From the November 2011 issue of Treasury & Risk magazine

Silver AHA Winner for Solution of the Year

Automating Derivatives Management: Microsoft

Winning accolades for outsourcing a challenging issue? Not so far-fetched considering the difficult choices Microsoft’s treasury made to determine which parts of managing its massive derivatives portfolio to outsource.

The company’s $62 billion portfolio involves 40 counterparties and more than 1,000 over-the-counter derivatives positions, for which efficient monitoring has only grown more important given turbulent markets and uncertainty about financial reforms.

Before Microsoft outsourced many of the daily operations to Northern Trust, counterparty capital calls, collateral movements and dispute resolutions were handled laboriously in-house. That introduced human error and complicated resolving counterparty disputes.

“In a volatile market, we could easily spend eight hours just communicating with counterparties about our exposure and collateral,” says Rebecca Chen, treasury manager at Microsoft.

The company explored internal and third-party solutions, and decided that using the system of a bank specializing in managing derivatives exposures and daily operations—Northern Trust—made the most sense. Chen, treasury manager Debdatta Banerjee and group treasury manager Jayna Bundy then set about determining which functions to farm out.

“We had to figure out which were the key pieces we wanted to continue to oversee and which functions could be passed to a third party that could do them much more efficiently and frequently,” Banerjee says.

Timing was important, since Microsoft’s more manual approach had resulted in a day’s lag in valuing foreign exchange exposures, preventing accurate valuations before the daily margin cut-off time and prompting disputes with counterparties.

Microsoft had to overcome some formatting issues between the bank and other vendors during the two-month implementation, but ultimately the company was left with fewer operational concerns and risks, and greater and more frequent transparency into its portfolio’s risks.

Microsoft is now able to reconcile nearly 100% of valuations and positions with counterparties, which was impossible before, and has greatly reduced operational risk and the likelihood of human error. Plus, the company is more prepared for the outcome of financial regulatory reform.

“Now we have a central location to host all our derivative exposures,” Chen says. “So if we need to report derivatives exposures, we have one place to extrapolate the data, instead of it being scattered in different internal systems.”



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