With commodity prices on a roller-coaster ride, and the world's currencies in a state of frightening flux, companies large and small have become mindful of the need to keep up with ever-more-complex derivatives and other hedging strategies. And the actions of standards-setters only add to the challenge.
The upshot has been a boon -- as is so often the case -- for consultants, and for a range of software companies offering products delivered about every possible way, from a spreadsheet environment to the ever-expanding world of the cloud.
A Handle on the Standard
Reval is one of the many companies that can be said to owe its existence to increased hedging and the accounting convulsions that have occurred as a result over the past decade or so. "Focusing on risk is part of our DNA," explains Justin Brimfield, Reval's senior vice president of corporate development, in an interview. Reval, started 12 years ago, came into existence just ahead of FASB hedge-accounting standard 133.
Companies seeking to offset commodity and currency price swings without adding volatility to profit-and-loss statements spent the first few years of the new millennium trying to get a handle on the standard, which for the first time required derivatives to be marked to market at fair value.
"The FASB kind of left it vague," so that auditors and financial executives had to sort out the particulars, Brimfield says. "Nobody could really get this hedge accounting right. The company founders [at Reval] saw the treasury market being underserved, and that was our entry into the treasury space." It was, from their viewpoint, "a real opportunity."
"Hedge accounting has gotten a lot of bad knocks over the years and some of it was justified five years ago," according to Jeff Wallace, founder of Greenwich Treasury Advisors. "Auditors really understand it now, and they're not changing their minds every year about everything like they did in 2002 and 2003."
Wallace, whose clients range "from companies like GE, Ford and Novartis, to a $30 million jewelry manufacturer," says he is emphatically not in the software business. "I mostly help people to do the hard part," he explains. "Most treasury consultants don't sell software. They're not in the business of selling software." But, he concedes, "it's useful to have software."
Some of the companies he talks to, particularly the smaller ones, try to do hedge accounting "on the cheap through Excel spreadsheets," he adds. But those with "more than 15 positions outstanding" are increasingly turning to "much more expensive solutions" via providers like Reval, SunGard and Wall Street Systems. "Sometimes Bloombergs are bought because company CEOs want to see what their stock prices are" while tracking hedges and other trades, Wallace says.
Theories Of Evolution
SunGard was formed in 1983 as a spinoff of the computer services division of Sun Oil Co., during a period of low crude oil prices. The name of the company originally was an acronym for Sun Guaranteed Access to Recovered Data, a reference to the disaster recovery business it helped pioneer.
SunGard continues to have a solid grounding in disaster recovery, which currently accounts for about 33% of its business, says Paul Bramwell, senior vice president, treasury Solutions, for SunGard AvantGard.
But the fortunes of SunGard, which as a hosted disaster recovery provider makes it one of the original cloud companies, are increasingly up in the cloud. "It's one of our strategic growth areas." CFOs and CIOs, he says, can go cloudward to "get rid of any operational issues, we take all that on board with no loss of connectivity and function." He adds, "There's always a healthy level of paranoia, but what we've seen is a big push to cloud-based solutions."
Reval's Brimfield agrees. "I think that we're seeing a shift," he says. "In Y2K, software-as-a-service wasn't called software-as-a-service. Now we're actually seeing RFPs that state SaaS as a requirement."
He notes that "Reval from day one has been software-as-a-service. If you've got the URL to get online to Reval.com, whether at home or on the beach in Bermuda, you have access to the application. We buy the servers, we buy the disaster recovery and free up the client from having to worry about software. We just allow you to do your job."
The Lower-Tech Way
That said, there are still plenty of companies out there going for the lower-tech solutions to hedge accounting.
"The reality is that there are plain vanilla derivatives like futures, swaps and options," that can be tracked via spreadsheet, says Ira Kawaller of Kawaller & Co., a Brooklyn, NY-based risk management solutions consultancy. "Most of my clients have fewer than half a dozen contracts," he says.
While some of his customers include dairy companies hedging the price of cheese by purchasing cheese derivatives, but "if it's a major bank or financial institution they may have thousands of contracts, but they won't be my clients.