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Accounting Expert Outlines Impact of FASB Hedge Accounting Proposals on REITs
May 11, 2017

Robert Barton, vice president of accounting advisory at Chatham Financial, joined REIT.com for a video interview at NAREIT’s headquarters in Washington, D.C. “This has been a significant burden on a lot of REITs, so this simplification of this standard will really benefit most REITs,” Barton said, as they will not have to separately record and state ineffectiveness in their earnings. View Video

Implementing FASB hedge accounting guidance

Watch the on demand video webcast where experts from the FASB, EY’s national office, GE, Comerica, and Chatham Financial discussed the upcoming changes to hedge accounting and the resulting impacts and opportunities they will create for companies’ hedging programs. The updates to hedge accounting are expected in late August and will be available for immediate adoption. Have questions about the FASB hedge accounting guidance? Reach us at risk@chathamfinancial.com.

VIDEO: Portfolio Reconciliation Requirements

Heather Fritzinger of Chatham Financial discusses the advantages of reconciling a portfolio of derivatives transactions with bank counterparties on a periodic basis. In addition, she explains which parties are required to reconcile trade portfolios under Dodd-Frank and EMIR, and describes how this reconciliation must be properly documented according to protocols published by the International Swaps and Derivatives Association (ISDA). A full transcription of the video is available below.

 

Video Transcript:
Heather Fritzinger: The frequency of portfolio reconciliation varies by jurisdiction, and depends on two factors; entity classification and the number of trades between the counter parties. Under Dodd-Frank, swap dealers must make reasonable efforts to engage in portfolio reconciliation with their end-user counter parties. If those counter parties have less than 100 trades with each other, the frequency is annual, and if they have more than 100 trades, it goes to quarterly. It’s important to keep in mind that end-users do not have to engage in portfolio reconciliation with their swap dealers. They can decline to do so. It’s a bit different under EMIR. Any entity that is domiciled in the EU, or an entity that faces a bank that’s domiciled in the EU must engage in portfolio reconciliation. Again, that’s based on entity classification. Under EMIR, there are FCs, NFC pluses, and NFC minuses. NFC minuses only have to engage in portfolio reconciliation once per year if they have less than 100 trades. If they have more than 100 trades, it goes to quarterly. For NFC pluses and FCs, the requirement is at a minimum quarterly, and then increases in frequency the more trades there are.

The portfolio reconciliation requirement under EMIR is different than that of EMIR reporting, but there is an obligation for FCs to report information to their national regulator if a dispute remains outstanding on a trade for more than 15 business days, and if that dispute is greater than 15 million Euros. Under both Dodd-Frank and EMIR, counter parties have the option of either exchanging data with each other, or simply reviewing data that they receive from one party. It’s important to keep in mind that under EMIR, if you elect to be a data-receiving entity and review the information that is sent from your bank, you have five business days within which to respond, otherwise, the information is deemed affirmed. Dodd-Frank and EMIR regulations require that the parties put in place documentation to govern the portfolio reconciliation process and dispute resolution procedures. An efficient way to satisfy those documentation requirements are via the protocols published by ISDA. Under Dodd-Frank, this could be satisfied using the ISDA March 2013 Dodd- Frank protocol, and under EMIR, that protocol is the ISDA 2013 EMIR port-rec and dispute resolution protocol. In general, portfolio reconciliation can be a good exercise, especially if you have a large portfolio of trades. Despite having correct trade documentation in place at the time of execution, minor discrepancies may arise in the portfolio reconciliation process. This can help you avoid surprises in the event you wish to modify a trade or unwind it early.

VIDEO: Michael Bontrager Wins EY Entrepreneur Of The Year® 2015 Greater Philadelphia Award

 

Video Transcript:
EY Speaker: Michael Bontrager, Chatham Financial. With Michael Bontrager, you’re in good hands. Michael founded Chatham Financial in 1991 on principles of transparency and unbiased expertise in the derivative and debt markets. Chatham is now a global success, providing risk management and investment solutions to over 1,600 companies.

Michael Bontrager: The most valuable service that we provide to our clients is a peace of mind that they’re doing the right thing, they’re paying a fair price, they’re not going to have any blowups, and their workflow is far more efficient.

