Example reference data screens, trade screens, and reports are attached:

• Portfolio Swap Example - Single TRS.xlsx (this simplified example was created by Instrument Engineering to focus on lifecycle processing without introducing too many additional complications)

Entity Setup

Two entities must be set up to book Portfolio Swaps.

• Long or Short Portfolio: holds the underlying long or short positions whose returns derive the return of the swap (all trades for positions held at the broker will be mirrored in this portfolio)
• Swap Portfolio: contains all activity related to the Portfolio Swap contract itself, including return and finance payments, corporate actions, and rebalancing (changes in notional) due to trading in the underlying portfolio

Before any trades can be booked, the Swap Portfolio must be set up appropriately.

The Long or Short Portfolio(s) for managing the underlying positions should have the following settings.

• Cost Method (22): consistent with broker
• Lot Selection Method (27): consistent with broker
• Contractual Cash Settlement Rule (11833): DEFAULTTRDONLY or a similar custom rule
  • This settles trades when running contract cash, but does not settle income
• Delta Process Flag (4758): Yes
• Create Performance Cash Flows in PACE (5398): No (reflexive flows will not be generated because performance is tracked on the Portfolio Swap contract)
• Store Cash Positions in PACE (5563): No (cash positions will not be loaded to Data Management because cash activity is tracked on the Portfolio Swap contract)
• Process Center (4896): a distinct Process Center should be set up and used for the underlying entity in order to schedule the STAR to PACE (S2P) Direct Batch, S2P Direct Delta, and Contract Cash events with the appropriate settings

Reference Data

Storage & Configuration

Eagle has modeled Portfolio Swaps (using TRS functionality) as three rows in Data Management, each with its own Security Alias (10), linked by a common Primary Asset ID. Eagle Accounting must be set up to allow duplicate IDs by following the steps here: Allow Duplicate Cross Reference Identifiers Processing Notes.

Market Data

Return leg payments are derived from the underlying portfolio of securities. The prices that are calculated from this portfolio must be entered directly on the TRS’s return leg; this is discussed in detail in the Valuation section.

The finance leg of a Portfolio Swap generally floats against an underlying interest rate index. The index must be set up as an Index security using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). Other than identifiers, the only information that must be entered to create an Index security is the currency. Refer to Instrument Engineering’s Total Return Swaps (TRS) Best Practices best practices for more information on configuring floating rates.

Portfolio swaps often pay different financing rates on different securities held in the basket. In these cases, a blended floating rate will have to be calculated and populated on the Index.

• The blended floating rate should be a weighted average of the financing rates on each security based on the proportion of notional they contribute to the portfolio

Security Data

Portfolio Swaps (modeled as TRSs) can be set up and maintained in Issue Viewer, SRM, or RDC. Most data is entered on the contract and propagated to the legs. The details listed below are particular to Portfolio Swaps; refer to the attached TRS best practice for information about other fields.

Contract

• Notional Reset Type (4409): select Recalc Notional for resetting notional Portfolio Swaps; this causes the notional value to be recalculated as part of the reset process
  • Select Constant Notional for Portfolio Swaps where the notional value does not change as part of the reset process
• Generate Swap Reset Schedule (2299, V17)
  • Yes: Swap Reset Schedule is generated automatically for both legs when security is added or changed via Issue Viewer or SRM; this is the default for new securities
  • No: Swap Reset Schedule is not generated automatically when security is added or changed; this is the default when changing securities
  • Note: if set to Yes when changing a security, new Swap Reset Schedules will be generated for both legs and will overwrite any existing schedules

Return Leg

• Processing Security Type (3931) = SWLXEQ (Swap Leg Total Rate Return on Equity)
• Price Multiplier (18) = 1.00
• Reset Calc Price (3314) = Reset Day
• Look Thru Value (1808): Entity ID of the Long or Short Portfolio; no Accounting impact, used for downstream exposure analysis and reporting
• Look Thru Ind (1776) = P (Portfolio)
• Payment Frequency (472): select appropriate frequency, typically monthly for Portfolio Swaps
• Business Day Convention (1536): as specified in contract; None may be the appropriate election
  • Coupon Day of Month (10551): only required if Business Day Convention != NONE
• Business Calendar (1480): must be entered to ensure that resets are only processed on valid business days when prices are available (leaving this null will throw an engine error)
• Underlying Security (1347): for reporting purposes only as Accounting will not automatically retrieve the underlying’s prices for use in trade processing and valuation (the return leg must be priced directly)
  • An Index security can be set up (with the same identifiers as the Long or Short Portfolio) and linked to the return leg to represent the underlying portfolio, but using Look Thru Value and Look Thru Ind is recommended for more robust reporting

