Discussing the Interest Rate Derivatives Management (1X3)

The interest rate derivatives management process helps you to manage your interest rate risks. The functionality helps you to automate labor-intensive processes, such as confirmation of financial transactions and accounting postings, giving you more time to focus on value-added activities.

The process includes the products interest rate swaps (payer, receiver, and basis), and cross-currency interest rate swaps (payer, receiver, and basis). 

The scope item helps to automate the management of interest swaps, including the creation of financial transactions, periodic activities (such as interest rate adjustments and payments), and accounting

You can also use it to make better operational and strategic decisions using the comprehensive reporting and analysis tools or to improve internal operational compliance.

The key process flows covered here include the creation of financial transactions (interest rate swaps / cross currency interest rate swap), the payments process or the month-end accounting process.

Furthermore, you will be able to adjust variable interests, calculate and post realized profit and loss or monitor and report on positions, postings and risk key figures.

Interest rate swaps are transactions that exchange payment flows on the basis of different interest rates in the same currency. You agree on a certain term, usually over a year. An interest rate swap enables you to hedge possible interest rate risks.

You can display the two cash flows for an interest rate swap either together or separately. This provides you with an overview of the incoming and outgoing payments. For swaps with a variable interest rate calculation, manual or automatic interest rate adjustments are carried out over the course of the term and the cash flow is gradually filled with the current values.

A company finances an existing investment with a fixed interest loan at 6.5%. The company treasurer expects falling interest rates and, therefore, agrees an interest rate swap with a bank. From this interest rate swap, the company receives a fixed interest yield of 7.25% and pays a variable rate of 6-M-EURIBOR.

The company, therefore, has the following interest rate costs:

Interest expenditure of 6.5% and 6-M-EURIBOR

Interest yield from SWAP of 7.25%

This results in interest expenditure of 6M-EURIBOR - 0.75%

Use the Fiori app Create OTC Interest Rate Instrument (TO01) to create an interest rate swap.

You enter transaction data for the partner, conclusion of the transaction, term and the actual trading object (amount, currency, interest structure, and so on). Also, you can branch to other entry screens to enter detailed information.

There are condition overviews available for the incoming and outgoing sides and the detailed information in each case. You can change the nominal amounts and also specify the interest rate adjustment conditions.

In the Interest Rate Adjustment detail view, set the frequency with which the variable interest is to be calculated and on what day the value of the underlying reference interest rate is to be determined. An interest rate adjustment can be carried out at the start of the period, at regular intervals, or at specific times.

Hint: there is a notice function for premature settlement of a swap or a cap/floor.

The swap creation, change and display functions provide displays which are fitted to the swaps special features. A conditions detail display is available separately for the outgoing and incoming side. In addition, three cash flow displays are available: summary, outgoing side, and incoming side.

The picture shows the combined cash flow: outgoing and incoming interest.

A currency swap is an exchange of payment flows comprising interest payments and capital payments in different currencies at an agreed exchange rate. You can use currency swaps to hedge possible currency risks. They also allow you cheaper access to the respective foreign currency markets.

An interest rate swap is a derivative in which one party exchanges a stream of interest payments for another party's stream of cash flows. Interest rate swaps are used by traders, investors, or hedgers to manage their fixed or floating assets and liabilities. They can also be used by speculators to replicate unfunded bond exposures to profit from changes in interest rates.

Interest rate swaps are swap transactions that usually have a term of over a year.

For cross currency interest rate swaps, different currencies for the outgoing and incoming side are maintained. The nominal amounts are exchanged at contract start and are transferred back at contract end.

Although it is not absolutely necessary to swap the nominal amounts at the start of the transaction, this provides a basis for calculating the respective interest amounts. The original amount can be swapped back again upon maturity at the original exchange rate. The necessary periodic adjustments of the reference interest rate are made either manually or automatically via a separate entry.

The picture shows the start and the end of the CCS contract: the amounts are exchanged and are transferred back.