VIDEO: Internal Compliance Under Dodd-Frank and EMIR

Matt Hoffman of Chatham Financial answers your questions such as “What regulatory compliance obligations might my banks not help me with?”, and others regarding Dodd-Frank, EMIR regulations, and, in particular, the ISDA Dodd-Frank Protocols. Thanks for watching!

 

Video Transcript:
Matthew Hoffman: When Dodd-Frank and EMIR first came online, we found that the buy-side of the over the counter market was concerned with continued access to that market asking us questions like, “What do I have to do for my banks to continue to trade with me?” This question really amounts to what do my banks need me to do so they are compliant with Dodd-Frank and EMIR and while these indirect compliance obligations are important in terms of continued access to the OTC market, we focused on ensuring that our end-user clients are meeting their own internal compliance obligations under Dodd-Frank and EMIR, internal compliance obligations that banks cannot handle for them.

While banks simply require these companies to make certain representations typically through ISDA’s Dodd-Frank Protocol 2.0, SEC filers boards were required to authorize a committee to review and approve the decision to enter into derivatives as well as to put a risk management policy in place and review it annually or more often upon a triggering event.

More generally, both Dodd-Frank and EMIR require derivatives end-users to have certain policies and procedures in place. And while banks simply are required to receive certain representations to that effect, internal auditors or even national derivatives regulators may look more closely to ensure that end users are complying with regulations in related representations. For example, on the Dodd-Frank side, US swap dealers typically require end-user parties to adhere to ISDA’s Dodd-Frank Protocol 1.0 and in so doing to make institutional suitability representations by electing schedule 3 from the DF supplement. But many end-users fail to realize that this election amounts to a representation, that certain written policies and procedures are in place.

On the EMIR side, end-users are required to have policies and procedures in place on account of direct risk mitigation compliance obligations including timely confirmations, portfolio reconciliation, dispute resolution and valuations. But banks typically only focus on portfolio reconciliation documentation rather than ensuring that end-user’s policies are drafted appropriately or even exist.

Another often overlooked element of internal compliance relates to record keeping. While banks typically report transaction data under Dodd-Frank, the regulations actually require end-users to keep full, complete and systematic records together with all pertinent data and memoranda with respect to each swap in which they’re a counterparty. As the system of record for many of our clients, we’re confident that our clients can meet the regulatory requirement that such data be accessible within 5 days at any time during the life of the trade and for 5 years thereafter.

VIDEO: Pre-trade Documentation

Christina Norland of Chatham Financial discusses the documentation requirements under current Dodd-Frank regulation that must be met prior to trading. Thanks for watching!

 

Video Transcript:
Christina Norland: So, for all transactions that involve U.S. swap dealers or registered, non-U.S. swap dealers, many clients have to complete pre-trade documentation, that’s required by their banks. This is because the banks have specific requirements that they have to fulfill under Dodd-Frank to, ensure that they have complied with various business conduct standards as well as swap-trading relationship documentation standards. This often involves a little bit of pre-trade work that needs to be done that can kind of delay trading if it’s not completed, prior to the day of execution.

VIDEO: Recordkeeping Requirements Under Dodd-Frank

Pam Brown of Chatham Financial discusses how the recordkeeping requirements implemented by the U.S. Commodity Futures Trading Commission (CFTC) as a result of the Dodd-Frank Act affect end-users in the OTC derivatives market. In addition, she explains how clients use ChathamDirect to maintain compliance with this regulatory requirement.

 

Recordkeeping
What is it? A requirement to report and keep records of relevant data for all swap transactions. All swap counterparties – including end users – must keep records of their derivatives transactions. As for reporting, the CFTC requires that one of the two counterparties to a swap must report the data to a swap data repository (SDR).

Why is it required? Congress enacted the Dodd-Frank Act in response to the financial crisis of 2008 with the explicit goal of preventing a repeat of those events by making markets safer through greater transparency. Reporting and keeping records of swap data are fundamental to this aim.

