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Case Study

ChathamDirect FX hedge flattening innovation sets new standard for global corporate treasury

Summary

Global agricultural sciences company FMC partnered with Chatham Financial to develop a new “hedge flattening” system that decreases their cost of hedging, lowers operational costs, and enables increased exposure tracking. This innovation in multi-currency hedge netting significantly minimizes the organization’s total notional traded, enables trading in more liquid currency pairs, and sharply decreases execution fees while streamlining operations.

Organizations with FX balance sheet hedging programs historically faced trade-offs between achieving maximum hedge execution efficiency at the parent level and maintaining good P&L coverage at the subsidiary level. This can cause tension between the Board and corporate financial leadership, who value the parent company financials and US GAAP accounting, and subsidiary CFOs and controllers concerned with optimizing their individual entity’s P&L. With this advancement on multi-currency hedge netting, FMC’s treasury team created a win-win scenario where subsidiaries have the hedges they need via internal trades while the parent company executes the most efficient economic hedges with minimal notional to maximize liquidity.

Company goals

  • Expand risk-based decision-making using native system reporting and workflows.
  • Maintain existing hedge coverage while reducing the cost of hedging.
  • Decrease system operation time at month/quarter end.
  • Standardize hedging operations across all treasury teams through ChathamDirect.
  • Minimize impact to other stakeholders, including IT, FP&A, controllership, counterparties, and auditors.

Key activities

  • Advanced new functionality within ChathamDirect that enabled a "top-of-house" risk view and trading strategy while preserving the "entity level" accounting policy.
  • Aligned derivative valuations with remeasurement activity via an ERP rates integration.
  • Utilized ChathamDirect reporting to decrease Excel-based tracking and improve sensitivity testing.
  • Automated postings and improved entry structure to reduce manual interventions.
  • Consolidated month-end reporting package while delivering increased visibility into the hedging program.

Results

FMC can now net their entire exposure profile across currency pairs to create the most efficient street-facing trades while still pushing down internal trades to the subsidiary level to align with subsidiary reporting objectives. This enabled the organization to achieve quantitative results, including:

  • 400% increase in number of exposures tracked per month.
  • 67% reduction in number of trades placed per month.
  • 50% reduction in number of currency pairs traded per month.
  • 30% reduction in traded notional per month.
  • 40% reduction in trade costs per month.
  • 50% reduction in time spent operating the system at month-end.

The teams get more visibility with less system manipulation while simultaneously lowering the cost of hedging.

Manage financial risk confidently with ChathamDirect

ChathamDirect is a groundbreaking financial risk management and hedge accounting platform that supports foreign exchange, interest rate, and commodity hedging programs. ChathamDirect provides a clear view of your entire hedging program, including cash flow forecasts, balance sheet exposures, and hedge requests — all securely available on a leading SaaS platform. ChathamDirect is backed by Chatham Financial, an independent market leader with a global team of capital markets experts, risk management advisors, CPAs, lawyers, quantitative analysts, and technology developers who serve more than 3,500 clients annually. Schedule a demo to learn more.

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Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

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