You can use options to perform liquidity control in your company and to recognize, analyze, and hedge FX and interest rate risks. A swaption is an option on an interest rate swap, which you can exercise on a certain date or within a certain period (product category 760 OTC Options using product category 620 Swap as underlying). As the buyer, you can choose whether to pay fixed interest rates or whether to receive fixed interest rates after the option has been exercised. You pay a premium to the seller for this right upon conclusion of the transaction.

The following product types are predefined:

• 76T - Swaption on IRS
• 76V - Swaption on CCS

The system supports you from the purchase/sale, through position management, including period-end closing, and reporting until the end of term including the exercise of the option. Risk-free rates are supported in variable interest conditions.

Depending on the swaption type different underlying product types, based on product category 760 and 620, can be used.

For the product types parallel conditions and new risk-free reference rates are supported.

The calculation of the net present value (NPV) of swaptions is not supported.

• In the predefined settings for the automatic derivation process of financial objects, the indicator for activating the market risk analysis in the financial objects for swaptions is set to inactive. Therefore, the swaptions are ignored in the market risk analysis apps such as the Calculate Market Risk Key Figures job template, the Analyze NPV app (app ID: JBRX), Sensitivity Key Figures, Single Analysis app (app ID: AISS), and the Calculate Market Risk Key Figures app (app ID: AISGENKF).
• In the Calculate Net Present Values - With CVA and DVA app (app ID:TPM60CVA), you should set the selection conditions so that swaptions are not processed. If the NPV of a swaption is needed for valuation steps in the key date valuation, enter the net present values manually in the Enter Net Present Values app.
• For the calculation of limit utilization using End-of-Day Processing app (app ID: KLNACHT) or in the integrated single transaction check for swaptions, you can either make the configuration for the attributable amount calculation for swaptions so that the limit utilization amount is based on the nominal amount instead of the NPV or you ignore the swaptions for the counterparty/issuer risk. To do so, set the Indicator: Counterparty/Issuer Risk Active to inactive for swaptions in the Financial Object Substitution Rules - Default Risk Data configuration app (business context Derivatives: Default Risk Data). Then use the Update Financial Objects app to deactivate credit risk analysis for already existing financial objects for swaptions by having the financial objects updated according to the changed substitution rules.

Open the app Manage Financial Transactions. From the screen several filter options are available to find the transaction that you want to process.

When you use the Settle function, you can indicate the financial transaction to record that it has been processed in the back office.

At this stage, you check the financial transaction and add any missing data. When you save the transaction, the system fixes the transaction (actual records) and flags the transaction flows for posting.

The contract can be posted only after it has been settled.

With the app Enter Net Present values you can store NPVs (net present values) for a financial transaction in the NPV table or display NPVs already stored in the system.

The calculation of the net present value (NPV) of swaptions is not supported. If the NPV of a swaption is needed for valuation steps in the key date valuation, enter the net present values manually in the Enter Net Present Values app.

In Treasury and Risk Management, financial data is analyzed based on the financial objects created automatically for each object you want to analyze. Additional information that is required for risk analysis is also entered into the financial object.

Financial objects are created for the following:

• Money market transactions
• Foreign exchange transactions
• Over-the-counter (OTC) derivatives
• Security transactions
• Security class positions in securities accounts
• Trade finance transactions
• Exposure positions

Bank accounts

The structure of financial objects mainly consists of three parts:

General part: General data (such as the product type) for the financial object

• Company Code
• Transaction
• Product Type
• Source System

Analysis: Data that is relevant for Market Risk Analysis

• Transaction Start
• Transaction End
• Contract Type
• Security Class ID
• Securities Account

Default Risk Limit: Data about the Default Risk and Limit System

• Credit Risk (CR) Active
• Limit Product Group
• Monitoring Unit
• Default Risk Rule

If you are creating a new financial transaction, you can set the values for the Counterparty Risk - for example, here with a Fixed-Term Deposit on the tab Default Risk Limit.

