SAP® TREASURY AND RISKMANAGEMENT WITHIN mySAP™ ERP FINANCIALS

SAP Function in DetailmySAP ERP

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Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

SAP FSCM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

SAP Treasury and Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Transaction Manager: Optimum Transaction and Position Management . . . . . . . . . . . . . . . . . . . . 7– Usage Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7– Product Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8– Flexible Processes for Transaction and Position Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9– Roles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9– Transaction and Position Management Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Financial Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10– Money Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10– Foreign Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10– Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11– Derivatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12– Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12– Standard Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13– Query . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13– Quick Viewer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13– Drill-Down Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

General Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14– Master Data Management and Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14– Business Partners and Role Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14– Standing Instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14– Hedge Management: IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15– Parallel Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16– Authorization Concept and Release. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16– Documentation and Control Functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16– Market Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16– Individual Enhancement Options: BAPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

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CONTENTS

Risk Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17– Market Risk Analyzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17– Data Retrieval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18– Mark-to-Market Valuation and Position Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18– Sensitivity Analyses and Simulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18– Currency Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18– Liquidity Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19– Value at Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19– VaR Procedure in the Market Risk Analyzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19– Gap Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19– Flexible Portfolio Hierarchies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Default Risk Analysis in the Credit Risk Analyzer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20– Important Functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Integrated Default Risk Limit Check. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23– Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

SAP Cash and Liquidity Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23– Cash Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23– Liquidity Planner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Benefits of SAP Treasury and Risk Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

SAP Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Paving the Way for Process Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Business Solutions “Powered by SAP NetWeaver”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

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The SAP® Treasury and Risk Management application in themySAP™ ERP Financials solution offers the most financiallysound investment for your treasury organization – regardless of business size or needs. At the same time, the entire mySAPERP Financials solution accords a platform for growth, a solidframework for corporate governance, and a financial solutionthat supports global business requirements in any industry.Moreover, an organization can easily add to the functionality of its landscape using additional SAP Financial Supply ChainManagement applications or the complete mySAP ERP appli-cation on an as-needed basis, depending on the growth of itsbusiness. SAP supports a unique approach to enterprise systemsand creates value from long- or short-term technology invest-ments – with the existing infrastructure greatly enhanced andyour money management right on track.

In this age of strict corporate governance, treasury organiza-tions, chief financial officers, and treasury managers in bothbanking and industry are in the process of redefining crucialfinancial functions. A new financial model is in demand – a model that combines strategic company management andhighly efficient financial supply chain management. The solu-tion should further provide cross-company cooperation andlower transaction costs by enabling efficient financial processes.At the same time, new management processes and analyticalapplications should optimize overall company performance.These new strategies require support from flexible, compre-hensive software that provides the answers right away – not atsome time in the future.

The immediate answer to these requirements is the SAP Treasuryand Risk Management application within the SAP FinancialSupply Chain Management (SAP FSCM) set of applications.This key application is also a part of the mySAP ERP Financialssolution, which offers multiple stages of financial excellence. All of these have the SAP NetWeaver® platform in their arsenal tofacilitate seamless integration with SAP or third-party software.They constitute the most extensive financial software on themarket for enterprise resource planning. Moreover, this multi-talented group from the mySAP ERP application transformsexisting IT investments into new technology using a modularapproach. In this way, previous investments are protected andyour future is assured with the latest software – all for a veryreasonable total cost of ownership (TCO).

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EXECUTIVE SUMMARY INTRODUCTION

SAP FSCM offers financial accounting solutions and services for managing companies cost-effectively and for enhancingprocesses. Investors and stakeholders profit in the long term,benefiting from both new financial service models and cross-company financial scenarios. Besides the inclusion of SAPTreasury and Risk Management, which is the focus of this paper,SAP FSCM provides various other useful tools and componentswithin its set of applications to support businesses and to helpoptimize your money management activities.

The following products and more are in the SAP FSCM set of applications:

• SAP Cash and Liquidity Management applicationThe SAP Cash and Liquidity Management application pro-vides a complete overview of your cash resources at all times,while also closely monitoring your financial reserves.

• SAP In-House Cash applicationThe SAP In-House Cash application controls internal andexternal payments by means of its in-house cash center. It also reduces external transactions, while it minimizes yourexternal bank account and foreign payment workload.

• SAP Credit Management applicationThe SAP Credit Management application helps activelymonitor, limit, and consequently reduce accounts receivable.At the same time, you can easily evaluate customers and takeany necessary countermeasures in sufficient time – as risksare always recognized at an early stage.

• SAP Dispute Management applicationYou can effortlessly structure and manage customer com-plaints by using the SAP Dispute Management application inSAP FSCM. To that end, you reduce outstanding debts and, at the same time, optimize company procedures.

• SAP Biller Direct applicationThis electronic bill presentment and payment applicationconsists of software that helps you process bills electronically.The SAP Biller Direct application also displays and paysinvoices over the Internet – with the resulting paymentinformation transferred directly to your existing SAP softwaresystems.

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SAP FSCM

SAP Treasury and Risk Management offers straight-throughprocessing of the principal tasks in a finance department toensure optimum liquidity management as well as portfolio andrisk management – in strict accordance with legal regulations.The software thus facilitates decisions regarding future invest-ments and borrowing, based on current liquidity analyses andrisk positions. At the same time, the application takes intoaccount the current conditions in financial markets in order to provide an integrated risk analysis. The integration of SAPTreasury and Risk Management into existing SAP or third-partysoftware enables precise measurement of the effects on liquidityand risks in the interest rate and currency areas.

In addition, as important developments in the treasury arenahave involved scrupulous compliance with legal regulations inrecent years, all measures to apply International FinancialReporting Standards (IFRS) or the Sarbanes-Oxley Act have beentaken and incorporated into the application. These provide thesoftware support needed – both now and in the future – toensure your processes comply with applicable laws worldwide.

Transaction Manager: Optimum Transaction and

Position Management

The transaction manager component in SAP Treasury and RiskManagement provides a complete framework for defining thesettings and key parameters needed for precise transaction andposition management.

Usage Areas

The financial instruments readily available in SAP Treasury and Risk Management range from money market and foreignexchange transactions through to securities, loans, and deri-vatives – depending on the term and hedging purpose. Withregard to the front office or trading arena, the software furtherprovides a wide range of options for entering, processing, andchecking transactions – then transferring the relevant data tofinancial accounting (straight-through processing).

By streamlining fundamental tasks in any treasury organiza-tion, SAP Treasury and Risk Management makes borrowingand investing in the financial markets and concluding hedge

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SAP TREASURY AND RISK MANAGEMENT

SAP NetWeaver®SAP NetWeaver Portal, Security, SAP NetWeaver Business Intelligence, Knowledge Management, SAP NetWeaver Exchange Infrastructure

Reporting Credit Risk Analyzer Market Risk Analyzer Portfolio Analyzer

mySAP™ ERP

SAP® Treasury and Risk Management

Ad hoc Reporting

Reporting Tools

Results Database

Management Reports

Middle Office

Data Export Dea

ling

Pla

tfor

ms

Rat

e Fe

eds

Hou

se B

anks

Oth

erUtilization

Limit Management

Price Calculator

Value at Risk

Simulate Rates

Yield Calculations

Money Market Foreign Exchange Debt Derivatives Securities

Transaction Manager

Front Office

Back Office

Accounting

Business Partner SAP In-House Cash SAP Cash and Liquidity Management

Financial Accountingin mySAP ERP

Figure 1: SAP Treasury and Risk Management

transactions an effortless procedure. It also provides an internalservice for affiliated group companies to participate actively infinancial markets – depending on the organization of yourtreasury department and current guidelines. You can also moreaccurately invest liquid assets, finance planned investment, orhedge existing risks.