Finance Leg

• Processing Security Type (3931) = SWLEAC (Swap Leg Interest Accrual)
• Coupon (70): enter 0.00 for floating (or variable) rate finance leg to indicate that actual rates must be viewed from the variable_rate table
• Coupon Type (97): typically X (Floating Rate)
• Day Count Basis (471): as specified in contract
• Payment Frequency: as specified in contract
• Floating Rate Fields
  • First Rate Reset Date (10911): enter First Payment/Valuation Date
  • Reset Frequency (1788): same as payment frequency
  • Reset Look Back Days (10547): typically 0.00 for Portfolio Swaps
  • Fixing Date Business Center (16407, V2015 R2.18): select calendar used for floating rate resets, which may be different than the calendar used for payment dates; this calendar will be used in lieu of the main Business Calendar when applying Reset Look Back Days for fixing dates
  • Underlying Security (1347): enter an identifier to select the appropriate floating rate index

TRS Reset Schedules

Option 1: Automated Scheduling

Once a Portfolio Swap’s reference data has been set up the reset schedule will be calculated “on the fly.” In order to view the schedule for accuracy, it will first need to be generated and stored in Data Management. This is done using Generate Swap Reset Schedule. Once the schedule is created, it can be viewed using List Schedule.

• If any of the reset dates are incorrect due to holidays, odd payment periods, or other factors, future reset dates can be updated by changing the schedule
• Periods can be added, changed, or deleted using the Schedule screens

Option 2: Manual Scheduling

If readily available, it may be easier to load a full schedule for the swap manually or via messages. Schedule should be structured as follows.

• Schedule Type (1250) = CPNRESET (Coupon/Reset)
• Effective Date (1109, both legs): first day in the calculation period; this is Dated Date for the first period and prior reset date in all subsequent periods
• End Date (73, both legs): last day in the calculation period and date when return is locked in
• Fixing Date (16410, Finance Leg, V17): date from which floating rate was pulled for accruals through End Date
• Valuation Date (16409, Return Leg, V17): date from which TRS price was pulled for reset
• Reset Date (16408, both legs, V17)
  • Return Leg: date return is locked in, new price is applied, and notional changes (if applicable); this will match End Date
  • Finance Leg: first day of accruals and date when floating rate was applied for accruals through End Date; this will match Effective Date
• Cash Payment Date (16411, both legs, V17): date when cash settles

A schedule must be set up for each swap leg (not the contract), except when using Unscheduled Variable Rate on the finance leg. Using this method the variable rate table contains the interest rate, effective date, and cash payment option, which are used in lieu of the schedule to specify the exact terms of the coupon.

Forced Resets

Many Portfolio Swaps include terms that call for ad hoc (forced) resets when one party's exposure exceeds a predefined threshold. In these cases the schedule for both the finance and return legs will need to be edited to add this new reset date. Follow the steps below to edit the current period and add a new period. Assume an example where resets occur on the last day of each month (ignoring weekends/holidays) - 1/31/16, 2/29/16, 3/31/16, etc. - and a forced reset is required on 3/13/16.

1. The full schedule must be generated prior to adding a new period
2. Open the Change Schedule screen
   1. Query for one leg of the Portfolio Swap
   2. Select the row with the closest following End Date and click Change Schedule Record(s)
      1. Example: row with Effective Date = 2/29/16 and End Date = 3/31/16
   3. Set End Date = forced reset date and click Submit
      1. Example: End Date = 3/13/16
3. Open the Add Schedule screen
   1. Query for the same leg as above
   2. Set Effective Date = forced reset date and End Date = next scheduled reset date (the original End Date from the row edited above) and click Submit
      1. Example: Effective Date = 3/13/16 and End Date = 3/31/16
4. Repeat steps 1 & 2 for the other leg with the same date information

After following these steps the reset process can be triggered for forced reset date (example: 3/13/16). If accruals have already been processed for forced reset date - 1, they will have to be rerun (example: 3/12/16) with Allow Earnings Rollback = Yes to drop the coupon.

