Macro Fair Value Hedge Accounting Solution

The Group Interest Rate Risk Management team within Nedbank Balance Sheet Management is responsible for the overall Macro Fair Value Hedge Accounting solution for Nedbank. The Macro Fair Value Hedge accounting solution is a complex accounting model used to fair value fixed rate assets and liabilities, hedged with interest rate swaps on a portfolio basis, for changes in the benchmark curve.

Opti-Num assisted with the operational deployment and enhancement of the Fair Value Macro Hedge Accounting solution, moving it from an Excel VBA Model to an automated MATLAB solution. Philip Visser, Executive Head: Interest Rate Risk Management, had the following comment:

Richard [the consultant on the project] collaborated closely with my team, allowing for development of a superior model; more than what was initially envisioned. By proposing and implementing several changes to the swap allocation algorithm he went above and beyond, not merely taking requirements and delivering a solution. His proactivity and ownership of the project contributed greatly to the improved hedge effectiveness test results produced”.

This improvement was as a result of adjustments to the swap allocation algorithm proposed by Opti-Num, as well as leveraging the power of MATLAB’s fast, sophisticated, and pre-built optimisation procedures. This allowed the focus to be on problem-solving rather than on software implementation.

The use of test-driven development allowed for rapid development, with easy comparisons between the Excel model and the MATLAB solution. This also allowed for simple back-testing of the MATLAB model, simplifying the validation process, giving Nedbank confidence in the new process, as well as mitigating model risk.

The MATLAB solution replaces the manual editing and updating of several large spreadsheets, thereby automating the monthly process and reducing the risk of human error. The turnaround time for the monthly process is also reduced from several hours to several minutes, which in turn reduces the monthly timelines required for business and reporting requirements, saving valuable time which Nedbank staff can rather apply to analysis and strategy.