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US treasurers urged to revisit interest-rate hedging strategies

As the US economy enters an interest-rate tightening cycle, with perhaps two more rate hikes expected this year, a guide published by the Association of Financial Professionals (AFP) and underwritten by Chatham Financial, says that treasurers would be wise to revisit their rate hedging strategy. The guide looks at how treasurers can implement a rate hedging programme and the challenges they might face.

Some of the key points made in the guide include:

  • treasurers should consider getting an 'end-user exception', which exempts corporates from the Dodd-Frank’s clearing mandate;
  • look at documentation before entering into the trade – usually an International Swaps and Derivatives Association (ISDA) agreement;
  • review the post-trade confirmation sent by the bank and check it against your own documentation;
  • it helps to have a treasury management system (TMS) for the valuation, payments and accounting treatment;
  • specify terms before the transaction takes place;
  • it's important to get a fair price on swap transactions and using an auction or negotiated process will enable you to retain control and lock in fair pricing.

The AFP's Craig Martin said in a video about the guide: “There are corporate treasurers who have never seen interest rates rise and a lot of people have never had to put interest-rate hedges in place. So there's a lot of education that has to take place on the instruments to use. Companies [in a recent AFP roundtable meeting] in New York were not only issuing bonds but were extending their floating to fixed ratios, from 40 per cent to 60 per cent, for example.”


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% Rate Hedging & Risk Management

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