BusinessBlueprint EM MFA TRM Derivatives

ABC Limited

CFM IMPLEMENTATIONDERIVATIVES

BUSINESS BLUEPRINTSAP Corporate Finance Management

Version- 1.0

Table of Contents

1 ORGANIZATION STRUCTURE.........................................................................................5

1.1 ORGANIZATIONAL STRUCTURE FOR TRANSACTION MANAGEMENT..................................51.1.1 DEFINITION AND MEANING........................................................................................51.1.2 DEFINITIONS AT ABC ...............................................................................................51.1.3 RELATIONSHIP / DEPENDENCIES ON OTHER ORGANIZATIONAL ENTITIES......................6

2 MASTER DATA...............................................................................................................7

2.1 TRANSACTION MANAGEMENT........................................................................................72.1.1 BUSINESS REQUIREMENTS (AS-IS)/EXPECTATIONS.....................................................72.1.2 PROCESS EXPLANATION (TO-BE)...............................................................................72.1.2.1 BUSINESS PARTNER ROLES.......................................................................................82.1.2.2 PRODUCT TYPES.......................................................................................................82.1.2.3 G/L ACCOUNTS........................................................................................................92.1.2.4 SPECIAL ORGANIZATION CONSIDERATION..................................................................92.1.2.5 DESCRIPTION OF IMPROVEMENT................................................................................92.1.2.6 DESCRIPTION OF FUNCTIONAL DEFICIENCIES.............................................................92.1.2.7 APPROACH TO COVER FUNCTIONAL DEFICIENCIES......................................................92.1.2.8 INTERFACE CONSIDERATIONS....................................................................................9

3 BUSINESS PROCESSES.............................................................................................10

3.1 TRANSACTION MANAGEMENT......................................................................................103.1.1 DERIVATIVES...........................................................................................................103.1.1.1 PROCESS EXPLANATION (TO-BE)............................................................................103.1.1.2 SPECIAL ORGANIZATION CONSIDERATION................................................................113.1.1.3 DESCRIPTION OF IMPROVEMENT..............................................................................113.1.1.4 DESCRIPTION OF FUNCTIONAL DEFICIENCIES...........................................................113.1.1.5 INTERFACE CONSIDERATIONS..................................................................................11

4 ANNEXURE....................................................................................................................12

4.1 AUTHORIZATION.........................................................................................................124.2 REPORTS....................................................................................................................144.3 DATA MIGRATION.......................................................................................................154.4 TRANSACTION MANAGEMENT......................................................................................164.5 Glossary..................................................................................................................26

Executive Summary

Company Profile

ABC is India’s largest integrated private steel sector company. Established in 1907, its steel plant at Jamshedpur produces coils and sheets. ABC ’s other products include tubes, wire rods, construction bars, structural, forging quality steel, rings and bearings for sale in domestic and export markets.

SAP Implementation

ABC has implemented core financial processes on SAP R/3 Enterprise 4.7 with extension set 110 and now wants to implement Corporate finance Management. The project is being implemented by XXXXXXXXXXXXXXXXXXXXXX Ltd. (XXX) and co-managed by ABC and XXX. It has about 7 full time resources comprising of consultants and the core team from ABC . The scheduled go-live date for Derivatives is 1st June, 2006.

Objectives, Scope and Approach

Objectives

Along with the process re-engineering and mapping the project team has to manage Organization Change Management. The purpose of Organization Change Management is to ensure that ABC achieves the expected results from its investment in SAP technology in a short span of time. As part of this service, XXX will work closely with ABC to introduce the change process, stress the importance of organizational alignment, and introduce the necessary tools and techniques needed to address issues in the Organization.

Scope

The scope for the current implementation of SAP Corporate Finance Management (CFM) software at ABC is as below:

1. A comprehensive treasury planning process for better control to hedge against interest rate and exchange rate risks

2. To support management of financial transactions and positions from the trading stage through back office to the transfer to financial accounting

3. Flexible reporting to analyze financial transactions and positions

In the light of the above, the following key areas will be covered as part of the current SAP implementation at ABC .

a. Transaction management in the area of Derivativesb. Analytics and information system for the above area

The locations that would be covered as part of the current implementation are:

1. For Transaction Management: Head office, Bombay

Approach

XXX ABC Confidential 3

XXX follows an implementation methodology called as Accelerated SAP (ASAP), which will be used as the base approach for the implementation at SAP. ASAP is a solution from SAP to streamline customer implementations and deliver faster business results.

