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From Cash Forecasting to Financial Repopting


In recent years more and more focus has been put on automation and the creation of more efficient technological solutions. This includes the ability to control cash flows and liquidity to help predict risk and control costs, or more precisely to predict changes in values and exposures such as the classical Greeks, Durations, and other risk figures at a point in time, as well as also profit & loss, balances, values per asset class etc. This is especially important for forecasting of financial reports such as Balance Sheet Forecasting, General Ledger based reports, Incomes Statements and Roll-Forward.


SimCorp Review Cash Forecast financial reports balance sheet

For one instrument in particular, the Alternative Investments, the rapid growth over the past ten years has meant that many organizations struggle with cumbersome setups that have evolved over the years. In many organizations, manual processes have been built to cope because of the lack of proper systems to handle it, or simply due to the fact that many details are delivered via email as PDF attachments. For this reason, cash forecasting can often be very painful and hard to come by that it is only done once a year, maybe twice at best.


SimCorp’s new module for cash forecasting promises to reduce these pain points and make it accessible to everyone on a regular basis, even down to a daily basis. And this is not just for Alternative Investments but for all asset classes, as well as the liability side. The solution consists of two modules to help solve these challenges. One is an Investment Forecasting solution that covers cash flows for all instruments, and the second is an Alternative Cash Flow Forecasting module aimed to help the alternative portfolio management.

"We have seen many investment managers struggle to create accurate and timely financial forecasts because they lack easy access to the underlying data required to create effective cash forecasting on an aggregated level, across asset classes and for different market outlooks. Our solution goes across multiple business functions to solve this challenge.” Marc Schröter, CPO SimCorp.


In this piece we are going to take a closer look at the functionality of the module, future enhancements, and some of its benefits and challenges.


Forecasting in SimCorp

Forecast of Securities

If we start by looking at marketable securities, SimCorp Dimension will continue to forecast coupons, redemptions, maturities and so forth based on the static data. But that only works when data exists. Now, future cashflows can be entered on a security-based level in local currency (QC) for any future timeline in an External Cash Flow window. The instrument coverage includes cash accounts, alternative investments, equity/fund-like instruments and derivatives. This means cashflow types such as deposits, withdrawals, dividends, capital return and call, alternative investments cash and close are covered.


By using different labels when setting up the cash forecasts, a security can be setup with different forecast scenarios that reflects different market outlooks. This means different outcomes can be reflected 1) from expected dividends, 2) from risk of a credit event of your fixed income securities and, 3) from expected cash on the liability side. In other words, a range of events can be defined from high to low – either in terms of risk or in amount.


Forecast of Alternative Investments

Alternative investments are different from regular securities, so we will look at these separately. SimCorp has created a new module called Alternative Cash Flow Forecasting which, put very simply, generates forecast entries for the illiquid alternative assets (at a given level of confidence), that can be used as entries in the new External Cash Flow window (see above). Thomas Meyer, Director Alternative Investments in SimCorp explains the two plans that are available:

  1. The first plan produces annual cash flow forecast for key strategies like buyout, venture, real estate, infrastructure, commodities, and fund of funds. It allows assessing the impact of key diversification dimension such as vintages and management companies and provides expert research parameters that have proven robust under various economic scenarios.

  2. The second plan, built for fund investments, is more advanced and relies on historical market data and gives access to the most up-to-date and complete private market data to ensure that the parameters are aligned with recent market developments. It is also used for calibrating Monte Carlo simulation of stochastic cash flows scenarios and it combines various private market data providers to get the most complete overview of the private market. It includes a clustering partitioning algorithm to assess how diverse a portfolio is in terms of vintage years spread, strategies, management companies, geographies, and industries. And it includes a wide range of risk and return measures such as Capital-at-Risk, Cashflow-at-Risk, Sortino ratio, Invested Capital-at-Risk and Value-at-Risk. This model can also calculate Capital-Call-at-Risk and Cashflow-at-Risk for every time interval in the projection, to help dimensioning credit lines or resource that are unlikely to be called so they can be invested in high yielding assets giving an extra boost.

We should note that other external models for alternatives can of course be used and the results from these can be automatically imported into the SCD Cash Forecasting module so they can be used along other instrument types to create a complete cash forecast.


Other Forecasts

In addition to cash flows, a portfolio’s value can also be impacted by market prices, currency fluctuations of foreign investments, yield curve changes impacting floaters, volatility etc. Defining ‘shock’ values it is possible to create scenarios on these additional types of market events to reflect a bull or bear event, a devaluation of a currency and/or a yield increase by, for example, the FED.


