Mastering hedging in volatile financial markets

Posted on 2 June 20252 June 2025 by Julie Duncan

Volatile financial markets pose significant challenges for banks and financial institutions worldwide. The unpredictability of swap rates and the lingering uncertainty reminiscent of the 2008 financial crisis require a strategic approach to risk management. In such a climate, traditional reactive hedging strategies are insufficient. Institutions must adopt a more dynamic and precise approach to protect margins and ensure capital stability. Leveraging advanced hedging strategies and real-time analytics is key to navigating these turbulent waters effectively.

Understanding the challenges of volatile markets

In today’s financial landscape, volatility is the norm rather than the exception. Global markets fluctuate with rapid movements, influenced by geopolitical tensions, economic shifts, and unforeseen global events. This environment challenges financial institutions to manage interest rate risk effectively, as even minor missteps can lead to significant financial repercussions. The complexity of balancing assets and liabilities, amidst ever-changing market conditions, necessitates a comprehensive understanding of risk exposure and a proactive hedging approach.

The stakes are high, and the margin for error is slim. Financial institutions must not only anticipate market shifts but also react swiftly to mitigate potential negative impacts. The traditional methods of hedging, which often rely on historical data and delayed responses, fall short in providing the agility needed in fast-moving markets.

Leveraging real-time data for proactive hedging

To hedge effectively in volatile markets, financial institutions must harness real-time data analytics. This involves continuously monitoring balance sheet behaviours, such as drawdown rates, prepayments, and the stickiness of non-maturity deposits. Real-time analytics provide insights into the dynamic gaps between assets and liabilities, allowing institutions to identify mismatches as they occur.

By employing sophisticated scenario modelling, institutions can stress-test their strategies against various rate shocks or liquidity constraints. This predictive approach ensures that treasury teams can hedge proactively rather than defensively. With data-driven insights at their disposal, financial institutions can make informed decisions with confidence, turning volatility into an opportunity for strategic advantage.

Optimising execution with advanced treasury systems

In the fast-paced world of financial markets, execution speed and accuracy are paramount. Advanced treasury management systems streamline the hedging process, enabling seamless execution of swaps and derivatives with live pricing and full audit trails. These systems offer comprehensive collateral management, tracking postings, margin calls, and collateral support annex (CSA) terms in real-time.

Furthermore, lifecycle control features allow institutions to monitor trades from inception to maturity, with alerts for rollovers or potential breaks. This level of control reduces errors and provides full visibility, ensuring that hedging strategies are executed flawlessly. By optimising execution processes, financial institutions can respond swiftly to market movements, minimising risk and maximising efficiency.

Aligning hedging strategies with profitability goals

Hedging is not an end in itself but a means to achieve sustainable margins and protect profitability. To align hedging strategies with commercial goals, financial institutions must integrate margin forecasting and strategy stress-testing into their risk management frameworks. By modelling net interest income under various rate scenarios, institutions can anticipate the financial impact of rate shifts.

Moreover, simulating the effects of balance sheet growth or product changes allows institutions to refine their strategies and avoid surprises. Transparency in cost structures uncovers hidden inefficiencies, enabling institutions to address basis risk and hedge inefficiencies proactively. By aligning risk management with profitability goals, institutions can ensure that their hedging strategies contribute to long-term financial stability.

Ensuring compliance through automated processes

Regulatory compliance is a critical aspect of risk management in volatile markets. Financial institutions must adhere to stringent standards, such as IFRS 9 and IAS 39, to document hedge effectiveness and manage accounting entries. Automated compliance processes reduce the risk of errors associated with manual documentation and streamline capital reporting, optimising risk-weighted assets (RWAs).

With audit-ready trails, every trade, valuation, and collateral movement is logged and traceable, ensuring transparency and accountability. By automating compliance processes, financial institutions can focus their resources on strategic decision-making rather than administrative tasks, enhancing overall operational efficiency.

The ALMIS® advantage: Transforming risk into resilience

In the face of market volatility, financial institutions need more than just tools; they need a strategic partner that offers an integrated platform for risk insight, execution, and reporting. ALMIS® International provides a comprehensive solution that combines dynamic analytics, streamlined execution, and profit-focused modelling into a single platform, empowering institutions to anticipate market shifts, act swiftly, and adapt strategies with agility.

By leveraging the ALMIS® One platform, financial institutions can transform risk into resilience, ensuring that their hedging processes are ready to withstand the challenges of volatile markets. The key to mastering hedging lies in embracing innovation and leveraging technology to gain a competitive edge in an unpredictable financial landscape.