Set the indicator Counterparty Risk Active (CP Risk Active), so that an attributable amount is calculated for the transaction.

Enter the following limit characteristics:

• Limit Product Group (the limit product group you enter here overwrites the default limit product group)
• Monitoring Unit (freely definable reporting characteristic)
• Rating (the rating you enter here overwrites the rating for the business partner, but this is not the case for the integrated external business partner).

Enter the following evaluation parameters:

• Default Risk Rule (the default risk rule you enter here overrides the one set in Customizing)
• Recovery Rate

In the next end-of-day processing run, the system calculates an attributable amount for the transaction to which you assigned this financial object.

The financial objects are created automatically by the system when you create financial transactions, exposure positions, and bank accounts. The field values are derived according to predefined derivation rules and customer-defined substitution rules. When you create a financial transaction, you can change the derived financial object data manually. Financial objects are created immediately following the creation of financial data. 

Financial objects are created for the following reasons:

• Treasury and Risk Management
• Cash Management

When you create financial transactions, the system offers dialog entry screens in which you can change the financial object data manually. If you do not enter the data manually, they are derived automatically by the system. For exposure positions and bank accounts, the financial objects are always derived automatically by the system. When you save the transaction, the system checks the information in the various parts of the financial object.

During the derivation process, the predefined derivation rules are executed first. The predefined derivation rules do not overwrite any field values. Therefore, a field value that is entered manually, for example, is not overwritten by the predefined rules. In the second step, the substitution rules are executed. When the system executes the substitution rules for the market risk data, the system first executes the rules for the specific business contexts and then the rules for the general context. The substitution rules can overwrite the fields that have already been filled manually - either by predefined derivation rules or by an earlier executed substitution rule - if the Overwrite indicator was set in the definition of the substitution rule. Note this when you define your substitution rules.

With the Financial Objects Substitution Rules - Default Risk Data app, you can display, change, and create substitution rules for some fields of the financial objects that are relevant for default risk limit management. The rules are executed during the automatic derivation process of financial objects, whereby you can replace the field values that have already been filled, for example, from the predefined derivation rules.

Using the Financial Objects Substitution Rules - Default Risk Data, your business configurations expert can define substitution rules for the values of the following fields of the financial object data that are relevant for default risk limit management:

• Business Partner as Limit Characteristic
• Default Risk Rule
• Transaction End Date for CL Counterparty/Issuer Risk
• Transaction Start Date for Counterparty/Issuer Risk
• Limit Product Group
• Counterparty/Issuer Risk Active indicator

The fields available for defining preconditions are different for each business context. This enables you to substitute values of the target fields dependent on attributes specific to the business context.

You can define substitution rules to fill the following fields:

• CR Active
• Business Partner as Limit Characteristic
• Limit Product Group
• Default Risk Rule
• Start Date
• End Date

If you changed or created new substitution rules, business user can start the Update Financial Objects app to update the data of all existing financial objects.

The Financial Objects Substitution Rules - Market Risk Data app facilitates the display, change, and creation of substitution rules for some fields of the financial objects that are relevant for market risk analysis. The rules are executed during the automatic derivation process of financial objects, whereby you can replace the field values that have already been filled, for example, from the predefined derivation rules.

You manage substitution rules by business context. A context represents the circumstances in which the substitutions are defined and applied. It determines the fields that are available in the rule definition. There are several applicable business contexts defined by SAP. It is important to note that those can not be changed. Examples of these are as follows:

• Bank Accounts: Market Risk Data
• Derivatives: Market Risk Data
• Exposure Positions: Market Risk Data
• General: Market Risk Data

When the system executes the substitution rules for the market risk data, the system first executes the rules for the specific business contexts and then the rules for the General: Market Risk Data context.

The fields available for defining preconditions are different for each business context. This enables you to substitute values of the target fields dependent on attributes specific to the business context.

The same fields are also available as source fields for the substitution.

