Hedging Advisory

Interest Rate Risk Hedging and Derivatives Advisory

AMG does not act as a counterparty to derivatives transactions but as an advisor. Our role is to walk you through the process from beginning to end and to be your advocate when dealing with all involved parties. The program is customized to fit your institution’s specific needs and can include any of the following services.

Asset Management Group provides independent derivatives advice to community banks and borrowers. Offering community banks state-of-the-art risk management systems and a wealth of capital markets experience. AMG’s interest rate risk expertise and derivatives knowledge offers financial institutions of all sizes access to state-of-the-art pre-trade stress testing and risk analysis. In addition, your institution receives “turnkey” interest rate swap strategies, including assistance with policy preparation, ongoing third-party pricing of your positions and expertise in pricing at execution.

Review of Existing Hedges

AMG will review your existing interest rate risk position and the documentation on existing or proposed hedges. The hedge will be modeled through various rate scenarios, with the results analyzed in context with the rest of the balance sheet. In addition to quantitative analysis, the hedge will be reviewed with a qualitative approach, looking for potential issues that may come up in audits or exams. AMG will provide a write-up summarizing the analysis and present the findings to management, ALCO, or the entire board as needed.

Strategy Consulting

AMG will review your existing BancPath^© position and discuss any exposure to rate changes. In addition, alternative scenarios with dynamic balance sheets are discussed to determine if potential exposure is not showing in the static BancPath^© modeling process. After determining the exposure, AMG will provide specific hedge strategies to mitigate or manage the risks while optimizing earnings. The strategy will be modeled to analyze its impact on earnings at risk and capital at risk. AMG will provide a write-up summarizing the analysis and present the findings to management, ALCO, or the entire board as needed.

Infrastructure Set-Up

AMG will assist you with setting up all the infrastructure necessary to execute derivatives transactions. The set-up service includes the following:

Template and guidance for a board policy
Board and staff education and training
Accounting procedures, including a list of general ledger accounts that will be needed (as well as a review with your accounting firm)
Correspondence to notify regulators
Approval and set-up with counterparties

Due Diligence and Assistance with Execution

AMG will assist with the due diligence and documentation for any transactions ready to be executed. This assistance will include documenting the expected impact on both the income and the balance sheet, analyzing the margin call/liquidity implications, and making the hedge accounting designation (including a draft of the Hedge Designation Memo). In addition to the due diligence, AMG can assist with execution, shopping the deal with multiple counterparties to ensure the best possible pricing.

Independent Valuation and Effectiveness Testing

After a hedge is executed, it will need to be valued and tested for effectiveness as part of hedge accounting under FAS 133. Accountants and regulators will want the values to come from an independent source, just like other valuations reported in financial statements. AMG can value derivatives instruments with the proprietary BancPath model and offers monthly reporting of these values along with effectiveness testing that will comply with the methodology designated in the Hedge Designation Memo.

Modeling of Interest Rate Shocks

Through the BancPath model, AMG can model the behavior of hedge strategies through a number of different rate scenarios and shocks. Many asset liability models lack any derivatives functionality, and most that offer it require the values to be input by the user. AMG can provide the modeling for the derivatives, which is integrated with the full suite of BancPath model products. Those results can then be used as the inputs for your AL model or to validate the existing model outputs.

Flex Loan

Flex Loan is a turnkey product for banks to execute interest rate swaps on individual commercial loans. Flex Loan uses fair value hedges with matching terms to the loan, creating an effective hedge with very clean monthly accounting entries. The end result is that banks can make fixed-rate loans directly to borrowers and then swap the exposure to a floating-rate instrument.