Who does it apply to? All swap counterparties are required to keep records of their swaps. As for reporting, only one side has to report. The CFTC regulations on swap data reporting prescribes which party should be the reporting party:

  • – If only one party is a swap dealer (SD), then the SD is the reporting party.
  • – If only one party is a major swap participant (MSP), then the MSP is the reporting party.
  • – If both parties are the same classification (e.g., both are financial entities), then the parties must designate a reporting party.
  • – If a US person faces a foreign person that is not registered in the US as an SD or MSP, then the US person is the reporting party.

How can I comply? If your counterparty is responsible to report for your trade/s, you will need to provide them with necessary information they request. This information includes a Legal Entity Identifier for each party. This is something your counterparty cannot procure on your behalf, so you will need to make sure to obtain one before trading. For more information on LEI’s.

If you are required to report, you will need to submit swap data to a swap data repository, either directly on your own or through a third party vendor like Chatham.

How can Chatham help? Chatham has reported over 25,000 trades, both in the US and in Europe. For more information about our swap data reporting service, please contact your Chatham advisor.

Video Transcript:
Pam Brown: You can think of swap data reporting in two parts. There’s a real-time public reporting component and then there’s a swap data reporting component. In terms of the real-time public reporting this is information that is provided to a swap data repository which they then make public. So the information is only a subset of what’s considered swap data and there’s no identifying information involved.

In terms of the other pieces of data that is the data that is provided to the regulators for monitoring and regulatory purposes. Most end-users do not have to worry about swap data reporting, and that’s because in most cases they’re facing swap dealers, and the swap dealers in those cases will be responsible for reporting those trades. But all end-users do have to be worried about record keeping. Record keeping and reporting go hand in hand. They try to enhance transparency in the OTC derivatives market and allow for effective oversight by the regulators.

Now with the swap data record keeping requirement end-users must keep their records for the duration of the life of the trade as well as five years after its maturity or termination. The records can be kept in either paper format or electronic and they must be retrievable within five business days. Now the data itself should be full and complete and should include all of the data that’s related to the swap, including any confirmations.

Chatham’s system has been keeping records of swap transactions since way before there was a record keeping requirement, and our clients can use us as their record keeping system. They can provide us with the confirmations or any other sort of swap-related documentation and we’ll make that available on our web portal, ChathamDirect. The record keeping requirement has not been the main focus for a lot of the market participants. I think a lot of the complexities around central clearing and reporting, I think those have been much bigger headaches for the market.

VIDEO: Risk Management Overview for CFOs and Treasurers

Amol Dhargalkar of Chatham Financial discusses Risk Management considerations for CFO and Treasurers and the key to getting a handle on what it means to the bottom line. A full transcription of the video is available below.




Video Transcript:
Amol Dhargalkar: Risk Management has definitely become one of the core issues that are on the minds of CFOs and Treasurers today. A few years ago, it was working fine. The currencies weren’t as volatile. Commodities prices weren’t moving as much. The impact on margins wasn’t felt as much, because businesses were growing, economies were growing, markets were growing. Now, you see every day in the press analyst reports around how large companies are providing earnings guidance that’s impacted by currency movements or commodity prices. What we’re starting to see is audit committees of boards, and even, generally, the entire board of directors, starting to ask questions to the CFO. “What are we doing with respect to our international exposure?” Is it sufficient to just say, “We have a little bit of exposure, but it all nets out at the end of the day” or do we need to be doing more?

What Chatham Financial can do, not just for treasurers, but for CFOs and boards of directors, is help reduce volatility. We help reduce volatility through helping them to design programs that make sense for their business. By helping them to implement those programs in a cost-effective manner.

Quantifying risk is one of the most difficult things that companies can do. It really begs the question of where does all the risk come from? That is a big project in and of itself, just to understand what are the risks we truly care about, and then the second part of that, what are all the contributors to that? Then, how do I measure volatility around that? Do you have more risk or less risk than you thought? There are companies out there that have spent literally millions of dollars a year building internal teams to do this type of work. It’s a very vexing issue for most treasury teams.

