Abstract:
A system, method, and data structure for managing hedging relationships among stored transaction data. In an embodiment, the system opens a position associated with a valuation area, identifies a quantity of position assets to be hedged, and splits the position into a pair of subpositions, wherein the first subposition stores the quantity of position assets to be hedged and the second subposition stores a remaining quantity of position assets. In an embodiment, the system stores the subpositions, wherein it applies a first set of accounting rules to the first subposition and a second set of accounting rules to the second subposition.

Description:
CROSS-REFERENCE TO RELATED APPLICATIONS 
       [0001]    This application is related to U.S. patent application Ser. No. 12/199,775, filed Aug. 27, 2008, entitled “System and Method for Exposure Management.” 
     
    
     COPYRIGHT AND LEGAL NOTICES 
       [0002]    A portion of the disclosure of this patent document may contain material which is subject to copyright protection. The copyright owner has no objection to the facsimile reproduction by anyone of the patent document or the patent disclosure as it appears in the Patent and Trademark Office patent files or records, but otherwise reserves all copyrights whatsoever. 
       BACKGROUND 
       [0003]    Business entities, e.g., banks, enter into a large number of transactions in the ordinary course of their operations. Some of these transactions carry financial risks such as currency or foreign exchange (FX) risks, commodity price risks, interest rate risks, stock price risks, and counterparty risks, to name a few. For example, a securities instrument bears the risk of loss through a drop in prices. As another example, an increased or decreased value of the USD relative to the Euro affects foreign exchange (FX) risks in transactions involving those currencies. 
         [0004]    To mitigate these risks, a business may invest in “hedging instruments” whose behavior counterbalances risks presented by financial transactions. Risk exposures presented by a first, typically numerically large, set of instruments are counterbalanced by performance of a second, typically much smaller, set of hedging instruments, such that when risk rises with respect to the instruments that present the risk exposures, risk falls in the hedging instruments. For example, a “forward security sale” is a special instrument that allows a business to sell a securities position to a counterparty in the future for a fixed price. 
         [0005]    A set of instruments may be grouped and treated as a single exposure that is to be hedged; one or more hedging instruments counterbalance the exposure group. The exposures or exposure groups and their corresponding hedging instruments are grouped into corresponding hedging relationships. A hedging relationship associates one or more particular hedging instruments with a particular exposure or exposure group. Accordingly, use of hedging relationships aids in management of risk exposures and corresponding hedging instruments and facilitates compliance with hedging policies or regulations. 
         [0006]    A company that invests in a hedging instrument to secure a risk of an existing investment (“hedge management”) may account for the profit and loss of both instruments so that they cancel each other out. This is called “hedge accounting” and is governed by generally accepted accounting principles such as Financial Accounting Statement (FAS) 133,  Accounting for Derivative Instruments and Hedging Activities,  promulgated by the Financial Accounting Standards Board (FASB), or International Financial Reporting Standard (IFRS) 39,  Financial Instruments: Recognition and Measurement,  promulgated by the International Accounting Standards Board (IASB), and/or the business&#39;s internal policies. 
         [0007]    Different accounting rules like these may yield different profit or loss results given the same data. For example: suppose a business made two purchases:
       Purchase 1: One share for $40 USD into security account 1   Purchase 2: One share for $70 USD into security account 2   Sale: One share for $100 USD from security account 1       
 
         [0011]    Under Accounting Rule 1: 
         [0000]    
       
         
           
             
               
