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BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 19 May 2020

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TABLE OF CONTENTS

OVERVIEW

Eagle supports end-to-end processing of Equity (EQ), Fixed Income (FI), and Index (INX) Options in V11.0 and all subsequent releases. This document covers the full lifecycle including Eagle Accounting, Data Management, and Performance. Also in-scope of this document are LEAPS, or long-expiration Options.

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• The writer (seller) of an Option receives a premium based on the Option price
• The buyer of a call is betting that the underlying equity’s or fixed income’s prices will rise above the strike price, allowing the Option to be exercised
• Conversely, the buyer of a put is betting that the underlying’s price will fall below the strike price, allowing the Option to be exercised
• In either case, the writer is betting that the Option will not be exercised and therefore expire worthless, allowing the premium to be recorded as a gain

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

• Option on EQ Example.xlsx
• Option on INX Example.xlsx

ENTITY SETUP

Before any trades can be booked, the target entity must be set up appropriately.

REFERENCE DATA

Storage & Configuration

Eagle has modeled Option security master files (SMFs) as single rows in Data Management.

Market Data

Because they are exchange-traded, Option prices and underlying security prices are readily available from a number of vendors.

Security Data

Options can be set up and maintained in Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). The list below contains all fields required to configure an Option SMF.

• Issue Name (961)
• Primary Asset ID (14) & Type (1432)
• Processing Security Type (3931): OPOPEQ for an EQ Option, OPOPDB for a FI Option, or OPOPIX for an INX Option
• Contract Size (19): # of shares (EQ/INX Option) or par value (FI Option) that each contract is entitled to
• Issue Country (1418)
• Asset Currency (85)
• Expiration Date (38): date when Eagle Accounting will automatically expire the Option, unless the entity-level Options and Futures Expiration Delay Days field has been populated
• Strike Price (67): price at which the Option can be exercised or assigned
• Option Type (1142)
  • American: contract can be exercised or assigned at any time until expiration, assuming the strike price has been reached
  • European: contract can be exercised or assigned on expiration date only
  • Bermudan: functions the same way as American in Eagle Accounting; this option exists for reference data purposes only
• Put/Call Flag (1350)
• Underlying Security (1347): select the appropriate underlying security based on the type of option

TRADE PROCESSING

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. Right-click it and select Open or Close. The list below contains all fields required to book an Option trade.

Net Option Positions = No

Open > Buy

This creates a long position (long with positive quantity).

• Contracts (40): number of contracts being transacted
• Price Per Contract (45): multiplied by Contracts, Contract Size, and Price Multiplier (18) to calculate premium
• Commission Per Contract (971): multiplied by Contracts to calculate Commission Amount Local (47), which is factored into the Net Amount fields
• Tax Amount (46), SEC Fee (48), Stamp Duty Tax (51), & Other Fee (3752): added to the premium and commission to generate the total net amount
• Broker (88)

Open > Write

This creates a short position (short with positive quantity), using the same fields as above.

Close > Sell

This closes (partially or fully) a previously established long position, using the same fields as above.

Close > Buy to Cover

This closes (partially or fully) a previously established short position, using the same fields as above.

Net Option Positions = Yes

Open > Buy

This creates a long position (long with positive quantity) or closes a previously established short position (long with negative quantity), using the same fields as above.

Close > Sell

This creates a short position (long with negative quantity) or closes a previously established long position (long with positive quantity), using the same fields as above.

ACCOUNTING

Once an Option trade is booked, it will be picked up in Eagle’s global workflow. Accounting valuation is calculated when posting unrealized gain/loss and Data Management valuation is calculated in STAR to PACE. These can be scheduled or triggered manually.

Valuation

Options are valued using unit prices. The market value formula is:

• Market Value = # of Contracts * Contract Size * Price * Price Multiplier

Stock Split

The most common corporate action that affects EQ Option contracts is a stock split. If there is a 2:1 split on the underlying stock, each Option contract is entitled to twice as many shares at half the original strike. To process a stock split on an EQ Option in Eagle, start by creating a Stock Split Corporate Action Announcement. After querying for the appropriate EQ Option, populate the fields below as described.

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Use the Stock Dividends/Stock Splits global process to process the Stock Split, with a date range that includes Sweep Date entered above.

Exercise/Assign

Exercises and assignments are processed using Book Trade > Other > Exercise. By definition purchased Options are exercised and written Options are assigned, but they use the same process in Eagle Accounting.

Settlement

Options can be exercised or assigned using cash or physical settlement. Cash settlement has no effect on the underlying asset; it is simply an exchange of money based on the exercise price. Physical settlement (not available for INX Options) results in either opening or closing a position in the underlying asset.

Cash Settlement

Note: exercise price is the Price Per Contract entered on the Exercise screen. Example: a call Option has Strike Price = $20 and underlying price on exercise date = $30. Set exercise price = $10 to generate a cash receipt/disbursement of $10 per contract.

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• Cash Disbursement = # of contracts exercised * contract size * exercise price * price multiplier
• Gain (Loss) = # of contracts exercised * contract size * (open price - exercise price) * price multiplier

Physical Settlement

Purchased Call: establish a long position (Buy of the underlying asset).

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• Cost = # of contracts exercised * contract size * (strike price - price per contract) * price multiplier
• Cash Disbursement = # of contracts exercised * contract size * strike price * price multiplier

Physical Short Settlement

Note: physical short settlement is not valid for written puts when the entity-level Net Options Positions = Yes.

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• Reduced cost of short position = # of contracts exercised * contract size * open price * price multiplier
• Cash Disbursement = # of contracts exercised * contract size * strike price * price multiplier
• Gain (Loss) = # of contracts exercised * contract size * (open price - strike price + price per contract) * price multiplier

Exercise/Assign Events

Eagle Accounting will automatically move the Option’s cost to the underlying security when the contract is exercised, via these events:

• Close the Option contract
• Open or close the underlying security position (long or short)
• Allocate Option cost or premium to the underlying security position

Canceling Exercise/Assign Events

Canceling an exercise or assign event requires the use of the Batch Cancel Trades panel. Query for the appropriate date range, entity, and security, then set Choose Trade to Cancel (962) = the target exercise/assign event. This will roll back the exercise/assign event by removing the action on underlying shares and restoring the original position. Option trades can be canceled using the regular Cancel Trade panel or rebooked using the Cancel & Rebook Trades module.

Expire

If the contract is not closed prior, Eagle Accounting will expire the Option on expiration date plus the number of days defined in the entity’s Options and Futures Expiration Delay Days election. Each contract's cost/proceeds are posted to realized gain/loss.

REPORTING

STAR to PACE (S2P)

Almost all reports in Eagle 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 Options on EQ-FI-INX Best Practices section.

The S2P process creates a single row for each Option in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables.

Accounting Reports

Eagle has a core set of accounting reports that can be used to review Option 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.

Insurance Reporting

Data Management Reporting

PERFORMANCE

The performance toolkit calculates market value-based performance for Options using data supplied by the S2P process. However, this can be misleading because traditional market values do not capture an Option’s true exposure. Exposure-based analyses, which can be implemented using Eagle Enrichment, calculate more accurate returns. The documentation and .egl files linked below as attachments are available for beta testing. Additional details are available in Exposure Reporting and the Eagle Enrichment User Guide 2015.

• Options on EQ-FI-INX Enrichment Rule EGAC_101.egl
• Options on EQ-FI-INX Enrichment Inventory EGAC_101.xlsx
• Options on EQ-FI-INX Enrichment Examples EGAC_101.xlsx

AUTOMATION

Below are the standard interfaces provided out-of-the-box for MC.

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