From the November 2008 issue of Treasury & Risk magazine

Silver AHA Award Winner for Technology

When the fair-value standard took effect in the first quarter, "fair" wasn't a word on the lips of most finance executives. Flummoxed by FAS 157's complexity and vagaries and with little in the way of automated tools to guide them, many muddled through using time-consuming and error-prone manual processes.

The main quandary was that while a consensus had been reached on when to include nonperformance risk, no clear guidance was offered on how to determine nonperformance risk. Enter Reval. The Web-based derivative solution provider's 157 Solution was greeted with enthusiasm by many companies as the answer to that problem. The tool automates manual processes around credit adjusting derivative valuations and categorizes those valuations into hierarchies.

Reval clients can now calculate credit adjustments to their derivative portfolios using either credit default swap spreads or bond-equivalent spreads over Libor, while also including these 'credit-adjusted' valuations in their FAS 133 assessment and measurement of ineffectiveness. The credit adjustment must be applied to any derivative fair value, not just interest rate swaps, but also FX and commodity derivatives.

A key challenge to the standard and to building a comprehensive module is the fact that you had to be able to apply one of two credit curves, either the company's or the dealer's, depending on if the swap was in a gain or loss position," says Jiro Okochi, Reval CEO. "We were able to automate this process, as well as provide the transparency behind the data which is also important under FAS 157." Peter Seward, senior vice president of products, and Alex Murray, product manager, also played a major role in developing the solution.

Customers cite another benefit. When used with Reval's HedgeRx derivative software (a 2007 AHA award winner), the credit data is fully integrated to not just the FAS 157 module, but also efficiently utilized throughout the system, whether for FAS 133 or the counterparty credit risk module.

"HedgeRx has really made the implementation of FAS 157 seamless at Waste Management," says Devina Rankin, senior manager of external financial reporting at that company. She attributes this success to the fact that all the credit curves that are needed for valuations are published by Reval so FAS 157 fair values are automatically calculated with a "click of the button."