Chatham works with a broad spectrum of companies. Everywhere from companies that are starting to just explore what their risks are and how they should be thinking about risk management, all the way through to the more sophisticated corporation that have had programs in place for a while and are actually looking to optimize them and then take them to the next level. All of our conversations with hundreds and hundreds of companies every year, there’s one common theme. Treasurers want to play that more strategic role within the organization. The question is always, “What’s holding you back?” Usually what we’ve found, what’s holding them back is, they need time, they need tools, they need a little bit of expertise to help them along their way.

Chatham is unique in its offering of advisory solutions and technology solutions to its clients help them solve risk management issues. One great example of how we offer both of these services is in our hedge accounting practice. What Chatham does with out clients is we act as partners up front in developing the program itself, helping to ensure that the designation memos are written correctly, that the strategies themselves are well-articulated, and that the company understands what it needs to do on an ongoing basis. Then, on the technology side, we offer our clients tools that we’ve been using for 20 plus years ourselves to allow them to streamline their program. Anything from the effectiveness testing to the journal entry reports that are required to be done on a monthly or quarterly basis.

Not many people in the treasury marketplace are focused on both advisory and technology. We strongly believe in the need to integrate these two. We really have always felt that the advisory, and everything we do on the advisory side, working with companies to help develop programs and to implement those programs, really strongly feeds into everything we do on the technology side.

Risk management has always been a difficult area for treasurers to talk about with respect to senior management. The difficulty comes in because it’s not about, necessarily, increasing revenue growth, or decreasing expenses. Oftentimes it requires an investment, which might be an expense, and the question is, how do you measure the return of that type of an investment from a treasury perspective or from a company perspective? It really comes down to understanding that risk management is truly about reducing volatility. To invest in a risk management program, the best way to measure that is to see how much volatility has been reduced in that bottom line. With the right set of tools, you can see that an appropriate risk management program can cut your volatility of EPS in half, perhaps, due to currency movements.

VIDEO: Chatham Financial Overview

Michael Bontrager of Chatham Financial discusses how our advisory and technology come together to help our clients. A full transcription of the video is available below.




Video Transcript:
Mike Bontrager: In a world of increasing volatility, the analytics around how much the volatility change could impact your bottom line, that really, really matters. Companies who want to be best in class must be thinking about, “What are impacts of different volatilities in different markets?” The risk management landscape over the last 20 years has just dramatically changed.

Back in the 90s, things were mostly around the economics, structuring to the economics of the trade, and then we had FAS 133, IS 39 that came along, and, all of a sudden, accounting needed to be part of that equation. Then Lehman Brothers goes down, and the credit of the counter party, which was not much of a consideration prior, became a very, very large deal. Now, we’re in an era of Dodd-Frank and Basel III, where regulatory capital and exactly how you’re going to handle your trades, whether to clear them or not. Those issues start to become considerations. The treasury department now is just being cast with worrying about or being concerned with just so many more areas of complexity.

The challenges that companies face are around addressing the issues of how to deal with the complexities that they face. We really believe that companies have to have expertise in any particular area, be it the economic structuring, be it the accounting, be it legal, credit, whatever. They need deep expertise. Secondly, they need a good process around calculating their risk, executing their risk, reporting their risk. And, thirdly, you need tools to actually be able to scale this whole process and make it happen. What Chatham is doing is we are filling in those gaps so that between Chatham and our clients, we are able to cover all 3 of those very important areas.

From the early days, technology has been very important in this company. While many people think of us as an advisory shop, in a way, you could say we’ve always been a technology shop. It has been a critical part of our service to the clients, and what’s happened, especially over the last 10 to 15 years, is as we’ve just invested a lot of money in technology, and, now, we’re moving to a place where we’re making a lot of those tools available.

The way that we’ve approached the market to actually bring technology tools and to also apply our expertise does give our clients so much more flexibility because, to the extent that they really just need the tools and only need a little advice, that works really well, to the extent that they start out needing a little advice but later need a lot of advice, we can fill in those gaps as well.

Chatham is kind of driven really by 3 ideas. The first idea is really around deep expertise. We have deep expertise in the areas where we’ve chosen to pursue, and so we have tremendous experience and expertise because we’ve seen and experienced so many kinds of transactions, and we’re able to bring that expertise to bear for our client.