Note

You are responsible for ensuring that the data used in the substitution rule is used in accordance with the applicable legal or business requirements. The results, which substitution rules were applied, and the values of the target fields are visible in the apps for users with treasury business roles and must therefore not contain any sensitive data.

With this app, you can update the data of your existing financial objects. The report starts the derivation process of financial object data for the selected financial objects and updates the values, if needed.

You use this report in the following cases:

• If your business configuration expert created new substitution rules for specific fields of the financial object using the Financial Objects Substitution Rules - Market Risk Data and Financial Objects Substitution Rules - Default Risk Data configuration apps
• If your business configuration expert changed the settings in the Assign Product Categories and Default Risk Rules and Assign Product Categories and Limit Product Groups configuration steps
• If an error occurred during the automatic integration process of financial objects and the data could not be derived

You execute the report for a specific financial object type, whereby you can also restrict the number of financial objects according to financial object type-specific selection criteria.

You can execute the report as a test run or as an update run.

Account assignment references are assigned to each treasury position.

You use the account assignment reference to determine the G/L account in which the position is managed.

You make the assignments of the G/L accounts dependent on the account assignment reference for the relevant account symbols (position and interest revenue) for posting the positions, dividend payments, interest payments, accruals and deferrals, incoming payments, and repayments in the general ledger.

For example, you can define different account determination settings for an update type, depending on the valuation area. You could, for example, assign posting specifications to an update type in valuation area 002 that differ from the posting specifications for the same update type in valuation area 003. Alternatively, you could use the same posting specifications, but assign different G/L accounts to a account symbol for each valuation area.

In order to derive the correct account assignment reference, the following requirements are set in the system:

• You have defined the chart of accounts and all the required accounts in Financial Accounting.
• You have defined all account assignment references in the step Define Account Assignment References.
• In the Define Account Symbols configuration step, you have defined abstract account symbols.
• You have defined your update types.
• The system posts flows in the parallel valuation areas only if an update type is set as relevant for posting in the Indicate Update Types as Relevant to Posting configuration step, and if posting specifications have been defined, for the corresponding update types in this configuration step.

The determination process of account assignment references starts when an over-the-counter (OTC) transaction or security purchase is created.​

During the determination process of account assignment references, the system runs through the following sequence:

1. The system searches for a suitable substitution rule. If it finds a suitable substitution rule, it uses it to determine the account assignment reference.
2. If the system can not find a suitable substitution rule, it searches for a suitable determination rule. If it finds a suitable determination rule, it uses it to determine the account assignment reference.
3. If the system can not find a suitable determination rule either, it derives the account assignment reference using predefined rules in the content.

The single items and dependent Fiori apps will be analyzed in more detail below.

The Account Assignment Reference - OTC Transactions (Substitution Rules) app helps you to display, change, and create substitution rules to determine the account assignment references of OTC transactions. Account assignment references are assigned to each treasury position. ​You use the account assignment reference to determine the G/L account in which a treasury position is managed.

The substitution rules are executed during the automatic process for determining account assignment references when an OTC transaction is created.​

Rules for the determination of account assignment references can be defined by you and are predefined in the content:

• You can define rules in the Account Assignment References - OTC Transactions (Substitution Rules) and Account Assignment References - Securities (Substitution Rules) configuration apps
• If you have the Define Determination Rules - Account Assignment References in use, the settings are still relevant for the determination process of account assignment references.
• The predefined content also contains derivation rules that are also still relevant for the determination of account assignment references.

During the determination of account assignment references, the system runs through the previously described sequence.

The table exemplifies the different fields for available defining preconditions by business context. This enables you to substitute values of target fields dependent on attributes specific to the business context. The target field is the Account Assignment Reference of Position Management.

Using the Account Assignment Reference - Securities (Substitution Rules) app, you can display, change, and create substitution rules to determine the account assignment references of securities. Account assignment references are assigned to each treasury position. ​You use the account assignment reference to determine the G/L account in which a treasury position is managed.

