That's why Ford undertook an initiative to develop a comprehensive view of its interest rate exposures companywide. Webb and his team were already managing interest rate risks, but they did so within silos, from Ford Credit to pension risks to the automotive division's cash and liabilities. Hedging of interest rate exposures looked effective if viewed from within each silo, but the risk management team questioned whether it was effective when viewed from a corporate perspective. They worked backward from the risks they were already quantifying to gain a high-level perspective of how the effects of a change in rates might offset one another. They also gauged the ways in which rising or falling interest rates could be expected to affect their business overall, an impact they had not previously quantified. Then they developed a means of simply and directly communicating with senior management about the company's overall exposure in the event of a change in interest rates.

"Most professionals tend to concentrate on their area of expertise—be it treasury or manufacturing or something else," says Sherman Garner, an ALM analyst at Ford. "In doing so, they may lose sight of how they fit into the greater scheme of things. One of the biggest value-adds of a project like this is the opportunity to step back and see whether you can come up with a strategy that might not only benefit risk management, but also might help the performance of the business as a whole."

The Dodd-Frank Act prompted the investment operations group at Microsoft Corp. to take a broader look at some of their derivatives-trading activities. As a global corporation, Microsoft mitigates financial risks using derivatives, including credit default index swaps. When Dodd-Frank passed, the company realized it would likely need to start clearing over-the-counter (OTC) derivatives trades. The rules were fuzzy, and deadlines were a moving target. Still, Microsoft took a big-picture view of the situation and decided it should aim to clear derivatives as soon as the rules became effective.

"A lot of people took a wait-and-see approach," says Eric Barka, a treasury manager in Microsoft's Investment Operations Group. "We knew the legal paperwork might take a long time—and it did." The trading and investment operations teams immediately began working to select a futures commission merchant (FCM), as well as navigating the legal complexities around negotiating an OTC clearing addendum and cleared derivatives execution agreements. They simultaneously worked to integrate their derivatives-trading solution with their internal treasury platform and with systems at their FCM, central clearing counterparties, collateral agent, and swap execution facility. "The proactive stance we took back in 2010 is really paying off for us," says group portfolio manager Michelle Christensen.

The treasury team at Dow Corning gained new insights into their company's financial risks when they overhauled their currency risk management program. Dow Corning has exposures to 15 to 20 currencies, and treasury was managing these exposures using balance sheet hedging, future-cash-flow hedging, and tax hedging. At ground level, the program seemed effective but inefficient; the team was using spreadsheets and largely manual processes. To improve the efficiency of their currency risk management activities, Dow Corning implemented a straight-through process. Now exposures are calculated automatically as soon as accounting has closed the books. To mitigate those exposures, the treasury team enters derivatives trades into a trade-execution system. Then everything flows automatically, from confirmation to accounting. The staff has gained a tremendous amount of time for more value-added activities, and they're confident that the information underlying their currency risk management decisions is accurate. The Dow Corning project even revealed that the company's forecasted currency risks offset one another to such a degree that the future-cash-flow hedging program no longer makes sense.

"If you don't commit to something like this, you'll always be fighting yesterday's battles, as opposed to being prepared for tomorrow," says Srikanth Dasari, head of treasury front office for Dow Corning. "In the past we were always working on the urgent rather than the important. Now we are able to talk to the businesses about their needs. We are able to participate in strategic initiatives within the businesses and provide treasury perspectives."

All three of these organizations succeeded with major initiatives designed to improve financial risk management. They did so because treasury and risk management teams took a step back from the daily grind and looked at the big picture, at what they needed to do to contribute more value to the business overall. These are our 2014 Alexander Hamilton Award winners in the category Financial Risk Management, sponsored by FiREapps, Kyriba, and Deloitte. Here are their stories.

(To access an archived version of the Treasury & Risk webcast in which this year's winners described their projects, click here.)

