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Post-Trade Management of Derivative Portfolios

by Jean-François Garneau, Director, Head of Financial Risk Management, Bombardier Transportation, Zürich

Some people think that risk management decisions are concerned with what happens up to and until a trade is executed, while hedge accounting ones are concerned with what happens post-trade, i.e., once a trade is on our books. This amalgamation of the distinction between risk management and hedge accounting with that between the pre-trade and post-trade occurrence of the decision can only be maintained as long as the size of one’s financial risk is not too high. The minute financial risk becomes significant, the accounting consequences of risk management start to matter tremendously, making it advisable that the risk management function be greatly involved in the set-up of the hedge accounting framework of the firm, and that hedge accounting specialists are called in whenever risk management decisions involve potential hedge accounting issues.

The better distinction to make is therefore not between a pre-trade risk management function divorced from hedge accounting and a post-trade hedge accounting function divorced from risk management, but between (i) a pre-trade decision-making process, where discretionary decisions can still be made with regard to both risk management and hedge accounting, and (ii) a post-trade decision-making process, which is almost entirely governed by the risk management decisions and hedge accounting set-up decided before the trade was executed. In this article, we would like to share with you four of the risk management and hedge accounting considerations that went into the set-up of our post-trade hedge accounting framework, with the hope that some of those insights could help you optimise your own post-trade set-up.