ASAP incorporates a Step-by-Step Approach and avoids non-value added tasks. It utilizes the Business Engine of SAP R/3 and is based on R/3’s best business practices. ASAP provides a baseline for Business Process Requirements, Configuration /Testing, and End-user Procedures/Training.

In the current phase of the project, Business Process Requirements, as detailed in the following pages, have been discussed and agreed in the form of Blue Print Document.


1 Organization Structure

The following organizational definitions have been done at ABC

1.1 Organizational Structure for Transaction Management

1.1.1 Definition and Meaning

For the purpose of the implementation of the SAP CFM module, the following considerations have been made while arriving at organizational structures at the treasury department at ABC .

1. Division of responsibilities and activities at ABC for the purpose of day-to-day operations at the treasury department (general divisions)

2. Organizational entities that have to be mapped in the SAP system.

In the context of the above (organizational entities to be mapped to the SAP system), the following are the key entities for transaction management.

1 Portfolio: An organizational unit that enables financial transactions and positions to be brought together and aggregated position analyses to be undertaken. Portfolios are also used to control and evaluate risk items in risk management.

2 Valuation Areas: Used for position management (example: Operative valuation area and parallel valuation area).

1.1.2 Definitions at ABC

1. Based on responsibilities and activities

The following organizational definitions have been done at ABC for transaction management in the Derivatives area.

The structures of activities are divided into the following:

1. Front office/trading2. Back Office 3. Accounting

This division of operations helps ensure

1. Clear segregation of roles and responsibility in the treasury function and

2. A system of tracking the transaction flows to the respective individual who carries out the same.

The key activities that fall under transaction management are given as below:

i. Trading:

a. Entering into dealsb. Exercise/expiration of dealsc. Reversals


ii. Back office:

a. Checking/verifying the deal detailsb. Settlementc. Confirmation Lettersd. Processing reversals

iii. Accounting:

a. Postings into the books of accountsb. Processing payments and receipts from transactionsc. Posting accrual and deferrals on transactionsd. Carrying out balance sheet valuations

2. Organizational entities that have to be mapped in the SAP system

i. Portfolios

The key considerations while evaluating a set of portfolios for ABC were:

a. Its amenability to reporting requirementsb. Its help in evaluating returns and carrying out further analysisc. Its help in tracking each transactiond. Its scalability for newer areas of operations

The proposed structure of portfolios at ABC is given below:

a. A portfolio will be defined for every area of treasury activity. The portfolios will be as below:

i. Derivatives portfolio (Trading/ Hedging)

b. Newer portfolios can be added if, for example, the company enters into newer areas of operations

ii. Valuation Area:

There will be one operative valuation area as per Indian Accounting Rules. This valuation area will be used for reporting all its treasury activities.

1.1.3 Relationship / Dependencies on other organizational entities

Relationship with entities in Financial Accounting

1. Portfolio: A portfolio is created in a company code. The portfolios for ABC , as mentioned above will be linked to the company code ABC

2. Valuation Areas are assigned to company codes in financial accounting


2 Master Data

2.1 Transaction Management

2.1.1 Business Requirements (as-is)/Expectations

The following outlines the master data in the area of transaction management that is maintained in the current system at ABC .For Derivatives transactions:

List of authorized dealersLimits for each authorized dealerLimits for each traders

2.1.2 Process Explanation (to-be)

The creation of master data for transaction management would involve creation of business partners in the system and certain repetitive parameters for managing transactions with them. A detailed sheet containing all the information requirements for master record creation for transaction management will be made available during the realization phase of the project.

Work Steps

Description Performed By

SAP Transaction / Function

1. Generic Activities for Business Partner creation

Create Business Partner roles Treasury Accountant

SAP Transaction

2. Master Data for Derivatives transactions

a. Business Partner Creation

Create business partners in the SAP role of ‘Counterparty’

Treasury Accountant

SAP Transaction

Create Business Partner standing instructions

Treasury Accountant

SAP Transaction

Maintain Credit rating for business partner Treasury Accountant

SAP Transaction

The proposed structure of master data at ABC is given below:


2.1.2.1 Business Partner Roles

Business Partners Role represents different capacities in which a Business Partner may act.e.g. Borrower, Agent, SponsorFor ABC , the business partner role suggested is that of Counterparty Role. Counterparty role is assigned to Business Partners with whom ABC has financial transactions. It could be either payment transactions or receipt transactions or both.e.g. with whom ABC Ltd. has financial transactions

* The List is indicative.

