SAP Function in Detail mySAP ERP

SAP TREASURY AND RISK MANAGEMENT WITHIN mySAP ERP FINANCIALS

Copyright 2006 SAP AG. All rights reserved. No part of this publication may be reproduced or transmitted in any form or for any purpose without the express permission of SAP AG. The information contained herein may be changed without prior notice. Some software products marketed by SAP AG and its distributors contain proprietary software components of other software vendors. Microsoft, Windows, Outlook, and PowerPoint are registered trademarks of Microsoft Corporation. IBM, DB2, DB2 Universal Database, OS/2, Parallel Sysplex, MVS/ESA, AIX, S/390, AS/400, OS/390, OS/400, iSeries, pSeries, xSeries, zSeries, System i, System i5, System p, System p5, System x, System z, System z9, z/OS, AFP, Intelligent Miner, WebSphere, Netfinity, Tivoli, Informix, i5/OS, POWER, POWER5, POWER5+, OpenPower and PowerPC are trademarks or registered trademarks of IBM Corporation. Adobe, the Adobe logo, Acrobat, PostScript, and Reader are either trademarks or registered trademarks of Adobe Systems Incorporated in the United States and/or other countries. Oracle is a registered trademark of Oracle Corporation. UNIX, X/Open, OSF/1, and Motif are registered trademarks of the Open Group. Citrix, ICA, Program Neighborhood, MetaFrame, WinFrame, VideoFrame, and MultiWin are trademarks or registered trademarks of Citrix Systems, Inc.

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CONTENTS
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

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

EXECUTIVE SUMMARY
The SAP Treasury and Risk Management application in the mySAP ERP Financials solution offers the most financially sound investment for your treasury organization regardless of business size or needs. At the same time, the entire mySAP ERP Financials solution accords a platform for growth, a solid framework for corporate governance, and a financial solution that supports global business requirements in any industry. Moreover, an organization can easily add to the functionality of its landscape using additional SAP Financial Supply Chain Management applications or the complete mySAP ERP application on an as-needed basis, depending on the growth of its business. SAP supports a unique approach to enterprise systems and creates value from long- or short-term technology investments with the existing infrastructure greatly enhanced and your money management right on track.

INTRODUCTION
In this age of strict corporate governance, treasury organizations, chief financial officers, and treasury managers in both banking and industry are in the process of redefining crucial financial functions. A new financial model is in demand a model that combines strategic company management and highly efficient financial supply chain management. The solution should further provide cross-company cooperation and lower transaction costs by enabling efficient financial processes. At the same time, new management processes and analytical applications should optimize overall company performance. These new strategies require support from flexible, comprehensive software that provides the answers right away not at some time in the future. The immediate answer to these requirements is the SAP Treasury and Risk Management application within the SAP Financial Supply Chain Management (SAP FSCM) set of applications. This key application is also a part of the mySAP ERP Financials solution, which offers multiple stages of financial excellence. All of these have the SAP NetWeaver platform in their arsenal to facilitate seamless integration with SAP or third-party software. They constitute the most extensive financial software on the market for enterprise resource planning. Moreover, this multitalented group from the mySAP ERP application transforms existing IT investments into new technology using a modular approach. In this way, previous investments are protected and your future is assured with the latest software all for a very reasonable total cost of ownership (TCO).

SAP FSCM
SAP FSCM offers financial accounting solutions and services for managing companies cost-effectively and for enhancing processes. Investors and stakeholders profit in the long term, benefiting from both new financial service models and crosscompany financial scenarios. Besides the inclusion of SAP Treasury and Risk Management, which is the focus of this paper, SAP FSCM provides various other useful tools and components within its set of applications to support businesses and to help optimize your money management activities. The following products and more are in the SAP FSCM set of applications: SAP Cash and Liquidity Management application The SAP Cash and Liquidity Management application provides a complete overview of your cash resources at all times, while also closely monitoring your financial reserves.

SAP Dispute Management application

You can effortlessly structure and manage customer complaints by using the SAP Dispute Management application in SAP FSCM. To that end, you reduce outstanding debts and, at the same time, optimize company procedures.

SAP Biller Direct application

This electronic bill presentment and payment application consists of software that helps you process bills electronically. The SAP Biller Direct application also displays and pays invoices over the Internet with the resulting payment information transferred directly to your existing SAP software systems.

SAP In-House Cash application

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

SAP Credit Management application

The SAP Credit Management application helps actively monitor, limit, and consequently reduce accounts receivable. At the same time, you can easily evaluate customers and take any necessary countermeasures in sufficient time as risks are always recognized at an early stage.

SAP TREASURY AND RISK MANAGEMENT

SAP Treasury and Risk Management offers straight-through processing of the principal tasks in a finance department to ensure optimum liquidity management as well as portfolio and risk management in strict accordance with legal regulations. The software thus facilitates decisions regarding future investments and borrowing, based on current liquidity analyses and risk positions. At the same time, the application takes into account the current conditions in financial markets in order to provide an integrated risk analysis. The integration of SAP Treasury and Risk Management into existing SAP or third-party software enables precise measurement of the effects on liquidity and risks in the interest rate and currency areas. In addition, as important developments in the treasury arena have involved scrupulous compliance with legal regulations in recent years, all measures to apply International Financial Reporting Standards (IFRS) or the Sarbanes-Oxley Act have been taken and incorporated into the application. These provide the software support needed both now and in the future to ensure your processes comply with applicable laws worldwide.
mySAP ERP SAP Treasury and Risk Management Reporting Ad hoc Reporting Reporting Tools Results Database Management Reports Middle Office Data Export Money Market Credit Risk Analyzer Utilization Limit Management Market Risk Analyzer Price Calculator Value at Risk House Banks Simulate Rates Foreign Exchange Debt Derivatives Securities Dealing Platforms Rate Feeds Other Portfolio Analyzer Yield Calculations

Transaction Manager: Optimum Transaction and Position Management

The transaction manager component in SAP Treasury and Risk Management provides a complete framework for defining the settings and key parameters needed for precise transaction and position management.
Usage Areas

The financial instruments readily available in SAP Treasury and Risk Management range from money market and foreign exchange transactions through to securities, loans, and derivatives depending on the term and hedging purpose. With regard to the front office or trading arena, the software further provides a wide range of options for entering, processing, and checking transactions then transferring the relevant data to financial accounting (straight-through processing). By streamlining fundamental tasks in any treasury organization, SAP Treasury and Risk Management makes borrowing and investing in the financial markets and concluding hedge

