FINCAD Annual Corporate Survey 2011

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FINCAD Annual Corporate Survey 2011

  1. 1. Annual Corporate Survey<br />FINCAD 2011<br />
  2. 2. Hedge Effectiveness Testing and Risk Remain the Biggest Challenge for Treasuries<br />Summary<br />73% of respondents reported that they conducted hedge effectiveness testing and this was also seen as one of the biggest challenges for them (27%).<br />ŠŠWhile hedge effectiveness continues to represent a major challenge, risk, in particular accurate risk assessment (29%), was also top of mind for Treasurers. 69% of respondents reported taking steps to adjust their risk management strategy and this included running scenarios/sensitivity analysis and calculating Value-at-Risk (VaR). These results were similar to last year’s survey.<br />Treasuries use derivatives to better manage their risk, but this year’s survey found a decline compared to last year’s survey. 75% reported using derivatives in the 2011 survey, compared to 83% of respondents in 2010. For those who are using derivatives, they are making adjustments to their portfolio and performing valuations less frequently than was indicated in the prior survey.<br />
  3. 3. Hedge Effectiveness Testing and Risk Remain the Biggest Challenge for Treasuries<br />The 2011 FINCAD Corporate Finance Survey also showed that treasuries were using counterparty pricing and spreadsheets as the prime methods for valuing their derivatives. Multiple, independent calculations are important to ensure that the valuations are accurate. <br />As a matter of best-practice, corporations should calculate the Credit Value Adjustment (CVA) on all of their OTC derivative transactions. Despite 75% of respondents using OTC derivatives in their portfolio, only 40% felt that they needed to calculate the CVA for their derivatives valuations. Without CVA in their calculation, corporate treasuries face potential adjustments in their books if their auditor’s valuations are different from their own.<br />With all of the regulatory changes on the horizon, the majority of corporate treasuries felt that they would need to change the way they are doing business. 51% of respondents anticipated that the impact would be minimal, with minor changes needed, while 30% felt that the impact would be moderate and notable changes would be needed. Only 12% felt that they were well-prepared for regulations that lie ahead.<br />
  4. 4. Majority of non-financial corporations use derivatives<br />Overall, fewer respondents reported using derivatives in this year’s survey compared to the one conducted in 2010. 75% of the respondents from non-financial corporations reported using derivatives in the 2011 survey, compared to 83% of the respondents from last year’s survey. Only 28% said they used derivatives extensively (23%) or very extensively (5%) in this year’s survey, compared to 42% in the 2010 one. Of those who use derivatives, 77% use either only OTC derivatives (47%) or a combination of OTC and exchange traded derivatives (30%).<br />
  5. 5. Majority of non-financial corporations use derivatives<br />Are your derivatives exchange traded or over-the-counter (OTC)? (n=225)<br />To what extent do you use financial derivatives? (n=313)<br />Not at all<br />Somewhat<br />Extensively<br />Very Extensively<br />Exchange traded<br />Over-the-counter (OTC)<br />Both<br />23.0%<br />29.8%<br />47.3%<br />46.7%<br />4.8%<br />24.9%<br />23.6%<br />
  6. 6. Majority of non-financial corporations use derivatives<br />The survey also showed that corporations were adding to their portfolios less frequently. Only 29% reported adding derivatives on a weekly basis in this year’s survey, compared to 40% making weekly adjustments in the 2010 survey. 44% reported Quarterly/Annual additions to their portfolio, up significantly from the 32% reported in 2010. As expected from the responses to the prior questions, the 2011 survey also showed that respondents were valuing their derivatives positions less frequently. Most respondents (63%) from non-financial corporations reported that they valued their positions monthly (42%) or quarterly (21%), compared to last year where 45% reported valuing their positions on a monthly basis and 10% on a quarterly basis.<br />How frequently do you need to value your derivative positions? (n=211)<br />Weekly<br />Monthly<br />Quarterly<br />Annually<br />Ad-hoc<br /> 25.6%<br /> 41.7%<br /> 21.3%<br />3.3%<br />8.1%<br />
  7. 7. End-of-day market data most common<br />The majority (73%) of respondents reported using end-of-day market data sources in the 2011 survey. 67% of respondents reported end-of-day market data use in the 2010 survey.<br />Do you use a real-time or end-of-day market data source? (n=209)<br />73.2%<br />Real-time<br />End-of-day<br />26.8%<br />
  8. 8. Corporates primarily use counterparty pricing and spreadsheets to value their derivatives<br />Counterparty pricing (52%) and spreadsheets (51%) were the two most popular ways that corporates valued their derivatives. Treasury management systems (13%) and outsourcing to a consultant (10%) were listed as the next most popular. The use of multiple sources was also indicated in last year’s survey, but there seems to be a greater reliance on counterparty pricing this year than last (52% vs. 40%).<br />Which of the following do you use to value your derivatives? (n=212)<br />FINCAD<br />Counterparty/ bank pricing<br />Spreadsheets<br />Outsource to a consultant<br />Treasury Management System (TMS)<br />Other<br /> 44.3%<br /> 51.9%<br /> 50.9%<br />10.8%<br /> 13.7%<br /> 17.9% <br />