Move Away from the Silos

Interest rate risk has always been on the radar at Ford Motor Company. The automotive giant's captive finance company, Ford Credit, provides auto loans and leases to consumers, offers business loans and lines of credit to dealerships, and regularly issues debt to support these activities. Changes in interest rates can have a big impact on Ford Credit's financials, and Ford's risk management team has a history of carefully managing those risks. Until recently, however, they were not taking a portfolio view of Ford's overall enterprise risk profile.

"We used to take a siloed approach to managing interest rate risks," says Dave Webb, Ford's director of risk management. "We assessed risks and developed strategies to mitigate each individual balance sheet component. Much of that effort focused on the assets and liabilities of our credit company, but we also have large pension, auto cash, and auto debt portfolios. Each of these areas had individual strategies that were developed and managed independently."

For example, Ford's automotive manufacturing business has a substantial cash portfolio, which it generally invests in short-term instruments to meet liquidity objectives. It also has long-term external debt, which was generally issued at a fixed rate to lock in interest expense. No distinction was made between the tenor and repricing characteristics of the debt. This resulted in a mismatch between the automotive group's cash portfolio and its debt portfolio.

Webb and his team realized they needed to take a more integrated approach to managing the interest rate risk for the total enterprise, and that they needed a big-picture view of the company's exposures. They also needed to educate the company's executive team about the risks. "We are in a very unusual interest rate environment right now," Webb says. "It got some of our senior management thinking, 'If someone were to ask me about the impact on the company of a rising-interest-rate environment, I'm not sure I could answer that question holistically.' That really spurred us to start on the journey toward developing a total picture of interest rate risks across the company."

The risk management group gathered information from teams from across Ford—including Ford Credit, pension, automotive strategy, and cash investment teams—to understand each group's individual risks and how those risks fit into the broader Ford portfolio. Next, they back-tested different strategies, looking at how the company would have performed if it had taken on either more or less interest rate risk. For example, they evaluated how the Ford debt portfolio would have performed over the preceding 50 years if it had consisted of more floating-rate, and fewer fixed-rate, instruments. They then benchmarked their interest rate risk management processes against those of other large organizations.

After completing all this legwork, Webb and his team separated the Ford balance sheet into a series of asset/liability pairs, then developed a framework for assessing the risk of each component pair based on the notional and duration for each component. The framework considered both the present state of the assets and liabilities, and the anticipated future state based on projections in the company's business plan. They calculated Value at Risk (VaR), quantifying the economic risk associated with a theoretical interest rate shift of 100 basis points. This enabled the team to understand the risks that each pair presented, both in isolation and as a component of overall corporate risk.

In addition to analyzing all the siloed interest rate risks that Ford already managed, Webb's team added to the model the effects of interest rate changes on the company's auto sales. "We needed to understand how the business performs throughout the interest rate cycle," Webb says. "We looked at the correlation of our sales to rising- and falling-rate environments. We ultimately found that there was a pretty strong correlation, which is something we need to take into consideration as we are setting our strategy."

When they completed the study, Webb and his team were ready to make recommendations for incremental actions that the company could take to optimize its interest rate risk portfolio. One final, substantial challenge involved translating their sophisticated risk analysis into terms that could be easily communicated. "Our senior managers are primarily concerned with running a large automotive company," Webb says. "They don't spend a lot of time thinking about the nuances of interest rate risk. We needed to take concepts that are fairly abstract and make them easy to understand quickly." To meet this challenge, Webb's team developed a simple diagram that communicates how changing interest rates would affect each asset and liability pair. (See Figure 1, below.)

The team then used a "step-wise" approach in communicating with senior management, says risk manager Jonathan Rock. "We bit off a little bit at a time," he explains. "Our early documents were educational around the concepts we were thinking about and what was going on in the environment. Then maybe our second or third presentation would include our proposed strategies. So we weren't trying to educate and then take a proposal forward at the same time. I think that cadence worked well for us."

The project was a tremendous amount of work, but the results have substantially improved risk management at Ford. "It's really important to understand your total portfolio of risk and how the different components of risk interrelate and interact with one another," Webb says. "If you're managing anything in isolation, you could be missing an important component or important offset that might cause you to take a different action.