Transaction Manager Front Office Back Office Accounting

Business Partner

SAP In-House Cash

SAP Cash and Liquidity Management

Financial Accounting in mySAP ERP

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

Figure 1: SAP Treasury and Risk Management

transactions an effortless procedure. It also provides an internal service for affiliated group companies to participate actively in financial markets depending on the organization of your treasury department and current guidelines. You can also more accurately invest liquid assets, finance planned investment, or hedge existing risks. Analysis tools in SAP Treasury and Risk Management also support numerous methods and procedures that analyze and measure risk with regard to currencies, interest, and security prices. Furthermore, you can calculate and monitor the success of activities on the financial markets using various performance figures. In addition, flexible limit management enables SAP to round out its solution offerings ensuring that companies keep track of their business partners default risk in relation to activities on the financial markets. Regardless of whether you process short-term finance or longterm strategic investments, all transactions in SAP Treasury and Risk Management use the same platform and can be readily evaluated.
Product Type
(Software Defined)

Product Types

The transaction manager enables you to control short-term liquidity and risk positions by carefully concluding money market and foreign exchange transactions for example, to iron out liquidity deficits/surpluses or hedge currency risks. The securities and loans areas support these instruments for the medium to long term. Derivative financial instruments allow you to actively manage interest rate and currency risks. There are a number of activities for the individual product types, 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 and position management process and can be set up in various ways, depending on the product type. The transaction manager also accords flexibility in configuring the structure and conditions of the various transactions, which enables you to represent even the most complex condition combinations in the software. This concept allows substantial freedom when you are setting up conditions and structure characteristics, and at the same time ensures that processes are consistent. Product types represent the financial transactions used in your company. The use of product types simplifies data entry considerably and ensures that transactions are entered in a uniform manner.
Trading/ New Transaction Back-Office Processing Accounting

Instruments

Product Category
(Customer Defined)

Classes

Money Market Foreign Exchange Securities Loans Derivates Debts

Stocks Investment Certificate Bonds Warrant Bond Convertible Bond Plus More . . .

Floater Fixed-Interest Bond Zero Bond Participating Certificate Plus More . . .

912828CA6 Treasury Note Curr.:USD Rating: AAA Interest: 4.000 Mat: 02-15-2014 U.S. Department of Treasury DE0001049070 Corporate Bond Curr.:EUR Rating: A Interest: 6.120 Mat: 10-25-2010 Commerzbank, GER 575930SR4 Muni.Rev.Bond Curr.:USD Rating: AAInterest: 2.875 Mat: 12-01-2007 State of Massachusetts, USA

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 Do Write-Up/ Perform Accruals Perform Valuation

According to: IFRS/U.S. GAAP Write-Down Transactions

Plus More . . .

Figure 2: Product Categorization

Straight-Through Processing Processes Dependent on Instruments Role-Based Concept and Authorization Auditing Acceptability and Segregation of Duties

Figure 3: Process Flow

Flexible Processes for Transaction and Position Management

Front Office

A typical feature of all financial instruments is the standardized basic structures or processes, which companies specify beforehand. SAP Treasury and Risk Management allows flexible configuration of transaction and position management processes for each product type so efficiency is maximized and, at the same time, organizational requirements for process security are fulfilled. You can consistently apply standard security measures, such as the dual-control principle, by incorporating additional release requirements into the workflow. The integration of these processes and the direct transfer of the relevant information to financial accounting thus allow optimum management of business transactions.
Roles

The front-office component contains functions for creating and displaying financial transactions. These include exercising rights and executing corporate actions in the securities area. The software supports a range of practical auxiliary and control functions that you can use to optimize trading. These include functions for entering and evaluating offers, fast entry functions for 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, the option-price calculator, and the net present value (NPV) calculator are also available.
Back Office

The transaction manager also takes into account that employees fulfill different roles in the processes prescribed by the organizational structure of a company. SAP Treasury and Risk Management allows you to define specific application menus according to those roles containing all the functions that each employee needs. Company-specific roles are defined and menus created based on the standard roles delivered by the transaction manager such as the roles of trader or risk controller.
Transaction and Position Management Process

In the back-office component, you can complete transaction data such as account assignment information and payment details and transfer it to accounting using the settlement function. Correspondence functions, such as automatic confirmations and counterconfirmations, can also be used. Other typical back-office tasks include corporate actions in the securities area, interest-rate adjustments based on variable interest rates, and payment netting arising from financial transactions.
Accounting

Transactions in various areas of the transaction manager (money market, foreign exchange, securities) generally follow the same procedure. They are first entered in the front-office component and then checked in the back-office component before being transferred to accounting.
Trading Back Office Accounting

Creation Exercising/Expiration Roll Over Plus More . . .

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

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

SAP Treasury and Risk Management also has automatic-posting functions to update the general ledger in real time. This does away with costly interfaces that arise when you are integrating other treasury solutions in financial accounting. According to accounting principles, you can also use valuation, accrual, and deferral procedures, as well as flexible functions for processing payment transactions. The application also provides you with reporting functions such as the posting journal and posting overview.

Figure 4: Transaction and Position Management

Financial Instruments

The transaction manager divides the transactions available on the financial markets into the following main categories to optimize crucial decision-making procedures, automate the steps toward better investments, and maximize cash flow: Money market Foreign exchange Securities Derivatives Loans
Money Market

The money market component comprises functions for periodbased accrual/deferral, key-date valuation, foreign-currency valuation, and disclosing of profits and losses. All relevant data for posting is automatically transferred to financial accounting.
Foreign Exchange

You can implement cash management decisions in the money market area on the basis of the liquidity surplus or deficit determined in the cash management component. The software records the impact transactions have on the liquidity of a company using value data for each flow in cash management. The integration of the transaction manager as a position management tool with the SAP Cash and Liquidity Management application reduces the work processes involved. These range from entering potential transactions through to related accounting activities.

The foreign exchange area covers all the business processes arising from both traditional foreign exchange trading as well as trading with over-the-counter (OTC) currency options. The functions offered support the entire trading process starting from concluding the transaction in the front office, through to processing in the back office, and on to transferring data to financial accounting. A range of evaluation options is also available for reporting purposes. By using the integrated transaction manager, you can immediately analyze and take into account the effects of foreign exchange trading on the currency risks and liquidity situation of your company. You can easily connect trading platforms so that deals are easily transferred and concluded. However, the latest SAP NetWeaver platform technology will make transferring deals from external software systems even simpler.
Derivatives Securities (Investments)

Money Market

Foreign Exchange

Debt Management

Fixed-Term Deposits Deposits at Notice Commercial Paper Repurchase Agreement Floating Rate Any Cash Flows
(e.g. Overnight)

Spot Forward Swap

Issued Bonds*

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

Fixed/Floating/Zero Interest Bullet Repayment/ with Repayment/ ABS Structures Fixed-Rate Loans Floating-Rate Loans Annuity Loans Commercial Paper Facilities Bilateral Syndicated*

Cap Floor Forward Rate Agreement Swaps

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

Payer/Receiver Fixed/Basis Exotics (e.g. Roller Coaster) OTC Options Security Swaption Interest Rate Guarantee Futures Exchange-Traded Options

Transaction Manager Market Risk Analyzer Credit Risk Analyzer Portfolio Manager Reporting *From mySAP ERP application.

