Use the Pre-Refunding Announcement Date for Full Pre-Refunding

If you recognize the pre-refunding date in the calculation of amortization yield based on the pre-refunding announcement date, the system uses the pre-refunding announcement date for full pre-refunding as follows:

1. If an open lot holding period date (for a new buy holding period date = trade date) is less than the pre-refunding announcement date, the open lot and all closed lots created when this lot is sold does not consider the pre-refunding date in the calculation of the amortization yield and resulting amortization. The lot continues to amortize to original call, put, or maturity date and corresponding price (that is, continues to amortize based on original amortization yield).
2. If an open lot holding period date is greater than or equal to the pre-refunding announcement date, the system recognizes the pre-refunding date in the calculation of amortization yield and resulting amortization for that open lot and for all closed lots that are created when this open lot is sold. The system treats the pre-refunding date as the last possible amortize to date.
3. If there are no call dates and optional put dates before the pre-refunding date, the system amortizes to the pre-refunding date.
4. If a bond has call dates and optional put dates and pre-refunding date:
   • Using the call dates, maturity date, and corresponding prices, the system determines the date and price that would yield to worst.
   • Using the optional put dates, maturity date, and corresponding prices; the system determines the date and price that would yield to best.
   • The system then compares the resulting dates to the pre-refunding date and selects the earliest of the yield to worst date or yield to best date or pre-refunding date and amortizes to that date and price.
5. If on the trade date and through settlement date of an open lot, the fields for pre-refunding date and pre-refunding announcement date are not defined, the system starts amortizing to the maturity date (or best put/worst call date). Subsequently you enter a pre-refunding date in the SMF along with the pre-refunding announcement date such that holding period date is greater than or equal to the pre-refunding announcement date. In this case, the system recalculates amortization yield using the pre-refunding date. The system follows the logic defined in the yield to best scenario described in the previous step. Any change in the amortization yield and resulting amortization is seen only in the future amortization stream. If you want to recalculate yield and amortization from the settlement date of the open lot, you can manually roll back earnings and rerun earnings to the current date.

Full Pre-

Refunding Example 1: Pre-

Refunding Date Announced after Holding Period Date

In this scenario, you set the amortization's Recognize Prerefunded (tag 3860) option to a value of Recognize Pre-refunded Date using Announcement Date and the pre-refunding date is announced after the holding period date.

A security is purchased on 1/1/2009 and has a maturity date of 1/1/2020. This lot should amortize to maturity or worst yield/best yield date based on the entity amortization rule.

A pre-refunding date is announced on 6/1/2009 with a pre-refunding date of 1/1/2015. You purchase an additional lot on 7/1/2009. The lot purchased on 7/1/2009 considers the pre-refunding date of 1/1/2015 in the calculation of amortization yield because the lot was purchased after the pre-refunding announcement date. The original lot purchased on 1/1/2009 continues to amortize to maturity date or worst yield/best yield date (that is, based on original amortization yield) if you elected to recognize the pre-refunding date with the pre-refunding announcement date in the entity amortization rule election.

Full Pre-

Refunding Example 2: Pre-

Refunding Date Announced before Holding Period Date

In this scenario, you set the amortization's Recognize Pre-refunded (tag 3860) option to a value of Recognize Pre-refunded Date using Announcement Date. The pre-refunding date is announced before the holding period date for some trades and after the holding period date for others.

SMF for a fully pre-refunded security follows.

Trades/open lots for the fully pre-refunded security follow. For Trades 1 and 2, the open lot holding period date (for a new buy holding period date = trade date) is less than the pre-refunding announcement date. For Trade 3, the open lot holding period date is greater than or equal to the pre-refunding announcement date.

Use the Pre-Refunding Announcement Date for Partial Pre-Refunding

If you recognize the pre-refunding date in the calculation of amortization yield based on the pre-refunding announcement date, the system uses the pre-refunding announcement date for partial pre-refunding as follows.

In a partial pre-refunding, each position of the partially pre-refunding security is spawned into two separate positions. One represents the security holdings that are eligible for full pre-refunding (that is, the pre-refunded portion) and the other represents holdings that are not eligible for pre-refunding (that is, the un-refunded portion).

When a partial pre-refunding is announced, you can process a non-taxable exchange offer corporate action to spawn off the two separate positions representing the pre-refunded portion and the un-refunded portion. Because the partial pre-refunding entitlement is decided based on a lottery, you can process the corporate action with voluntary elections where you manually input the quantity for resulting positions. Under these conditions:

• For the un-refunded portion, newly created positions of the holdings that are not eligible for pre-refunding have the same SMF data as the original open lot. When processing a non-taxable exchange offer, the system carries over the holding period of the original open lots to the new open lots and the amortization stream from the old lots continues in the new lots as the SMF data remains the same.
• For the full pre-refunded portion, the system carries over the holding period of the original open lots to the new open lots. The newly created positions eligible for full pre-refunding have a pre-refunding date. The system captures the pre-refunding date and the pre-refunding announcement date. The system then uses the holding period carried over from the original open lots to the new open lots and applies the same logic as defined in the prior Full Pre-Refunding Date section for the calculation of amortization yield.

Partial Pre-

Refunding Example

In this scenario, you set the amortization's Recognize Pre-refunded (tag 3860) option to a value of Recognize Pre-refunded Date using Announcement Date. The pre-refunding date is announced before the holding period date for some trades and after the holding period date for others.

SMF information for a partially pre-refunded security follows.

Trades/open lots for the partially pre-refunded security as of 10/1/2011 follow.

On 10/1/2011 a partial pre-refunding is announced on asset 882720Y90. A non-taxable exchange corporate action is processed to exchange the open lots above. The corporate action closes the existing open lots and creates two new open lots each as shown below.

In the following example, the 6/12/2003 open lot of the partially pre-refunded asset is spawned off into two new assets. One represents the fully pre-refunded portion (CUSIP 882722UL3) and one represents the un-refunded portion (CUSIP 882722UM1), as follows:

• The pre-refunding announcement date of the fully pre-refunded asset is 8/1/2011. Because the open lot holding period of 6/12/2003 occurs prior to 8/1/2011 (the announcement date), the system does not utilize the pre-refunding date in the yield calculation. For this lot, the existing amortization stream from the original lot continues.
• The new un-refunded open lot is not eligible for pre-refunding and the system continues existing amortization steams from the original lots.

The system processes the following corporate action transactions.

In the next example, the second open lot of the partially pre-refunded asset that was purchased on 9/1/2011 is spawned off into two new assets. One represents the fully pre-refunded portion (CUSIP 882722UL3) and one represents the un-refunded portion (CUSIP 882722UM1).

• The pre-refunding announcement date of the fully pre-refunded asset is 8/1/2011. Because the open lot holding period of 9/1/2011 occurs after the 8/1/2011 announcement date, the system considers the pre-refunding date in the yield calculation. For this lot, the system treats the pre-refund date as the last possible amortization to date.
• The new un-refunded open lot is not eligible for pre-refunding and the system continues existing amortization steams from the original lots.

The system processes the following corporate action transactions.