  9. 9. Majority of corporates adjusted their risk management strategy<br />More than 53% reported adjusting their risk management strategy to use scenario analysis, and 41% say that they now incorporate VaR. Almost one-third (31%) said they made no adjustments. This implies that they already have a risk management strategy in place. This number is down from last year’s survey, as more respondents (38%) felt there wasn’t a need to make any adjustments.<br />What steps have you taken to adjust your risk management strategy? (n=203)<br />Running scenario/ sensitivity analysis<br />Calculating Value at Risk (VaR)<br />No adjustments<br /> 53.7%<br /> 40.9%<br />30.5%<br />
  10. 10. Liquidity risk<br />When it comes to liquidity risk, one-quarter of respondents said they didn’t have a tool in place to better understand and manage threats to their liquidity. Of those who did, internal spreadsheets (63%) was the predominant tool.<br />What tools are you using to better understand and manage threats to liquidity? (n=202)<br />32.7%<br />Internal spreadsheets<br />Bloomberg<br />We don’t have a tool in place<br />Other<br />25.7%<br />6.4%<br />62.9%<br />
  11. 11. Only 40% calculate Credit Value Adjustment (CVA)<br />The survey found that 60% of respondents do not include any kind of CVA calculations with their derivatives valuation, up slightly from last year (57%). Given the issues surrounding counterparty risk and that 29% of respondents reported that accurate risk assessment was the biggest challenge, it is quite surprising that more treasuries aren’t incorporating CVA into their valuations.<br />Do you need to calculate Credit Value Adjustment (CVA) for your derivative valuations? (n=206)<br />60.2%<br />Yes<br />No<br />39.8%<br />
  12. 12. Hedge effectiveness and risk remain the biggest challenges with respect to derivatives<br />While nearly three-quarters (73%) reported that they performed hedge effectiveness testing, it was also listed as one of their biggest challenges. More than one-quarter (27%) reported that hedge effectiveness was their biggest challenge and a similar number reported this as the key issue in last year’s survey too. But as some of the prior responses in the survey indicated, risk was also on their minds. 29% of respondents reported accurate risk assessment as their biggest challenge.<br />
  13. 13. What is the biggest challenge you currently face with respect to derivatives? (n=195)<br />Do you conduct hedge effectiveness testing under regulations such as IFRS 9/IAS 39/FAS 133? (n=204)<br />26.7%<br />Independent pricing / valuation (IFRS 7, FAS 157)<br />Accurate risk assessment<br />Hedge effectiveness (IFRS 9 / FAS 133, IAS 39)<br />Transparency in financial reporting<br />Other<br />27.5%<br />17.4%<br />Yes<br />No<br />72.5%<br />29.2%<br />6.2%<br />20.5%<br />Majority of non-financial corporations use derivatives<br />
  14. 14. OTC pricing solutions<br />Easy to use (76%) and cost effective (76%) top the list of what corporations are looking for in an OTC pricing solution.<br />Rate the importance of the following features of an OTC derivatives pricing solution. (n=196)<br />1 = Not at all important; 5 = Very important<br />Trade coverage<br />Strong support services<br />Transparency into models<br />Easy to use<br />Risk management capabilities<br />Cost-effective<br />1<br />2<br />3<br />4<br />5<br />
  15. 15. Most non-financial corporations expect regulations to have some impact on the way they do business<br />With all of the regulatory changes on the horizon, the majority of corporate treasuries felt that they would need to change the way they are doing business. 51% of respondents anticipated that the impact would be minimal, with minor changes needed, while 30% felt that the impact would be moderate and notable changes would be needed. Only 12% felt that they were well-prepared for regulations that lie ahead.<br />How significant of an impact do you think the upcoming regulatory changes will have on your business area? (n=193)<br />No Impact – we are well-prepared<br />Small impact – some minor changes will need to be implemented<br />Moderate impact – notable changes will be required<br />Major impact – significant changes will have to be made to accomodate new regulations<br />30.1%<br />51.3%<br />6.2%<br />12.4%<br />
  16. 16. IT spending<br />More respondents (46%) reported that IT spending should stay the same in the 2011 survey compared to last year’s survey (36%).<br />What are your expectations for your company’s IT spending throughout 2011? (n=193)<br />46.1%<br />Spending will increase<br />Spending will decrease<br />Spending will remain the same as in 2010<br />13.0%<br />40.9%<br />
  17. 17. Methodology<br />FINCAD conducted an online survey of 313 professionals from non-financial corporations. The survey took place throughout April 2011.<br />
  18. 18. About FINCAD<br />Founded in 1990, FINCAD provides advanced modelling solutions built on award-winning, patent pending technology.  With more than 4,000 clients in over 80 countries around the world, FINCAD is the leading provider of financial analytics technology, enabling global market participants to make informed hedging and investment decisions. FINCAD provides software and services supporting the valuation, reporting and risk management of derivatives and fixed income portfolios to banks, corporate treasuries, hedge funds, asset management firms, audit firms, and governments.  FINCAD Analytics can be accessed through Excel, MATLAB, as a Software-as-a-Service or embedded into an existing system through software development kits.  Now, over 70 FINCAD Alliance Partners embed FINCAD Analytics within their solutions. FINCAD provides sales and client services from Dublin, Ireland, and Vancouver, Canada.<br />For more information on how FINCAD is helping buy-side firms with many of the challenges expressed by this survey, visit: www.fincad.com<br />

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