Figure 5: Selection of Financial Instruments

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The foreign exchange position report shows the current foreign exchange position in one integrated report with the ability to drill down to transactions using data from SAP Cash and Liquidity Management and SAP Treasury and Risk Management.

The interest risk exposure report shows the risks to changes in interest with detailed lists and drilldown functionality.

The daily cash position report shows dealers exactly what they need to know.

Figure 6: Front Office: Position Reporting

The position monitor gives foreign exchange traders or risk controllers in a central treasury department a quick and clear overview of currency positions. This software includes all transactions in the transaction manager and information from the cash management component, such as bank accounts. The foreign exchange positions are listed, along a defined maturity band, according to the individual currencies. The software also calculates the NPVs for each currency, based on current market data. In the foreign exchange area of the transaction manager you can also map intercompany deals. Internal foreign exchange trading enables foreign exchange transactions to be entered decentrally. The software also concludes foreign exchange transactions between the parent and subsidiary companies.

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

Securities are fungible because of the securitized rights associated with them. SAP Treasury and Risk Management manages your securities efficiently by helping you define structure characteristics, conditions, and parameters for valuation and position management in your security master data. This provides the basis for automating trading, back-office, and accounting

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processes. In addition, you can freely configure the securities valuation and position management using the securities account, position indicator, and portfolio. Extensive reporting in the information system supports the securities evaluation.
Financial Accounting

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

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

Information System Reports

The loan management component allows you to easily manage loans that have either a simple structure such as loans with installment repayment or a complex structure. You can further manage loans as assets or liabilities, and the software automates and streamlines their typical processes. The transaction manager also provides the basic instruments for creating and managing positions for default loans, external business partner loans, and intercompany loans. Functions are available for complex loans that map every stage involved in their management 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 incorporates complex collateral management functions, support for decision making, and a range of options for tailoring contracts. SAP Treasury and Risk Management thus provides the same functions used by banks in their loan departments.
Reporting

Figure 7: Securities Management Overview

Derivatives

As derivatives play a very important role in interest and currency management, concept flexibility in the transaction manager ensures that SAP Treasury and Risk Management supports most derivative instruments traded on the market. To manage risk, the software first analyzes the current situation on the basis of up-to-date market data. Underlying transactions and associated hedging transactions under comparable conditions for derivatives and options, in particular are then observed on the basis of the analysis. To further clarify matters, the software represents the instruments as delta equivalents so that risk analysis and decision making include only the volume of all positions examined that are actually subject to market fluctuations. SAP Treasury and Risk Management also helps you take into consideration the special nature of derivatives during exposure and market analyses, as well as when you review your liquidity situation. In contrast to classical financial instruments, derivative instruments generate cash flows that have an element of uncertainty (either the amount is uncertain or the amount and the likelihood of occurrence are uncertain), in addition to fixed cash flows. You can display and simulate these cash flows (variable payments of a swap or options, for example) in the SAP Market Risk Management application.
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SAP has realized the increased need for strict corporate governance and the demand for clear reporting practices. It also realizes that static reporting alone no longer fulfills the requirements of a finance department. Therefore, to satisfy complex
Drill-Down Reporting

Standard Reports

Analysis: Data

Query

SAP NetWeaver Business Intelligence

Figure 8: Treasury Reporting with SAP Treasury and Risk Management

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

QuickViews are defined on the basis of the users requirements. You can transfer a QuickView to the query tool, for example, if you want to make the report accessible to other users. The same applies if additional functions available in the query tool are needed.
Drill-Down Reporting

SAP Treasury and Risk Management provides the following range 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 options and a flexible design layout. However, reports written in the ABAP programming language from SAP usually offer only limited flexibility. Further reporting requirements can be fulfilled with the query tool, the drill-down reporting tool, or the SAP NetWeaver Business Intelligence component.
Query

The drill-down reporting tool enables you to define your own reports on the basis of characteristics and key figures. You can also use the key figures delivered with the software as a basis for defining your own. The characteristic attributes and values can also be grouped into a hierarchy.
Reporting with SAP NetWeaver Business Intelligence

The query tool offers flexible functions for generating reports and adapting them to your specific requirements. Even users not familiar with programming can generate comprehensive reports to provide to other company employees. Query supports a wide range of options for defining reports, which are usually based on InfoSets. These are special views of data sources and specify which fields of a data source can be analyzed in queries. You can assign InfoSets to different user groups. The system administrator can then control the extent to which individual departments and users can run evaluations using the query tool. End users have access to an individual selection of InfoSets that are relevant to their field of work (as defined by the user group).
Quick Viewer

Another reporting tool is available within the SAP NetWeaver Business Intelligence component. This is used to collect data from different software and platforms, and it provides a company with a consistent, uniform view of its customers, operations, and other business processes. The SAP Treasury and Risk Management application is adapted to this company-wide goal. By collecting complete sets of data and converting them into information for analysis, companies can improve transparency, control costs, and maximize efficiency.

Reporting SAP NetWeaver Business Intelligence Data Pool

SAP Software System II (Companies in the United States) SAP Software System I (Companies in Europe) SAP Treasury and Risk Management Money Market Securities Foreign Exchange Derivative SAP Cash and Liquidity Management Cash Position Liquidity Forecast Clearing Liquidity Planner Actual Analysis Financial Budgeting Plus More . . . ThirdParty Software

Calculation

The quick viewer tool for generating reports provides even easier access to reporting. You can use the quick viewer to define reports, without actually having to program. It is therefore suitable both for beginners and for occasional users.