In conclusion, navigating volatile financial markets requires a multifaceted approach that combines advanced hedging strategies, real-time analytics, and efficient execution systems. By aligning hedging strategies with profitability goals and ensuring compliance through automation, financial institutions can protect their margins and thrive amidst uncertainty. The ALMIS® advantage equips institutions with the tools and insights they need to turn market volatility into an opportunity for growth and success.

Fair value accounting: an open and shut case

Posted on 10 May 2016 by Julie Duncan

For the first time this year many financial institutions will have included derivatives at their fair value on balance sheets and, in many cases, this will have been a major headache.

Although fair value accounting became mandatory for larger banks and building societies in 2005, it has only become a requirement for smaller firms recently and must now be evident in their accounts. There is also a lot of evidence that all ‘big 4’ accounting firms are tightening up their procedure for auditing hedge accounting for both new FRS 102 transition clients and established IFRS clients.

Fluctuation in interest rates from one period to another causes the fair value of interest rate swaps to change materially and, as a result, there is potential for large volatility in reported earnings and profits. The numbers are often material and so the accounting is very important.

The accounting standard IAS 39 was amended back in March 2004 to specifically allow a portfolio approach to hedge account for a fair value portfolio of derivatives used to hedge interest rate risk. This was particularly helpful to banks who hedge interest rate risk in the banking book (IRRBB) on a portfolio basis. IFRS 9 (IAS 39 replacement) has not yet replaced portfolio or macro hedge accounting and so currently the only way to account for a portfolio of derivatives rather than individually is to adopt IAS 39.

However, in order to follow the relevant guidelines (AG114 – AG132) many banks have adopted this portfolio hedge accounting approach where constant, eg monthly, amortisation adjustments for de and re designation are required.

The complex guidance requires that the hedge item amount is fully tracked between the prospective and retrospective stage, the only way to keep track is to amortise off all the hedge adjustments and amortise on all the hedge adjustments every month, and that way you know you have it right.

If your portfolio has 60 time periods, this means 60 new adjustments every month, leading to many thousands after a few years. These adjustments are often made on large spreadsheets, introducing the risk of human error. Importantly the adjustments can cause the value on the balance sheet to become distorted from the true economic fair value and the accounts can also distort what is actually happening between the hedge and the hedged item.

The example below shows the treatment for a simple theoretically perfectly hedged bullet loan with no expected pre-payments. The example shows how the carrying amount is amortised out each period and we can compares this to its true economic value. In this simple example, the balance sheet value and the true economic value are materially different, and even a theoretically perfectly hedged scenario shows material P/L volatility. Surely this is not the best way to perform hedge accounting.

It is however difficult but perfectly feasible to adopt open portfolio hedge accounting, allowing a firm to take an open portfolio of interest rate swaps and apply the concept of dynamic hedging without the need for constant adjustments.

With this in mind, the ideal software will properly calculate the value of the designated hedged item while following the very specific rules laid out in AG126 and AG 127. It will include the individual loans and have the ability to calculate their fair value based on expected cash flows and can track actual pre-pre-payments between the prospective and retrospective stages. If it can’t then we go back to the headache of de designating every month and amortising the fair value out.

Surely adopting a cleaner approach to hedge accounting, that doesn’t require all of these adjustments, is essential, where the hedged item amount reported always reflects the economic value of that hedged item without any distortion?

For more information on ALMIS® International and our solution go to Hedge Accounting or contact us T: +44 131 452 8898

Case Study

Posted on 30 September 2013 by Julie Duncan

Whilst COREP has been dominating the headlines in terms of changes in the regulatory reporting environment, new Hedge Accounting standards are being introduced for banking firms. Many of our clients can take advantage of having the data already installed and easily slot in the Hedge Accounting module to ensure compliance with the new standard.

A recent example of this is with The Cambridge Building Society, for more information click on the link below:

CASE STUDY: “Hedge Accounting In A Day”

For further information on the Hedge Accounting Module, click here or contact ALMIS® International.

IAS 9 (IAS 39 replacement project) delayed until 2015

Posted on 7 July 2011 by Julie Duncan

At the IFRS Conference held in Zurich on 5th July 2011, IFRS staff member Sue Lloyd announced their recommendation to the IFRS board to delay IAS 9 adoption until 2015.This is yet to be formally confirmed by the IFRS Board.

A delay to the timetable is bound to be welcome news to banks who are struggling to understand and implement this far reaching accounting standard. However early adopters can still take advantage of improvements in the standard, particularly to hedge accounting – and if you adopt before January 2012 you will not need to retrospectively report under IAS 9 rules.

The next important date to watch is the final general hedge accounting standard in Q3 2011 and exposure draft for macro hedging, due to be published Q4 2011.