                 
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         [0012]    Under Accounting Rule 2: 
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         [0013]    Different accounting rules may apply to hedged assets versus non-hedged assets. Available computer applications aid in generating hedge accounting data and organizing and managing risk exposures, hedging instruments, and hedging relationships. At the top level, the Treasury Ledger (TRL) explains the position accounts of treasury products such as securities bonds, loans, and options. Within the TRL, Valuation Areas present different views of the same data to reflect how a treasury product or business transaction profit depends on the underlying account regulation (e.g., IFRS 39, FAS 133). Returning to the above example, then, a user might create two Valuation Areas within the TRL: one for Accounting Rule 1, and the other for Accounting Rule 2. 
         [0014]    At the lowest level of existing applications, a Position is a group of stocks or financial positions that carries the values of the asset it represents. That is, the current value per date (“valuation”) is computed at the Position level according to rules stored in the position&#39;s management procedure. A position is the smallest unit in a TRL that may be valuated or managed independently; it is defined by fixed or variable terms that unambiguously identify that position. For example, Accounting Code, Valuation Area, Valuation Class, Product Type, and Security or Transaction ID might be fixed terms, so that any difference in these attributes definitely denotes separate positions. On the other hand, Security Account, Security Account Group, Portfolio, and Lot ID might be variable terms, so that their differentiating effect on positions may be set or customized by the user. Business transactions (such as purchases, sales, transfers, or dividend payments) under a given set of accounting rules are represented by Flows. The valuation of a position is based on the sums of flows related to that position. 
         [0015]      FIG. 1  illustrates an example scenario using the prior art. Suppose on Jul. 1, 2008, XYZ Co. (or “XYZ”) purchases 10 units of STOCK_A at 40 EUR each into Security Account SEC_ACCT 1 . Suppose then that on Aug. 1, 2008, the XYZ purchases 10 more units of STOCK_A at 70 EUR each into Security Account SEC_ACCT 2 . The resulting flows are shown in  FIG. 1   a    101   a - d,  and the resulting position values are shown in  FIG. 1   b    102   a - c.  Since Valuation Area  001  groups by Security Account, and Flows  101   a  and  101   b  affect different security accounts, Flows  101   a  and  101   b  affect different Positions  102   a - b  in Valuation Area  001  ( FIG. 1   b    103   a ). Since Valuation Area  002  groups by Account Group, and Flows  101   c  and  101   d  affect the same account group, Flows  101   a  and  101   b  affect the same Position  102   c  in Valuation Area  002  ( FIG. 1   b    103   b ). Thus, three positions result:
       Position  1  ( 102   a ): Valuation Area  001  SEC_ACCT 1     Position  2  ( 102   b ): Valuation Area  001  SEC_ACCT 2     Position  3  ( 102   c ): Valuation Area  002 , GROUP 1           
         [0019]    Now suppose that, on Sep. 2, 2008, XYZ&#39;s accounting department executes a valuation with key date Aug. 31, 2008, to determine and disclose the value of the positions on that date. Suppose that the accounting rule for Valuation Area  001  requires taking the spot price, currently 80 EUR per share, of the security as the valuation basis. Suppose further that the accounting rule for Valuation Area  002  requires taking the closing price on August 31, which was 81 EUR per share, of the security as the valuation basis. The resulting position flows are shown in  FIG. 1   c:  
       Position  1  ( 102   a ) had a book value of 400 EUR.   New book value=10 units*80 EUR/unit=800 EUR   Write-up=400 EUR (shown as Flow  104   a )   Position  2  ( 102   b ) had a book value of 700 EUR.   New book value=10 units*80 EUR/unit=800 EUR   Write-up=100 EUR (shown as Flow  104   b )   Position  3  ( 102   c ) had a book value of 1100 EUR   New book value=20 units*81 EUR/unit=1620 EUR   Write-up=520 EUR (shown as Flow  104   c )       
 
         [0029]    The resulting position values are shown in  FIG. 1   d    102   d - f.    
         [0030]    Continuing the above example, suppose that on Sep. 15, 2008, XYZ sells the 10 units of STOCK_A in Security Account SEC_ACCT 1  at 100 EUR each. This sale would trigger the creation of additional flows (derived flows) to adjust the position values and to account the profit or loss from the sale. That is, a profit/loss flow is created for each affected position. The resulting position flows are shown in  FIG. 1   e:  
       Position  1  ( 102   d ) had a book value of 800 EUR   It was sold completely for 1000 EUR (shown as flow  104   d . 1 )   Gain=200 EUR (shown as flow  104   d . 2 )   Position  2  ( 102   e ) was not affected by the sale, since the sale was made from SEC_ACCT 1 , not SEC_ACCT 2 .   Position  3  ( 102   f ) had a book value of 1620 EUR   Half of it (=book value of 810 EUR) was sold for 1000 EUR (shown as flow  104   f . 1 )   Gain=190 EUR (shown as flow  104   f . 2 )       
 
         [0038]    The resulting position values are shown in  FIG. 1   f    102   g - i.    
         [0039]    But suppose, for example, that XYZ now hedged 8 of the 10 stocks in SEC_ACCT 2 . As noted above, different accounting rules may apply to some or all of a position depending on, for example, which stocks within the position are hedged. In this example, then, future business transactions may have different effects on the 8 hedged stocks than on the 2 non-hedged (freestanding) stocks, even though all 10 stocks are in the same position. However, existing applications do not differentiate between hedged and non-hedged assets when applying accounting rules. 
         [0040]    Thus, a system is needed to manage and valuate the hedged portions of a financial position separately from the freestanding portion if only part of a position is hedged. For accurate accounting, financial instruments may not be moved to a separate account if hedged or used as a hedging instrument. Moreover, the combined value of the hedged and freestanding portions of a position must equal the total value of the position. Also, the user must be able to view the hedged and freestanding parts of a position value both as one value and as separate values. Finally, to facilitate compatibility with existing systems and business processes, the treatment of financial positions as positions in the system must not change. 
       SUMMARY OF INVENTION 
       [0041]    Embodiments of the present invention enable users to direct different accounting rules to hedged assets than to freestanding assets by creating a new entity called a “subposition” that identifies a portion of a position. Subpositions are cumulative in that the sum of the values of a subposition component equal the value of the corresponding position component. Thus, hedged and freestanding portions may be independently managed and valuated while allowing operative actions (e.g., sales, purchases, valuations) to continue to run on a position level. 
     