Electronic Bank Statement

Figure 9: Reporting with SAP NetWeaver Business Intelligence

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General Functions

SAP Treasury and Risk Management offers companies a variety of general functions.
Master Data Management and Relationships

Role categories accurately determine the role the partner plays in business transactions. You can even assign several role categories to one business partner.
Business Partner General Role Data Company Code Data

In the basic functions section of the transaction manager, bank master data is defined and managed. It is then stored centrally in the SAP software in a bank directory and accessed from the application (for example, if bank details for a business partner need to be entered). When created, the bank directory contains bank master data such as SWIFT codes or bank groups, including address data and control data. It also contains master data on all the banks, which is required for payment transactions with business partners to take place. This includes both house banks and business partner banks. You can create a bank directory in the following ways: Automatically A national bank directory on a data medium is imported from one of your countrys banking organizations and updated regularly. That is, you can import master data for the bank directory on tape or disk into the software using unique country programs. Manually This function creates master data for all banks and can even enter master data for your business partners banks. When a vendor or customer master record is created, or a document is entered for a one-time account, the software automatically branches to the screen that maintains the bank directory if new bank details are specified.
Business Partners and Role Assignment

Address/Address Overview Control/Bank Data Control Data Bank Details Payment Transactions Relationships Role Data

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

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

Figure 10: Business Partner Data

Data processed for a business partner is divided into the following areas: General data Centrally held for all business partner roles; access varies according to the role and customizing settings Company codedependent data Applies only to a particular business partner role in the relevant company code Differentiated data Additional information, valuations, and customer segment data defined by a differentiation criterion, business partners being the basis for individual evaluations using reporting tools from SAP
Standing Instructions

In addition to banks, all business partners party to financial transactions can be entered in the transaction manager. The SAP Treasury and Risk Management application also uses the central business partner functionality. The advantages of this include the shared use of various SAP components and single entry into the software.

SAP Treasury and Risk Management further provides standing instructions, which are general agreements made with a business partner for processing specific types of transactions. They include transaction authorizations, payment details for incoming and outgoing payments, correspondence, and derived flows. They are proposed as default values when transactions are entered in the software system. Payments to a business partner are often made to the same bank account.

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In the standing instructions for correspondence section, you can define external correspondence to be printed or faxed for individual partners. Counterconfirmation before postings are released can also be set up if required.
Transaction Authorization Payment Details

Accounting Standards (IAS). According to Financial Accounting Standard (FAS) 133/IAS 39, derivatives must be shown in the balance sheet at fair value. If you wish to use a derivative financial instrument as a hedging transaction in accordance with FAS 133/IAS 39, then special hedge accounting rules apply as far as the market value of the derivative is concerned. In such cases, components in SAP Treasury and Risk Management make sure that the hedging relationship and valuation functions fulfill the following requirements: As a derivative should be linked to exposure, and a hedging strategy should be defined at the start, the application helps create a hedge plan to accommodate this. At the valuation key date, the software supports use of the effectiveness test to check whether the value change of the derivative in the previous period correlates closely enough with the value change of the hedged exposure. Various calculation methods to perform the retrospective assessment are also used and depend on the underlying hedge for example, cash-flow hedge, fair-value hedge, or net investment in foreign subsidiary and foreign currency hedges. The results of the prospective effectiveness assessment are also facilitated. If the hedging relationship proves effective in both the retrospective-effectiveness and prospective-effectiveness assessment, you are then assisted in carrying out the effectiveness valuation. To calculate the market value of a derivative financial instrument, the hedge management component uses mark-to-market valuation taken from the risk management component. There is also a link to market-data supply. This is important later on for the effectiveness test. The key-date valuation (accounting valuation of transactions relative to market value) reads saved NPVs from the mark-tomarket valuation. Unrealized gains and losses are distributed to appropriate accounts according to hedge accounting principles. The key-date valuation and the realized gains and losses ensure automatic integration into financial accounting.

Business Partner A

Correspondence

Derived Flows

Figure 11: Business Partner Standing Instructions

Hedge Management: IFRS

The European Commission determined that as of 2005, all listed companies within the European Union (EU) are required to prepare their consolidated financial statements in accordance with IFRS. Implementing these regulations has presented globally operating companies in the EU and their subsidiaries with one of the greatest challenges in the areas of accounting and information technology. The SAP Treasury and Risk Management application has risen to that challenge. SAP has taken into account that international financial markets are becoming increasingly important for globally active companies nowadays as more and more transactions are being concluded outside home markets. It also covers the importance of transparency in capital markets to ensure their efficiency. To that end, SAP Treasury and Risk Management takes year-end closing information and financial characteristics for companies in the various countries involved and compares their financial situation and financial changes according to IFRS transparency guidelines. With SAP Treasury and Risk Management, you can also use the transaction manager to display derivative financial instruments and hedging relationships in compliance with U.S. Generally Accepted Accounting Principles (GAAP) and International

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Parallel Accounting

Nowadays, more and more companies are preparing their balance sheets according to multiple accounting principles. A treasury solution must therefore be able to value financial instruments in parallel. It also needs to clarify whether to store data for the various financial statements according to a complete or a delta approach. In addition, the software manufacturer must decide whether to enhance existing structures or write completely new software. In SAP Treasury and Risk Management, SAP developed a position management concept in accordance with the existing structures in the SAP Accounting for Financial Instruments application. Parallel position management was first available in 2001, and the operative valuation area was fully integrated into position management in 2003. This generates up to 999 balance sheets in parallel, according to accounting principles. To accompany the development of parallel position management, customizing has been simplified and is thus more user friendly. New position management is the architectural basis for supporting IAS using the fair-value approach.
Documentation

roles. The application also enables you to define release requirements for one or more individuals to control a transaction before transferring it to accounting.
Documentation and Control Functions

Comprehensive documentation and control functions in the transaction manager ensure that specific instruments or various instrument groupings are evaluated at each stage of the transaction process. This fulfills the various documentation and control requirements of both financial accounting and treasury groups. One of these control functions is the warning monitor, which shows whether certain system activities are necessary, such as interest rate adjustments, postings, or correspondences. Furthermore, the software uses automatic status management, which means that each transaction goes through a series of previously defined processing stages. This makes it easier to control and evaluate individual transactions.
Market Data

SAP Treasury and Risk Management provides authorization and documentation functionality.
Authorization Concept and Release

The real-time data feed from SAP Treasury and Risk Management is a universal, open interface that can be used to import market data from market-data providers. With the interface, you can easily transfer exchange rates, swap rates, security price information (stocks and bonds), reference interest rates, index values, volatilities (for exchange rates, interest rates, security prices, and indexes), and futures prices. You can also import current and historical market data by copying it to the file format supported by SAP Treasury and Risk Management. The application also offers the option of calling up market data already in the software from a spreadsheet (file upload). Similarly, you can download market data to the software or enter it manually.
Individual Enhancement Options: BAPI

