COMPIRICUS Webinar: "SOFR and how it is covered in SAP Treasury" - Boston, June 26, 2020
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COMPIRICUS Webinar:
„SOFR and how it is covered in SAP Treasury“
Boston, June 26, 2020
Welcome!
Your Speakers
Fabian Geue Jorg Pappert
is Principal Consultant at COMPIRICUS is CEO at COMPIRICUS Inc. and
and focuses on financial instrument focuses on finance market in
management with SAP since more than combination with SAP Treasury for more
15 years. than 30 years.
2
Agenda
COMPIRICUS at a Glance
Benchmark Rates and their Impact on Capital Markets
Requirements for and Solutions in SAP Treasury
Questions and Answers
3
COMPIRICUS at a Glance
Clients Focus Locations Team
Our Company Portfolio Your Benefits
Founded in 2009 as a team of experienced Products, Solutions and Services for Excellent consulting with more than 20 years of
consultants and software developers experience in the area of management and
Asset, Risk and Treasury Management accounting of financial products
Committed to Services and Solutions for
Treasury, Asset & Risk Management International Accounting Holistic solutions and services related to
Treasury and Asset Management from one
Offices in Frankfurt, Dusseldorf (Germany) and Cash and Liquidity Management single source
Boston (USA)
Methods for Asset Management You benefit from our portfolio of innovative
Preferred Partner for SAP FAM/TRM, service solutions for e.g. Electronic Bank Statement,
and content provider for the Spanish, Italian Treasury Controlling & Compliance Capital Asset Controlling interfaces to trading
and US statutory reporting for insurance systems (360T, Bloomberg, SimCorp etc.)
companies Internal and External Reporting
4
COMPIRICUS’ Scope of Solutions and Services
Experts in Finance,
Treasury, Asset and Risk
Management
Simplify your day-to-day business with COMPIRICUS‘
5 Proven SAP Treasury and Asset Management Solutions
Partnerships with SAP and Bloomberg
Source:
https://www.bloomberg.com/professional/product/inte
gration-partner-directory/
Source:
https://partneredge.sap.com/content/partnerfinder/search.h
tml#/partner/details/0001103440
COMPIRICUS Webinars in 2020
COMPIRICUS has developed an application For the second half of the year we have
for investment/financing projection to forecast planned a webinar on the “COMPIRICUS
interest income/expense as well as a future Process Cockpit for SAP - a modern SAP UI5
investment/debt portfolio under scenario app for the automation of complex financial
assumptions (market assumptions and processes”. Invitation follows.
portfolio assumptions).
As a consulting company and
software partner specialized in
finance, we would like to support
you as usual in all questions
concerning the LIBOR-SOFR
Transition. In recent months, we
have therefore paid particular
attention to the effects of the
benchmark changes on your SAP
Treasury (TRM, FAM, CML)
System. Explore in our Webinar,
what is important now!
If you have any questions about the above-mentioned topics, please do not hesitate to contact us at any time.
At the end of the presentation you will find the contact details.
7
Agenda
COMPIRICUS at a Glance
Benchmark Rates and their Impact on Capital Markets
Requirements for and Solutions in SAP Treasury
Questions and Answers
9
Reference Interest Rates and its Manipulation
Why Reference Interest Rates?
Reference for transactions with variable interest such as
securities and loans as well derivatives like swaps, caps/floor, options
Current typical reference interest rates?
Best known is the LIBOR (London Interbank Offered Rate) as a rate that banks lend short-term
money to each other
Published with several maturities: From Overnight up to 12 months
Manipulation of Reference Interest Rates by participating Banks for several years
Construction of “IBOR-Determination” (inter-banking market) leaves room for collusion
between the participating banks
“LIBOR-Scandal“ (2011): Published LIBOR-Rates were not traded but arranged by
participating banks over a period of several years
10
Consequences for the LIBOR – Current Status
Introduction of Money Market Interest Rates world wide
As a reaction to the manipulation, starting in 2012, central banks recommended reference
rates published by themselves instead of LIBOR
In the US SOFR (Secured overnight financing rate) was introduced by the FED of NY in 2014.
11Consequences for the LIBOR – Current Status
LIBOR will be decommissioned by 2021
In 2017 the British Bank Regulation FCA announced support of the LIBOR only until 2021.
