Hedge Effectiveness Presents a Significant Challenge for Corporate Treasuries

Fincad, a derivatives and hedge accounting solutions company, has released the results of its annual Corporate Finance Survey. Nearly 30% of survey respondents stated that hedge effectiveness testing is the biggest challenge they face with respect to derivatives, followed closely by accurate risk assessment (26%). Transparency in financial reporting was also listed as a challenge by 22%, up from the previous surveys.

The survey also found that the majority of corporate treasuries (75%) comply with hedge accounting regulations, an increase from 2011 (73%) and 2010 (64%). However, the majority (70%) of those who are complying with hedge accounting use spreadsheets to run their effectiveness testing. Hedge accounting systems (41%) was the next most cited method for testing, followed by the critical/short-cut method (14%).

“This latest research further affirms the difficulty corporate treasuries have been facing with regards to hedge effectiveness testing,” said Gurpreet Banwait, director, insight solutions product management, Fincad. “While spreadsheets are a pervasive tool, they do not offer an easy to use solution for hedge accounting. Treasuries need simple and reliable solutions to comply with hedge accounting standards without dealing with the operational issues that accompany spreadsheets.”

The survey also identified accurate risk assessment as another significant challenge faced by corporate treasuries. More respondents (35%) made adjustments to their risk management strategy compared to last year (31%). However, credit value adjustment (CVA), generally seen as an important component of accurately measuring portfolio risk, was trending downwards. In 2012, only 35% reported the need to calculate CVA as part of their derivatives valuation, compared to 40% in 2011 and 43% in 2010.

Few respondents in the 2012 survey (2%) expect the regulations to have a major impact on the way they do business. Instead, the trend seems to be an expectation that there will be more of a moderate impact to their business (34% in 2012, 30% in 2011 and 27% in 2010). Also approximately two-thirds of the respondents (65%) expect their IT spending to decrease or stay the same. This is evident in tighter corporate budgets and the need for more affordable solutions.


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