Analysis tools in SAP Treasury and Risk Management alsosupport numerous methods and procedures that analyze andmeasure risk with regard to currencies, interest, and securityprices. Furthermore, you can calculate and monitor the successof activities on the financial markets using various performancefigures. In addition, flexible limit management enables SAP to round out its solution offerings – ensuring that companieskeep track of their business partners’ default risk in relation toactivities on the financial markets.

Regardless of whether you process short-term finance or long-term strategic investments, all transactions in SAP Treasury andRisk Management use the same platform and can be readilyevaluated.

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Figure 2: Product Categorization

Instruments

Money Market

ForeignExchange

Loans

Derivates

Debts

ProductType

(SoftwareDefined)

Product Category (CustomerDefined)

Securities

Stocks

InvestmentCertificate

Bonds

WarrantBond

ConvertibleBondPlus

More . . .

Floater

Fixed-InterestBond

Zero Bond

ParticipatingCertificate

Plus More . . .

912828CA6 Treasury NoteCurr.:USD Rating: AAAInterest: 4.000 Mat: 02-15-2014U.S. Department of Treasury

DE0001049070 Corporate BondCurr.:EUR Rating: AInterest: 6.120 Mat: 10-25-2010Commerzbank, GER

575930SR4 Muni.Rev.BondCurr.:USD Rating: AA-Interest: 2.875 Mat: 12-01-2007State of Massachusetts, USA

Plus More . . .

Classes

Figure 3: Process Flow

Trading/New Transaction Back-Office Processing Accounting

• Create Business Partner• Create Order/Contract• Terminate the Order• Extending the Contract • Exercise the Rights

• Verify Transaction• Create Correspondence• Perform Netting• Do Reference • Hedge Management• Perform Periodic Activities

– Corporate Actions– Interest-Rate Adjustments– Foreign-Rate Fixings

• Perform Posting• Do Payment

Transactions• Do Write-Up/

Write-Down• Perform Accruals• Perform Valuation

According to:IFRS/U.S. GAAP

Straight-Through ProcessingProcesses Dependent on InstrumentsRole-Based Concept and Authorization

Auditing Acceptability and Segregation of Duties

Product Types

The transaction manager enables you to control short-termliquidity and risk positions by carefully concluding moneymarket and foreign exchange transactions – for example, toiron out liquidity deficits/surpluses or hedge currency risks.The securities and loans areas support these instruments forthe medium to long term. Derivative financial instrumentsallow you to actively manage interest rate and currency risks.

There are a number of activities for the individual producttypes, which an actual financial transaction can pass through,depending on how the tasks are distributed in a company. A sequence of activities is referred to as the transaction andposition management process and can be set up in various ways, depending on the product type.

The transaction manager also accords flexibility in configuringthe structure and conditions of the various transactions, whichenables you to represent even the most complex conditioncombinations in the software. This concept allows substantialfreedom when you are setting up conditions and structurecharacteristics, and at the same time ensures that processes areconsistent. Product types represent the financial transactionsused in your company. The use of product types simplifies dataentry considerably and ensures that transactions are entered ina uniform manner.

Front Office

The front-office component contains functions for creatingand displaying financial transactions. These include exercisingrights and executing corporate actions in the securities area.The software supports a range of practical auxiliary and controlfunctions that you can use to optimize trading. These includefunctions for entering and evaluating offers, fast entry functionsfor common transactions, limit checks, date checks, expiration,and barrier checks for options or other support evaluations.Decision-making tools such as the cross-rate calculator, theoption-price calculator, and the net present value (NPV)calculator are also available.

Back Office

In the back-office component, you can complete transactiondata such as account assignment information and paymentdetails and transfer it to accounting using the settlementfunction. Correspondence functions, such as automaticconfirmations and counterconfirmations, can also be used.Other typical back-office tasks include corporate actions in thesecurities area, interest-rate adjustments based on variableinterest rates, and payment netting arising from financialtransactions.

Accounting

SAP Treasury and Risk Management also has automatic-postingfunctions to update the general ledger in real time. This doesaway with costly interfaces that arise when you are integratingother treasury solutions in financial accounting. According toaccounting principles, you can also use valuation, accrual, anddeferral procedures, as well as flexible functions for processingpayment transactions. The application also provides you withreporting functions such as the posting journal and postingoverview.

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Figure 4: Transaction and Position Management

• Creation• Exercising/Expiration• Roll Over• Plus More . . .

Trading

• Settlement/Control• Interest Rate Adjustment• Netting• Plus More . . .

Back Office

• Posting• Payment Transactions• IFRS/U.S. GAAP• Plus More . . .

Accounting

Flexible Processes for Transaction and Position

Management

A typical feature of all financial instruments is the standardizedbasic structures or processes, which companies specify before-hand. SAP Treasury and Risk Management allows flexible con-figuration of transaction and position management processesfor each product type so efficiency is maximized and, at thesame time, organizational requirements for process security arefulfilled. You can consistently apply standard security measures,such as the dual-control principle, by incorporating additionalrelease requirements into the workflow. The integration of theseprocesses and the direct transfer of the relevant information to financial accounting thus allow optimum management ofbusiness transactions.

Roles

The transaction manager also takes into account that employeesfulfill different roles in the processes prescribed by the organiza-tional structure of a company. SAP Treasury and Risk Manage-ment allows you to define specific application menus accordingto those roles – containing all the functions that each employeeneeds. Company-specific roles are defined and menus createdbased on the standard roles delivered by the transaction manager– such as the roles of trader or risk controller.

Transaction and Position Management Process

Transactions in various areas of the transaction manager(money market, foreign exchange, securities) generally followthe same procedure. They are first entered in the front-officecomponent and then checked in the back-office componentbefore being transferred to accounting.

The money market component comprises functions for period-based accrual/deferral, key-date valuation, foreign-currencyvaluation, and disclosing of profits and losses. All relevant datafor posting is automatically transferred to financial accounting.

Foreign Exchange

The foreign exchange area covers all the business processesarising from both traditional foreign exchange trading as well astrading with over-the-counter (OTC) currency options. Thefunctions offered support the entire trading process – startingfrom concluding the transaction in the front office, through to processing in the back office, and on to transferring data tofinancial accounting. A range of evaluation options is alsoavailable for reporting purposes.

By using the integrated transaction manager, you can imme-diately analyze and take into account the effects of foreignexchange trading on the currency risks and liquidity situationof your company. You can easily connect trading platforms sothat deals are easily transferred and concluded. However, thelatest SAP NetWeaver platform technology will make trans-ferring deals from external software systems even simpler.

Financial Instruments

The transaction manager divides the transactions available onthe financial markets into the following main categories tooptimize crucial decision-making procedures, automate thesteps toward better investments, and maximize cash flow:

• Money market

• Foreign exchange

• Securities

• Derivatives

• Loans

Money Market

You can implement cash management decisions in the moneymarket area on the basis of the liquidity surplus or deficitdetermined in the cash management component. The softwarerecords the impact transactions have on the liquidity of a com-pany using value data for each flow in cash management. Theintegration of the transaction manager as a position managementtool with the SAP Cash and Liquidity Management applicationreduces the work processes involved. These range from enteringpotential transactions through to related accounting activities.

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Figure 5: Selection of Financial Instruments

*From mySAP™ ERP application.

