In addition to daily VM processing, Cleared Swaps can also be configured to record the upfront fees as cost (V17 R2.3). This allows for the same type of amortization processing that is available for bilateral swaps.

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

• View file
  name Cleared Swap Examples.xlsx

Entity Setup

Before any trades can be booked, the target entity must be set up appropriately. Refer to Swaps Entity Setup Processing Notes for details.

• Primary Amortization/Accretion Rule (3197) must be defined for all entities trading Cleared Swaps, regardless of whether they are traded with or without cost

Some clients have a requirement to process the same Cleared Swap with VM in certain funds and without VM in others. This can be accomplished by using a Variation Margin Override Rule. Refer to Override a Security's Variation Margin Setting for an Entity for details.

Cleared Swaps Amortization (V17 R2.3)

If an entity will be trading Cleared Swaps with cost that can be amortized, three additional fields are required.

• Bifurcation Method (5825) = All

  • This tells Accounting to bifurcate the gain/loss between capital and currency gain/loss ledger accounts, regardless of the security type

• Derivatives Cost Rule (7104): select the rule that was set up to process Cleared Swaps amortization

  • If a rule does not yet exist, start by adding one using Create Accounting Rules

    • Set Rule Type (1882) = Derivative Cost Rule

  • Open Create Derivative Cost Rule

    • Select the Processing Security Type (3931) to be amortized

      • Only one Processing Security Type is allowed per record, but additional rows can be added by clicking Add Row in the navigation ribbon

    • Set Rule Begin Date (71) to any date that is less than or equal to initial open trade date of the position(s) to be amortized

    • End Date (73) should only be populated if there is a requirement to stop Cleared Swap amortization on a particular; otherwise, leave it blank and the rule will remain valid indefinitely

    • Contra Fx Gain/Loss Indicator defines if currency gain/loss is posted Daily, or only At Disposition

• Margin Price Source (18041): this price source is used for VM processing and can be different than the price sources used for URGL

  • If an entity has multiple bases, this must be the same across all bases; when adding a secondary basis it will default to the same value as the primary basis

Reference Data

Storage & Configuration

Eagle distinguishes between bilateral and cleared swaps using a single field on the security master file (SMF): Cleared Security (5027). Other details should be entered identically to a bilateral contract. Refer to Credit Default Swaps (CDS) Best Practices, Credit Default Index Swaps (CDX) Best Practices, andInterest Rate Swaps (IRS) Best Practices for more information on general reference data setup.

Market Data

Cleared swap prices are available from the CCP and should be entered directly into Eagle. The Price Multiplier (18) will always be 0.01 for CDXs, but may have to be adjusted for CDSs and IRSs depending on how the prices are received. They may already be multiplied by 0.01, in which case a Price Multiplier of 1.00 would be used in Eagle.

Legal Entity Identifier (LEI)

Eagle has functionality to tag issuers, counterparties, brokers, exchanges, and depositories with their LEIs. Executing brokers, clearinghouses, DCMs, and SEFs have all been given LEIs to help track the identities of all parties to cleared swap transactions. The process for adding LEI information is slightly different for counterparties (maintained as issuers) than brokers and exchanges (maintained as code values). Refer to Setting Up Legal Entities Best Practices for more information.

Security Data

Cleared swaps can be set up and maintained using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). The list below contains fields that are specific to cleared swaps. There are no security-level requirements to process amortization (V17 R2.3).

• Unique Product Identifier (1955) & Unique Swap Identifier (1958): available to support Dodd-Frank mandate

• Primary Exchange (85): populate with the clearinghouse (CME, ICE, etc.), which can be linked to its LEI

• Cleared Security = Yes

  • This will automatically trigger the Variation Margin field to be shown and set to Yes, allowing for the calculation of daily VM

Trade Processing

Open

Trades are entered using the Book Trade module once the entity and reference data have been configured. Enter the appropriate entity, security identifier, and trade/settle dates and click Submit to query for the security. For a CDS or IRS, right-click it and select Open > Open Swap Contract. For a CDX, right-click it and select Open > Long Index (Sell Protection) or Short Index (Buy Protection). The list below contains fields that are specific to booking cleared swap trades.

All Cleared swaps

Opening a cleared swap position does not produce any cash movement. On trade date, VM will be calculated based on the change from trade price to end-of-day price plus any commissions and fees.