The authorization concept used throughout SAP software is implemented in SAP Treasury and Risk Management to secure access to partially sensitive data and to satisfy the need for functional segregation arising from auditing requirements. To that end, the transaction manager incorporates an authorization concept that ensures the functional segregation of trading, back-office, and accounting activities. For the various activities in the transaction and position management process, user authorizations are designated to assign different authorization profiles to employees in various company departments. These authorization profiles are defined in conjunction with specific

Standardized interfaces referred to as BAPI programming interfaces turn SAP applications into open software systems that let you exchange data across system boundaries. The transaction manager provides you with BAPIs for creating,

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changing, displaying, reversing, and counterconfirming single transactions in the money market and foreign exchange areas, as well as for spot dealing in securities. Using these BAPIs ensures that only consistent single transactions are transferred to the software.
Risk Analysis

reduction are just a handful of the aspects accompanying this trend. A companys organizational structure is also feeling the effects of this change since risk controlling now reports directly to the board. Companies also have to consider the growing number of legal regulations some for specific industries, some for all industries which call for the establishment of risk management systems within the enterprise. Here, the legislators have protected the interests of investors by taking into account the vast expansion of the risk scope, which has gone hand in hand with the globalization of markets.
Market Risk Analyzer

Of all the various external risks that companies competing on international markets are exposed to, market price changes impact their success most. Market price changes (in currencies, interest, and securities, for example) can have a profound effect on the amount or present value of payment flows. This applies also to payment flows resulting from operative company activities. In order to determine and manage risks extensively, SAP Treasury and Risk Management brings together all riskrelated company activities. In recent years, no other area has come close to developing such an extensive methodology for measuring risk as market risk management. The comparatively high availability of the most up-to-date market data as well as historical market data means that risk volume can be quantified precisely, which is exactly what SAP Treasury and Risk Management does. In addition, the methodical capacity of the entire mySAP ERP Financials solution enables companies to perform detailed valuations of their existing positions with respect to all the factors affecting price. Furthermore, the decision-support aspect of risk management is gaining importance so as to ensure the successful implementation of company strategies. Simulating various portfolio structures and incorporating potential market trends in the analyses is becoming a key aspect of preventative financial management as well. At the same time, risk management is moving away from being a downstream control instrument to one capable of adding value to a company. The development of new financial instruments, the improvement in investor relations, and a companys reputation on the capital market as a result of proven risk

The market risk analyzer component in SAP Treasury and Risk Management has been designed to cater to the requirements of all industry sectors. It combines the methodical requirements of financial services with the ability to incorporate payment flows from the operative company into risk analysis. You can also use individually defined portfolio hierarchies to analyze risks according to the underlying factors (exchange rates, interest rates, prices, and volatilities, for example). In addition, identifying open risk positions with regard to interest or currency exposure is supported, along with value-at-risk (VaR) procedures as classical risk-control instruments. In an integrated SAP software environment, you have all the information you need for market risk analysis. This includes the option of adding transaction simulations and market-data scenarios to real transactions and market data. This serves to highlight change potential or, in other words, shows how much of a difference alternative hedging strategies would make. This feature and many more enable the market risk analyzer to fully support your financial market activities in a more secure atmosphere.

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Data Retrieval

For informed risk management, it is essential to capture all risk-related activities. Market risks influence all payment flows in a company regardless of the business processes from which they originate. The SAP Treasury and Risk Management applications integrated environment ensures that once all the necessary information has been entered, it can be accessed automatically. This is equally true for operative activities within the logistical chain and for financial transactions that have been entered in the transaction manager. Thus, modern SAP software can considerably reduce the number of interfaces between different software systems that have to be defined, implemented, and maintained. This is usually a major cost consideration when implementing risk management systems. The link between the market risk analyzer and real-time data feed also provides access to current market data that you can use to analyze risk positions. The imported data is stored centrally and is available across the entire software system, thus ensuring that all evaluations are based on consistent data.
Mark-to-Market Valuation and Position Analysis

NPV of common financial instruments. The calculated values can be stored and used later for accounting purposes by the valuation functions of the transaction manager. This also complies with the requirements of FAS 133/IAS 39. The calculation steps carried out are logged clearly and comprehensibly together with the market data upon which they were based. Extensive documentation on the financial mathematical models used is also available. To help companies cope with the risk profiles of complex financial instruments, SAP has developed a data model using the concept of a generic transaction. By linking various elementary components, the data model can map flexible business structures. The software provides you with an architecture that can adapt to future demands. It allows you to valuate risks independent of the underlying business processes.
Sensitivity Analyses and Simulations

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

Transaction Data Linear

Calculation

Evaluations

Nonlinear

Debts Assets More...

Options CAPs More...

Market Data

Mark-to-Market Valuation Sensitivities Duration Convexity Exposure Crash/Stress Tests

Company Portfolio Profit Center Product

Based on the NPVs, different key figures are used to measure the sensitivity of the portfolio to changes in market data and to highlight any potential changes. You can also represent classical sensitivity key figures, such as basis point values, durations, convexities, and Greeks, as well as differentiated simulation scenarios, in the market risk analyzer. These scenarios contain any combination of market-data values and can be integrated into all market risk analyzer evaluations. You can even map a series of scenarios in chronological order in the software as scenario progressions. Using different simulation procedures, you can adapt market fluctuations to current market data dynamically (market-data shift), or keep them constant as extreme-value scenarios (market-data scenarios) over any time period.
Currency Exposure

Risk Management NPV

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

Price Calculator
(User Exit)

Risks

Figure 12: The Net Present Value Concept

For many companies that are actively involved in global markets, analyzing and hedging foreign currency risks is an essential element of market risk management. To capitalize on economies of scale and set up hedging activities for aggregated foreign currency payments across the group, central treasury departments frequently do the currency management of the whole group.

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This restricts local activities to transactions that are required for processing incoming or outgoing payments or those that observe the statutory regulations. This type of structure places high demands on the system landscape to include all the relevant liquidity flows in the foreign currency planning. The cash management component undertakes the necessary preparatory tasks for this; it prepares a formatted data basis by bringing together local payment activities in a distributed system landscape. The market risk analyzer can also access this information directly, without needing its own interface. The financial transactions entered in the transaction manager are then compared with the operative payments. For flexible maturity bands, the currency exposure then calculates the remaining open items for each currency, which you can use for further hedging activities. You can also use the drill-down reporting tool to call up detailed information for individual items at any time.
Liquidity Analysis

The market risk analyzer NPV approach used throughout the VaR evaluation allows you to consolidate the VaR across all subareas of the company. This means you can freely aggregate the risk from products, currencies, and organizational units and bring the results together to establish the total risk. VaR analysis is therefore of key significance for a companys global risk-controlling activities.
Transaction Data Balance Sheet Nonlinear Calculation Evaluations

Debts Assets More...