• Fixed-Term Deposits(e.g. Overnight)

• Deposits at Notice• Commercial Paper• Repurchase Agreement• Floating Rate• Any Cash Flows

Money Market

• Spot• Forward• Swap

– Vanilla Options• Barrier Options

(Single and Double)• Compound Options• Average Rate Options• Basked Options • Futures• Exchange-Traded Options

Foreign Exchange

• Issued Bonds*– Fixed/Floating/Zero

Interest– Bullet Repayment/

with Repayment/ ABS Structures

• Fixed-Rate Loans• Floating-Rate Loans• Annuity Loans• Commercial Paper• Facilities

– Bilateral– Syndicated*

Debt Management

• Cap• Floor • Forward Rate Agreement• Swaps

– Payer/Receiver– Fixed/Basis– Exotics (e.g. Roller Coaster)

• OTC Options– Security– SwaptionInterest Rate Guarantee

• Futures• Exchange-Traded Options

Derivatives

• Bonds • Asset Backed Security

/MBS/CMO*• Index-Linked Bonds • Dual Currency Bonds• Drawable Bonds• Warrant Bonds• Stocks• Shareholdings• Subscription Rights• Investment • Certificates• Repurchase/Reverse Repo• Security Lending

Securities (Investments)

Transaction Manager

Market Risk Analyzer

Credit Risk Analyzer

Portfolio Manager

Reporting

The position monitor gives foreign exchange traders or riskcontrollers in a central treasury department a quick and clearoverview of currency positions. This software includes all trans-actions in the transaction manager and information from thecash management component, such as bank accounts. Theforeign exchange positions are listed, along a defined maturityband, according to the individual currencies. The software alsocalculates the NPVs for each currency, based on current market data.

In the foreign exchange area of the transaction manager youcan also map intercompany deals. Internal foreign exchangetrading enables foreign exchange transactions to be entereddecentrally. The software also concludes foreign exchangetransactions between the parent and subsidiary companies.

A subsidiary company can use the closing-function transactionto request an exchange rate for a foreign exchange transaction(spot exchange, forward exchange, or foreign exchange swap, forexample) from the head office. The subsidiary can accept thisexchange rate and close the transaction. In transaction closing,the transaction is automatically created in the head-office com-pany code. You can also create this transaction automatically inthe company code of the subsidiary using the mirror transactionfunctionality.

Securities

Securities are fungible because of the securitized rights associ-ated with them. SAP Treasury and Risk Management managesyour securities efficiently by helping you define structurecharacteristics, conditions, and parameters for valuation andposition management in your security master data. This providesthe basis for automating trading, back-office, and accounting

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Figure 6: Front Office: Position Reporting

The daily cash positionreport shows dealers exactlywhat they need to know.

The interest riskexposure report shows therisks to changes in interest –with detailed lists and drill-down functionality.

The foreign exchangeposition report shows thecurrent foreign exchangeposition in one integratedreport – with the ability todrill down to transactions –using data from SAP® Cashand Liquidity Managementand SAP Treasury and RiskManagement.

processes. In addition, you can freely configure the securitiesvaluation and position management using the securitiesaccount, position indicator, and portfolio. Extensive reportingin the information system supports the securities evaluation.

Derivatives

As derivatives play a very important role in interest andcurrency management, concept flexibility in the transactionmanager ensures that SAP Treasury and Risk Managementsupports most derivative instruments traded on the market.

To manage risk, the software first analyzes the current situationon the basis of up-to-date market data. Underlying transactionsand associated hedging transactions – under comparable condi-tions for derivatives and options, in particular – are then observedon the basis of the analysis. To further clarify matters, the soft-ware represents the instruments as delta equivalents so that riskanalysis and decision making include only the volume of all posi-tions examined that are actually subject to market fluctuations.

SAP Treasury and Risk Management also helps you take intoconsideration the special nature of derivatives – during exposureand market analyses, as well as when you review your liquiditysituation. In contrast to classical financial instruments, deriva-tive instruments generate cash flows that have an element ofuncertainty (either the amount is uncertain or the amountand the likelihood of occurrence are uncertain), in addition tofixed cash flows. You can display and simulate these cash flows(variable payments of a swap or options, for example) in theSAP Market Risk Management application.

As derivatives are dependent on variable financial market values(such as reference interest rates), SAP Treasury and Risk Man-agement gives access to a real-time data feed, which providesup-to-the-minute market price information. In the front-officecomponent, an option price calculator helps you calculate prices.

Loans

The loan management component allows you to easily manageloans that have either a simple structure – such as loans withinstallment repayment – or a complex structure. You canfurther manage loans as assets or liabilities, and the softwareautomates and streamlines their typical processes.

The transaction manager also provides the basic instrumentsfor creating and managing positions for default loans, externalbusiness partner loans, and intercompany loans. Functions areavailable for complex loans that map every stage involved in theirmanagement process – both for loans given and loans taken.These functions range from entering data in a potential contract,through to contract disbursement, and then to transferring the data to financial accounting. The software also incorpo-rates complex collateral management functions, support fordecision making, and a range of options for tailoring contracts.SAP Treasury and Risk Management thus provides the samefunctions used by banks in their loan departments.

Reporting

SAP has realized the increased need for strict corporate gover-nance and the demand for clear reporting practices. It alsorealizes that static reporting alone no longer fulfills the require-ments of a finance department. Therefore, to satisfy complex

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Figure 7: Securities Management Overview

Financial Accounting

Information System Reports

Master Data• Business Partner• Class Data• Securities Account• Position Indicator

Transaction Management• Purchase/Sale• Exercising of Rights• Plus More…

Portfolio Management • Valuation• Corporate Actions • Rebooking• Plus More …

Figure 8: Treasury Reporting with SAP® Treasury and Risk Management

Standard Reports Query

Drill-Down Reporting

SAP NetWeaver® Business Intelligence

Analysis:Data

“QuickViews” are defined on the basis of the user’s requirements.You can transfer a QuickView to the query tool, for example, if you want to make the report accessible to other users. Thesame applies if additional functions available in the query tool areneeded.

Drill-Down Reporting

The drill-down reporting tool enables you to define your ownreports on the basis of characteristics and key figures. You canalso use the key figures delivered with the software as a basis fordefining your own. The characteristic attributes and values canalso be grouped into a hierarchy.

Reporting with SAP NetWeaver Business Intelligence

Another reporting tool is available within the SAP NetWeaverBusiness Intelligence component. This is used to collect datafrom different software and platforms, and it provides a com-pany with a consistent, uniform view of its customers, opera-tions, and other business processes. The SAP Treasury and RiskManagement application is adapted to this company-wide goal.By collecting complete sets of data and converting them intoinformation for analysis, companies can improve transparency,control costs, and maximize efficiency.

reporting requirements that vary from one company to another,SAP Treasury and Risk Management draws upon variousstandard-reporting functionalities from SAP software.

Standard Reports

SAP Treasury and Risk Management provides the followingrange of standard reports through its transaction manager:

• Position lists, such as money market, securities, and so on

• Remaining terms

• Posting journals

• Payment schedules

• Maturity schedules

The standard reports also include numerous selection optionsand a flexible design layout. However, reports written in theABAP™ programming language from SAP usually offer onlylimited flexibility. Further reporting requirements can befulfilled with the query tool, the drill-down reporting tool, or the SAP NetWeaver Business Intelligence component.

Query

The query tool offers flexible functions for generating reportsand adapting them to your specific requirements. Even usersnot familiar with programming can generate comprehensivereports to provide to other company employees. Query supportsa wide range of options for defining reports, which are usuallybased on “InfoSets.” These are special views of data sources andspecify which fields of a data source can be analyzed in queries.

You can assign InfoSets to different user groups. The systemadministrator can then control the extent to which individualdepartments and users can run evaluations using the query tool.End users have access to an individual selection of InfoSets thatare relevant to their field of work (as defined by the user group).

Quick Viewer

The quick viewer tool for generating reports provides eveneasier access to reporting. You can use the quick viewer todefine reports, without actually having to program. It istherefore suitable both for beginners and for occasional users.

