Now, the company's subsidiaries have internal accounts with the in-house bank and use those to trade foreign exchange and arrange hedges, as well as to make cross-border and inter-entity payments, with the in-house bank. Lucent charges the subsidiaries a spread on FX trades comparable to what they would be charged in the market. And the in-house bank allows treasury to run a single foreign exchange portfolio that has positions in 16 currencies.

"Previously we were spending a lot of our time executing transactions, making sure these transactions were approved and the right delivery instructions applied," says Chris Donus, senior manager of the foreign exchange and money market groups. "It was very much process-focused. Now, by bringing all this together, we've reduced the amount of time we have to spend on processing these transactions and we have a much better ability to take a comprehensive look at our risk portfolio." The in-house bank has allowed Lucent to cut the number of external foreign exchange trades it makes by 56% and the volume of its external FX trading by 52%.

"Ultimately, our goal is to get the right economic result for the company," Schacknies says, but notes that operational barriers and time constraints were hindering treasury's pursuit of that goal. "With in-house banking, we're taking the operational dimension off the table."

The Trema solution Lucent uses was developed with input from many parts of the company, including IT and the controller's group. and was designed to provide a real-time view of the FX risk involved in derivatives, cash, loans and investments. The move to a single foreign exchange portfolio encouraged Lucent to improve its risk management techniques by adding a Value-at-Risk methodology to the notional limits it already used. And in order to get the best prices, Lucent uses an online trading platform to execute trades.

FINANCIAL RISK MANAGEMENT – Silver

General Electric Co.

The November compliance deadline for Section 404 of Sarbanes-Oxley has produced many stories about the amount of work that's involved. So it's all the more amazing that General Electric Co.'s treasury managed to get through the entire process in 28 weeks last year, after GE decided that its units should meet the 404 requirements by the end of 2003.

GE's corporate steering committee set a timeline for the project, but let each business establish its own framework. Representatives from treasury, finance, risk management and IT worked to develop a framework for GE's treasury. After a training phase, each employee responsible for a process in treasury documented the process for which he or she was responsible, along with associated risks and controls. The treasury steering committee then worked with these process managers on completing control self-assessment documents and planning testing.

GE treasury staff members around the world spent 5,950 hours on 404 compliance last year. Brian Wenzel, manager of finance for corporate treasury operations, says the key to the project's success was the support it got from GE's executives. While the hours were long, treasury managers say the effort accomplished a lot. For one thing, it gave treasury a chance to step back and review everything that could possibly go wrong. Treasury also took the opportunity to look at whether its controls were preventive or detective, Wenzel says, adding that "obviously preventive controls are much more effective than detective." Robert Ceske, chief risk manager for treasury and global funding operations, adds that 404 compliance was "a way to broaden and bring more depth to our risk culture and measurement and management of risk, particularly around operational risk initiatives."

FINANCIAL RISK MANAGEMENT – Bronze

Toyota Financial Services

Financial Accounting Standard 133, which mandates marking derivatives to market, injected considerable volatility into Toyota Financial Services' balance sheet in fiscal year 2003–$335 million worth, in fact. Toyota came up with a couple of creative solutions that reduced that volatility by more than 90% on a monthly basis.

Some of the swing stemmed from macro hedges. Toyota deals with the disparity between its debt, which it swaps to floating rate, and its mostly fixed-rate receivables by entering into pay-fixed hedges. Because they're done on a macro basis, they must be marked to market under FAS 133. Toyota realized that it could select certain derivatives it puts on to swap its fixed rate debt to floating and not designate them for hedge accounting treatment. By marking to market these targeted derivatives along with the macro hedges with offsetting characteristics, Toyota neutralized much of its portfolio volatility.

The other source of volatility was the cross-currency swaps Toyota used to convert its foreign currency debt issuance into U.S. dollars. To get hedge accounting, a hedge must be proven effective. But due to limitations of the dollar-offset testing method, sometimes these hedges would fail the effectiveness test. An alternative, regression testing, involves the use of prospective and retrospective market data, but a standard application would have required a substantial investment in people, time and systems. Instead Toyota suggested, and got its auditors to sign off on, regression testing that uses a Value-at-Risk approach to analyze the hedges under 1,000 randomly selected scenarios for prospective testing and then uses 40 observations plus current market data for retrospective testing. Amit Shroff, director of market risk and international at Toyota, says the method "saved us literally hundreds of hours compared to the alternatives." Shroff adds that Toyota's "economic and accounting results are now much closer."