2.1.2.2 Product Types

The Product types for Derivatives are as under:

Sr. No.

Investment Type SAP Product Type

1 Cap/Floor 61A61B

CapFloor

2 Swap 62A62B62C

Interest rate swapCurrency swapCross currency interest rate swap

3 Forwards 74A Forward

4 OTC Options 76A76B76C

Currency optionsInterest rate guaranteeFX Double barrier option - knock in

2.1.2.3 G/L Accounts

The following G/L account will be maintained:1. Gain/Loss on forward cover option/deals

XXX ABC Confidential

Counterparty*

State Bank of India

Citibank N.A.

Deutsche Bank

Standard Chartered Bank

8

This account will be profit/loss type account.

2.1.2.4 Special Organization Consideration

Not applicable in this section

2.1.2.5 Description of Improvement

1. Standing instructions help map general agreements between the business partner and ABC . This helps in regulating the areas (Derivatives) in which ABC deals with the partner, the partner’s bank details (which account any payments to the business partner needs to be made), the types of correspondence regularly used with the partner.2. Master agreements will help in avoiding repetitive tasks for monitoring the execution of individual transactions. This will help in tracking limits per business partner.

2.1.2.6 Description of Functional Deficiencies


2.1.2.7 Approach to cover Functional Deficiencies


2.1.2.8 Interface Considerations



3 Business Processes


3.1.1 Derivatives

This includes the following product categories like1. Cap/floor2. Swap3. Forwards4. OTC Options

3.1.1.1 Process Explanation (To-Be)

The organizational structure for ABC in the area of Derivatives would be the same as mentioned in section 1.1.2. The broad split of the functions with the area of coverage is given as below.

a. Front office/tradingb. Back Officec. Accounting

The activities for each area with reference to Derivatives transactions are given as below:

1. Trading: The trading area contains functions for entering Derivative transaction. It also enables to call up information on transactions or make changes at a later date. The following would involve:

i. Creation of deals ii. Exercise / Expiration of dealsiii. Reversals, if any

2. Back office: Once the financial transaction is entered in the trading area, it is settled in back office. The Back office area contains functions for checking and changing the transactions. Transaction post processing primarily involves adding any missing transaction data that is needed to process the transaction further as well as for posting and payment. Correspondence is in the form of internal or external confirmations. The following activities would include:

i. Checking/verifying the deal details once they have been entered into by the trading area

ii. Settling the deals entered into the systemiii. Preparing confirmation letters to the business partnersiv. In case transactions have been reversed by the trading area,

entering reversal details

3. Accounting: The financial transactions are processed in the Accounting area. The accounting area functions are transferring data to financial accounting, posting of accruals / deferrals, valuation and preparing accounting related MIS reports with respect to transactions carried out by ABC .


The detailed explanation for the to-be processes can be found in Annexure 4.4.

3.1.1.2 Special Organization Consideration


3.1.1.3 Description of Improvement

1. As exists, all transactions are carried out of the system. Only accounting entries are passed after execution of the transactions. The proposed system will help in creating deals as is executed, on a real time basis.

2. As it currently exists, information relating to daily surpluses is obtained as a separate, offline activity. It has to be manually aggregated collecting data from different, offline sources. The proposed system would ensure availability of the information as required.

3. Any investment analysis (yields, returns, cash flows) is currently carried out manually. With the implementation of the transaction manager component, transaction data will be available readily for analysis

4. There is an automatic link to accounting – GL balances are updated automatically from the transactions

5. Accruals and valuations were done manually, but now it will be done on the system.

3.1.1.4 Description of Functional Deficiencies


3.1.1.5 Interface Considerations



4 Annexure

4.1 Authorization

The topic of authorizations in CFM can be covered under two broad categories.

1. Role based authorizations: These refer to the role an employee plays in an organization and how this role is mapped in the SAP system. Role based authorizations help allocate SAP users (employees) to areas of activity (example: transaction processing, report extraction).