"It's also really important," Webb says, "to understand your company's overall risk appetite. We've spent a lot of time trying to put metrics around our risk appetite, trying to quantify tradeoffs in certain scenarios. But fundamentally, the most important action is to engage in an ongoing conversation with senior management. Sometimes it's easy to default to the lowest-risk alternative. But that's not necessarily the optimal position for the company, nor is it what we're tasked, as risk managers, to do. What we're tasked to do is manage the business and take an appropriate amount of measured risk."

Doing so not only improves financial risk management, but may also improve the acumen of financial risk managers within the company. "The aspect of this project that was somewhat eye-opening for me was the opportunity to look at risk management strategies in the context of the underlying physicals of the business," says Sherman Garner, ALM (asset/liability management) analyst. "Most professionals tend to concentrate on their area of expertise—be it treasury or manufacturing or something else—and in doing so, they may lose sight of how they fit into the greater scheme of things. One of the biggest value-adds of a project like this is the opportunity to step back and see whether you can come up with a strategy that might not only benefit risk management, but also might help the performance of the business as a whole."

A Proactive Stance Pays Off

Like many large organizations, Microsoft Corp. uses derivatives in its investment portfolio to mitigate risk. When the Dodd-Frank Act passed in 2010, Microsoft's treasury team immediately began exploring what the regulation would mean for their trades. "From the very beginning, we took a proactive stance," says Eric Barka, a treasury manager in the Investment Operations Group. "We did not want to just wait and see what happened."

Barka and the treasury team closely monitored news about Dodd-Frank, piecing together everything they could about what an over-the-counter (OTC) clearing model would look like. "We paid particular attention to the regulatory timeline and when the changes would impact non-financial end users like us," he says. They talked to as many industry experts as they could, including both internal legal counsel and an external legal team that specializes in derivatives law. They also benchmarked with other corporations in preparation for the regulatory changes.

"It was a time when everybody was just doing their best to interpret the regulation and figure out how to plan for it," says Michelle Christensen, a group portfolio manager at Microsoft. "It was difficult because the regulatory environment was constantly evolving. It was hard to have a solid project plan as the deadlines and rules kept changing."

Microsoft's research indicated that once Dodd-Frank's higher margin requirements kicked in for banks, non-cleared OTC trades could become prohibitively expensive. "We decided to set up our systems and processes so that we would be ready to clear derivatives trades as the rules became effective," Christensen says. Microsoft trades credit default swap index (CDX) products. When the team learned that CDX swaps would be among the first derivatives to require clearing for non-financial end users, they shifted into high gear.

The first step was to select a futures commission merchant (FCM). "We did a lot of due diligence in finding out which FCMs we could use for OTC clearing," Barka says. "There were differences in ticket costs and nuances around capabilities. Of course, we had to review the credit ratings of prospective FCMs. And then we considered portability—whether we could port our positions to another counterparty if our FCM had a problem. That was important as well."

Next, Microsoft's legal counsel needed to work with the FCM's legal team to negotiate an OTC clearing addendum. The regulations were a moving target throughout the process, which took about a year. "We had internal and external counsel working on our documentation, and there was a lot of back and forth," Barka says. The legal review process also involved review and approval of a cleared derivatives execution agreement (CDEA) with each of Microsoft's counterparties. Before swap execution facilities (SEFs) were functional in February 2014, all cleared OTC trades required a CDEA. Now the documents are necessary only for block trades that don't have to be traded through a SEF.

At the same time the legal evaluations were in progress, Microsoft was also preparing its technology platform for interconnectivity for cleared OTC trades. To facilitate straight-through processing, the team integrated their derivatives trading solution with their internal treasury platform, as well as with systems at Microsoft's newly selected FCM, its central clearing counterparties (CCPs), its collateral agent, and its SEF.