Since then, national regulating authorities urge market participants to actively convert their
financial instruments to the new reference rates.
As a result, LIBOR trading volume decreases constantly.
12LIBOR Aftermath – Reference Interest Rates for Major Markets
Currency Reference Published by... Determination Base Publishing Time
Rate
Sterling (GBP) SONIA Bank of England Unsecured Money 9am at following
Market Transactions trading day
EURO (EUR) €STR European Central Bank Unsecured Money 9am at following
Market Transactions trading day
US-Dollar (USD) SOFR US Federal Reserve Bank Repo-Transactions 8am at following
(secured) trading day
Swiss Franc SARON Schweizerische Nationalbank Repo-Transactions 6pm at same trading
(CHF) SIX Swiss Exchange AG (secured) day
Japanese Yen TONAR Japan Study Group on RFR Unsecured Money 10am at following
(JPY) Market Transactions trading day
Different publishing times and different transaction types as a determination base
(secured / unsecured)
13Determining SOFR Source: https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf
Example: SOFR and Compounded Average SOFR Rates from
11/25/19 – 12/31/19Explaining SOFR Parameters
Parameters to determine interest payments
“In Advance“ versus “In Arrears“
Compounding vs. Average Compounding
Lookback Period
Lockout Period
Payment Delay
Spreads
included in compounding or added later
ARRC recommends not to compound the
spread
Source:
https://www.newyorkfed.org/medialibrary/microsites/arrc/files/2019/How_to_Use_SOFR.pdf
16Impacts of the Reference Interest Rate Reform - Overview
Impact on
Interest Conditions Accounting
and Cash Flow Model
Calculation Calculations
Conversion of
Financial
Transactions
Determination of
Yield Curves and
NPV Calculation
17Agenda
COMPIRICUS at a Glance
Benchmark Rates and their Impact on Capital Markets
Requirements for and Solutions in SAP Treasury
Questions and Answers
18SOFR Coverage in SAP (newest Info from SAP this week)
• For TRM and CML together:
• Note: 2939657 (necessary if you want to implement RFR in TRM and/or CML)
• SAP CML:
• 2880124 – Composite Note: EU-Benchmark Regulation, Risk-Free Rates (RFRs)
• The adjustment are available only for contracts with “new FIMA” (VDARL-
SFIMA_METHOD = 4);
See SAP Note 2907389
• SAP TRM/FAM:
• Note: 2932789 (published on 6/23/2020)
• SOFR functionality available for instruments supporting the “parallel conditions”, i.e.,
Money Market (asset cat. 550/580) und Bonds (asset cat. 040) are covered
19Securities – Condition Entry
Condition overview
20Securities – Condition Entry
Interest Details Control for the spread:
Entry in “Percentage Rate” in upper box
means -> Spread included in
compounding
Entry in “Spread” field in lower area
means -> Spread added after
compounding
Two new Interest Rate Calculation Method
5 – Compound Interest Calc.
6 – Average Compound Interest Calc.
(The compound formula in the NY
FED paper)
Cap/Floor for the Average Interest Rate are
possible too
21Securities – Condition Entry
Interest Adjustment Details
22Securities – Cash Flow Overview (TPM40)
Condition overview
23Money Market (Borrowing) – Conditions
Transaction
The condition details are identical with securities
24Money Market (Borrowing) – Cash Flow 25
CML – Plain / Base Case – In Arrears – Linear Interest Calculation
Condition overview
26CML – Plain / Base Case – In Arrears – Linear Interest Calculation
Nominal interest
27CML – Plain / Base Case – In Arrears – Linear Interest Calculation
Interest rate adjustment
28CML – Plain / Base Case – In Arrears – Linear Interest Calculation
Calculated Cash Flow
Remark: Interest calculation is based on periods with identical interest rate / base
amount. In this example five interest periods are shown. They sum up to one week.