    
     
       BRIEF DESCRIPTION OF THE DRAWINGS 
         [0042]      FIG. 1  illustrates an example scenario, according to the prior art. 
           [0043]      FIG. 2  illustrates an example system and method, according to an embodiment of the present invention. 
           [0044]      FIG. 3  illustrates an example scenario, according to an embodiment of the present invention. 
       
    
    
     DETAILED DESCRIPTION 
       [0045]    Embodiments of the present invention relate to a solution for managing and valuating financial instruments using cumulative subpositions. Embodiments of the present invention direct different accounting rules to hedged and freestanding assets, as applicable, while maintaining the cumulative values of each corresponding position component. Thus, subpositions may be independently managed and valuated without affecting the treatment of financial positions as positions. Example embodiments of the present invention further allow the user to view the hedged and freestanding parts of a position value both as one value and as separate subposition values. 
         [0046]    In example embodiments, each subposition holds the master data that identifies a portion of the position. For example, a subposition may identify a portion of a position as relating to a hedging instrument, a hedged item, or a freestanding item, and it may hold all hedging-related information about that portion of a position. 
         [0047]    In example embodiments, subpositions are associated with certain value components, such as the number of units, consolidated security gains or losses, consolidated FX gains or losses, hedge adjustment, fair value hedge, and cash flow hedge. In example embodiments, the subpositions are “cumulative”: that is, the sum of the component values of the subpositions within a position equals the component value of that position. For example, if Position  1  contains Subposition A and Subposition B, then the number of units in Subposition A plus the number of units in Subposition B equals the number of units in Position  1 . Since subpositions are cumulative, valuation areas and positions remain unaffected. In an embodiment, the TRL provides links to the subpositions. 
         [0048]    In example embodiments, each flow maps through one position to one subposition; subpositions do not overlap, and each flow is assigned to a single subposition. If a flow is not assigned to any subposition, then it is assumed to affect the freestanding subposition. Each flow holds information concerning the subposition to which it is assigned. 
         [0049]    For purposes of illustration, the below example embodiments of the present invention largely concern stock price risk. However, the embodiments may be used for other purposes as would be evident to one of skill in the art. For example, embodiments of the present invention may manage or simulate all kinds of risks, such as financial risks including foreign exchange risk, interest rate risk, commodity price risk, stock price risk and counterparty risk. 
         [0050]      FIG. 2  is a simplified block diagram of a system  200  according to an embodiment of the present invention. As shown, the system  200  may include one or more computer terminals  210  coupled to one or more servers  220  via a network  230 . The terminals  210  provide user interface points at which users may interact with the system to enter, view, and manage financial data. The financial data will typically be calculated and maintained by applications executing on the servers  220  although, in some instances, such applications will execute on the terminals  210 . The network  230  provides a communication medium between the terminals  210  and the servers  220 , which may exchange communication between network components according to wired and/or wireless protocols. A variety of network topologies are well known for such computer systems  200 ; the number of terminals  210 , the number of servers  220 , and differences in network topologies are immaterial to the present invention unless otherwise mentioned. 
         [0051]    The system may be programmed to manage and valuate hedged, hedging, and freestanding assets according to relevant accounting rules, for example as summarized in steps  201 - 204 . 
         [0052]    In step  201 , the user enters a hedged item (such as stock) purchase in the system, for example as described above and shown in  FIG. 1 . 
         [0053]    In step  202 , the user enters a hedging instrument (such as a forward securities sale) purchase in the system. Continuing the example above, suppose that on Sep. 22, 2008, to hedge part of Position  2 , XYZ concludes Transaction # 37 , a forward securities sale which allows it to sell 8 units of STOCK_A at 90 EUR each on Dec. 22, 2008. The forward securities sale appears as one position per valuation area in the position list, as shown in  FIG. 3   a    301   a  and  301   d.    
         [0054]    In step  203 , the user creates a hedging relationship in the system between the hedged item (for example, the stock position) and the hedging instrument (for example, the forward securities sale). The user may designate some or all of the hedged item as hedged, leaving the remainder freestanding. 
         [0055]      FIG. 3   b  illustrates step  203  with respect to the above example. Since transaction # 37  allows XYZ to hedge 8 units of STOCK_A in SEC_ACCT 2  (Position  2 ), XYZ would a create hedging relationship in Valuation Area  001  with Transaction # 37  as the hedging instrument and STOCK_A in SEC_ACCT 2  as the hedged item. XYZ would then designate 8 of the 10 units in Position  2  as related to hedging instrument Transaction # 37 . In an embodiment, the hedging relationship ID (HRel #), hedged item ID (HItem #), hedged instrument ID (HInstr #), and Available Units fields may be auto-populated based on, for example, other information entered into the form. 
         [0056]    In example embodiments, designating hedged units triggers the creation of separate subpositions to maintain the freestanding and hedged parts of the hedging instrument and hedged item:
       Non-hedging part of hedging instrument Fwd Sale  37 : Subposition  480 A   Hedging part of hedging instrument Fwd Sale  37 : Subposition  480 B   Freestanding part of hedged item Stock A: Subposition  4800     Hedged part of hedged item Stock A: Subposition  4801         
 
