Building a system to value internally the most complex financial transactions gives Toyota Financial Services (TFS) a position of strength when negotiating with its financial counterparties.
Prior to building its Valuation Center of Excellence, TFS valued simpler financial transactions internally and relied on counterparty valuations for the more complex ones. Executive management and auditors were concerned about the company’s valuations, and reporting them in financial statements, stunting its ability to diversify funding and hedging sources to support growth.
“Valuations are a core competency for growth and success, and that ability helps us maintain funding competitiveness, visibility into financial statements and manage our counterparty credit risk,” says Vanita Aggarwal, director of treasury risk and analytics at TFS.
The financial crisis accelerated efforts already in motion to eliminate conflicts of interest stemming from the use of counterparty valuations and increase transparency by bringing all valuations in-house. Aggarwal says one major challenge was implementing the appropriate technology and systems to do the internal valuations, and another was installing the right people in the correct organizational structure to identify and quickly resolve issues.
TFS created cross-functional teams to address those challenges and hired Deloitte Consulting for an external view. Aggarwal says it reinforced the auto finance company’s plan and provided some implementation guidance.
The wholly owned subsidiary of Toyota Motor manages $100 billion in derivatives that it uses to hedge interest-rate and other risks. Further increasing the need to value structured products has been TFS’s desire to diversify its funding options further.
To do that, TFS implemented the valuation capabilities of Numerix and Wall Street Systems’ Wallstreet Suite, and uses Bloomberg’s BVAL service to validate valuations and provide full transparency. TFS’s valuations team was reorganized to support the new platform and ensure optimal controls and governance around valuations.
Now, says Aggarwal, TFS is “100% covered” in terms of valuing transactions in-house or validating counterparty values with an independent service provider. Automation of processes has significantly reduced operational risk.
“It enables our funding teams to offer more options to our investors, based on their needs,” Aggarwal says.