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Figure 9: Reporting with SAP NetWeaver Business Intelligence

Reporting

SAP NetWeaver®Business

Intelligence

Data Pool

Calculation

SAP Software System II (Companies in the United States)

SAP® Treasury and Risk Management• Money Market• Securities• Foreign Exchange• Derivative

SAP Cash and Liquidity Management• Cash Position• Liquidity Forecast• Clearing• Electronic Bank Statement

Liquidity Planner• Actual Analysis• Financial

Budgeting• Plus More . . .

Third-Party Software

SAP Software System I (Companies in Europe)

General Functions

SAP Treasury and Risk Management offers companies a varietyof general functions.

Master Data Management and Relationships

In the basic functions section of the transaction manager, bankmaster data is defined and managed. It is then stored centrallyin the SAP software in a bank directory and accessed from theapplication (for example, if bank details for a business partnerneed to be entered).

When created, the bank directory contains bank master datasuch as SWIFT codes or bank groups, including address dataand control data. It also contains master data on all the banks,which is required for payment transactions with businesspartners to take place. This includes both house banks andbusiness partner banks.

You can create a bank directory in the following ways:

• AutomaticallyA national bank directory on a data medium is imported fromone of your country’s banking organizations and updatedregularly. That is, you can import master data for the bankdirectory on tape or disk into the software using uniquecountry programs.

• ManuallyThis function creates master data for all banks and can evenenter master data for your business partners’ banks. When avendor or customer master record is created, or a documentis entered for a one-time account, the software automaticallybranches to the screen that maintains the bank directory – if new bank details are specified.

Business Partners and Role Assignment

In addition to banks, all business partners party to financialtransactions can be entered in the transaction manager. TheSAP Treasury and Risk Management application also uses thecentral business partner functionality. The advantages of thisinclude the shared use of various SAP components and singleentry into the software.

Role categories accurately determine the role the partner playsin business transactions. You can even assign several rolecategories to one business partner.

Data processed for a business partner is divided into thefollowing areas:

• General dataCentrally held for all business partner roles; access variesaccording to the role and customizing settings

• Company code–dependent dataApplies only to a particular business partner role in therelevant company code

• Differentiated dataAdditional information, valuations, and customer segmentdata defined by a differentiation criterion, business partnersbeing the basis for individual evaluations using reportingtools from SAP

Standing Instructions

SAP Treasury and Risk Management further provides standinginstructions, which are general agreements made with a busi-ness partner for processing specific types of transactions. Theyinclude transaction authorizations, payment details for incom-ing and outgoing payments, correspondence, and derived flows.They are proposed as default values when transactions areentered in the software system. Payments to a business partnerare often made to the same bank account.

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Figure 10: Business Partner Data

Business Partner

• Address/Address Overview

• Control/Bank Data• Control Data• Bank Details • Payment

Transactions • Relationships • Role Data

• Account Management • Accounting• Account Interest• Payment Data• Automatic Payment• Dunning Data• Correspondence Data

General Role Data Company Code Data

• Legal Data • Fiscal-Year Information• Personal Data• Employment Data • Additional Data • Credit Standing • Tax Data• Regulatory Reporting Data

In the standing instructions for correspondence section, you candefine external correspondence to be printed or faxed for individ-ual partners. Counterconfirmation before postings are releasedcan also be set up if required.

Hedge Management: IFRS

The European Commission determined that as of 2005, all listedcompanies within the European Union (EU) are required toprepare their consolidated financial statements in accordancewith IFRS. Implementing these regulations has presentedglobally operating companies in the EU and their subsidiarieswith one of the greatest challenges in the areas of accountingand information technology. The SAP Treasury and RiskManagement application has risen to that challenge.

SAP has taken into account that international financial marketsare becoming increasingly important for globally active com-panies nowadays – as more and more transactions are beingconcluded outside home markets. It also covers the importanceof transparency in capital markets to ensure their efficiency. Tothat end, SAP Treasury and Risk Management takes year-endclosing information and financial characteristics for companiesin the various countries involved and compares their financialsituation and financial changes according to IFRS transparencyguidelines.

With SAP Treasury and Risk Management, you can also use thetransaction manager to display derivative financial instrumentsand hedging relationships in compliance with U.S. GenerallyAccepted Accounting Principles (GAAP) and International

Accounting Standards (IAS). According to Financial AccountingStandard (FAS) 133/IAS 39, derivatives must be shown in thebalance sheet at fair value. If you wish to use a derivative finan-cial instrument as a hedging transaction in accordance withFAS 133/IAS 39, then special hedge accounting rules apply as faras the market value of the derivative is concerned.

In such cases, components in SAP Treasury and Risk Manage-ment make sure that the hedging relationship and valuationfunctions fulfill the following requirements:

• As a derivative should be linked to exposure, and a hedgingstrategy should be defined at the start, the application helpscreate a hedge plan to accommodate this.

• At the valuation key date, the software supports use of theeffectiveness test to check whether the value change of thederivative in the previous period correlates closely enoughwith the value change of the hedged exposure.

• Various calculation methods to perform the retrospectiveassessment are also used and depend on the underlying hedge– for example, cash-flow hedge, fair-value hedge, or netinvestment in foreign subsidiary and foreign currency hedges.

• The results of the prospective effectiveness assessment arealso facilitated.

• If the hedging relationship proves effective in both theretrospective-effectiveness and prospective-effectivenessassessment, you are then assisted in carrying out theeffectiveness valuation.

To calculate the market value of a derivative financial instrument,the hedge management component uses mark-to-marketvaluation taken from the risk management component. Thereis also a link to market-data supply. This is important later onfor the effectiveness test.

The key-date valuation (accounting valuation of transactionsrelative to market value) reads saved NPVs from the mark-to-market valuation. Unrealized gains and losses are distributed toappropriate accounts according to hedge accounting principles.The key-date valuation and the realized gains and losses ensureautomatic integration into financial accounting.

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Figure 11: Business Partner Standing Instructions

Transaction Authorization

Payment Details

Correspondence Derived Flows

Business Partner A

Parallel Accounting

Nowadays, more and more companies are preparing their balancesheets according to multiple accounting principles. A treasurysolution must therefore be able to value financial instrumentsin parallel. It also needs to clarify whether to store data for thevarious financial statements according to a complete or a deltaapproach. In addition, the software manufacturer must decidewhether to enhance existing structures or write completelynew software.

In SAP Treasury and Risk Management, SAP developed a positionmanagement concept in accordance with the existing structuresin the SAP Accounting for Financial Instruments application.Parallel position management was first available in 2001, and the operative valuation area was fully integrated into positionmanagement in 2003. This generates up to 999 balance sheets inparallel, according to accounting principles. To accompany thedevelopment of parallel position management, customizing hasbeen simplified and is thus more user friendly. New positionmanagement is the architectural basis for supporting IAS usingthe fair-value approach.

Documentation

SAP Treasury and Risk Management provides authorizationand documentation functionality.

Authorization Concept and Release

The authorization concept used throughout SAP software isimplemented in SAP Treasury and Risk Management to secureaccess to partially sensitive data and to satisfy the need forfunctional segregation arising from auditing requirements.

To that end, the transaction manager incorporates an authoriza-tion concept that ensures the functional segregation of trading,back-office, and accounting activities. For the various activitiesin the transaction and position management process, userauthorizations are designated to assign different authorizationprofiles to employees in various company departments. Theseauthorization profiles are defined in conjunction with specific

roles. The application also enables you to define release require-ments for one or more individuals to control a transaction beforetransferring it to accounting.