2. Trader authorizations: More specific to CFM, these authorizations determine the areas of activity (Derivatives) that a trader (as defined in the system) has access to. They are detailed as below:

1. Role based authorizations: SAP delivers certain standard roles for CFM. They contain certain predefined activities that the user assigned to this role can play. An overview of the roles as delivered in the standard CFM system is given as below. These activities for each role will be assigned to user(s), depending on their roles during the realization phase.

Role in Treasury Department Sample authorizations

Administrator All technical authorizations for maintaining the CFM system.

Trader Authorizations to carry out front office activity (entry/exit from deals etc)

Limit Manager Control of limits of exposure to business partners. This role is essentially a controller’s role.

Risk Controller The risk controller analyzes and calculates the company's risks and opportunities on the basis of market data, in order to develop risk-oriented strategies and assess the consequences of certain decisions.

Back Office Processor Access to back office activityFund Manager The fund manager plans and manages the

company's liquidity.

Staff Accountant Access to accounting functions in CFMTrade Controller The trade controller evaluates performance,

proposes strategies and monitors the effects of these strategies.

Treasury Manager The treasury manager checks that all theStrategies defined for the derivatives, market risk, limit management and cash management areas have been observed.

2. Trader authorizations: This activity will be carried out during the realization phase of the project.


4.2 Reports

All standard SAP reports will be provided under this implementation. System generated reports in CFM (Derivatives) will be provided as part of this implementation.


4.3 Data Migration

Sl. No.

Description of Data to be Uploaded/ Entered

Manual/ SAP program (if Program- Standard/ BDC/ LSMW)

Data Source

Pre-requisite data / process

Remark

1 Business Partner Master data

LSMW Current records in ABC

Sequential, ‘flat’ file needs to be supplied as per a specified format.

If the number of Business partners are not high, manual entry of master records can be an option

2 Open transactions – Derivatives

-do- -do- -do- -do-


Detailed to-be process list


Sl Sl Process Step Activity Explanation/Comments System Performed by

1 Derivatives (Currency Options)

1 Identify partners with whom ABC deals for derivatives

1 Identify business partners based on policy

ABC has a procedure for identifying business partners (Banks, other financial institutions) that it deals with. This is carried out as a business activity outside the system

Manual

2 Create Business Partner in the system

Once business partner has been decided, a business partner master record has to be created in the system

System Head office - treasury accountant

2 Entry into deals with business partner


Sl Sl Process Step Activity Explanation/Comments System Performed by1 Receive information about inward remittance projections

Information is available in the open item list by due date


2 Receive information on outward remittance projections

Information is available in the open item list by due date


3 Get option price from business partners for the tenure - different scenarios

This activity is done over phone - and inward correspondence containing different instruments and alternatives are received

Manual Head office - treasury manager

4 Compare prices for the same option between business partners and decide on optimum contract

The activity of comparing deals offered by different business partners is carried out manually

Manual Head office - treasury manager

5 Enter deal in the system


Sl Sl Process Step Activity Explanation/Comments System Performed byThe deal is saved in the system - it is not confirmed


6 Create internal correspondence that is sent to the related approving authority

Correspondence can be generated for the deal. This can go as a memo to the responsible authority for approval


7 Get approval for entering into the option from relevant approving authority

Signatures are required on the correspondence slip

Manual Head office - approving authority

8 Verify deal and confirm it in the system

Once the correspondence slip is back after signature, confirm/settle the deal in the system


9 Create a confirmation correspondence for the deal (send to business partner)

After confirmation, create a correspondence and send it to the business partner




3 Exercise / Expiration of contract

1 Get information on (t - 3) days about option expiry

This can be available from CFM reports


2 Check spot rate with partner bank (with whom the deal is entered) on (t-2) day

Carried out over phone Manual Head office - treasury manager

3 If option is bought for inwards: if spot > strike price, allow option to expire

Check the position of the deal to verify if it is in the money or out of the money.

