Simplifying FX program lifecycles without losing auditable valuation processes

August 9, 2016
Tom Gavaghan
simplifying FX program processes diagram breaking down functions

Many Treasurers report that the accounting complexities required to comply with derivative accounting standards actually inhibit their ability to effectively manage a hedging program.

To simplify the FX program lifecycle,  Jonathan Zeman, senior consultant at Actualize Consulting, and the Actualize consulting team, and Tom Gavaghan, presales manager at Kyriba, teamed up to present Simplifying Regulatory Compliance for Your FX Hedging Program as a part of the Treasury Best Practices series from Kyriba.

There are number of elements in the total lifecycle of an FX program from the Exposure Management, Front Office, Middle Office, and Back Office. With this session, Jonathan and Tom looked to broaden the discussion specifically in the Middle Office, and the importance surrounding a transparent and auditable valuation process. Additionally, they expanded upon the specifics in the hedge documentation and achieving true STP in accounting for the FX program.

Additional reading: Building the Business Case for a Treasury Management Solution

Their discussion emphasized how technology, and specifically Treasury Management technologies are a critical component to simplify any company's FX program.  One important take-a-way from the webinar were three questions that should be asked when building out the technology to support an FX program.

  1. Front Office:  How easy is it for my treasury management solution to integrate with my ERP(s), and other solutions in place to aggregate exposures?
  2. Middle Office: What is the source of my market rates for valuing my portfolio, and how easy is it to document or results for audit?
  3. Back Office: How can I automate the accounting treatment from my measurements and integrate these into my GL?

In the Front Office, there might be multiple tools in place that are used to identify both cash flow and balance sheet exposures. This data might reside within the ERP, budgeting tools, or simply within Excel.  To consolidate these exposures for effectiveness tracking in your FX program, a treasury system needs to easily integrate with these tools without any backend development or customization.

In the Middle Office, as a part of the overall valuation process, a company needs to understand the source of its market data. There is a proofing process that must occur for both internal and external auditors, so transparency is key. Being able to clearly provide the results of the measurements and the data that went into the evaluation will reduce the time it takes to perform these period-end tasks. The more systems that are in place to manage the functions within the front office, middle office, and back office, the more questions that will arise from audit and introduce additional complexities into the overall process. Treasury Management technologies specifically should combine the data being tracked in the front office seamlessly with the market data and valuations that need to be performed in the middle office.  

In the Back Office, a company would need their systems to easily integrate back into their ERP systems for GL posting. Following the measurements and results within the Middle Office, to achieve true Straight-through-processing, a company should ensure that the accounting treatment can be automated and easily integrated into their ERP system. Doing so eliminates timing delays and operational risk.

In summary, the Treasury in Best Practice Series focused on FX processes, and how to implement straight through processing for foreign exchange contracts from deal management, through to the hedge documentation, valuations, and automated accounting. If simplification and automation for your FX program is what you are looking for, you can view the webinar playback here

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