• Traded Interest/Effective Date (2857): date accruals begin in Accounting, and the date to which traded interest is calculated; typically Trade Date or T+1

  • Cleared swaps sometimes have Trade Date = Settlement Date, where Traded Interest/Effective Date needs to be T+1 to calculate correct traded interest and accruals

• Select Values to be Calculated by STAR (7000): must be populated, but does not have an accounting impact for Cleared swaps because swap fee accruals settle each day as part of the VM movement

  • Some trade tickets include traded interest, even though it is not exchanged in cash, so selecting Traded Interest can be used to validate it

• Comm Amt L (47): enter transaction commission

• Other Fee Local (3752): enter clearing fee

  • The prior two fields will be factored into the VM calculated on trade date

  • The entity-level Futures & Options with Margin Transaction Fees (3889) field defines whether the sum of these fields hits Transaction Fees (5004000800) or is netted into Unrealized Variation Margin (3003000500) on the ledger

• Broker (88): populate with the executing broker of the Cleared swap transaction

• Clearing Broker: populated with the clearinghouse (CME, ICE, etc.) through which VM will be exchanged

  • This will allow the VM process to be run for individual clearinghouses, if needed

  • Clearing Brokers are maintained as Code Values; to add a new one, use Add Code Value and enter a Code Category Name of Clearing Broker

• Counterparty information can be stored in the Counterparty (1144) field

  • The dynamic list returns all Issuers that have their Counterparty flags set to Yes

  • When the transaction initiates from a Designated Contract Market (DCM) or Swap Execution Facility (SEF), the DCM or SEF should be entered in the counterparty fields

Cleared CDS

• Sell Protection or Buy Protection: defined at the security level by selecting Sell or Buy, with the contract always held as a long position in Eagle

• Cleared CDS trades generally settle T+1

• Notional Principal Value (40): notional value of the trade

• Price (45): par-zero price

Cleared CDX

• Sell Protection or Buy Protection: defined by going long or short

  • Long Index (Sell Protection): creates a long position; this indicates that credit events are not expected to occur, so protection is sold to collect the quarterly premium payments

  • Short Index (Buy Protection): creates a short position; this indicates that credit events are expected to occur, so protection is bought to collect the payments from these credit events

• Cleared CDX trades generally settle T+1

• Original Face (41): full notional value of the trade, without the effect of any credit events and factors

• Factor (91): current factor on the index, between 0.0001 and 1.00

• Notional Principal Value (40): calculated automatically as Original Face * Factor

• Price (45): par-based price

Cleared IRS

• Long/Short Indicator (2284)

  • Long: the contract and receive legs will be held as long positions, with the pay leg held short; use this for "buy receiver" swaps

  • Short: the contract and receive legs will be held as short positions, with the pay leg held long; use this for "sell receiver" swaps

• Cleared IRS trades generally settle T+1

• Notional Principal Value (40): notional value of the trade

• Price (45): par-zero price

Initial Margin

Eagle does not calculate initial margin due to the large variance in requirements and calculation formulae between different brokers. Initial margin is typically calculated by another system and maintained in Eagle using Miscellaneous Income or Expense transactions against specific entities and securities.

Close

The Book Trade module should also be used to process both full and partial terminations. Enter the same identifiers as the open to query for the security. For a CDS or IRS, right-click it and select Close > Close Swap Contract. For a CDX, right-click it and select Close > Long Index (Sell Protection) or Short Index (Buy Protection) depending on whether the existing position was selling or buying protection.

All Cleared swaps

Like the open, closing a cleared swap position does produce any cash movement. Instead, the final swap fee accruals and VM will be calculated as part of the earnings process. VM is calculated as the difference between the prior end-of-day price and the close trade price plus any commissions and fees. These final accruals and VM create cash records that will be settled on settlement date (T+1).

Cleared CDS

All CDSs positions are held long, which will be defaulted on the close.

Cleared CDX

The type of close must correspond to how the position was opened (buy protection or sell protection).

• If the position is long (sell protection), select Close > Long Index (Sell Protection)

• If the position is short (buy protection), select Close > Short Index (Buy Protection)

Cleared IRS

Long/Short Indicator: long or short; must match the value from the open.

Conversion

The CONVERSION event is not supported for Cleared Swaps. Instead, follow the steps below.

1. Enter a regular open for the original trade and settlement dates

2. Load a price for the business day prior to conversion date

3. Run VM calculation and approval to true up margin

4. Adjust the fund's cash as needed

5. Trigger VM on conversion date to calculate the expected day-over-day amount

Cancel & Rebook

Faulty CDS and CDX transactions can be cancelled and rebooked using the Cancel & Rebook Trade module; however, it will not replay the full lifecycle. The subsequent daily cash settlement, swap fee accruals, VM calculation, and VM approval events must be entered manually. Alternatively, these trades can be cancelled using Cancel Trade, with the transactions rebooked using the Book Trade module.