Documentation and Control Functions

Comprehensive documentation and control functions in thetransaction manager ensure that specific instruments or variousinstrument groupings are evaluated at each stage of the trans-action process. This fulfills the various documentation andcontrol requirements of both financial accounting and treasurygroups. One of these control functions is the warning monitor,which shows whether certain system activities are necessary, suchas interest rate adjustments, postings, or correspondences.

Furthermore, the software uses automatic status management,which means that each transaction goes through a series ofpreviously defined processing stages. This makes it easier tocontrol and evaluate individual transactions.

Market Data

The real-time data feed from SAP Treasury and Risk Manage-ment is a universal, open interface that can be used to importmarket data from market-data providers. With the interface,you can easily transfer exchange rates, swap rates, security priceinformation (stocks and bonds), reference interest rates, indexvalues, volatilities (for exchange rates, interest rates, securityprices, and indexes), and futures prices.

You can also import current and historical market data bycopying it to the file format supported by SAP Treasury andRisk Management. The application also offers the option ofcalling up market data already in the software from a spread-sheet (file upload). Similarly, you can download market data to the software or enter it manually.

Individual Enhancement Options: BAPI®

Standardized interfaces referred to as BAPI® programminginterfaces turn SAP applications into open software systemsthat let you exchange data across system boundaries. Thetransaction manager provides you with BAPIs for creating,

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changing, displaying, reversing, and counterconfirming singletransactions in the money market and foreign exchange areas,as well as for spot dealing in securities. Using these BAPIsensures that only consistent single transactions are transferredto the software.

Risk Analysis

Of all the various external risks that companies competing oninternational markets are exposed to, market price changesimpact their success most. Market price changes (in currencies,interest, and securities, for example) can have a profound effecton the amount or present value of payment flows. This appliesalso to payment flows resulting from operative companyactivities. In order to determine and manage risks extensively,SAP Treasury and Risk Management brings together all risk-related company activities.

In recent years, no other area has come close to developingsuch an extensive methodology for measuring risk as marketrisk management. The comparatively high availability of themost up-to-date market data as well as historical market datameans that risk volume can be quantified precisely, which isexactly what SAP Treasury and Risk Management does.

In addition, the methodical capacity of the entire mySAP ERPFinancials solution enables companies to perform detailed valu-ations of their existing positions with respect to all the factorsaffecting price. Furthermore, the decision-support aspect ofrisk management is gaining importance so as to ensure thesuccessful implementation of company strategies. Simulatingvarious portfolio structures and incorporating potential markettrends in the analyses is becoming a key aspect of preventativefinancial management as well.

At the same time, risk management is moving away from beinga downstream control instrument to one capable of addingvalue to a company. The development of new financial instru-ments, the improvement in investor relations, and a company’sreputation on the capital market as a result of proven risk

reduction are just a handful of the aspects accompanying thistrend. A company’s organizational structure is also feeling theeffects of this change since risk controlling now reports directlyto the board.

Companies also have to consider the growing number of legalregulations – some for specific industries, some for all industries– which call for the establishment of risk management systemswithin the enterprise. Here, the legislators have protected theinterests of investors by taking into account the vast expansionof the risk scope, which has gone hand in hand with theglobalization of markets.

Market Risk Analyzer

The market risk analyzer component in SAP Treasury and RiskManagement has been designed to cater to the requirements ofall industry sectors. It combines the methodical requirementsof financial services with the ability to incorporate paymentflows from the operative company into risk analysis. You canalso use individually defined portfolio hierarchies to analyzerisks according to the underlying factors (exchange rates,interest rates, prices, and volatilities, for example). In addition,identifying open risk positions with regard to interest orcurrency exposure is supported, along with value-at-risk (VaR)procedures as classical risk-control instruments.

In an integrated SAP software environment, you have all theinformation you need for market risk analysis. This includesthe option of adding transaction simulations and market-datascenarios to real transactions and market data. This serves tohighlight change potential or, in other words, shows how muchof a difference alternative hedging strategies would make. Thisfeature and many more enable the market risk analyzer to fullysupport your financial market activities in a more secureatmosphere.

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Data Retrieval

For informed risk management, it is essential to capture allrisk-related activities. Market risks influence all payment flowsin a company regardless of the business processes from whichthey originate. The SAP Treasury and Risk Managementapplication’s integrated environment ensures that once all thenecessary information has been entered, it can be accessedautomatically. This is equally true for operative activities withinthe logistical chain and for financial transactions that have beenentered in the transaction manager. Thus, modern SAPsoftware can considerably reduce the number of interfacesbetween different software systems that have to be defined,implemented, and maintained. This is usually a major costconsideration when implementing risk management systems.

The link between the market risk analyzer and real-time datafeed also provides access to current market data that you canuse to analyze risk positions. The imported data is storedcentrally and is available across the entire software system, thusensuring that all evaluations are based on consistent data.

Mark-to-Market Valuation and Position Analysis

The main task of risk management is to quantify potential losses.The market risk analyzer in SAP Treasury and Risk Managementprovides you with a comprehensive system for calculating the

NPV of common financial instruments. The calculated valuescan be stored and used later for accounting purposes by thevaluation functions of the transaction manager. This also com-plies with the requirements of FAS 133/IAS 39. The calculationsteps carried out are logged clearly and comprehensibly togetherwith the market data upon which they were based. Extensivedocumentation on the financial mathematical models used isalso available.

To help companies cope with the risk profiles of complexfinancial instruments, SAP has developed a data model using theconcept of a generic transaction. By linking various elementarycomponents, the data model can map flexible business struc-tures. The software provides you with an architecture that canadapt to future demands. It allows you to valuate risks inde-pendent of the underlying business processes.

Sensitivity Analyses and Simulations

Based on the NPVs, different key figures are used to measure the sensitivity of the portfolio to changes in market data and tohighlight any potential changes. You can also represent classicalsensitivity key figures, such as basis point values, durations, con-vexities, and Greeks, as well as differentiated simulation scenarios,in the market risk analyzer. These scenarios contain any combi-nation of market-data values and can be integrated into allmarket risk analyzer evaluations. You can even map a series ofscenarios in chronological order in the software as scenarioprogressions. Using different simulation procedures, you canadapt market fluctuations to current market data dynamically(market-data shift), or keep them constant as extreme-valuescenarios (market-data scenarios) over any time period.

Currency Exposure

For many companies that are actively involved in global markets,analyzing and hedging foreign currency risks is an essential ele-ment of market risk management. To capitalize on economies ofscale and set up hedging activities for aggregated foreign currencypayments across the group, central treasury departmentsfrequently do the currency management of the whole group.

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Figure 12: The Net Present Value Concept

Transaction Data

Linear• Debts• Assets• More...

Market Data

• Saved Market Prices• Real-Time Market Prices• Flexible Scenarios• Rule Shifts

Calculation

• Mark-to-Market Valuation• Sensitivities

– Duration– Convexity– Exposure

• Crash/Stress Tests

Nonlinear• Options• CAPs• More...

Evaluations

• Company• Portfolio• Profit Center• Product

Risk Management

Price Calculator(User Exit)

NPV

Risks

This restricts local activities to transactions that are required for processing incoming or outgoing payments or those thatobserve the statutory regulations. This type of structure placeshigh demands on the system landscape to include all the rele-vant liquidity flows in the foreign currency planning. The cashmanagement component undertakes the necessary preparatorytasks for this; it prepares a formatted data basis by bringingtogether local payment activities in a distributed system land-scape. The market risk analyzer can also access this informationdirectly, without needing its own interface. The financial trans-actions entered in the transaction manager are then comparedwith the operative payments. For flexible maturity bands, thecurrency exposure then calculates the remaining open items foreach currency, which you can use for further hedging activities.You can also use the drill-down reporting tool to call up detailedinformation for individual items at any time.