Pulling all the pieces together took more than two years. The end result is a straight-through process for clearing swaps trades. "For trades that need to be executed on a SEF, our capital markets team will initiate the trade, and it will flow automatically to our FCM and CCPs," Barka explains. "Within 60 seconds, we can see that the trade was executed and cleared. The next day the trade is reflected in our FCM reporting, at which point we deal with any margin requirements."

Previously, Microsoft executed most trades by phone, with confirmation completed via paper documents. Now the entire process is streamlined. "Since we got everything set up, the pipeline has been working very well," Barka says. The straight-through process not only saves time and accelerates information flow, but it also reduces Microsoft's exposure to its trading counterparties and improves operational efficiencies.

The project involved a lot of moving parts. Barka credits its success to good planning, teamwork, and extensive benchmarking. "In a complex regulatory environment with constant change, we stayed the course, identified what the project plan would be, and put the necessary systems in place to be able to do all this," he says. "As a result, we were ready to clear on day one. We believe we're one of just a few non-financial end users that executed a cleared OTC trade on September 9, 2013. We did it to ensure that we were ready."

Barka believes Microsoft made the right decision in moving early on swaps clearing. "A lot of people took a wait-and-see approach," he says. "We knew the legal paperwork might take a long time—and it did. The FCMs and our counterparties had a logjam of paperwork to deal with, so we were glad we got our foot in the door early." Adds Christensen: "The majority of CDX trades now have to be executed over a SEF and cleared, so the proactive stance we took back in 2010 is really paying off for us."

True Treasury Value-Add

For Dow Corning, currency risk is a big deal. The company sells more than 7,000 products to more than 25,000 customers worldwide. In all, 15 to 20 currencies have an impact on the company's performance. A couple of years ago, Dow Corning mitigated foreign exchange (FX) risk using a three-pronged hedging strategy.

Its balance sheet hedging program involved around 2,000 trades per year, worth about US$15 billion. Accounting books would close by the middle of the second workday after month-end. Then the hedging team would extract balance sheet information from the company's SAP ERP system and run analyses in Microsoft Excel. Based on those analyses, they would enter into derivative contracts. Because the legacy software systems couldn't handle non-deliverable currencies or options, many of the company's hedges were executed via phone or email and confirmed by fax.

In addition to the balance sheet hedging program, Dow Corning hedged future cash flows as well as the tax impacts of the currency hedges. "All our hedging is centralized," says Srikanth Dasari, the company's head of treasury front office. "No matter where an exposure is, the hedging resides at corporate." On a pretax basis, the balance sheet hedges were effectively mitigating risk. "But on a post-tax basis, the hedges and the exposures might be taxed very differently," Dasari adds. "So we would work backward and find a hedge to fill that gap to make the program effective on both a pre-tax and a post-tax basis."

All three currency hedging programs were highly manual and relied heavily on Excel. Thus, they weren't efficient, and they left the company exposed for longer than necessary. "We were pretty slow in taking the FX risk off our balance sheet," Dasari says. "Information was not immediately accessible, nor immediately actionable. We were also basing all our decisions on very complicated Excel models, so the information wasn't necessarily trustworthy either, given the manual nature."

Keeping the spreadsheets up to date was another challenge. Dasari says they often seemed to be running in circles. "It felt like our entire time was spent on calculating the exposures and hedging them. Before long, the next month-end would be there and we would start the same exercise again. We never had time to sit back and understand the source of the exposures and the effectiveness of the program," he says.

That's why the treasury team undertook an overhaul of FX risk management at Dow Corning. "We decided we needed a fully integrated system that would automate all the processes that are routine and non-value-added," Dasari says. "We wanted to enter the trade data once and have it flow through the rest of the systems without human intervention."

Dasari had prior experience with Lean Six Sigma, so that's the project management approach the team adopted. "I've always been a big believer in it," he says. "It gives a structure. And the value stream mapping was eye-opening. I didn't think it was going to be a learning experience, just mapping out what we were already doing every day—but it was." The team mapped out the steps in their FX-hedging value stream, defining which required human intervention and which could be handled by a machine. "Anytime an activity didn't involve thought leadership, we decided to hand it over to a machine," Dasari adds. "And anytime we didn't need to touch a data point more than once, we figured out how to establish a straight-through process."