The substitution rules are executed during the automatic process for determining account assignment references when a securities transaction is created.​

You manage substitution rules by business context. A context represents the circumstances in which the substitutions are defined and applied. It determines the fields that are available for the definition of rules.

At runtime, business users create financial transactions. This triggers the automatic determination of the account assignment references for the corresponding treasury positions, and the rules that you have defined are applied automatically. In case of a substitution the system derives, replaces, or clears values for the relevant fields defined in the substitution rules. The substitutions take place at the time of data entry with no system messages.

View the previous example to learn about how the target field (account assignment reference) is derived.

Using the Define Determination Rules - Account Assignment References app, you can define rules for the automatic determination of account assignment references for parallel valuation areas. You define the rules for each product group and subledger position that enables you to make postings to a position. Business rules for OTC Transactions and Securities are available.

Note

The Account Assignment References - OTC Transactions (Substitution Rules) and Account Assignment References - Securities (Substitution Rules) apps replace this app. The Define Determination Rules - Account Assignment References app is deprecated and will soon be deleted from the launchpad. We recommend that you switch to the successor apps.

Note

The Define Determination Rules - Account Assignment References app is deprecated and will soon be removed from the launchpad. However, if you have the Define Determination Rules - Account Assignment References app already in use, the settings are still relevant for the determination process of account assignment references.

Various account assignment references are predefined in the Define Account Assignment References configuration step under the following: Manage Your Solution → Configure Your Solution → Finance → Treasury and Risk Management → Treasury Accounting.

As outlined above, the predefined account assignment references are used if otherwise no suitable rule can be found and applied in the SAP S/4HANA Cloud system.

Differentiation terms are used to determine how the positions are created. Some differentiation terms are defined by the system for each product group, and others can be selected additionally. The differentiation SEC. ACCOUNT is defined and assigned for all company codes and valuation areas that do not have a specific differentiation assignment. For Securities, the following is predefined:

• Valuation area
• Special valuation class
• Accounting code
• Security class ID number
• Securities account

In addition to that, you can define and assign your own differentiation in the Define and Assign Differentiation configuration activity. This enables you to use account assignments of other areas, such as Cost Center, Profit Center, WBS Element, and Functional Area, to differentiate treasury positions in Treasury and Risk Management. When the flows are posted to Financial Accounting, the account assignment values for a treasury position are also transferred to Financial Accounting.

With this feature, you can transfer the units/nominals of a treasury position to another position with different account assignments (such as cost center, WBS element, functional area, profit center). In this internal transfer, the position component values are transferred proportionally according to the transfer category of the target position management procedure.

If you have activated Public Sector Management and use the fund and grant account assignments as differentiation criteria for your treasury positions, the account assignment transfer can also be used to transfer a treasury position from one fund to another or from one grant to another.

The simulated period-end closing uses the framework of the operative period-end closing functions. Therefore, the simulated valuation includes, for example, all relevant valuation results that are also generated by the real valuation during period-end closing.

Click on the single elements of the simulated period-end closing below to learn more.

In order to run the simulated period-end closing, the following prerequisites must be met:

• Make sure that the market data (such as exchange rates and interest rates) are up-to-date because the simulated period-end closing operations require current market data.
• Net Present Values (NPV) values need to be stored in advance of the valuation of treasury positions and of the classification. You can enter the NPVs manually (using the Enter Net Present Values app), or start the calculation of the NPVs using Calculate Net Present Values - With CVA and DVA.
• You must execute the simulated valuation before or together with the simulated classification.

Note

The system does not check the availability of current market data for the key date.

In the Simulate Period-End Closing app, key figures are used to verify how balance and P&L figures have been developing since last period end.

The simulated key figures cover all relevant Period-End Close figures, which are usually generated within the period end closing process. The idea for the simulation key figures is to call the wrapped functionality, which is used in the operative transactions, and reuse the calculated results for reporting without generating any persistent flows in and postings from the subledger.

