Implementation Hedge Accounting

Referenz Raiffeisen Bank International

Austria as well as Central and Eastern Europe (CEE) are the domestic markets of Raiffeisen Bank International AG (RBI). The bank is one of the leading commercial and investment banks in Austria and has built a comprehensive network of local banks, leasing companies and numerous specialized financial services companies in 17 CEE markets. Its customer base mostly includes Austrian customers, but also international customers and large global customers operating in Central and Eastern Europe.

Background and project assignment

Against this background, RBI faces high earnings and risk management requirements. To hedge market volatility of customer transactions, the bank uses derivatives to establish inverse hedge relationships. If economic hedging is not transferred into a hedge relationship in financial hedge accounting, accounting mismatches in the income statement and equity may occur. This is due to the fact that if hedge accounting is not applied, a combination of elements of the amortized cost principle with elements of the fair value approach leads to an improper balance sheet designation of value fluctuations from risky items. Hedge accounting refers to specific accounting rules in IFRS for corresponding hedge relationships, as defined by IAS 39. Owing to the high impact on income statements, hedge accounting is particularly important for stabilizing the financial result. Thanks to the specialization in bank-wide risk management, zeb offers business expertise in applying hedge accounting methods as well as technical expertise by means of the Hedge Engine — a proven software for the fulfillment of the vast hedge accounting requirements.

Project approach

Together with zeb RBI implemented the Hedge Engine in a three-stage process to apply additional hedge accounting methods of portfolio fair value hedge accounting and to continue the optimization process.

The first and second stage of the hedge accounting introduction lasted nine months and were followed by additional four months for extended hedge methods as part of stage 3. The run-up and project setup concentrated on defining business requirements and analyzing data requirements. This was then used to derive the target architecture in view of possible implementation options. To be able to estimate balance sheet and income statement effects with the implementation of the Hedge Engine, test calculations were conducted for micro and portfolio fair value hedge accounting. Stage 1 dealt with creating the business concept which was used as the basis for implementing the Hedge Engine. This allowed for the migration of existing micro fair value hedges to the software and designation of new micro fair value hedge relationships. Stage 2 focused on introducing portfolio fair value hedge accounting and cash flow hedge accounting, as well as the “Hedge Selection” module which is part of the Hedge Engine. Consequently, the income statement impact was improved through optimized assignments to hedge accounting approaches based on treasury interest rate risk management. The hedge accounting enhancements of stage 3 included the introduction of micro fair value hedge accounting for structured products and the introduction of a regression analysis method based on prospective cash flows, which also led to an improved hedge effectiveness. Furthermore, the project team developed and implemented a prototype for derivative netting (n:m).

Overview of project stages and scope

Project results

Numerous benefits were achieved with the introduction of the Hedge Engine and the resulting expansion of hedge accounting activities in the RBI head office. The project also made an important contribution to the vast automation of the hedge accounting process, as well as to the stabilization and transparency of the financial result. In addition, RBI now profits from a more powerful infrastructure to transfer hedge relationships for financial accounting purposes.

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