SAP FS-CML and SAP Treasury and Risk Management have a very long history, one that is characterized by functional changes, deletions, splits, fusions of multiple components, functional enhancements, and name changes. All of this shows us that the role of SAP CML and Treasury and Risk Management has not only changed but expanded in recent years.
In the early 1990s, when the DARWIN solution, a financial asset management product for insurance, came onto the market, the main changes to take place included the name change to Treasury Management alongside the spin-off of the Real Estate Management RE-FX solution, the addition of the first risk modules, such as Market Risk Management (MRM), and the spin-off of the loans component, CML. A far-reaching development occurred next, namely the change to a pure add-on on the basis of SAP R/3 Release 4.6C under the new name Corporate Finance Management (CFM). At this stage, major changes and new developments in terms of architecture and functions took place, such as Position Management in parallel valuation areas and the implementation of the three largest analytical sub-components, namely the Analyzers. Other modules were also brought under the umbrella of CFM, such as Liquidity Manager, which today is part of Financial Supply Chain Management (FSCM), and In-House Cash (FIN-FSCM-IHC).
Then with the return to the ERP standard and the reorganization under FSCM ,the treasury functions reverted to their former names, with the addition of the words Risk Management. (The generic term SAP Financial Chain Management was taken away, but the solutions previously provided under this term continue to exist.
A hallmark of the past decade has been the extremely active and comprehensive further development of SAP Treasury and Risk Management. In one release after another, a lot of energy has been invested in creating an improved, future-oriented architecture, mapping new products and functions, and implementing important accounting rules such as IAS/IFRS and US GAAP correctly and quickly. Today, the Treasury system is a balanced one that is used in enterprises in a range of industries, from international groups to small producer cooperatives that relate sales of their products to the commodity futures exchanges. Other users of the treasury component include companies that carry out internal and external hedging, companies that analyze and hedge risks, and companies that want to optimize their financing or even just their cash management processes. Then there are insurance companies that manage dozens of millions and even hundreds of millions of Euros and US dollars in assets, as well as several banks that use the treasury component in own-account trading, for example
However, having an instrument this comprehensive comes at a price: SAP Treasury and Risk Management is much more complex than most other SAP ERP components
In Release SAP R/3 Enterprise 2.0, Transaction Manager was fully migrated to the new parallel position management architecture. What this meant for all existing customers was a data migration to the new release. In this release, it was then possible to map the impairments required for IAS/IFRS within Position Management. The following new instruments were provided: Repurchase Agreements (REPOS) and Short Positions. There were also new BAPIs for interest rate derivatives. In addition to that, the Position Monitor provided support in operative foreign currency hedging. Lastly, in the NPV calculator, improvements were made to the valuation of Bermuda options (Hull-White model)
In Release SAP ERP 2004, the following new instruments were introduced: FX average rate option, FX basket option, and FX forward volatility agreement. Annuity repayments also became available for interest rate instruments. In the area of period-end closing, this new release also enabled users to carry out foreign currency valuations for futures and listed options
There were several improvements in the area of hedge management. In the area of exposure handling, it was then possible to upload a loan cash flow from CML and to create exposures and hedge plans directly on the screen in which you create hedge transactions. In the area of the effectiveness test, the procedure for hypothetical derivatives on options was extended. In terms of price calculators, a function was created to calibrate implicit Black-Scholes volatilities on Hull-White volatilities, while in the area known as Value at Risk, improvements were made to the log in the single value analysis function, and the statistics calculator was extended. This calculator now calculates annualized volatilities. Furthermore, the Rebonato procedure was also added. The key figures and evaluation procedure monitor was created in the results database. Within the Credit Limit area in this release, it was possible, for the first time, to use a derivation rule to determine the business partner, which is used in risk analysis. The settlement risk for loans (from CML) and for money market transactions could then be calculated in this release. In the areas of Credit Limit and BI, a DataSource generation tool was developed for the purpose of creating DataSources for credit limit data
In Release SAP ERP 6.0, the new asset instruments available in this release are known as ABS and MBS. Simple pass-through and pay-through structures can be mapped using these new instruments. Syndicated facilities and securities lending transactions from the viewpoint of the lender can now be created in this release. Another major new development is the addition of a function for mapping bond issues. In the area of foreign exchange, new BAPIs have been made available for FX spot and FX forward transactions.
As before, the hedge management area has also experienced many new developments. BAPIs that enable users to load exposures from any source are now available in the exposure handling area. Also, the new exposure management tool makes it possible to manage foreign currency exposures. New hedging instruments such as caps, floors, and FRAs have also been introduced. The integration of hedge management into position management is now complete, thus making hedge accounting possible in multiple parallel valuation areas. A damping factor, which limits erratic effectiveness values in the area of small offsets, can now be added to effectiveness measurements performed using the dollar-offset method. In this release, calculating and saving the starting net present value, which is necessary when designating a hedging relationship, can now be carried out implicitly without any additional step. It is now also possible to time-resolve any OCI and equity components that have to be reclassified at the end of a hedge relationship. In Reporting, a new logical database for financial transactions has been created, and the RAPIs concept has been introduced. The Portfolio Analyzer now has a benchmarking function, which includes composite benchmarks. Finally, in the Credit Limit area, you can now automatically start a workflow when a limit is exceeded. Limits at individual transaction levels are also possible.
About the Author
Joe Torres is the Founder and CEO of DYCSI Inc. He has over two decades of senior management experience in the IT and financial services industry with institutions such as Nacional Monte de Piedad and Banco Actinver.
Joe has seen success with roles in Technology Evolution, Bank Operations, Treasury and Risk Management, Contract and Lease Management and Money Laundry Prevention Systems, Banking Tellers and Emerging Technologies to Deliver Business Value.