Trade Processing

There are several types of trading that occur when processing Portfolio Swaps, each described below. All transactions should be processed using the Book Trade module or Message Center.

Underlying Portfolio

Each Portfolio Swap comprises an initial batch of securities at given prices. These positions should be established in the Long or Short Portfolio as of Trade Date of the Portfolio Swap. Subsequent trading (rebalancing) occurs in the underlying portfolio at the direction of portfolio managers. These trades should be entered into the Long or Short Portfolios in Eagle. This activity must also be factored into the Portfolio Swap contract, which is detailed in the Swap Contract Maintenance section.

Swap Contract Initiation

Book an open trade against the Portfolio Swap contract and enter information as follows.

Contract

• Traded Interest Date (2857): date to which traded interest is calculated; typically Trade Date or TD + 1
• Swap Fee Local (7510): typically 0.00; this represents the actual cash amount, if any, paid or received to enter the contract
• Broker (88): executing broker
• Counterparty (1144, optional): the counterparty can be selected from a list of all Issuers that have been tagged as counterparties (see Setting Up Legal Entities Best Practices for more information)

Return Leg

• Shares (40): enter total shares held across all positions in the underlying portfolio (do not enter Shares on the contract, as it will be automatically populated from the return leg)
  • Constant Notional: Notional (7782) is entered directly (instead of being calculated)
• Price (45): enter a price equal to total cost divided by total shares held across all positions in the underlying portfolio (Blended Unit Cost for the purposes of this document)
• Commission (47) & Other Fee (3752): typically zero for Portfolio Swaps; these will be factored into the notional value calculation on the finance leg, but not exchanged in cash

Finance Leg

• Finance leg notional will be equal to the total cost across all positions in the underlying portfolio (total shares * Blended Unit Cost)
  • Constant Notional: the finance leg notional value (displayed in the Shares field) will be taken directly from the Notional entered on the return leg, which should equal the total cost of the underlying portfolio
• Select Value to be Calculated by STAR (7000) = Calculate None

Swap Contract Rebalancing

The Portfolio Swap contract must be updated to reflect trading that occurred in the underlying portfolio. This is done by fully closing out the existing swap position at a price that generates the correct net realized gain/loss across all trading activity in the underlying portfolio, followed by reopening the position at the new total shares and Blended Unit Cost. This must be done regardless of whether the net result is an increase or decrease in notional.

• Example: 10,000 shares @ $55 Blended Unit Cost = $550,000 notional; 6,000 shares of Stock A sold for gain of $20,000 and 2,000 shares of Stock B are purchased at $20
  • Step 1: close 10,000 shares @ $57   >>   10,000 * ($57 - $55) = $20,000 realized gain
  • Step 2: open 6,000 shares @ $43.333333 = ((4,000 * $55) + (2,000 * $20)) / 6,000

Cancel & Rebook

Faulty TRS transactions can be cancelled manually using Batch Cancel Trades or via Message Center by sending through a single cancel row (this will get routed to the Batch Cancel Trades process). The transaction will then have to be rebooked using the Book Trade module. TRSs are not supported in the Cancel and Rebook Trade module.

Accounting

Valuation

Portfolio Swap valuation is based on pricing the return leg. Daily pricing is derived from the total market value of the underlying portfolio divided by its total shares held (Blended Unit Price for the purposes of this document.

• Blended Unit Price = Total Market Value of Underlying Portfolio / Total Shares Held in Underlying Portfolio
• Return Leg Market Value = Shares * (Blended Unit Price - Blended Unit Cost)

This will produce a daily market value on the Portfolio Swap contract equal to the unrealized gain/loss of the underlying portfolio.

Reset Processing

There is some additional processing required for Portfolio Swaps beyond the core TRS workflow. This applies to both the Portfolio Swap contract and the underlying portfolio.

