How CFOs and CIOs Find Hedging Help

CFOworld — With commodity prices on a roller-coaster ride, and the world's currencies in a state of frightening flux, companies large and small have become mindful of the need to keep up with ever-more-complex derivatives and other hedging strategies. And the actions of standards-setters only add to the challenge.

The upshot has been a boon -- as is so often the case -- for consultants, and for a range of software companies offering products delivered about every possible way, from a spreadsheet environment to the ever-expanding world of the cloud.

A Handle on the Standard

Reval is one of the many companies that can be said to owe its existence to increased hedging and the accounting convulsions that have occurred as a result over the past decade or so. "Focusing on risk is part of our DNA," explains Justin Brimfield, Reval's senior vice president of corporate development, in an interview. Reval, started 12 years ago, came into existence just ahead of FASB hedge-accounting standard 133.

Companies seeking to offset commodity and currency price swings without adding volatility to profit-and-loss statements spent the first few years of the new millennium trying to get a handle on the standard, which for the first time required derivatives to be marked to market at fair value.

"The FASB kind of left it vague," so that auditors and financial executives had to sort out the particulars, Brimfield says. "Nobody could really get this hedge accounting right. The company founders [at Reval] saw the treasury market being underserved, and that was our entry into the treasury space." It was, from their viewpoint, "a real opportunity."

'Bad Knocks'

"Hedge accounting has gotten a lot of bad knocks over the years and some of it was justified five years ago," according to Jeff Wallace, founder of Greenwich Treasury Advisors. "Auditors really understand it now, and they're not changing their minds every year about everything like they did in 2002 and 2003."

Wallace, whose clients range "from companies like GE, Ford and Novartis, to a $30 million jewelry manufacturer," says he is emphatically not in the software business. "I mostly help people to do the hard part," he explains. "Most treasury consultants don't sell software. They're not in the business of selling software." But, he concedes, "it's useful to have software."

Some of the companies he talks to, particularly the smaller ones, try to do hedge accounting "on the cheap through Excel spreadsheets," he adds. But those with "more than 15 positions outstanding" are increasingly turning to "much more expensive solutions" via providers like Reval, SunGard and Wall Street Systems. "Sometimes Bloombergs are bought because company CEOs want to see what their stock prices are" while tracking hedges and other trades, Wallace says.

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