The challenge

MODEC deals with a lot of vendors and major equipment suppliers located all over the world. FX exposures to be hedged were based on purchase orders entered in the system, with a hedging ratio of the committed exposure being set to be between 80% and 125% in line with the company’s FX risk policy.

“Since our functional currency is US dollar, we are exposed to significant FX risk,” says Qiurong Chong, Financial Planning and Treasury Manager.

MODEC’s finance department in its Singapore entity was managing the FX hedging process manually with the use of spreadsheets. The same team was responsible for entering hedge contracts (FX forwards and spots) that were communicated via email, letter or phone and processed through a single cash centre between two banks. By the end of 2019, there were approximately 350 outstanding FX forwards hedging the future cash flows of the purchase orders (POs) associated with MODEC’s projects. The POs contain the information needed from the vendors for the FX process, including the cost in US dollar value, the breakdown of the payment milestones and the expected payment date.

Initially, the PO information was extracted from the materials management module in MODEC’s system to be incorporated in a spreadsheet which determined the hedging activities. This was a labour-intensive process and since the expected number of FX transactions was expected to double within the next two years, MODEC decided to automate this process.

Moreover, monthly valuations – net present value (NPV) – of the hedge contracts were provided by the banks. Upon settlement of the hedge contracts the banks automatically debited or credited MODEC’s bank accounts including the realised FX gain or loss. Any required general ledger (GL) entries were then created manually in SAP.

The solution

MODEC decided to optimise the end-to-end FX risk management process with the implementation of SAP TRM module. The specific functions employed were the exposure management, hedge management and hedge accounting and materials management integration. The main objectives were to:

• Reach straight through processing of purchase order data to update FX exposures.
• Standardise FX contract management and reporting.
• Automate general ledger (GL) entries for monthly valuations and settlements relating to hedge accounting.
• Automate hedge accounting documentation based on hedge relationships.
• Lower the FX risk management operational burden on the treasury team.

Best practice and innovation

MODEC demonstrated a high degree of innovation in its treasury and risk management implementation project. Best practices were adopted in terms of system module integration between materials management (MM) and TRM. Exposure management, transaction management and accounting settings were made to automate the FX risk management and accounting process.

In addition, an innovative bespoke development was built to reach the optimal level of integration required between the MM and TRM modules. The complex purchase order data was directly sourced from MM to TRM to update exposure management on a near real-time basis taking purchase order changes, partial settlement, rollovers, credit memos and milestone changes into account and reflecting them in exposure management.

Key benefits

• Improved hedging accuracy.
• Improved efficiency with time spent on FX hedging month-end closing.
• Improved FX risk management.
• Improved process control with less manual errors.
• Increased standardisation and automation.
• Improved governance.
• Operational risks reduced.
• History of audit logs and improved response time to audit requests.

“The most impressive aspect is that despite the level of project detail and data integration complexity, the perfect balance between technical and functional knowledge of all the project team members allowed the project to be successfully executed fully remotely and from different time zones,” explains Chong.