The second area is really around a partnership mentality. We really want to be viewed by our clients not as a vendor of risk management services but really a partner, a thought partner, thinking with them through the process of, “What should they do?” “How should we do it?” and, “How do we track what you’ve done?” We want to be that partner through that process, which also means that we have a very long-term type of outlook with our client.

The third idea is really around the fact that we think integration of all of these highly complex areas really, really matters. What happens in accounting will affect what happens on the economic side. What happens on the economics will affect the capital. All of these areas of deep expertise really flow together.

And since Chatham is so involved in so many of these different areas from interest rates to foreign exchange to commodities to technology to doing analysis on a portfolio level. Since we’re involved in all of these things, we’re able to bring that all to bear to the specific problems that a client faces.

VIDEO: ChathamDirect

Michael Bontrager and others from Chatham Financial involved in the project describe why ChathamDirect was developed and what client needs it meets in managing risk. A full transcription of the video is available below, but you can view the video here:




Video Transcript:
Mike Bontrager: For years, Chatham has been known as an advisory company but what people don’t know is we’re also a technology company and we’ve been for years. What we really believe is that we can bring advisory and technology together just to produce solutions in the markets that are just second to none.

Amol Dhargalkar: CFOs have been dealing with volatility in their businesses since the beginning of time. Chatham has really been working with them to help them mitigate that volatility in the interest rate, currency and commodity markets. We’ve found that there’s three key questions that companies ask. How do I quantify my risk? How do I assess that risk? Then ultimately, how do I account for and report on that risk?

Really, treasurers are being asked to be more strategic partners to CFOs to boards to the businesses within an organization. We found that they could benefit from the tools that we’ve been using since our inception, particularly the tools around quantitative analysis of their risks and hedge accounting. Ultimately, what companies are looking for are intelligent tools that help them manage and quantify their risks.

Jose Sabastro: We see those companies typically fall into one of two buckets. The first one is companies who’ve recently experienced a lot of growth internationally. The second type are companies who are already managing their risk and maybe have been doing it for some time but they’ve been doing it via more home-grown solutions such as Microsoft Excel.

ChathamDirect is a SaaS application really accessible anywhere around the world. It was designed with the very specific needs of corporate treasurers especially for those who have a cash flow hedging program or a balance sheet hedging program in place or who are considering establishing a program.

ChathamDirect is composed of four main modules; it’s exposure management, trading, valuations and hedge accounting. Those modules are put together to address the issues that you come across within the entire FX risk management process.

ChathamDirect’s exposure management module is really catered toward streamlining that whole process starting from the gathering of exposures from across the world and across many different entities, the netting of those exposures, the comparing of those net exposures against hedges that have already been put in place, the analysis of risk and then analytics that drive at a strategy for hedging that really look at what is the most optimal and cost-effective way for me to now mitigate these risks and what trades would I need to be able to put in place in order to be able to do that.
The third idea is really around the fact that we think integration of all of these highly complex areas really, really matters. What happens in accounting will affect what happens on the economic side. What happens on the economics will affect the capital. All of these areas of deep expertise really flow together.

The trade execution module integrates with third party trading platforms such that trades to be executed flow from ChathamDirect to the electronic trading platform and once executed that trade information flows right back into ChathamDirect and the hedge accounting and valuations process is kicked off automatically.

For the valuations module, we’ve really taken the models that we built over the last 20 years for valuing derivatives on a live basis and have incorporated those models into ChathamDirect. Those models are tested on a daily basis via our practitioners who trade over a billion and a half dollar’s worth of notional. We’ve also applied the models that we use for credit evaluation adjustments into that module.

The hedge accounting module streamlines the entire hedge accounting process from hedge designation memos to journal entries. In the highly complex and nuanced world of hedge accounting, ChathamDirect combines the proven excellence of our practitioners with an intuitive user experience providing best-in-class hedge accounting and compliance that will withstand the most critical auditors’ scrutiny. Our application is built in collaboration with our technology team, our risk advisory team and our hedge accounting advisory team. That unique combination creates a product that really provides visibility for our clients and gives them the ability to get their arms around their exposures and really understand them better. It streamlines that entire process.