System Head office – treasury accountant and Treasury Manager

4 If option is bought for inwards: if spot < strike price, exercise the option


System Head office – treasury accountant and Treasury


Sl Sl Process Step Activity Explanation/Comments System Performed byManager

5 If option is bought for outwards: if spot < strike price, allow option to expire


System Head office – treasury accountant. and Treasury Manager

6 If option is bought for outwards: if spot > strike price, exercise the option


System Head office – treasury accountant. and Treasury Manager

7 If option is expire, enter expiration in the system

Expiration details for the option entered in the system


8 If option is exercised, enter the exercise in the system

Exercise details for the option entered in the system


9 Issue funds transfer instruction from House Bank to


Sl Sl Process Step Activity Explanation/Comments System Performed bypartner bank

Create a funds transfer order on SBI debiting its account and crediting the partner bank

Manual Head office - treasury accountant

10 Pass accounting entries for funds transfer

Will happen during the transaction for funds transfer

Manual Head office - treasury accountant

11 Book forex gain/lossWill happen during the posting of flows

System No intervention required

4 Periodic activities for deal maintenance and monitoring

1 Post flows Already covered

2 Post realized gains/losses in forex transactions

Already covered

5 Periodic activities for legal reporting

1 Valuate the forex position for balance sheet (Key date valuation)

Done in the system by executing valuation reports



Sl Sl Process Step Activity Explanation/Comments System Performed by6 Reporting and MIS

activities1 Cash flows for FX options

System generated reports in CFM


2 Payment schedulesSystem generated reports in CFM


3 Maturities of optionsSystem generated reports in CFM


4 FX option Position listSystem generated reports in CFM


5 Revenue report from FX options



6 Posting journal for FX options


System Head office - treasury


Sl Sl Process Step Activity Explanation/Comments System Performed byaccountant

2 Periodic activities at HO

1 Valuation of investments for Balance sheet

Covered in earlier points

2 Half yearly reporting to board (calendar year)

Can use standard CFM reports. Specific reports in specific formats have to be developed

3 Communication with banks/business partners w.r.t discrepancies

Manual activity

4 Process Bank statement for interest accrual / flows (physical statement)

Bank statement can be entered in the system System Head office - treasury accountant

5 Entry of market data Foreign Exchange rates Data entry to be made in the system on a daily basis or through interface.


Swap rates Data entry to be made in the system on a daily basis or through interface.




3 Transaction Supplements

1 SAPscript outputs1 Investment note, Borrowing

note, Hedging Note based on the ABC format. This will be a part of the deal correspondence (internal).

Gap. Can be addressed by add-on ABAP development

2 All external correspondence should be printed on ABC letterhead (pre printed stationery)

Gap. Can be addressed by add-on ABAP development

4 Analytic tools Value at risk System generated report System Treasury Accountant

Mark to market analysis System generated report System Treasury Accountant

Sensitivity analysis System generated report System Treasury Accountant

Option price calculation System tool System Treasury Accountant


4.5 Glossary

1. Business Partner: A business partner is a person, group or an organization in which you have a business interest. Typical business partners include banks or central treasury departments.

2. Business Partner Roles: A marker used to assign functions to your business partner depending on the business relationship (for example, counterparty, issuer, borrower), and to control field selection for the partner data. A business partner may have more than one role.

3. Correspondence: A communication that can be printed automatically or manually. Correspondence includes:i. External correspondence (confirmation letter) ii. Internal correspondence (dealing slip) related to financial transactions.

4. House Bank: A business partner that represents a bank through which you can process your own internal transactions.

5. Key date valuation: Key date valuation is the valuation of transactions or positions for accounting purposes at the market value on a specific key date. Depending on which valuation principle is used, key date valuation includes creating or reversing provisions, posting write-ups and write-downs as well as posting unrealized gains and losses. In Customizing, you can set up the exchange rate types you want to use for valuation for each transaction type within a company code.

6. Master Agreement: This refers to the arrangements and conditions that are applied to individual transactions. Some of the criteria of a master agreement are:

i. Permitted company codes ii. Termiii. Permitted business partners iv. Permitted transaction types and the minimum and maximum transaction terms v. Permitted currencies, including minimum amounts, the tranche and the total transaction volume in the

respective currency.

7. Standing instructions: Standing instructions are general agreements made with a business partner for processing transactions of the same type. They include transaction authorizations, payment details for incoming and outgoing


payments and correspondence with a business partner. The standing instructions are proposed as default values when you enter transactions in the system.

8. Valuation Area: In the financial subledger you can set up different valuation areas in order to value your financial transactions according to different accounting regulations. Example: Valuation area 1 as per Indian rules, Valuation area 2 as per US GAAP.


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