1. User Guide
  2. Hedge Management Effectiveness Process
  3. Managing Hedge Definitions

Managing Hedge Definitions

The Hedge Lifecycle feature enables you to manage the Hedge definitions, based on multiple scenarios. In any scenario, for a hedge to be designated on day 1, it should be effective. On subsequent FIC MIS dates, the hedge need not be effective for it to be finalized. While executing through the batch, the hedge is finalized automatically (irrespective of whether the hedge is effective or ineffective). In a manual process, you need to finalize the hedge through the application UI.

Finalize indicates that a given hedge and its effectiveness test results are valid to be reported on any given date.

Following are the scenarios possible in Hedge Effectiveness:

  • The hedge is designated on Day 1. On a subsequent day, while the hedge is still not finalized (remains un-finalized), the user can perform effectiveness testing via the UI, and irrespective of the result (effective/ineffective), the hedge is (marked as) finalized. There is no re-balancing in this scenario.
  • The hedge gets Designated on Day 1. On a subsequent day, when a batch is triggered, the effectiveness tests are performed and all (previously) designated hedges are finalized, irrespective of the result. The user may view the results via the UI and if required re-execute the effectiveness. Again in this scenario, no re-balancing is made.
  • The hedge gets Designated on Day 1. On a subsequent day, while the hedge is still not finalized (remains un-finalized), the user can modify the hedge composition (it is advised to modify only the hedge composition to modify the number of hedging instruments and not the instruments themselves - it is not allowed in IFRS 9) and test the modified hedge for its effectiveness. If the hedge effectiveness test results are unsatisfactory, the user may revert the modifications. Upon revert, the hedge composition (that was valid) as of the last FIC MIS DATE (the last finalized hedge composition) is selected. The user may make such modifications and reversion any number of times. If the user finalizes a modified hedge, then the steps of scenario 4 are followed.
  • The hedge gets Designated on day 1. On a subsequent day, while the hedge is still not finalized (remains un-finalized), the user can modify the hedge composition (it is advised to modify only the hedge composition to modify the number of hedging instruments and not the instruments themselves - it is not allowed in IFRS 9) and test the modified hedge for its effectiveness. If the hedge effectiveness test results are satisfactory, the user may finalize the hedge. Upon finalize, the hedge is marked as "Rebalanced".

    The user may make such modifications and finalize any number of times. If the user modifies an already finalized hedge, then the steps of scenario 6 are followed. If the user reverts changes made on a finalized hedge, the steps of scenario 5 are followed.

  • The hedge gets Designated on day 1. On a subsequent day, post the hedge being finalized (maybe via a batch process - refer to scenario 2), the user may choose to modify the composition of the hedge (it is advised to modify only the hedge composition to modify the number of hedging instruments and not the instruments themselves - it is not allowed in IFRS 9) and test the modified hedge for its effectiveness. If the hedge effectiveness test results are unsatisfactory, the user may revert the modifications. Upon revert, the hedge composition (that was valid) before the modification; as of that FIC MIS DATE/current date (the last finalized hedge composition) is considered. The user may make such modifications and reversion any number of times. If the user finalizes a modified hedge, then the steps of scenario 6 are followed.
  • The hedge gets Designated on day 1. On a subsequent day, post the hedge being finalized (maybe via a batch process - refer to scenario 2), the user may choose to modify the composition of the hedge (it is advised to modify only the hedge composition to modify the number of hedging instruments and not the instruments themselves - it is not allowed in IFRS 9) and test the modified hedge for its effectiveness. If the hedge effectiveness test results are satisfactory, the user may finalize the hedge. Upon finalize, the hedge is marked as "Rebalanced". The user may make such modifications and finalize any number of times. If the user modifies an already finalized hedge, then the same steps (of this scenario) are followed. If the user reverts changes made on a finalized hedge, the steps of scenario 5 are followed.

Note:

It is important to understand that, on revert, across any scenario, the last finalized hedge composition will be selected. The hedge could have been finalized on that FIC MIS DATE or the previous FIC MIS DATE.

Whenever a hedge is Rebalanced, the gain/loss computation (from the last date to the current FIC MIS date) considers the composition of the hedge as per the previous finalized/designated date. The re-balancing of the hedge affects the gain/loss computation only from the subsequent date.