Faulty IRS transactions are not eligible for Cancel & Rebook Trade; they must be cancelled using Batch Cancel Trades and rebooked using Book Trade.

Accounting

Once a cleared swap position has been established it will be picked up in Eagle’s global workflow.  The variation margin functionality developed for Future Contracts has been expanded, and its application to Cleared Swaps is explained below. Daily swap fee accruals, periodic resets, and daily VM are generated as part of the earnings process, Accounting valuation is calculated when posting unrealized gain/loss, and DM valuation is calculated in STAR to PACE.

• These can be triggered manually via Global Process Center

  • Cash Settlement: Settlements > Contract Cash

    • The Multiple Settlements Panel can also be used

  • Swap Fee Accruals: Earnings > Accrue

  • VM Calculation: Earnings > Variation Margin

  • VM Approval: Earnings > Approve Margin

  • Accounting Valuation: Unrealized Gain Loss Entries > Post Daily Fund Unrealized Gain Loss-Position

  • DM Valuation: Eagle STAR to Eagle PACE Direct Processing > Transfer Data - Batch

Cash Settlement

This can be done at the end of prior day or beginning of current day.

• Settles the payable and/or receivable cash records that were created for the prior day’s margin amount +/- swap fee accruals

Swap Fee Accruals

• Swap fee accruals are calculated based on the interest rate supplied on the SMF, and are exchanged daily as part of the VM process

  • Because they are exchanged daily, only delta accruals are calculated; the period-to-date accrual will always be zero

• When running accruals manually it is recommended to select One Entity/One Security or One Entity/All Securities

Price Alignment Interest (PAI)

In addition to daily swap accrual fees, PAI will need to be posted for certain types of swaps. To post PAI on a daily basis, it will need to be calculated offline and manually assigned to the security using Post Miscellaneous Income or Expense, Asset Specific. If appropriate Rec/Pay Events have not been setup, new ones can be created via Define a Rec/Pay Event. Separate events will need to be created for PAI payable and PAI receivable.

• Rec/Pay Events define the category (Income, Fees & Expenses, etc.) and specific ledger accounts where Miscellaneous Income or Expense transactions will be posted

• The interest rates for PAI are based on the Fed Funds Effective Rate (annualized) for USD balances and EONIA (Euro Overnight Index Average) for EUR balances; other currencies will need to be assessed on a case-by-case basis

VM Calculation

• VM is calculated at the contract level based on the day-over-day price change of the swap

VM Approval

• Upon approval, separate payable and/or receivable cash records will be created for the margin amount and swap fee accrual(s)

• Margin and swap fee accruals are moved into Market Value Income

  • PAI adjustments will also appear in Market Value Income

• By default, VM will settle the following business day if a Business Calendar is selected on the entity. If no calendar is selected, VM settlement date will be equal to VM approval date

If you do not want to impact cash on the current day, you can delay cash settlement when approving margin. On the approval event, setting Advance Variation Margin Settlement Date to Yes (or leaving it NULL) will result in the cash being settled on margin date + 1 business day. Selecting No will cause the cash to settle on margin date when Contract Cash is run.

• When margin settlement is delayed by a day, running Contract Cash on T+1 settles the cash records that were created on T

• If users elect to delay cash settlement of the margin by one day, the same approach should be followed for the related PAI Miscellaneous Expense/Income posting

  • This is the approach that Eagle has seen in analyzing many live cleared swap examples

Valuation

Cleared Swaps will always have a market value of zero in Eagle due to the daily settlement of VM. Once VM has been approved, the VM amount (equal to the day’s URGL) will appear in Market Value Income.

