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DZ BANK
Reference SaaS-Operations
Hedge Accounting expanded to include multi-curve capabilities
DZ BANK, in collaboration with zeb, is expanding the Fair Value Hedge Accounting portfolio in zeb.control to include multi-curve valuation. This adapts the valuation methods to changing market conditions and supports the stability and transparency of financial results.
Results at a Glance
By expanding hedge accounting to include multi-curve valuation, DZ BANK is creating a solid foundation for market-based valuation and transparent bank-wide management.
Background & Objectives
Hedge accounting is of great importance for stabilizing financial results due to its impact on the income statement. DZ BANK uses portfolio fair value hedges to hedge interest rate risks. These hedges take into account transactions across various categories and currencies.
Due to changing financial market conditions and a revised valuation of the interest rate swaps used, the valuation methods for group-wide risk management and hedge accounting should be expanded to include multi-curve valuation.
Objectives
- Expansion of portfolio fair value hedge accounting
- Implementation of a multi-curve valuation in zeb.control
- Ensuring a robust effectiveness test
- Limiting P&L mismatches to an acceptable range
- Development of an economically and technically viable solution
The Solution: From the Preliminary Study to Implementation
At the start of the project, a preliminary study analyzed the effects of multi-curve valuation. This was followed by an intensive conceptual phase involving trial calculations. The results of these calculations formed the basis for selecting the valuation methodology and designing the effectiveness test.
The analyses showed that the choice of valuation curve is critical to the effectiveness of the hedges. With a suitable valuation curve and regression analysis, the risk of failing the effectiveness test was reduced to near zero. At the same time, the separation of interest rate and pull-to-par effects was maintained even in a multi-curve context.
Key elements
- Preliminary Study on the Effects of Multi-Curve Valuation
- Concept Development and Trial Calculations
- Selection of the Valuation Methodology and the Effectiveness Test
- Coordination of the Solution with the Auditor
- Consensus on Procedures and Implementation in zeb.control
Two-Phase Technical Implementation
A two-phase approach was chosen for the implementation. First, new interfaces for business and fair value data were agreed upon, and the prerequisites for multi-curve valuation were established. Subsequently, parts of the calculation were to be shifted to the source system.
After the technical implementation of the software and data delivery, hedge accounting was tested using the terms-and-conditions interface. Final parameter optimizations were performed using real data before the solution went live.
In the short term
Provision of the terms and conditions to enable multi-curve hedge accounting.
In the medium term
Transfer of selected calculation components to the source system.
Results: Objectives and Impact
The valuation methods used in overall bank management were adapted to changing market conditions and optimized for hedge accounting. The multi-curve valuation in zeb.control continues to contribute to the stability and transparency of the financial results.
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REFERENCES
Selected References
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