Options CAPs More...

Historical Market Parameters

Historical Simulation Monte Carlo Full Valuation Delta Method Delta/Gamma Method Variance/Covariance Back Testing

Company Portfolio Profit Center Product

Risk Management

Market Interest Rates Exchange Rates Stock Prices Volatilities Correlations

Price Calculator
(User Exit)

Ensuring liquidity is a fundamental condition for revenueoriented and risk-oriented enterprise management. Companies today also require a software system in this area that does much more than simply combine actual payment information. Only when your liquidity planning is integrated and market-data changes can be simulated do you have a solid base of information for analyzing your liquidity. By incorporating scenarios or scenario progressions, the market risk analyzer allows you to analyze the impact of market fluctuations on the liquidity of your company (for example, the amount of variable or optional cash flows) and smooth out identified liquidity surpluses or deficits.
Value at Risk

Figure 13: Value at Risk

VaR Procedure in the Market Risk Analyzer

The market risk analyzer defines the valuation procedure depending on the instrument valued. You can also import external data for the calculations or use the market data stored in the SAP software tables. A statistics calculator enables you to determine volatilities and correlations for the variance/covariance approach. Risk factors you want to use can also be structured to calculate and display the VaR in risk hierarchies that can be configured. In addition, you can use risk hierarchies to determine the aggregation procedures and levels.
Gap Analysis

The VaR evaluation represents the potential loss in value of a position (expressed as an NPV) that can occur, with a certain probability, before the position is hedged or liquidated. The VaR evaluation is therefore an extension of NPV analysis, enabling standardized risk quantification. The difference between the two types of evaluation is that VaR takes into account the uncertainty of future market developments.

In gap analysis, position and maturity volumes, cash flows, and liquidities are analyzed in periods (maturity band) unlike NPV analysis and VaR analysis where risks are depicted using NPVs. The market risk analyzer then displays the derived gap positions, interest rate risk, currency risk, and liquidity risk.

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Flexible Portfolio Hierarchies

Default Risk Analysis in the Credit Risk Analyzer

To control risks efficiently, the market risk analyzer clearly assigns the contribution of individual risk factors (such as interest and currencies) to the relevant risk objects (such as financial transactions and portfolio). It is therefore possible to perform risk evaluations according to different aggregation levels. If, for example, you want to have a VaR key figure just as summarized information at a company-wide level, the market risk analyzer determines the risk amounts precisely for each of the relevant underlying factors to comply with hedge accounting requirements. For tasks such as these, the market risk analyzer uses flexibly definable portfolio hierarchies. These hierarchies not only determine the characteristics by which risks are separated but also define the hierarchy levels at which the individual risks are summarized. The portfolio structure is based on the characteristics of the risk objects (such as financial transactions and operative cash flows), which are stored in the software in an internal data pool. Each of these characteristics (for example, trader, transaction currency, type of financial instrument, and exchange) can be used to create the portfolio hierarchy. If some of the characteristics are assigned to a portfolio hierarchy node, the market risk analyzer automatically displays all objects that have these characteristics under the corresponding node. Since it is possible to create any number of portfolio hierarchies on the basis of the data pool, the different aspects of risk reporting (organizational and instrument specific) are taken into account at all times. The sheer flexibility in evaluation control and the highly sophisticated tools combine to make the market risk analyzer an efficient instrument for controlling risk for companies across all sectors of industry. In addition, the market risk analyzer can access all the information related to risks that is available in the software, without needing other interfaces to do so. When you integrate operative activities using SAP Cash and Liquidity Management or enter financial transactions in the transaction manager, you have all the real-time data you need for the market risk analyzer evaluations. What is more, there is no need to enter anything twice.
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Tightened regulations for controlling risk state the increasing significance of the default risk analysis and limit system. From a business perspective, too, it is essential to have a software system that supports the measurements, analysis, control, and limitation of counterparty/issuer risks. Integrated, central limit management enables the credit risk analyzer component to control counterparty/issuer risk by means of limits and online monitoring. By setting different maximum risks, you should be able to limit the potential treasury transactionrelated 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 analyzer component enables you to measure, analyze, and control default risks. Default risk refers to the potential loss arising from a financial transaction should the business partner not fulfill contractual obligations because of specific economic or political reasons. Default risks are classified as shown in Figure 14.
Default Risk

Counterparty/Issuer Risk

Country Risk

Settlement Risk

Credit Risk

Counterparty Risk

Issuer Risk

Classic Credit Risk

Counterparty Risk from Trading Book

Figure 14: Risk Overview

Counterparty/issuer risk describes the danger of a loss in value of a receivable due to worsening creditworthiness of the business partner. Country risks arise when either the country of the business partner or the country of the transaction currency becomes insolvent. The credit risk analyzer subdivides counterparty/issuer risks into credit risk and settlement risk, as both of these risks depend on when the transaction is analyzed.

Credit risk exists over the whole term of the transaction, but settlement risk exists only during the settlement period. Credit risk may comprise just a counterparty risk or also include issuer risk, 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 that arises when a transaction is concluded. The credit risk analyzer depicts both the expected loss and the unexpected loss arising from a financial transaction. The software determines an attributable amount for every expected incoming cash flow or asset. The credit risk analyzer also takes into account that the credit risk of a trading transaction exists for the entire term of the transaction and reflects the counterparty risk from the trading book plus any term-related and risk-related add-ons for covering potential positive market-value changes. In the case of classic credit transactions, the credit risk is influenced by the committed contract capital and the actual drawings in accordance with their amounts. Settlement risk exists only at certain points in time during the life of the transaction. It exists during the period from the triggering of the advance payment until receipt of the return payment. The level of settlement risk also depends on whether the settlement takes place via a clearinghouse or directly.
Attributable Amount Determination

Settlement risk is divided into direct settlement risk and thirdparty settlement risk. Direct settlement risk occurs in the case of transactions for which payment was agreed without delivery or involvement of a settling agent. It is present from the time the advance payment is triggered until receipt of the return payment. Third-party settlement risk involves the counterparty/issuer default risk after the due date. In the case of transactions that have been closed via a settling agent, the credit risk analyzer ensures advance payment. This means there is only a counterparty/issuer risk up to the amount of a positive further development of the respective transaction from the settlement date until the actual receipt of the return concession. Thus, the risk entailed is limited to the difference between the direct settlement risk generated and the market value of the expected return payment. In practice, a large number of calculation methods are used to determine the exposure in the counterparty/issuer risk. The credit risk analyzer component provides a flexible formula catalog that you can customize to valuate various financial instruments. This allows you to limit the counterparty risk from the trading book on the basis of the nominal amount, mark-to-market valuation, or add-on factors that depend on the term of the transaction. The NPV can be used to determine the exposure of a money market transaction, while an add-on procedure determines the exposure of a derivative. The credit risk analyzer could assign individual formulas on the basis of determination procedures and default risk rules defined for each transaction. Each combination of determination procedures and default risk rules can be assigned a formula to suit your requirements. The variables in the formulas may be assigned base key figures, NPV, nominal amount, advance payment amount, or return payment amount. The recovery rate takes into account that outstanding receivables are at least partially covered should the business partner default.