Liquidity Analysis

Ensuring liquidity is a fundamental condition for revenue-oriented and risk-oriented enterprise management. Companiestoday also require a software system in this area that does muchmore than simply combine actual payment information. Onlywhen your liquidity planning is integrated and market-datachanges can be simulated do you have a solid base of informa-tion for analyzing your liquidity. By incorporating scenarios orscenario progressions, the market risk analyzer allows you toanalyze the impact of market fluctuations on the liquidity ofyour company (for example, the amount of variable or optionalcash flows) and smooth out identified liquidity surpluses ordeficits.

Value at Risk

The VaR evaluation represents the potential loss in value of aposition (expressed as an NPV) that can occur, with a certainprobability, before the position is hedged or liquidated. The VaRevaluation is therefore an extension of NPV analysis, enablingstandardized risk quantification. The difference between the twotypes of evaluation is that VaR takes into account the uncertaintyof future market developments.

The market risk analyzer NPV approach used throughout theVaR evaluation allows you to consolidate the VaR across allsubareas of the company. This means you can freely aggregatethe risk from products, currencies, and organizational unitsand bring the results together to establish the total risk. VaRanalysis is therefore of key significance for a company’s globalrisk-controlling activities.

VaR Procedure in the Market Risk Analyzer

The market risk analyzer defines the valuation proceduredepending on the instrument valued. You can also importexternal data for the calculations or use the market data storedin the SAP software tables. A statistics calculator enables you todetermine volatilities and correlations for the variance/covarianceapproach. Risk factors you want to use can also be structuredto calculate and display the VaR in risk hierarchies that can beconfigured. In addition, you can use risk hierarchies to deter-mine the aggregation procedures and levels.

Gap Analysis

In gap analysis, position and maturity volumes, cash flows, and liquidities are analyzed in periods (maturity band) – unlikeNPV analysis and VaR analysis where risks are depicted usingNPVs. The market risk analyzer then displays the derived gappositions, interest rate risk, currency risk, and liquidity risk.

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Figure 13: Value at Risk

Transaction Data

Balance Sheet• Debts• Assets• More...

Historical Market Parameters

• Market Interest Rates• Exchange Rates• Stock Prices• Volatilities• Correlations

Calculation

• Historical Simulation• Monte Carlo

– Full Valuation– Delta Method– Delta/Gamma Method

• Variance/Covariance• Back Testing

Nonlinear• Options• CAPs• More...

Evaluations

• Company• Portfolio• Profit Center• Product

Risk Management

Price Calculator(User Exit)

Flexible Portfolio Hierarchies

To control risks efficiently, the market risk analyzer clearly assignsthe contribution of individual risk factors (such as interest andcurrencies) to the relevant risk objects (such as financial trans-actions and portfolio). It is therefore possible to perform riskevaluations according to different aggregation levels. If, forexample, you want to have a VaR key figure just as summarizedinformation at a company-wide level, the market risk analyzerdetermines the risk amounts precisely for each of the relevantunderlying factors to comply with hedge accountingrequirements.

For tasks such as these, the market risk analyzer uses flexiblydefinable portfolio hierarchies. These hierarchies not only deter-mine the characteristics by which risks are separated but alsodefine the hierarchy levels at which the individual risks are sum-marized. The portfolio structure is based on the characteristics ofthe risk objects (such as financial transactions and operative cashflows), which are stored in the software in an internal data pool.

Each of these characteristics (for example, trader, transactioncurrency, type of financial instrument, and exchange) can beused to create the portfolio hierarchy. If some of the character-istics are assigned to a portfolio hierarchy node, the market risk analyzer automatically displays all objects that have thesecharacteristics under the corresponding node. Since it is possibleto create any number of portfolio hierarchies on the basis of thedata pool, the different aspects of risk reporting (organizationaland instrument specific) are taken into account at all times.

The sheer flexibility in evaluation control and the highlysophisticated tools combine to make the market risk analyzer anefficient instrument for controlling risk for companies acrossall sectors of industry. In addition, the market risk analyzer can access all the information related to risks that is available inthe software, without needing other interfaces to do so. Whenyou integrate operative activities using SAP Cash and LiquidityManagement or enter financial transactions in the transactionmanager, you have all the real-time data you need for the marketrisk analyzer evaluations. What is more, there is no need to enteranything twice.

Default Risk Analysis in the Credit Risk Analyzer

Tightened regulations for controlling risk state the increasingsignificance of the default risk analysis and limit system. From a business perspective, too, it is essential to have a softwaresystem that supports the measurements, analysis, control, andlimitation of counterparty/issuer risks.

Integrated, central limit management enables the credit riskanalyzer component to control counterparty/issuer risk bymeans of limits and online monitoring. By setting differentmaximum risks, you should be able to limit the potentialtreasury transaction–related harm caused by the insolvency of a business partner. It is also possible to control the actions of traders by using a system of limits.

In SAP Treasury and Risk Management, the credit risk analyzercomponent enables you to measure, analyze, and control defaultrisks. Default risk refers to the potential loss arising from afinancial transaction should the business partner not fulfillcontractual obligations because of specific economic or politicalreasons. Default risks are classified as shown in Figure 14.

Counterparty/issuer risk describes the danger of a loss in valueof a receivable due to worsening creditworthiness of the businesspartner. Country risks arise when either the country of thebusiness partner or the country of the transaction currencybecomes insolvent. The credit risk analyzer subdividescounterparty/issuer risks into credit risk and settlement risk, asboth of these risks depend on when the transaction is analyzed.

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Figure 14: Risk Overview

Classic Credit Risk Counterparty Risk from Trading Book

Settlement Risk Credit Risk

Counterparty Risk Issuer Risk

Default Risk

Counterparty/Issuer Risk Country Risk

Credit risk exists over the whole term of the transaction, butsettlement risk exists only during the settlement period. Creditrisk may comprise just a counterparty risk or also include issuerrisk, depending on the transaction category (for example,securities transactions).

Important Functions

Below are the key functions of the credit risk analyzer.

Exposure Versus the Attributable Amount

The attributable amount is a measure of the default risk thatarises when a transaction is concluded. The credit risk analyzerdepicts both the expected loss and the unexpected loss arisingfrom a financial transaction. The software determines an attri-butable amount for every expected incoming cash flow or asset.

The credit risk analyzer also takes into account that the creditrisk of a trading transaction exists for the entire term of thetransaction and reflects the counterparty risk from the tradingbook plus any term-related and risk-related add-ons for coveringpotential positive market-value changes. In the case of classiccredit transactions, the credit risk is influenced by the committedcontract capital and the actual drawings in accordance with theiramounts.

Settlement risk exists only at certain points in time during the lifeof the transaction. It exists during the period from the triggeringof the advance payment until receipt of the return payment. Thelevel of settlement risk also depends on whether the settlementtakes place via a clearinghouse or directly.

Attributable Amount Determination

When quantifying default risk, the credit risk analyzer takescredit and settlement risks from credit and trading book trans-actions into account. It also knows that credit risk, alongsideclassic credit risk, comprises the counterparty risk from thetrading book plus any term-related and risk-related add-onfactors for covering potential positive market-value changes. It further takes into account the danger of a business partnerbecoming insolvent and consequently not being able to fulfillpayment or delivery commitments.

Settlement risk is divided into direct settlement risk and third-party settlement risk. Direct settlement risk occurs in the caseof transactions for which payment was agreed without deliveryor involvement of a settling agent. It is present from the time theadvance payment is triggered until receipt of the return payment.Third-party settlement risk involves the counterparty/issuerdefault risk after the due date. In the case of transactions thathave been closed via a settling agent, the credit risk analyzerensures advance payment. This means there is only acounterparty/issuer risk up to the amount of a positive furtherdevelopment of the respective transaction from the settlementdate until the actual receipt of the return concession. Thus, the risk entailed is limited to the difference between the directsettlement risk generated and the market value of the expectedreturn payment.