Dow Corning implemented FiREapps to automate exposure calculations, which eliminated the two-day gap between closing the books and understanding FX exposures. It implemented 360T for trade execution and IT2 to track trading activity pre- and post-confirmation. It implemented Misys to auto-match trades, and started to use Bloomberg for Value at Risk (VaR) and basket portfolio analyses.

The systems are tightly integrated. Once Dow Corning closes its books, SAP pushes currency data to FiREapps automatically. FiREapps calculates exposures, and the treasury team enters trades in 360T for execution. Post-trade data flows into IT2 and then Misys for auto-matching and confirmation. Confirmed trades flow back to IT2 for accounting purposes.

The currency-risk mitigation process no longer involves any phone calls, faxes, or emails. The project freed up about 600 hours per year of treasury staff time and resulted in more effective hedging. "Within an hour after we close the books we have exposures that we trust," Dasari says. "Within another hour or two, we are fully traded. Now we have a lot of time left to do everything that we were really supposed to be doing."

What the team is really supposed to be doing is collaborating with the business, understanding the sources of currency exposures, and selecting the smartest and most cost-effective hedges for currency risks. They're now doing that better than ever before. In particular, their improved portfolio-level analysis led to a real revelation about the company's cash flow hedging program.

"We used to have a program where we picked and chose one currency at a time to hedge," Dasari explains. "We never had a great reason behind why we picked particular currencies. Now we put all our future cash flows into Bloomberg and run a Value at Risk analysis for the whole basket. We learned by doing this that our exposures have a lot of natural diversification—about 80 percent of our overall future-cash-flow exposures. Given how tricky forecasting is, we don't believe we can enter into a cost-effective hedging program that is more effective than our natural diversification, so we dropped future-cash-flow hedging entirely. In hindsight, we can see that the future-cash-flow program was not only costing money to hedge something that didn't need hedging, we were losing some of that natural diversification through the hedges we were placing."

The treasury team is also now able to take a more educated approach to precisely selecting the right hedges. Dasari gives the example of the Chinese renminbi: "We have a very large exposure to the renminbi on our balance sheet," he says. "It's one of those currencies that often has a non-linear forward curve, so purchasing a three-month hedge is sometimes more (or less) expensive than purchasing three rolling one-month hedges. And sometimes there is a sweet spot, where if we hedge for two months we might have a positive carry but anything longer or shorter would have a negative carry. Now that we have time to run these analyses, we can pick the right tenor that minimizes costs. I'd say Dow Corning is saving at least $1 million a year through smarter choices of tenors and hedging instruments."

Dasari attributes the success of his team's FX risk management overhaul to three key factors: First, a tone at the top that had the vision and emphasized standardizing processes and streamlining workflows throughout treasury. Second, the Lean Six Sigma project management. And finally, a healthy team approach.

"I can't emphasize this enough," he says. "Of course we work well with other departments within Dow Corning. But on this project we also took a team approach to working with our external vendors. We've done projects before where we talked to each vendor one at a time, even though the systems were supposed to interface. In this case, we were all-hands-on-deck. We had all vendors on calls together, so everybody was listening to what everybody else had to say. That way we all knew exactly who was committing to what, to whom, and who was signing off on the workflow."

The change has been dramatic, and Dasari is thrilled with the way it has made his function more strategic. "If you don't commit to something like this," he says, "you'll always be fighting yesterday's battles, as opposed to being prepared for tomorrow. Right now, we can afford to worry about Basel III, money market reforms, Dodd-Frank, and EMIR. When you automate all the manual processes, you get more out of your treasury staff.

"In the past we were always working on the urgent rather than the important. Now we are able to talk to the businesses about their needs. We are able to participate in strategic initiatives within the businesses and provide treasury perspectives. Rather than running the same spreadsheet month after month, we're looking at what we can do next. We're providing real value-added work. That's the most important benefit of this project."