Underlying Portfolio

On reset date the Blended Unit Price will be used to reset the Portfolio Swap contract. After this price has been calculated and loaded to the Portfolio Swap contract, the underlying portfolio's cost must be reset to equal its market value from reset day. This keeps gain/loss in sync between the underlying portfolio and swap contract.

• This is accomplished by fully closing and then reopening each position in the underlying portfolio at the price from reset date

Swap Contract

On reset date the Portfolio Swap will get picked up in the global TRS reset process using the Blended Unit Price. Since this price was derived from the true market value of the underlying portfolio, the reset process will create the correct gain/loss and associated cash receipt or disbursement. The Blended Unit Price from reset date becomes the Blended Unit Cost for the following period.

After reset the finance leg's notional value and return leg's cost will match the underlying portfolio's updated cost. There is no change for processing rebalances (changes in notional) after a reset. The full swap position will be closed out at a price that generates the correct net realized gain/loss for any trading activity in the underlying portfolio, followed by reopening the position at the new total shares and Blended Unit Cost.

Corporate Action Processing

The most common corporate action that applies to a Portfolio Swap is a cash dividend. A corporate action announcement can be set up using the Cash Dividend screen and assigned to the return leg of the Portfolio Swap.

• Pay Date: set to payment date of the cash dividend if there is a cash impact to the Portfolio Swap on that day, or next reset date if cash dividends settle with reset payments

Stock splits and stock dividends should be treated as rebalances, with the full position closed down and then reopened at the updated total shares and resulting Blended Unit Cost.

Reporting

STAR to PACE (S2P)

Almost all reports in Eagle Accounting leverage data from Data Management, which is populated by the S2P process. This will be scheduled as part of the daily workflow, but can also be triggered manually as described in the Accounting section.

The S2P process creates three rows for each Portfolio Swap in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column for each row captures a portion of the total market value.

• Contract: always zero
• Return Leg: market value due to unrealized gains/losses on positions in the underlying portfolio
• Finance Leg: market value due to period-to-date accrual payable/receivable

Accounting Reports

Eagle has a core set of accounting reports that can be used to review Portfolio Swap information. These are designed to support the daily operational workflow for business users, allowing Grid Reports to be easily exported to Excel and customized to provide additional details as needed. Advanced Reports are intended to be client-facing and do not provide the same level of customization.

Portfolio Swaps are displayed as three separate rows. The contract and legs are intended to be displayed together, but may be broken into different areas depending on the report's groupings (long/short, for example).

Insurance Reporting

Data Management Reporting

Look-Through

Look Thru Value (1808) must be populated on the security with the underlying Long or Short Portfolio's Entity ID, and Look Thru Ind (1776) populated with P (Portfolio), to leverage Eagle's look-through capabilities. OLAP reports must also be built with look-through field attributes. These field attributes can leverage the relationship on the security to look through to a position's underlyings, flatten out the holdings, and apply the appropriate weights. The look-through is also recursive, going through as many levels of underlyings as have been defined. Please contact Instrument Engineering for more information.

Performance

The performance toolkit calculates market value-based performance for Portfolio Swaps at the return leg (price changes) and finance leg (accruals paid/received) levels using data supplied by the S2P process. However, this can be misleading because swaps use notional values and typically start with a market value of zero. Exposure-based analyses, which can be implemented using Eagle Enrichment, calculate more accurate returns.

Exposure

Exposure reporting and analysis are available in the product suite, but some accounting data must be augmented via Eagle Enrichment. Currently there are no default rules to calculate exposure for Portfolio Swaps, so Eagle is looking for clients to help define how these rules should be configured to provide the required exposure values. Please contact Instrument Engineering for more information. Additional details are available in our Exposure Reporting Best Practices and the Eagle Enrichment User Guide 2015.

Automation

Portfolio Swap prices must be loaded to the Return Leg only. Make sure you set tag 4590 = P or R in your price message depending on whether it is paying or receiving the return.

Other Notes

Variable Rate: if using a Coupon Type of I (Variable Rate), populate the "all-in" rate (blended floating rate +/- index offset) directly in the variable rate table for the finance leg. This defines the interest rate used for the calculation period, the coupon period end date, and ensures that rate from the correct fixing date is used.