In practice, a large number of calculation methods are used todetermine the exposure in the counterparty/issuer risk. Thecredit risk analyzer component provides a flexible formulacatalog that you can customize to valuate various financialinstruments. This allows you to limit the counterparty riskfrom the trading book on the basis of the nominal amount,mark-to-market valuation, or add-on factors that depend onthe term of the transaction. The NPV can be used to determinethe exposure of a money market transaction, while an add-onprocedure determines the exposure of a derivative.

The credit risk analyzer could assign individual formulas on thebasis of determination procedures and default risk rules definedfor each transaction. Each combination of determinationprocedures and default risk rules can be assigned a formula tosuit your requirements. The variables in the formulas may beassigned base key figures, NPV, nominal amount, advancepayment amount, or return payment amount. The recoveryrate takes into account that outstanding receivables are at leastpartially covered should the business partner default.

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The credit risk analyzer uses the following control parametersto assess risk:

• Market-value change period/retention period

• Risk-commitment period/remaining term

• Risk sensitivity/risk factors

• Rating of business partner

These parameters specify access to the tables in which you canenter the above formula values according to your requirements.If you want to use a formula value that cannot be displayed inthe credit risk analyzer, then the user exit provides you withadded flexibility to apply your own formula. You can also takecollateral into account when determining business partnerexposure.

This function helps you control counterparty/issuer risks andcountry risk by means of limits and online monitoring. It alsoenables you to create comprehensive reports that can be usedfor internal and external purposes.

There are four types of limit characteristics:

• Direct limit characteristics

• Derived limit characteristics

• Free (or custom) limit characteristics

• Generated characteristics

You can differentiate between direct and derived limitcharacteristics. Direct limit characteristics are derived directlyfrom transaction data. In contrast, derived limit characteristicsare obtained from direct characteristics, such as the businesspartner.

The credit risk analyzer also gives you the option of creating 15free characteristics as limit characteristics. You can derive thesefrom the characteristics provided by SAP Treasury and RiskManagement with the help of the enhancement concept. Oneexample of a free limit characteristic is a geographical group ofcountries with Asia, Latin America, North America, and WesternEurope characteristic values. In this case, the values would bederived from the “country of the business partner” section.

Limit Types

Various criteria or limit characteristics are used to define limittypes. In the credit risk analyzer, you can define a limit for eachcombination of characteristic attributes. The utilization limitreport displays whether the limit has been exceeded or not.

The credit risk analyzer uses a limit type to ensure that thecompany-wide exposure from trading transactions withderivatives does not exceed US$20 million for each businesspartner. If one of your traders decides to close a derivativecontract with the partner whose additional exposure exceedsthe specified limit, that trader will automatically receive acorresponding message.

If the trader closes this transaction despite exceeding the limit,it is logged by the software. Limit types may be assigned differentlimit characteristics that you decide upon. Using a limit type to combine different characteristics provides you with manypossibilities for restricting your default risks and monitoring

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Limit Type 33:Bank +

TransactionType + Trader

Limit Type 45: Transaction

Type + Trader

Limit Type 1:Country

Limit Type 2:Industry

Limit Type 3:Bank

Limit Type 4:TransactionType

Limit Type 5:Trader

Germany/BanksUSD €100 MillionGermany/BanksUS$100 million

Euro Bank/Money Market/Connor €300,000

Euro Bank/Money Market/Connor US$10 million

Germany US$200 million

USA US$200 million

Banks US$500 million

IndustryUS$400 million

Euro BankUS$250 million

United BankUS$200 million

Smith/ForeignExchange

US$50 millionConnor

US$50 million

Money MarketUS$250 million

Foreign ExchangeUS$80 million

One-D

imensional

Limit

Multidim

ensionalLim

its

SmithUS$100 million

Figure 15: Multidimensional Limit Types

trader activities. You can then ensure that your foreignexchange traders do not exceed a certain currency exposure. To do this, you can define a limit type with “trader,” “limitproduct group,” and “currency” characteristics and set anamount limit for trade volumes.

Integrated Default Risk Limit Check

The integrated default risk limit check refers to the processesused to check an individual financial transaction against therelevant limits when it is entered or processed in the transactionmanager. The corresponding attributable amounts are deter-mined for the data entered for all the risk categories. The soft-ware checks the specified maximum risk commitment period,the internal and external limits, and the determined criticallimit utilization. The integrated default risk limit check ensuresyour risks are monitored at all times.

Reporting

The credit risk analyzer provides extensive standard reports and is linked to both the drill-down reporting and the query tools. Its aggregated limit utilization can be displayed for any key date– taking into account business partner relationships for therelevant software settings. You can trace how limit utilizationdevelops over time, including the unique assignment of theunderlying transactions. Consequently, you can consistentlymonitor your trading activities and maintain a high standard of security.

The credit risk analyzer also provides you with the option ofdefining your own reports, based on limits and utilization. You can then display the percentage utilization of the limits of all or some of your business partners in descending order.The software stores all the historical limits and utilization untilthey are archived. You can then reload them from the archiveas required. In this way, you can monitor the extent to whichindividual traders have used or overdrawn their limits over time.

SAP Cash and Liquidity Management

In these times of intense global competition and value-orientedmanagement strategies, financial planning has been playing anincreasingly important role in the management of a company.The key aim is to recognize liquidity deficits or surpluses intime and to identify expected foreign currency positions in theplanning period. In order to anticipate future trends, you mustrecord planning data on a timely basis and adapt it as soon ascircumstances change. Another problem is to establish processesfor capturing data on a decentralized basis.

To meet these requirements, SAP Cash and Liquidity Manage-ment provides tools for determining actual values and forentering, adjusting, aggregating, and evaluating planned cashflows. Decision makers within a company have all the informa-tion they need to gain a clearer picture of the financial situationand to optimize the use of their financial resources.

To optimize the management of your liquidity across thegroup, SAP Cash and Liquidity Management makes use of thefollowing components:

• SAP NetWeaver Business Intelligence

• Cash management

• Liquidity planner

Cash Management

The efficient management of cash flows and liquidity riskssecures a company’s future. A company uses the cash manage-ment component to monitor all the cash flows in the companyand to ensure sufficient liquidity. Functions include the short-term monitoring and aggregation of different bank accountbalances or the short-term planning and forecasting of incomingand outgoing payments from the accounts receivable andpayable area. These show the importance of integrating infor-mation from other business areas. Combining these operativeareas with the financial transactions in SAP Treasury and RiskManagement provides a solid basis for making 24-carat financialdecisions within a company.

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Architecture

The structure of the cash management component plays a central role in determining your day-to-day liquidity. It takesinto account the balances of all general-ledger accounts, as wellas incoming and outgoing payments.

All cash flow–relevant information should be combined in one central treasury system. This principal system, which alsoenables cross-evaluations in a distributed system landscape, canreceive liquidity information automatically from other operativeSAP software. This means that all the central and decentralizedcompany entities can be linked to cash management. Corporategroups that do not use SAP software can import informationinto the central cash management software either by uploadingit or by using middleware.

The central software can thus support all corporate groupswith its optimal treasury transaction management. This flexiblearchitecture enables various views and analysis of the aggregatedliquidity and risk positions of the group, taking into accountcompany-specific organizational structures in SAP Treasuryand Risk Management.