29CML – Plain / Base Case – In Arrears – Compound Interest
Compound Interest:
The interest is calculated for an interest period, followed by an interest capitalization
on the next day
Nominal interest (no change for other conditions)
Compound interest
30CML – Plain / Base Case – In Arrears – Compound Interest
Calculated Cash Flow
without compounding with compounding
31CML – Plain / Base Case – In Arrears – Compound Interest + Spread
Two active interest conditions: one for the RFR, the other for an additional spread
Nominal interest (compound interest)
Compound interest
32CML – Plain / Base Case – In Arrears – Compound Interest + Spread
Spread (linear interest)
33CML – Plain / Base Case – In Arrears – Compound Interest + Spread
Calculated Cash Flow
34CML – In Arrears – Lockout Period
Lockout working days are set relative to the period end in the interest rate adjustment
condition; in this example 1 working day
35CML – In Arrears – Lockout Period
Calculated Cash Flow
without Lockout with Lockout
36CML – In Arrears – Lookback
Interest adjustment condition one working day lookback
37CML – In Arrears – Lookback
Calculated Cash Flow
without Lookback with Lookback
38CML – In Advance – Last Reset
Assumption: average reference interest rate, e.g. SOFR 7-day average, is supplied by
market data provider. A calculation within SAP is not required anymore
Interest rate adjustment condition
In Arrears In Advance
39CML – In Advance – Last Reset
Calculated Cash Flow
Remark: Last Recent can get created in a similar manor
40CML – In Arrears – Payment Delay
Nominal interest (linear interest calculation) and annuity repayment with payment
delay of two days
41CML – In Arrears – Payment Delay
Calculated Cash Flow
without Payment Delay with Payment Delay
42Agenda
COMPIRICUS at a Glance
Benchmark Rates and their Impact on Capital Markets
Requirements for and Solutions in SAP Treasury
Questions and Answers
43Questions submitted prior to session (1)
? If there is a spread on the OIS side, it would be necessary to capitalize the variable
interest component separately, while the fixed spread component is only due at the
end of the interest period without compounding. However, SAP's current financial
mathematics do not provide this feature, as it compounds the total interest (variable
+ spread). What solutions do you see for this?
! The new feature of include/exclude the spread into the compounding has been
added to the solution
44Questions submitted prior to session (2)
? How far is the TRM system conversion? Which products and calculations are
supported?
! Currently money market transactions (asset cat. 550 and 580) and bonds (040)
are supported. SAP is currently developing support for swaps (asset cat. 620).
Structured securities (asset cat. 042) are delivered later.
Regarding day count methods: all act/* calculations are supported. For all
others currently SAP has no requirements.
45Questions submitted prior to session (3)
? How are current, open transactions converted: through new entries or data
migration?
! We do not know of any technical support for the conversion. In practice a
mass migration is hard to realize because every contract/transaction might be
handled differently.
? How are compensation payments between bank and customer handled in a TRM
transaction .
! Also here, we do not expect an automated solution. Probably, manually
postings of additional flows with a respective posting might be necessary.
46Links
2880124 – Collective note: EU-Benchmarkverordnung, Risk-Free Rates (RFRs)
2907389 - „New FiMa" (VDARL-SFIMA_METHOD = 4)
https://www.newyorkfed.org/medialibrary/Microsites/arrc/files/2019/Users_Guide_to_SOFR.pdf
https://www.ecb.europa.eu/stats/financial_markets_and_interest_rates/euro_short-
term_rate/html/index.en.html
https://www.ecb.europa.eu/pub/pdf/other/ecb.wgeurofr_financialaccountingimplicationstransitioneo
niaeurostrfallbackseuribor~6e1bb63340.en.pdf
https://www.esma.europa.eu/policy-rules/benchmarks
https://www.fsb.org/2019/06/overnight-risk-free-rates-a-users-guide/
47Don’t hesitate to contact us Fabian Geue | Principal Consultant COMPIRICUS AG Graf-Adolf-Platz 6 | 40213 Dusseldorf | Germany T +49 211 64949-304 | M +49 152 22722304 F +49 211 64949-598 | www.compiricus.de Fabian.Geue@compiricus.de Simplify your day-to-day business with COMPIRICUS’ proven SAP Treasury and Asset Management Solutions
Don’t hesitate to contact us Jorg Pappert | President & CEO COMPIRICUS INC. Independence Wharf 470 Atlantic Avenue, 4th Floor | Boston, MA 02210 | USA M +1-617-895-7977 | www.compiricus.com Jorg.Pappert@compiricus.com Simplify your day-to-day business with COMPIRICUS’ proven SAP Treasury and Asset Management Solutions
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