From Passive to Active Bet

Combining the cashflow forecasts and the market events, SimCorp Dimension can now calculate the outlook of the portfolios on the different scenarios defined. This will produce a view of your future expected cash flows and market values in the form of a passive strategy. Having a passive strategy with cash flowing in and out but not being re-invested does not reflect a normal operation, especially if you have a lot of fixed income in your portfolio. So rather than keeping a passive view, SimCorp encourages clients to steer it by using rebalancing of the asset and cash holdings along the forecast horizon. Simulating buys and sells creates a more realistic view of your future positions, which creates a better reflection of reality.

SimCorp Cash Forecast Balance sheet strategy reinvestment

SimCorp offers a module that has been around for decades to create automatic rebalancing using pre-defined setups and criteria to determine which securities to sell and which ones to buy. This is based on asset allocation schemes and the algorithm will suggest buys and sells, but it is also possible to combine that with your own predicted or derived buys and sells, which will together or individually simulate buys and sells that rebalance your portfolios.


The configuration and calculation are handled from the Middle Office Calculation Manager. This is not a manager in the traditional SimCorp terms, as you cannot view results from this application. It is purely for setting up rules and details for the execution. The data can be viewed in a new window called Position Results, but if more advanced viewing is required, for example aggregation, you are referred to use APIs and view it in a BI tool.


Forecasting of Financial Reports

The projected assets, liabilities and equity in the future is a key part of a balance sheet forecast to approximate what you will owe, what you will own, as well as plan for future purchases and other important business decision.

Niels Jacobsen, Product Manager SimCorp explains: “To create a forecasted balance sheet or any other forecasted financial report, we have enhanced the SimCorp booking engine to support simulation of required finance transactions. In other words, finance transactions can now be created not only on actual transactions, but also on simulated ones as if they were real.” Furthermore, Niels tells us that no configuration is needed as the existing finance schemes can be reused.


That means with your current transactions, your simulated cash, buys and sells, and simulated liability you can create finance transactions based on your organizations existing chart of accounts to create financial report forecasts such as balance sheet forecasts out of SimCorp Dimension. SimCorp has also added a so-called Taxonomy, which describes the structure of your financial report. Combining this taxonomy with the simulated finance transactions results in the actual financial report. Again, the final output (taxonomy + data) is generated in SimCorp BI and can be exported from there.


Benefits

Investment forecasting will continue to be complex in terms of input data. This includes defining market scenarios, defining the liability side, forecasting dividends, and selecting a rebalancing / investment strategy. These are input data firms need to source or create themselves. This new module promises to make it less complex by capturing most data from SimCorp Dimension and gathering it all in one place where it is calculated to produce results at future points in time consistent with how results for the past and current days are calculated. And this is done in an application which does not influence anything else – for example a dividend simulation does not influence actual transactions or pricing.


The solution is smart enough to go back and adjust the cash forecasts to take into consideration any positions that have been increased or decreased and adjust the cash flows to the new amounts when a portfolio is rebalanced.


Forecasting is particularly interesting and important for the Finance department in creating forecasted financial reports. A task that is tedious for accounting departments in many firms is the financial results guidelines with the goal to adjust strategies if off target. This is of special importance in the insurance sector where expected returns from assets need to outperform expected claims. The calculation includes projections of end-of-period adjustments to improve forecasting of book value, cost value, as well as income statement amounts in the evaluation of the positions.


As mentioned earlier, a big benefit is in the alternative investment space. But it goes beyond this to include exchange-traded securities as well. The solution allows you to import cash forecasts from third parties, giving you extra flexibility over the already existing forecasting solutions found in SimCorp Dimension. Or, to put it differently, you get a more comprehensive forecasting tool that covers most asset classes.


We should clarify that it is possible to predict the next dividend in SimCorp based on the most recent past dividend record on the static data, at the same constant value and period interval. With this new External Cash Flow window, you can have multiple outlooks that better fit current market expectations. Another advantage is on the liability side; here you don’t have to set these up as fictitious instruments but can capture them directly in this new window.

Cash forecast 2 scenarios

The tool allows firms to be better prepared for large market events and long-term outlooks. It allows firms to run ‘what-if’ scenarios on market data and positions on multiple different scenarios for most asset classes. This can be done in different frequencies such as quarterly or yearly, and for years into the future. And different investment rules can be taken into account that support both passive and active reinvestment strategies. It is also a great way to test out new strategies, analyze cost-benefit and see how robust they perform under different market conditions. Such testing would be very complex in the spreadsheet world, where most of this work is done today.