When quantifying default risk, the credit risk analyzer takes credit and settlement risks from credit and trading book transactions into account. It also knows that credit risk, alongside classic credit risk, comprises the counterparty risk from the trading book plus any term-related and risk-related add-on factors for covering potential positive market-value changes. It further takes into account the danger of a business partner becoming insolvent and consequently not being able to fulfill payment or delivery commitments.

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The credit risk analyzer uses the following control parameters to 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 can enter the above formula values according to your requirements. If you want to use a formula value that cannot be displayed in the credit risk analyzer, then the user exit provides you with added flexibility to apply your own formula. You can also take collateral into account when determining business partner exposure. This function helps you control counterparty/issuer risks and country risk by means of limits and online monitoring. It also enables you to create comprehensive reports that can be used for 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 limit characteristics. Direct limit characteristics are derived directly from transaction data. In contrast, derived limit characteristics are obtained from direct characteristics, such as the business partner. The credit risk analyzer also gives you the option of creating 15 free characteristics as limit characteristics. You can derive these from the characteristics provided by SAP Treasury and Risk Management with the help of the enhancement concept. One example of a free limit characteristic is a geographical group of countries with Asia, Latin America, North America, and Western Europe characteristic values. In this case, the values would be derived from the country of the business partner section.

Limit Types

Various criteria or limit characteristics are used to define limit types. In the credit risk analyzer, you can define a limit for each combination of characteristic attributes. The utilization limit report displays whether the limit has been exceeded or not.
Limit Type 1: Country

Germany US$200 million Germany/Banks US$100 USD 100million Million

USA US$200 million

Limit Type 2: Industry

Banks US$500 million

Industry US$400 million

One-Dimensional Limit

Limit Type 3: Bank

Euro Bank US$250 million

United Bank US$200 million

Limit Type 4: Transaction Type

Foreign Exchange US$80 million Smith/Foreign Euro Bank/Money Market/ Exchange Connor US$10 million Connor 300,000
US$50 million

Money Market US$250 million

Multidimensional Limits

Limit Type 5: Trader

Connor US$50 million

Smith US$100 million

Limit Type 45: Transaction Type + Trader

Limit Type 33: Bank + Transaction Type + Trader

Figure 15: Multidimensional Limit Types

The credit risk analyzer uses a limit type to ensure that the company-wide exposure from trading transactions with derivatives does not exceed US$20 million for each business partner. If one of your traders decides to close a derivative contract with the partner whose additional exposure exceeds the specified limit, that trader will automatically receive a corresponding message. If the trader closes this transaction despite exceeding the limit, it is logged by the software. Limit types may be assigned different limit characteristics that you decide upon. Using a limit type to combine different characteristics provides you with many possibilities for restricting your default risks and monitoring

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trader activities. You can then ensure that your foreign exchange traders do not exceed a certain currency exposure. To do this, you can define a limit type with trader, limit product group, and currency characteristics and set an amount limit for trade volumes.
Integrated Default Risk Limit Check

SAP Cash and Liquidity Management

The integrated default risk limit check refers to the processes used to check an individual financial transaction against the relevant limits when it is entered or processed in the transaction manager. The corresponding attributable amounts are determined for the data entered for all the risk categories. The software checks the specified maximum risk commitment period, the internal and external limits, and the determined critical limit utilization. The integrated default risk limit check ensures your risks are monitored at all times.
Reporting

In these times of intense global competition and value-oriented management strategies, financial planning has been playing an increasingly important role in the management of a company. The key aim is to recognize liquidity deficits or surpluses in time and to identify expected foreign currency positions in the planning period. In order to anticipate future trends, you must record planning data on a timely basis and adapt it as soon as circumstances change. Another problem is to establish processes for capturing data on a decentralized basis. To meet these requirements, SAP Cash and Liquidity Management provides tools for determining actual values and for entering, adjusting, aggregating, and evaluating planned cash flows. Decision makers within a company have all the information they need to gain a clearer picture of the financial situation and to optimize the use of their financial resources. To optimize the management of your liquidity across the group, SAP Cash and Liquidity Management makes use of the following components: SAP NetWeaver Business Intelligence Cash management Liquidity planner
Cash Management

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 the relevant software settings. You can trace how limit utilization develops over time, including the unique assignment of the underlying transactions. Consequently, you can consistently monitor your trading activities and maintain a high standard of security. The credit risk analyzer also provides you with the option of defining 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 until they are archived. You can then reload them from the archive as required. In this way, you can monitor the extent to which individual traders have used or overdrawn their limits over time.

The efficient management of cash flows and liquidity risks secures a companys future. A company uses the cash management component to monitor all the cash flows in the company and to ensure sufficient liquidity. Functions include the shortterm monitoring and aggregation of different bank account balances or the short-term planning and forecasting of incoming and outgoing payments from the accounts receivable and payable area. These show the importance of integrating information from other business areas. Combining these operative areas with the financial transactions in SAP Treasury and Risk Management provides a solid basis for making 24-carat financial decisions within a company.

