The World After Brexit Over the last few days, we’ve already spoken with numerous clients about the potential financial and regulatory impacts of the UK’s vote to leave the European Union. As the referendum’s outcome reverberates through the markets, here are a few key notes: 1) What happened in financial markets? The British pound plummeted 12% overnight from Thursday, nearly doubling its worst ever one-day percentage loss that occurred in 1992 when it came under speculative attack and fell out of the ERM – it has continued to fall sharply today. The euro also weakened substantially, while the Japanese yen strengthened considerably as the safe-haven currency of choice (the Swiss franc’s pressure to appreciate was mitigated by Swiss Central Bank activity). Bonds from the US to the UK to Germany rose sharply, anticipating expansionary monetary policy to ward off recession.…

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Hedging Lessons from Brexit On Thursday, British citizens will vote in a referendum posing this question – “Should the United Kingdom remain a member of the European Union or leave the European Union?” The result will have sweeping implications for trade policy, the flow of immigrants, and even the continued viability of the European Union. Hence, as the referendum’s projected outcome has shifted from Remain to Leave and back again, worldwide currency, interest rate, and equity markets have swung wildly. As a global company with operations in the UK and Europe, we’ve been monitoring the referendum buildup closely. In addition to its anticipated economic and political impacts, there are also numerous valuable risk management lessons, including (1) The best time to buy insurance: The cost of seasonal hurricane insurance on an Outer Banks home skyrockets once there’s already a Category…

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A Hedge! A Hedge! My Kingdom for a Hedge! Four centuries ago, the most influential English-language playwright in history was laid to rest in Stratford-upon-Avon. Yet since April 25th, 1616, William Shakespeare has captivated four centuries of audiences and readers with his masterful dramatic arcs, playful neologism, and comprehensive depiction of life’s full breadth. In fact, Shakespeare’s astonishing thematic scope led Ralph Waldo Emerson to declare: “What point of morals, of manners, of economy, of philosophy, of religion, of taste, of the conduct of life, has he not settled? What mystery has he not signified his knowledge of?” As we reflected on Emerson’s adulation, it dawned on us that if Shakespeare really did settle all points of the economy, he must have written plenty about risk management. We spent the weekend curled up with our college Shakespeare text and, as…

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Training: Join Chatham for an afternoon of Financial Risk and Hedge Accounting Training, and attain CPE/CTP March 8, 2016 San Francisco, CA, USA: Join Chatham Financial for a day of interactive learning focused on understanding current economic risks, how to manage those risks with derivatives, and how to apply hedge accounting to interest rate swaps and caps. This session will provide an overview of the economic risk in today’s market, the various derivatives available to manage those risks, and detail on how to account for derivatives, which will assist your company in aligning hedging conversations among Treasury, Accounting, and board members to help optimize decision making within an organization. The training will take place at The Hyatt Hotel, 5 Embarcadero Center, San Francisco, CA. CPE 5 credits & CTP 6.4 credits are available, and there is no charge for this…

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What Should I Be Hedging – Tangible Book Value or Economic Value of Equity? March, 2015 And Should I be moving Available for Sale securities to Held to Maturity? Long term interest rate risk of a Financial Institution (“FI”) is better measured by Economic Value of Equity (“EVE”) sensitivity analysis rather than TBV changes. Hedging solutions that consider EVE sensitivity are more comprehensive than those that consider TBV changes exclusively. Tangible Book Value (“TBV”) includes changes in value of Available for Sale (“AFS”) securities, but does not consider changes in value of any other asset or liability. Accordingly, TBV excludes changes in value of core deposits and loans, which make up a primary funding and at least 70% of earning assets. Adoption of Basel III in the United States will allow banks (under $250 billion in assets) to continue to…

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POLAR: Path of Least Accounting Resistance December, 2014 Selection of the desired interest rate risk position and the corresponding transactions that can be used to broadly support a desired change in a financial institution’s interest rate risk position is critical, but unfortunately, only half the story. The next steps in the larger balance sheet risk management framework are to assess the accounting implications of each transaction and pursue the risk mitigating strategies that best accomplish the FI’s economic and accounting objectives. POLAR can help guide the FI to the simplest, most efficient, and accounting-friendly solution that has the desired impact on the FI’s interest rate risk position. Download This Bulletin

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Laying the Groundwork January 13, 2015, Financial Managers Society: Update By Bob Newman “As a rate hike looms, derivatives may draw renewed interest, Chatham’s Bob Newman discusses that ‘Now that we’re seemingly closer to the Fed getting ready to raise short-term interest rates, having derivatives in the toolkit can help an institution be better prepared to take action.’” Download Complete Article More information at:

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A Framework for Balance Sheet Risk Management November, 2014 Interest rate risk management is top of mind for senior managers at many financial institutions right now. With so much uncertainty around the timing and magnitude of any changes to the federal funds target rate, it’s understandable that everyone from board members to investors to regulators wants to know exactly how the institution is positioned, and whether it will benefit or suffer when rates begin to change. While FIs are generally willing and able to tackle their interest rate risk, too often the focus is on a specific transaction, rather than an assessment of whether and how the transaction fits into the overall interest rate risk mitigation strategy. This bulletin lays out a simple, yet powerful balance sheet risk management (BSRM) framework that can be used to evaluate an FI’s exposure…

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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: Interest Expense & Currency Risk Our Client: A software firm with contracts in multiple currencies, a complicated legal structure and unique debt structures. Situation: The company had recently increased leverage from a negligible amount to roughly 50% of its enterprise value in a recapitalization, compounding the currency risk. The company was trying to determine the best way to hedge its exposure to a CAD loan with interest payments based on a USD LIBOR index, as well as how to manage its currency risk across multiple currencies. Summary: Chatham Financial assisted the company in developing a hedging strategy for its debt by explaining the various hedging structures that could be used to create the appropriate hedge of the firm’s interest rate risk. To help the management team obtain an understanding of its currency risk, we worked to isolate…

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