Treasury Today talked to David Rusate about how GE developed and implemented TRS.

Before we talk about the system, can you explain the nature and the size of your hedging requirement?

We have a need to hedge about $220 billion of exposure during the course of the year. As a result of the globalisation and growth of our business, this exposure has grown quite significantly over the last few years.

We, in the central treasury, require that all operating companies hedge their foreign exchange exposures. We leave the decision how to hedge up to the operating companies, although we do provide them with advice on how they should do this. In most cases, we recommend that the businesses utilise a portfolio approach. The benefits of a centralised treasury are that we can:

• leverage our purchasing power to achieve better exchange rates;
• monitor our counterparty exposure and
• eliminate redundant systems/costs at our 13 operating divisions.

As a business, GE sells products ranging from light bulbs to massive aircraft engines. As a result, we have products with business cycles ranging from the short to the very long. This means the operating companies generate a multitude of hedges for a variety of different periods.

In the past, we used to receive requests from the operating units by fax, phone and email. Coping with the different formats was inefficient. We found the quality of the data was inconsistent and there were the occasional but inevitable mistakes.

We also need to be able to track the underlying transactions – an essential requirement of FAS 133 and IAS 39.

Why did you need a front end dealing system in addition to your FXpress treasury management system?

As a system, FXpress handles the trades very successfully once we have captured the request. TRS provided a front-end web-based solution that is flexible enough to interface with any Treasury Management system.

Once the deal request is automatically downloaded into FXpress, our streamlined system requires only three clicks (select the banks to quote, select the winning trade and store the trade in the data warehouse) to trade the FX deals. GE uses one FX portal (FXall) to electronically trade its foreign exchange.

The process can be summarised as shown below:

TRS provides a web-based front-end deal capture system for foreign exchange and commodities to the whole process. This enables us to capture the deal requests from operating companies in over 100 countries relatively easily.

You are implying that TRS was initially developed simply as a deal request system?

Yes, that was our first objective back in 1997 – to get some structure in the front end dealing requests. It was a great success and eliminated all the errors in this stage of the process. It also reduced processing time by over 90%.

So how does it help with IAS 39?

That was the second part of the development. By 2001 we realised the need to develop a method to document the transactions and provide an audit trail to meet domestic US accounting regulations (FAS 133) and the equivalent international rules (IAS 39). The documentation wizard in TRS facilitates the appropriate and consistent documentation required under FAS 133 and IAS 39.

Our idea was to develop a ‘wizard’ that takes the operating unit through a process, which would document the underlying exposure and provide an audit trail between the hedge and the underlying transaction. The documentation wizard ensures not only contemporaneous documentation, but also ensures consistent, verbatim language for each and every hedge transaction.

It has been two years in development but it now works very well.

Isn’t this rather complicated for the operating units?

No. A key feature of the system is that at every point there is tutorial help available. This can provide guidance as to what something means or to explain the alternatives available. There are also tutorials and teaching materials available for new users, making the system very user friendly.

Do you run a netting system and how does this fit in?

Yes, we have an internal billing system which all the businesses use for intra-group settlement. Every week, invoice details are continually communicated to the system. The cycle is closed late every Friday. Transactions are then netted over the weekend, so that every operating company returns to work on Monday morning to view their net positions.

The Internal Billing System then systematically communicates these trade request via the flat file feature in TRS.

What do compliance and audit say about the system?

It has been vetted by KPMG (GE’s external auditors) as well as GE’s Internal Corporate Audit Staff for its ability to meet FAS 133 and IAS 39 requirements. Frankly, it is compliance and auditor’s dream system. When checking IAS compliance, the auditors expect to see a policy, which is well documented and has the ability to check how a specific item may be hedged together with any supplementary hedges. TRS delivers on this second requirement.

You have announced this system might be available to others.

We realise we have developed a system that might be of great use to others. We are talking actively with one bank about licensing the software or selling the code. We do not want to be in the business of software support and whilst we have a plug and play solution, TRS is flexible enough to be integrated with other Treasury Management Systems. We hope to make an announcement about this very soon.

TT comment:

Many leading companies are grappling with the challenges of meeting the hedge effectiveness test of the new accounting regulations as theoretical application is turning into practice. The GE trade capture system provides a neat and simple solution to the problem of documenting the links between the underlying transaction and the hedge.

This will not be the only solution. The larger treasury system providers are working behind the scenes on solutions to the same problem. But if and when the GE system is available, we will see a number of corporates looking at it. Interestingly Shell’s Treasury Operations are already in discussion with GE and testing the system.