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Liquidity Planner
Cash Position Cash Management Liquidity Forecast

Cash-Flow Data Central Cash Reporting Integration of Transaction Manager, Customer /Vendor, and More

Control Function
Payment Advice Comparing Condition Comparing Control Cashed-Check Interest Scale

Manual Planning

Bank Account Management

Planned Items

Payment Advice

The liquidity planner component in SAP Cash and Liquidity Management helps you plan your finance and liquidity effectively. By running a detailed actual analysis with planning tools from SAP, you provide a sound basis for your financial planning. These tools are available in the SAP Strategic Enterprise Management (SAP SEM) application and the SAP NetWeaver Business Intelligence component. The planned and actual values are then analyzed in these two applications, thus providing the foundation for improving your planning process in the long run.
Plan Data Group Actual Data

Manual Bank Statement Electronic Bank Statement

Cash Concentration

Electronic Bankto-Bank Transfer

Manual CheckDeposit-List Check Reader

Planning Unit 1

Planning Unit 1

Figure 16: Functions in Cash Management Architecture

Planning Unit 2 Central Data Store Planning Unit 2

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

Planning Unit 3

Planning Unit 3

All cash flowrelevant information should be combined in one central treasury system. This principal system, which also enables cross-evaluations in a distributed system landscape, can Figure 17: Processes in Liquidity Planner receive liquidity information automatically from other operative SAP software. This means that all the central and decentralized company entities can be linked to cash management. Corporate groups that do not use SAP software can import information into the central cash management software either by uploading it or by using middleware. The central software can thus support all corporate groups with its optimal treasury transaction management. This flexible architecture enables various views and analysis of the aggregated liquidity and risk positions of the group, taking into account company-specific organizational structures in SAP Treasury and Risk Management.

Reporting

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BENEFITS OF SAP TREASURY AND RISK MANAGEMENT

SAP Treasury and Risk Management offers the following benefits: Optimum groupwide financial management, using a global treasury software system Improved efficiency, with rationalized, end-to-end process enhancement Flexible mapping of current and new financial instruments, using open concepts Uniform entering of new transactions and accounting figures (straight-through processing) for all types of financial activities Secure business processes, using functions such as the authorization concept, status management, and dual-control principle Quick and efficient business processes, using highly automated back-office tasks Total compliance with legal requirements, such as IFRS and U.S. GAAP Reduced financial risks, using modern risk analyses and control tools Comprehensive and flexible reporting options, such as with SAP NetWeaver Business Intelligence Reduced IT operating costs, using an integrated system landscape without service- or cost-intensive interfaces User-friendly software, thanks to personalized, role-based user interfaces Open interface to market-data suppliers, such as Reuters or Telerate Dynamic architectural elements from SAP for example, authorization concept, business partner, and the SAP Business Workflow tool Multiple options to transfer data or integrate data from external applications Full integration and enterprise service-oriented architecture (enterprise SOA) functionality with SAP NetWeaver

SAP TECHNOLOGY
Integration continues to be one of the central IT challenges facing companies in all industries. To help meet this challenge, the SAP NetWeaver platform, with its support for enterprise SOA, has been developed to considerably reduce time and costs. Its integrating structures help bring people, information, and processes together easily. Consequently, this reduces TCO and ensures a quick ROI. Treasury organizations in both banking and industry have also come to rely on the flexibility and stability provided by modern IT. SAP Treasury and Risk Management is therefore proud to have handed over its components and substructures to SAP NetWeaver and enterprise SOA on a step-by-step basis. In addition, enhanced technology has already been used to develop new functions for its arsenal of useful tools. Just contact SAP and see for yourself how you can use SAP NetWeaver and enterprise SOA to your competitive advantage.

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PAVING THE WAY FOR PROCESS INNOVATION

Companies today demand software that is both flexible and enhanced. To be at the forefront of change, however, information technology must comprise the following central characteristics: Openness to technology Your technology lets you integrate individual developments in the same way as standard applications from various software providers. You can also depict value-added chains that go beyond organizational, system, and company boundaries. Functional modularity You can implement functions as Web services that communicate with one another using standardized interfaces. They are coordinated using a technology platform. This results in brand-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 existing environment. To be certain you gain maximum use from our products, both now and in the future, SAP has paved the way with support for a new software concept that is also innovation friendly: enterprise SOA in partnership with SAP NetWeaver. Companies that implement enterprise SOA enjoy both technological and commercial functionality and, in combination with the SAP NetWeaver platform, the resulting business process platform offers entirely new and integrated business applications from SAP and its partners. SAP NetWeaver also allows the smooth integration of enterprise services. This open technology platform is responsible for coordinating services and incorporating applications including SAP, third-party, or your own solutions. The dramatic reduction in costs for integrating applications and customizing interfaces has removed a considerable innovation barrier. At the same time, SAP NetWeaver has created unexpected options for group functions and the ability to integrate them throughout any company. Development tools that are included in the SAP NetWeaver platform make the innovation potential of enterprise SOA complete. This involves a new key function in the SAP Composite Application Framework tool, which makes it unnecessary to develop applications from scratch. You can simply assemble them from existing application components. Thus, enterprise SOA turns your IT into a driving force that provides strong support for constantly changing processes.

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BUSINESS SOLUTIONS POWERED BY SAP NetWeaver

In todays challenging markets, business strategies need to be finely tuned so often that companies have a hard time keeping abreast of the rapidly changing global competition. Your companys information technology must likewise map current changes in strategies or market situations to stay viable. It is not practical, of course, to replace your existing IT system with the latest version every time something new comes along. On the contrary, you should establish flexible processes by optimizing your existing investments. SAP supports you in this with SAP NetWeaver, which provides the basis for a new generation of SAP solutions and applications in the mySAP Business Suite family of business applications. This results in much lower TCO when adjusting existing business processes or generating new ones. Thus, SAP has brought together two worlds: the world of technology and the world of business functionality. The versatile platform, 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 them with your current strategies. With SAP NetWeaver and enterprise SOA, you can increase the productivity and efficiency of standard processes or execute innovative processes that make sure you stand out from the crowd.

SUMMARY
The SAP Treasury and Risk Management application is an integrated software solution that supports international and domestic finance management. It hails from a family of innovative applications that are based on successful best practices used by SAP customers to streamline financial affairs and optimize money management. Its extensive range of software provides all necessary functions to analyze and structure treasury-related business processes in both banking and industry flexibly and efficiently. By further integrating the softwares overall functionality into existing system landscapes, companies gain automatic, straight-through processing, from trading 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 integration functionality, SAP Treasury and Risk Management also provides you with cross-company business processes as well as quick and easy Web-based access to all the relevant information your industry needs. In particular, components such as the SAP NetWeaver 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 user interface is easy to use, understand, and adapt corresponding with the wide range of tasks within a finance department. In addition, SAP and its partners accord you use of the latest options available to speed up intracompany and cross-company management processes. By using the direct integration of current market information or by supporting financial transactions over a marketplace link, SAP instantly replaces guesswork with answers. In brief, SAP Treasury and Risk Management secures a future-proof landscape for your global corporate and financial management needs now not later. To learn more about how the SAP Treasury and Risk Management application can help your organization, call your SAP representative today or visit us on the Web at www.sap.com/fscm.

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www.sap.com /contactsap

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