Over the years, CITIC Pacific had to depend on banks’ valuations for derivative instruments purchased for hedging its currency and interest rate risks. However, this posed a difficulty for the company in determining whether any of these were mispriced, also there was always an inherent risk of conflict of interest as the bank valuing the derivatives was also the party that had sold them to the company. CITIC Pacific had all along conducted its testing of hedge effectiveness on a manual basis, using spreadsheets with their inherent risk of error.

As part of an overhaul of risk management practices, CITIC Pacific decided to go to an outside contractor to provide independent benchmarks and leading edge systems.

With the deployment of a treasury outsourcing service developed by Reval, CITIC Pacific now manages to utilise independent valuations to verify banks’ results. The provision of supporting calculation documents also facilitates CITIC Pacific’s discussion with the banks in case of any kind of valuation disagreement and helps expedite the annual audit process of the company.

Operating on Reval’s proprietary SaaS (software as a service) platform, the solution performs hedge accounting automatically and provides regular reports to CITIC Pacific, allowing for time saving and diminution of user error. It also provides advanced regression as a methodology for effectiveness testing. This avoids many of the calculation pitfalls when using the dollar-offset method to test hedge effectiveness, hence resulting in more effective trades and minimising the P&L impact of any movements in the fair value of the derivative instruments.

Bernard Kwan, General Manager of Treasury Risk Management at CITIC Pacific commented, “We have long been in search of a tool to fully address our need for accurate yet independent valuations. With breadth of expertise and technology in mind, outsourcing has unquestionably been the solution of choice, which has enabled CITIC Pacific to meet all financial and audit requirements in a relatively short implementation timeframe. We receive independent valuations, hedge accounting solutions, and derivative risk and liquidity management all in one go.”

“This is a one-stop-shop solution fulfilling virtually all of CITIC Pacific’s requirements in financial instrument valuation and hedge accounting.”

By furnishing Reval Center™ with trades and hedge information, related data is booked into CITIC Pacific’s own account on the Reval SaaS platform, a SAS 70 Type II compliant solution. Further processing done by the team of financial experts behind the solution is performed in a controlled environment utilising workflow and audit capabilities within the platform. CITIC Pacific is able to get hold of valuation reports promptly after having its portfolio information sent.

On top of this, CITIC Pacific receives from inception hedge accounting documentation, prospective and retrospective effectiveness testing and reporting, as well as general ledger entry information from the solution. In addition, stress testing and liquidity reporting are also prepared. With the aid of this solution, compliance matters in relation to HKAS 39, IAS 39 and IFRS 7 are also being handled and managed in an effective manner.

Mr Kwan concluded, “This is a one-stop-shop solution fulfilling virtually all of CITIC Pacific’s requirements in financial instrument valuation and hedge accounting. This enables us to approach our derivatives portfolio management with greater control, speed and ease. This award is a generous recognition of the focus CITIC Pacific has placed on improving risk management and transparency, in line with our Chairman’s aim that CITIC Pacific’s corporate governance should be world class.”