The Accounting formula for calculating VM is:

• Variation Margin = Current Day Notional Market Value - Notional Cost

  • Notional Market Value = Notional Value * Price * Price Multiplier * Quantity Scale

    • Accounting will correctly interpret par-based prices for CDXs and par-zero prices for CDSs and IRSs

  • Current Day Notional Market Value becomes the Notional Cost used for the next day’s VM calculation

• For foreign Cleared Swaps, base VM delta values are calculated by comparing the day-over-day change in life-to-date (LTD) values

  • VM LTD local is converted to base each day using the prevailing FX rate

  • Each day's VM delta base = current day VM LTD base - prior day VM LT base

  • Converting each day's VM delta local to base produces different results

Cleared Swaps Amortization (V17 R2.3)

When a Cleared Swap is booked to an entity with a Derivative Cost Rule that matches the Processing Security Type of the Cleared Swap, cost will be recorded with an offsetting entry to the CONTRA COST ACCOUNT (1007000520). Cost is amortized during the earnings process just like a fixed income security, while the CONTRA COST ACCOUNT is adjusted based on daily VM. URGL is calculated from the net of each day's amortization (or accretion) and VM. The attached

Credit Events

Cleared CDX credit events are processed the same way as bilateral CDX. The only difference is that cash is generated as part of part of the VM process, same as an open or close, rather than immediately when the credit event is processed. Refer to CDX Credit Event Processing Notes for more information on credit event processing.

Credit Event Cancel & Rebook

If a credit event corporate action is set up incorrectly it must be canceled or deleted before rolling back and replaying any activity. If the corporate action is not in released status it can be deleted using Delete Corporate Action Announcement. If it is in released status a Cancel Corporate Action Announcement must be set up to prevent the original from being processed.

Once the faulty corporate action has been canceled or deleted the activity can be rolled back and replayed by following these steps. Please pay close attention to the order. All global processes should be run as One Entity/One Security. CEED = Credit Event Effective Date.

1. Run accruals for the day prior to CEED (make sure that Allow Earnings Rollback is set to Yes)

2. Run VM for the day prior to CEED

3. Run S2P for the day prior to CEED

4. Run VM approval for the day prior to CEED for clients who do same-day margin approval, or CEED for clients who do next-day margin approval

5. Run contract cash for CEED

6. Create new credit event corporate action

7. Trigger credit event through Global Process Center

8. Run accruals for CEED

9. Run VM for CEED

10. Run rest of regular workflow through current day

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 a single row for each CDS and CDX, and three rows for each IRS in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. For IRSs, the MARKET_VALUE_INCOME column for each row captures a portion of the total market value.

• Contract Position: market value due to price fluctuations

• Pay Leg Position: market value due to period-to-date accruals payable

• Receive Leg Position: market value due to period-to-date accruals receivable

Variation Margin

Upon approval of VM in Eagle Accounting, any unrealized gain or loss is reflected in Market Value Income of the Cleared Swap, and Market Value will always remain zero. Market Value Income is closed out to cash after the payables and/or receivables created by the approval process are settled. The VM process is illustrated below, and the attached

Accounting Reports

Eagle has a core set of Accounting reports that can be used to review cleared swap and other security 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.

IRSs 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).

Refer to Derivatives Reporting Best Practices for additional guidance.

Cleared Swaps Amortization (V17 R2.3)

Original Cost and Amortized Cost are both maintained on the position.

• Contra currency gain/loss is shown on the Realized Gain Loss Report

• Contra balances and realized currency gain/loss are shown on the Ledger Subledger Reconciliation Report

• Contra balances will be available in the Show All view of the Holdings and Portfolio Valuation reports in a future release

Insurance Reporting

Data Management Reporting

Performance

The performance toolkit calculates market value-based performance for cleared CDS, CDX, and IRSs using data supplied by the S2P process. For IRS, returns are calculated at the contract (price changes) and leg (accruals paid/received) levels. However, these returns 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 meaningful returns. The documentation and .egl files for cleared CDX and IRS enrichment are linked below as attachments. Additional details are available in Exposure Reporting Best Practices and the Manage Eagle Enrichment.

• View file
  name CDX Enrichment Rule Cleared R_88.egl

• View file
  name CDX Enrichment Inventory Cleared R_88.xlsx

• Refer to https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978617/Interest+Rate+Swaps+IRS+Best+Practices#Performance for the IRS rule as it works for both cleared and bilateral

CDX Note: CDX positions require synthetic cash offsets to accurately reflect performance on the fund level. Depending on your version, minor panel changes may be required to allow synthetic cash to be created and linked for these instruments. Please contact Instrument Engineering through your Eagle representative for details.

IRS Note: the IRS rule is only available for use in V15 R2.29+ and V17 R2.7+. It is not supported in prior versions due to changes to the underlying cash functionality.

Automation

Cleared swap SMFs and trades can be loaded through the standard Message Center streams. The SMF must be loaded prior to the trade (trades do not spawn SMFs). Refer to https://eagledocs.atlassian.net/wiki/spaces/GENERICINTER for more information.

Sample messages for the standard interfaces are listed below.