What a few weeks we’ve just lived through in the financial markets, with no shortage of turbulence, turmoil, and downright tribulation across the world. The S&P 500 tumbled more than one hundred points last week, a dubious distinction it had not achieved since the grim days of October 2008 – as of this writing, it’s fallen more than fifty points in a single morning. China’s yuan (partially) and Kazakhstan’s tenge (entirely) shifted to a freely floating currency from central management, causing the former to fall materially and the latter to plummet precipitously. A barrel of crude oil cost 32% less than it did at the outset of July. Against this backdrop of coordinated devaluating pressure, it’s no surprise that market volatility measures have jumped considerably. 2-year cap volatility, a measure of the cost of insuring against rising interest rates, has…

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NEW YORK, N.Y. – Peter Beyers and Stanley Sellers, two former Wall-Street derivative’s traders, are leading a group of financial professionals in a quest to create a derivatives trading system completely untethered from financial regulation. The idea is to establish human and technological infrastructure robust enough to support a legitimate presence in the derivatives market that operates apart from any regulatory scheme. “Navigating the do’s and don’ts of the new and existing regulation across the world is becoming increasingly difficult and burdensome for market participants,” said Mr. Beyers. “Imagine the efficiencies you could create by cutting away all the red tape.” But finding a way to stay out of reach of regulation while still maintaining a presence in derivatives markets creates a unique challenge. “The regulatory landscape in today’s world is changing,” Beyers explained. “All of the major markets exist…

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Corporate Case Study: Tracking & Reporting for Hedges Our Client: A global musical instruments manufacturer and distributor who actively manages FX and interest rate risk exposures. Situation: The company was managing over 1,500 derivative instruments in Excel and was applying hedge accounting for more than half of their derivatives portfolio. They were applying a hedge accounting methodology that caused some earnings volatility and wanted to evaluate whether another approach, such as regression for effectiveness assessment and hypothetical derivative method for measurement, could produce better results. The period end process was taking longer than our client wanted, and, unfortunately, it was necessary to enter and maintain every derivative into multiple systems or spreadsheets. The company was seeking to implement a hedging, hedge accounting & derivative reporting solution that would: Ease the administrative burden of tracking and reporting derivative transactions Eliminate risk…

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Corporate Case Study: Strategy & Accounting Our Client: A global packaging and manufacturing company with over $7 billion in revenues and a complex capital structure. Situation: The company had recently issued fixed rate financing and was considering converting it to variable via a pay-variable, receive-fixed interest rate swap. Management’s objective was to achieve a certain fixed-floating mix, but was sensitive to the earnings impact that could be generated from the changes in fair value of a pay variable interest rate swap. Summary: The company sought our advice regarding the potential application of fair value hedge accounting on the proposed structure. Our analysis not only highlighted crucial issues that hindered the application of the shortcut method (such as the presence of equity-linked options in the hedged bond), but also showed the earnings impact over the life of the hedging strategy, under…

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What if we told you that there was a derivatives contract so perfect in concept and execution that the non-financial counterparty had huge potential upside without any downside risk? What if we further told you that everyone – all parties to the derivative, related institutions, and society as a whole – could be made holistically better off from the transaction? Wouldn’t that be the best derivative ever, worthy of special acclaim on World Derivatives Day? “Come, come,” you might say, “that’s too good to be true. This World Derivatives Day spirit has gone to your head, and you’ve forgotten core principles of economics like greed, moral hazard, and zero sum games. No derivative could benefit all stakeholders this way … right?” Let us begin by telling you about juvenile recidivism rates in Massachusetts. Every year in the Commonwealth, 4000 high-risk…

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At-a-glance management to save time and costs As a real estate investor, managing debt terms, payments, covenants and other details can quickly become a job that a spreadsheet alone can’t handle. The Chatham Debt Management system helps clients ease the burdens of managing and reporting on their debt portfolio. This web-based system centralizes all debt information and performs tasks such as tracking covenants, building payment budgets, and managing critical event dates. The system serves to guide the workflow for debt management processes while organizing key documents. The system also provides powerful reporting, such as scenario analysis under hypothetical future interest rate environments, portfolio-level weighted average rates and maturities, and linked hedge and debt instruments. How Chatham provides management of client debt portfolios Chatham’s Debt Management system for commercial real estate covers both day-to-day operations as well as major events, such…

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Experts in CRE debt and derivatives valuation Determining the accurate, fair value of commercial real estate loan debt or applied derivative instruments may seem simple on the surface. Nonetheless, improper measurements can lead to significant, long-term financial loss over the course of the loan or derivative. It may also prompt questions from investors, auditors, and regulators. How Chatham’s valuation services help real estate clients Independent third-party expertise: Chatham has been working with real estate companies for over 20 years, using proprietary models and independently gathered data to value debt and derivatives. And our advisors are in the markets every day, continually building market knowledge, monitoring trends, and adjusting for changing standards. From caps, swaps, and FX forwards, through to more exotic derivatives, Chatham offers a robust platform that provides clients with real-time values via our secure website. Our best-in-class valuation…

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Adding clarity and precision to derivative valuations Failure to properly measure the fair value of a derivative instrument can result in significant losses for a company. It can also lead to sub-optimal pricing when executing a derivative transaction. This translates into real economic losses over the life of the instrument. In addition, using outdated valuation modeling techniques or not understanding how derivative fair values are measured often lead to additional scrutiny from management, auditors, and regulators, further increasing costs to a company. Benefits of Chatham Derivative Valuation Services Independent third-party perspective: We cover all types of interest rate, foreign currency, and commodity derivatives, from caps and all types of swaps including cross-currency to FX forwards, options, and exotic derivatives. As a trusted third party that is independent and objective, Chatham offers a robust platform with proprietary methodology that provides real-time…

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Lowering cost of funds with interest rate derivatives When properly structured, from both an economic and hedge accounting perspective, interest rate derivatives are usually the best solution for banks concerned about forecasted interest rate movements that negatively impact their financial performance. Chatham offers outstanding derivatives and hedge accounting advisory and systems designed to reduce this risk. What’s more, our experienced team of advisors can assist in navigating the new derivatives regulatory landscape of Dodd-Frank. Unlike broker-dealers or counterparties to derivative transactions, Chatham is an independent advisor. We are an unbiased partner with the expertise and resources you need to meet your interest rate risk management goals. How Chatham helps mitigate interest rate risk Chatham’s risk management consultants work with clients to develop and execute accounting-friendly hedging strategies that best meet the bank’s ALM objectives. We leverage our strong capital markets…

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It’s amazing how time flies. Can this really be our first newsletter in June 2013? Why, that means our favorite holiday is one short week away! Of course, we’re talking about World Derivatives Day! To answer your first question: no, this is not a joke! If you’ve been reading our newsletters for a while, you may recall that in 1997, we at Chatham decided to dedicate one day a year to celebrating the mighty derivative and its use in financial risk management: more predictable than a LIBOR-Fed Funds dislocation; more foreseeable than a black swan event; and able to fix the largest of variable interest rate exposures with a single “done”! But this year, World Derivatives Day coincides with an important milestone in the now four-year-old realm of financial regulatory reform, and it is an inauspicious day for some. Beginning…

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