Liquidity Planner

The liquidity planner component in SAP Cash and LiquidityManagement helps you plan your finance and liquidityeffectively. By running a detailed actual analysis with planningtools from SAP, you provide a sound basis for your financialplanning. These tools are available in the SAP StrategicEnterprise Management (SAP SEM®) application and the SAPNetWeaver Business Intelligence component. The planned andactual values are then analyzed in these two applications, thusproviding the foundation for improving your planning processin the long run.

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Figure 16: Functions in Cash Management

Cash Position Liquidity ForecastCash Management• Cash-Flow Data• Central Cash Reporting• Integration of Transaction

Manager, Customer/Vendor, and More…

Manual Planning

Planned Items

•Comparing Payment Advice

•Comparing Condition

•Cashed-Check Control

•Interest Scale

PaymentAdvice

Control Function

Manual Bank Statement

Electronic Bank Statement

Cash Concentration

Electronic Bank-to-Bank Transfer

Manual Check-Deposit-List

Check Reader

Bank Account Management

Reporting

Plan Data Group Actual Data

Figure 17: Processes in Liquidity Planner

Planning Unit1

Planning Unit2

Planning Unit3

Planning Unit1

Planning Unit2

Planning Unit3

Central DataStore

SAP Treasury and Risk Management offers the followingbenefits:

• Optimum groupwide financial management, using aglobal treasury software system

• Improved efficiency, with rationalized, end-to-end processenhancement

• Flexible mapping of current and new financial instruments,using open concepts

• Uniform entering of new transactions and accountingfigures (straight-through processing) for all types of financialactivities

• Secure business processes, using functions such as theauthorization concept, status management, and dual-controlprinciple

• Quick and efficient business processes, using highlyautomated back-office tasks

• Total compliance with legal requirements, such as IFRS andU.S. GAAP

• Reduced financial risks, using modern risk analyses andcontrol tools

• Comprehensive and flexible reporting options, such aswith SAP NetWeaver Business Intelligence

• Reduced IT operating costs, using an integrated systemlandscape without service- or cost-intensive interfaces

• User-friendly software, thanks to personalized, role-baseduser interfaces

• Open interface to market-data suppliers, such as Reuters orTelerate

• Dynamic architectural elements from SAP – for example,authorization concept, business partner, and the SAPBusiness Workflow tool

• Multiple options to transfer data or integrate data fromexternal applications

• Full integration and enterprise service-orientedarchitecture (enterprise SOA) functionality with SAP NetWeaver

Integration continues to be one of the central IT challengesfacing companies in all industries. To help meet this challenge,the SAP NetWeaver platform, with its support for enterpriseSOA, has been developed to considerably reduce time and costs.Its integrating structures help bring people, information, andprocesses together easily. Consequently, this reduces TCO andensures a quick ROI.

Treasury organizations in both banking and industry have also come to rely on the flexibility and stability provided bymodern IT. SAP Treasury and Risk Management is thereforeproud to have handed over its components and substructuresto SAP NetWeaver and enterprise SOA on a step-by-step basis. In addition, enhanced technology has already been used todevelop new functions for its arsenal of useful tools. Just contactSAP and see for yourself how you can use SAP NetWeaver andenterprise SOA to your competitive advantage.

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BENEFITS OF SAP TREASURYAND RISK MANAGEMENT SAP TECHNOLOGY

Companies today demand software that is both flexible andenhanced. To be at the forefront of change, however,information technology must comprise the following centralcharacteristics:

• Openness to technologyYour technology lets you integrate individual developmentsin the same way as standard applications from various soft-ware providers. You can also depict value-added chains thatgo beyond organizational, system, and company boundaries.

• Functional modularity You can implement functions as Web services that commu-nicate with one another using standardized interfaces. Theyare coordinated using a technology platform. This results inbrand-new opportunities to combine and integrate functions.At the same time, adaptation costs are reduced dramatically.

• Powerful development tools Easy-to-use development tools ensure that new solutions are developed quickly and are included in the existingenvironment.

To be certain you gain maximum use from our products, bothnow and in the future, SAP has paved the way with support fora new software concept that is also innovation friendly:enterprise SOA in partnership with SAP NetWeaver. Companiesthat implement enterprise SOA enjoy both technological andcommercial functionality and, in combination with the SAPNetWeaver platform, the resulting business process platformoffers entirely new and integrated business applications fromSAP and its partners.

SAP NetWeaver also allows the smooth integration of enterpriseservices. This open technology platform is responsible for coor-dinating services and incorporating applications – including SAP,third-party, or your own solutions. The dramatic reduction incosts for integrating applications and customizing interfaceshas removed a considerable innovation barrier. At the sametime, SAP NetWeaver has created unexpected options for groupfunctions and the ability to integrate them throughout anycompany.

Development tools that are included in the SAP NetWeaverplatform make the innovation potential of enterprise SOAcomplete. This involves a new key function in the SAP CompositeApplication Framework tool, which makes it unnecessary todevelop applications from scratch. You can simply assemblethem from existing application components. Thus, enterpriseSOA turns your IT into a driving force that provides strongsupport for constantly changing processes.

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PAVING THE WAY FORPROCESS INNOVATION

In today’s challenging markets, business strategies need to befinely tuned so often that companies have a hard time keepingabreast of the rapidly changing global competition. Yourcompany’s information technology must likewise map currentchanges in strategies or market situations to stay viable. It is notpractical, of course, to replace your existing IT system with thelatest version every time something new comes along. On thecontrary, you should establish flexible processes by optimizingyour existing investments. SAP supports you in this with SAPNetWeaver, which provides the basis for a new generation ofSAP solutions and applications in the mySAP Business Suitefamily of business applications. This results in much lower TCO when adjusting existing business processes or generatingnew ones.

Thus, SAP has brought together two worlds: the world of tech-nology and the world of business functionality. The versatileplatform, SAP NetWeaver, and its support for enterprise SOA,enables you to use enterprise services to create new processes.SAP shares the benefits of mySAP Business Suite and its“powered by SAP NetWeaver” applications by integrating themwith your current strategies. With SAP NetWeaver and enter-prise SOA, you can increase the productivity and efficiency ofstandard processes or execute innovative processes that makesure you stand out from the crowd.

The SAP Treasury and Risk Management application is anintegrated software solution that supports international anddomestic finance management. It hails from a family of inno-vative applications that are based on successful best practicesused by SAP customers to streamline financial affairs andoptimize money management. Its extensive range of softwareprovides all necessary functions to analyze and structuretreasury-related business processes in both banking andindustry – flexibly and efficiently. By further integrating thesoftware’s overall functionality into existing system landscapes,companies gain automatic, straight-through processing, fromtrading to financial accounting. They also have total control of their globally distributed financial management processes,which significantly speeds up any type of transaction.

With SAP NetWeaver and enterprise SOA backing its integrationfunctionality, SAP Treasury and Risk Management alsoprovides you with cross-company business processes as well asquick and easy Web-based access to all the relevant informationyour industry needs. In particular, components such as the SAPNetWeaver Portal component easily support daily workloads –providing the internal and external applications at the touch of a button. On top of that, the personalized, role-based userinterface is easy to use, understand, and adapt – correspondingwith the wide range of tasks within a finance department. In addition, SAP and its partners accord you use of the latestoptions available to speed up intracompany and cross-companymanagement processes. By using the direct integration of currentmarket information or by supporting financial transactionsover a marketplace link, SAP instantly replaces guesswork withanswers. In brief, SAP Treasury and Risk Management secures afuture-proof landscape for your global corporate and financialmanagement needs now – not later.

To learn more about how the SAP Treasury and Risk Manage-ment application can help your organization, call your SAPrepresentative today or visit us on the Web atwww.sap.com/fscm.

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BUSINESS SOLUTIONS“POWERED BY SAPNetWeaver” SUMMARY

www.sap.com/contactsap

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