Future impacts of fiscal decisions under different strategies can be evaluated much faster than before without the use of Excel. The fact that financial postings can be automatically simulated on forecasted scenarios will, for many organizations, give a big reduction in time and cost as well as using the same chart of accounts for a consistent past, present and future reporting on accounting figures.


On the regulatory side some already require this, such as ORSA (Own Risk and Solvency Assessment) by EIOPA, NAIC for insurance in the US, as well as under Solvency II to help with better management of expensive capital requirements for SCR Market Risk figures and to address transparency regarding expected management and performance fee in MiFiD2, as well as potentially in PRIIPS (risk return profile of managed portfolios).


For management and other stakeholders such as investors, clients, and board of directors, this can help in making an informed decision as to whether a proposed strategy change will likely perform as expected under different long-term scenarios.

Else Braathen, Product Manager SimCorp sums it up: "The investment forecasting solution in SimCorp Dimension is an advanced scenario analysis. Many financial institutions settle with the usual stress tests and cash flow forecasts as it is too cumbersome to bring it all together AND calculate the accounting figures in the forecasted scenarios. However, because SCD has all the ingredients from accounting, simulations and risk scenario techniques, then you are able to make advanced scenarios where the market changes gradually over time influencing market data dependent cash flows and make rule-based rebalancing of the assets etc. And what is unique, is that predicted accounting figures are calculated consistently with accounting figures for past periods".


Challenges and Future Developments

A good part of the foundation has been established with the most recent release, but as with any new software development, there are several items on the bucket list to be completed. In this chapter we will discuss some of the challenges and areas SimCorp is looking to potentially expand the coverage.


We mentioned input data as a benefit in the previous chapter, but at the same time it is worth pointing out that one major challenge will, in fact, be getting this input data to make the calculation run. Sure, it is easy to import it and the table structure is easy to handle, but how do you get the data and how do you agree what is the right data? Some organizations will already have processes and data venders in place, others might not; regardless, it might be worth reviewing the quality of the data as part of this endeavor.


The instrument coverage is another area where there are some limitations. Although coverage is broad and better than what most organizations can do today, it is nevertheless an area that needs to be improved upon. Especially for those instruments where you cannot simply enter a forecast value but rely on the limitations of the static data definition. Especially on ABSs, creating cash forecasts is limited or, at times, inadequate. This limitation is not only on the forecast side, but also in the rebalancing rules and in which ones you can simulate on cash, equity, and some simple bonds buys and sells.


The Alternative Cash Flow Forecasting module is a good option to create cash flows for this illiquid instrument. The more advanced option comes at an additional cost and requires third party data vendors. Further enhancements are planned to capture great details of real estate assets held by funds as well as better support of administration of such assets.


Using backtesting to see how well the forecasting and rebalancing strategy and model would have done ex-post is something SimCorp would like to add. This would allow users to assess the viability of the strategy selected by discovering how it would play out using historical data as well as aide in increasing confidence to employ it going forward.


The simulated transactions created from the rebalancing can currently not be checked via the limits setup in the compliance manager. This includes both input (rebalancing rules) as well as output result limits.


On the liability side, SCD is not able to capture all data for insurance companies. An interim solution exists which includes importing the data as external values, relying on this to be readily available.


We briefly alluded to the challenge viewing the data. In its current form it provides a general view, but the User Experience it is something SimCorp would like to improve, as well as provide more transparency to the underlying calculations. This includes aggregation of data where SimCorp in the performance area has built a cloud-based aggregation engine currently in pilot at a number of clients; we expect that cash forecasting and functionality from the Middle Office Calculation Manager will be made available more generally throughout SimCorp Dimension, including in this new tool.


Working with the new APIs to fetch, aggregate and report data via a BI tool is something that will be new to most SimCorp clients. It clearly reduces time to market, focusing on developing functionality and letting first movers deal with downstream data flow. But at the same time finding resources who both understand the APIs, SimCorp Data and business data will be a challenge. It is a compromise that early adaptors will have to take, but in the end it is the functionality that adds value, not another GUI.


The Power of Cash

There is no doubt these enhancements will add great value to SimCorps clients, given them better control of their financial reporting needs at a faster pace and at a reduced cost. Getting forecasting right has many advantages and has the opportunity to solve a heavy manual and labor-intensive tasks for investment firms, while being beneficial to the Finance department.


The functionality is currently being implemented and tested at a number of select pilot clients, so you can expect this to be available and ready for a broader client base next year 2023.


If you are considering these new features, have questions or would like to discuss this topic with us directly then please get in touch with us at Dimensional Community. If you would like to speak to Ebbe Kjaersbo about this topic, please click here to setup a call.

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