         [0061]    These subpositions are shown in  FIG. 3   c;    FIG. 3   c  also shows the resulting flows (“derivative flows”) that transfer units and proportionate values from the freestanding subpositions to the hedged subpositions:
       Decrease units in Subposition  480 A (non-hedging Fwd Sale  37 ) by 8   Increase units in Subposition  480 B (hedging Fwd Sale  37 ) by 8   Decrease units in Subposition  4800  (freestanding Stock A) by 8   Increase units in Subposition  4801  (hedged Stock A) by 8   Decrease purchase value of Subposition  4800  (freestanding Stock A) by 8 units*70 EUR/unit purchase price=560 EUR   Increase purchase value of Subposition  4801  (hedged Stock A) by 8 units*70 EUR/unit purchase price=560 EUR   Decrease Security Write-Up of Subposition  4800  (freestanding Stock A) by 8 units*(80 EUR/unit book val−70 EUR/unit purch price)=80 EUR   Increase Security Write-Up of Subposition  4801  (hedged Stock A) by 8 units*(80 EUR/unit book val−70 EUR/unit purch price)=80 EUR       
 
         [0070]      FIG. 3   d  shows the resulting position values. As is evident by comparing  FIG. 3   d  to  FIG. 1   f  and  FIG. 3   a,  the positions within a hedging instrument or hedged item and their values remain unchanged. In example embodiments, no subposition is created within any freestanding position (that is, any position for which no hedging relationship is defined, such as SEC_ACCT 1  in Valuation Area  001  or Transaction  37  and GROUP 1  in Valuation Area  002 ). In this example, the freestanding subposition now includes 2/10 of the position values, and the hedged subposition includes 8/10. However, a subposition may include different kinds of position component values if, for example, different accounting rules apply to hedged versus freestanding subpositions. Nevertheless, in any case, the sum of each subposition value equals the corresponding position value. 
         [0071]    In an example embodiment, an additional button in the position list links to a subposition display for a position.  FIG. 3   e  shows such a subposition display for the position shown as  FIG. 3   d    301   f  (i.e., the hedging instrument Transaction  37  in Valuation Area  001 ). In example embodiments, as mentioned above, the subposition comprises the position information regarding the hedge relationship. In this example, note that there are no position component values for Transaction  37  in Valuation Area  001 , since the net present value of the forward sale was set to 0 at designation. 
         [0072]      FIG. 3   f  shows the corresponding subposition display for the position shown as  FIG. 3   d    301   h  (i.e., the hedged item in Position  2 , Valuation Area  001 , SEC_ACCT 2 ). Again, the subposition comprises the position information regarding the hedge relationship. 
         [0073]    Note that the hedging relationships created in Valuation Area  001  do not affect the positions in Valuation Area  002 , since the positions in Valuation Area  002  do not coincide with the hedged positions in all relevant differentiation criteria. (In this case, for example, Valuation Area  002  does not differentiate by securities account.) This allows the valuation areas to continue to operate under entirely separate accounting rules. 
         [0074]    In step  204 , the system valuates all hedged, hedging, and freestanding assets (for example, at the end of an accounting period such as a fiscal quarter), each according to the appropriate accounting rules. 
         [0075]    From the foregoing description, those skilled in the art can appreciate that the present invention may be implemented in a variety of forms. For example, the above embodiments may be used in various combinations with and without each other. Therefore, while the embodiments of the present invention have been described in connection with particular examples thereof, the above embodiments are for illustration purposes only and are not meant to limit the scope of the present invention. Other modifications will become apparent to the skilled practitioner upon a study of the present application.