellation of integrated best in class products that are maintained and supported by technical experts? 

Companies will be able to assemble their own suites at a far lower integration cost without creating a compliance nightmare. Both the era of best-of-breed and suites will be over. A new area of planned integration will have begun, bringing a best-of-breed SaaS application into an enterprise architecture would be much less burdensome

Instead, the best software for handling the complex needs of trading and related derivative accounting and performance reporting are highly focused best-in-breed solutions with robust integration capabilities. In this new era, Forbes suggests, “companies will be assembling their own suites at a far lower integration cost.” We are clearly seeing this best-in-breed constellation of ERP systems, trade portals, cash systems and other critical pieces of infrastructure, delivering a far higher level of hedge accounting functionality than the all-in-ones. This is the best of both worlds – data transference is efficient and simple, and necessary functionality is not sacrificed.

2. Managing Real Exposures

If your forecast is perfect, and you never change assumptions, and you don’t hedge inventory purchases or deferred revenue and your exposures are not at all complicated, and all your entries are in USD, nearly any hedge accounting software solution will do. That’s the scenario they’re made for! Unfortunately, few (if any) corporations are so fortunate – and as a result many companies with bolt-on hedge accounting systems are managing the complexity of derivative accounting manually, outside the software. It’s automated the trading, but not the hard work of derivative management.

To get the most value out of a hedge accounting software solution, potential buyers must be sure it is designed to handle all your business cases – easy and complex, perfect and imperfect – within the system.

3. Robust Analytics

Senior corporate leaders are used to enjoying quick access to highly detailed information about every facet of the organisation. Why should the hedge program be any different? The software should be processing data into information highlighting what rates will be delivered in the financials in the coming quarter -- and the next quarter, or what was the earnings impact of those currencies we chose not to hedge, or what was spent on forward points and option premium in the period. And they don’t just want to know – they want to know now.

Fortunately, today’s top hedge accounting best-in-breed software solutions incorporate an unprecedented layer of analytics, allowing corporations to quickly and efficiently identify the source of hedge program ineffectiveness. This layer of information represents a tremendous value-add – and a significant differentiator between the best solutions and their mediocre competitors.

Hedge Accounting & Technology: Looking Back (and Ahead)

Like so many business functions, hedge accounting has been transformed by the technological evolution: Arcane manual processes are being supplanted by automated solutions, of which a few select stand out. As a result, Treasury and Accounting personnel at many organizations are significantly more effective and productive than their counterparts scarcely more than a decade ago. The benefits of technology in hedge accounting have proved immense – and they’re certain to continue in the future.

By Helen Kane, Founder and President, Hedge Trackers

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