Therefore, the simulated key figures are using the same framework as the operative procedure to assure coherence between reporting and subledger values. Based on the most recent book value from the last period end closing without reset the customer can see at a glance the balance effects, the P&L revenue and expenses as well as potential interest payables/receivables as of today.

You can use the following procedure to work on the simulated period-end closing:

1. Select the treasury positions for which you want to perform the simulated valuation. To do this, you must choose the relevant product groups. In addition, you can use the fields available under General Selections to restrict the selection of the treasury positions. The General Selections area of the interface provides selection criteria - Company Code, Valuation Area, Product Type, and Valuation Class - as relevant for all product groups, as well as selection criteria relevant for specific product groups.
2. In the Simulation Parameter area, you control how the report is run.
   • If you want to recalculate outdated simulated valuation results of the selected treasury positions, set the Recalculate Outdated Sim. Val. indicator. The recalculation can be executed for outdated treasury positions for a specific date or period, or for all outdated treasury positions. Enter the date range for recalculation according to your needs.
   • If you want to carry out simulated period-end closing, you must enter the simulation date as the key date.
3. Choose which function you want to execute:
   • Valuation
   • Accrual/Deferral
   • Classification

The result of the simulated period-end closing is composed of the following:

• For the selected treasury positions, the selected period-end closing operations are executed on the entered simulation date according to the settings of the position management procedure and the relevant configurations for the period-end closing operations based on the current market data.
• A message log is shown for the simulated period-end closing run.
• The results are shown in the results list. Each row represents a treasury position and shows the simulation results, such as the new book value in position currency and in valuation currency and also all other new position component values. You can mark a row and choose Display. In the following Details box, you see the information for the selected treasury position, the new book value of the treasury position in position currency and in valuation currency and all other position component values (empty fields are not displayed).
• The results are stored in database tables.

The Delete Results of Simulated Period-End Closing app deletes the results of simulated period-end closing for a specific date from the database tables.

Simulated Period-End Close results which are invalidated automatically by a real Period-End Close run can be deleted from the database tables in this way.

The result of this action is that simulated valuation results for the selected treasury positions and the position value date entered are deleted from the database table. A message log is shown for the deletion run of simulated valuation results.

Use the Enter Book Values for Manual Valuation app to enter the new book values for treasury positions for a specific key date.

After you have entered the new book values, you can start the valuation of the treasury positions using the Run Valuation app executed with the valuation category Manual Valuation With Reset or Manual Valuation Without Reset.

This valuation categories allows you to write-up or write-down a position to the book values entered in position currency and valuation currency in the Enter Book Values for Manual Valuation app, independent of the valuation rules defined.

The following valuation steps support manual valuation:

• Security valuation
• Foreign currency valuation
• One-step price valuation
• Index valuation

Select the Manage Your Solution app in order to get to the Configuration screen.

The task Configure Your Solution enables you to maintain certain processes.

A general valuation class must be assigned to every financial transaction from which the special valuation classes of different valuation areas can be derived.

One valuation area and two valuation area scenarios are possible.

The table, General Valuation Chart, shows the available valuation classes for one valuation area scenario.

There is also a similar list available when using two valuation areas.

Using this step you can make the required settings for a business partner group, which defines the business settings of your correspondence. They are used to differentiate business attributes, such as counterconfirmation requirement, matching requirement and others.

You assign the business partner group to the business partner in the Assign Profile and BP Group, External Recipients and Assign Profile and BP Group, Internal Recipients apps.

Here you can make the required settings for business partner groups.

You set, for example, the Automatic Correspondence indicator if the correspondence object is Status Relevant for the financial transaction, the Counterconfirmation indicator from the counterparty or the Auto Completion indicator to a combination of the business partner group, correspondence class and recipient/sender type.

If you create a financial transaction, you assign the portfolio on the Administration tab. You can use the portfolio as a selection criterion. You can also use the portfolio as an analysis characteristic in risk management.

Create the portfolio per company code. Give a code and the name for your portfolio.