Equity-Linked Notes (ELN)

Best Practices Guide

Last Update: 24 Oct 2017

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INTRODUCTION

This document applies to all releases of Eagle software. Version-dependent functionality is noted with the initial release(s) it became available.

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This document outlines trade processing in Eagle Accounting based on real examples. However, because ELNs are structured products, security attributes and mechanics may vary between issuers. Please carefully review the term sheet when using this document and contact Instrument Engineering if you encounter any issues modeling your particular security.

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

• ELN Example Trade.pdf
• ELN Example.xlsx

ASSUMPTIONS

• This document uses existing Accounting functionality to accommodate ELN processing
• Security will be valued using an equity price, not a par-based price like a bond
• Income accruals are required and posted on a daily basis

REFERENCE DATA

ELN are set up as fixed income securities in Accounting with Price Multiplier (18) and Quantity Scale (19) = 1.00 to accommodate equity pricing. The security will accrue using an inflated coupon rate, calculated as the annualized coupon rate multiplied by the starting equity price. Embedding the equity price within the coupon rate will generate the required income accrual while maintaining the traded equity units for accurate valuation.

Storage & Configuration

ELNs are modeled as single-leg fixed income securities linked to an underlying equity, index, or basket of equities, which can be set up ahead of time and linked for reporting purposes.

Security Data

ELNs can be set up and maintained in Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). The security will accrue using an inflated coupon rate, calculated as the annualized coupon rate multiplied by the starting equity price. Embedding the equity price within the coupon rate will generate the required income accrual while maintaining the traded equity units for accurate valuation. Price Multiplier and Quantity Scale should be set to 1.00 to accommodate equity pricing. Other than basic identifier and country information, the following fields define Eagle’s recommended setup for ELNs.

• Processing Security Type (3931) = DBIBFD
• Price Multiplier (18) = 1.00
• Quantity Scale (19) = 1.00
• Issue Country (1418): as specified
• Asset Currency (85): as specified
• Primary Exchange (17): typically OTC
• Coupon (70): populate with fixed rate from term sheet for reference purposes (the interest rate used for accruals will be retrieved from the variable_rate table)
• Coupon Type (97) = I (Variable Rate)
• Day Count Basis (471): as specified
• Payment Frequency (472): as specified
• Business Day Convention (1536) = ADJMBC (Modified Business Day – Adjusted)
• Coupon Day of Month (10551): regular payment date without any adjustments for weekends or holidays (12 for attached example)
• Business Calendar (1480): as specified
• Issue Price (69) = 0.00
• Issue Date (68): first date security can be traded, populate with Issue Date (if available) or Trade Date
• Dated Date (1183): accrual start date, populate with Effective Date (if available) or Settle Date
• First Coupon Date (473): as specified
• Last Coupon Date (474): penultimate payment date
• Maturity Date (38): as specified
• Maturity Price (42): 0.00, or initial trade price if SEC yield is required
• Trading Flat (3949) = No
• OID Indicator (218) = No

Variable Rates

Once the security master is created a variable rate must be loaded to the variable_rate table. Calculate this variable rate using the below formula. Fixed Coupon and Initial Equity Price can be sourced from the term sheet or trade ticket.

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• Effective Date (1109): populate with Dated Date from the SMF
• Variable Rate (96): annualized coupon rate calculated from the formula above

TRADE PROCESSING

Trades can be entered using the Book Trade module once the reference data has 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 > Buy/ShortShell or Close > Sell/BuytoCover.

• Select Values to be Calculated by STAR (7000) = Traded Interest
• Par Value/Current Face (40): as specified; Units from attached example
• Price (45): as specified
• Broker (88): as specified

SEC Yield

If Maturity Price is set to 0.00 it is likely that a negative SEC Yield will be calculated. To calculate an accurate SEC Yield, the security's Maturity Price must be set to initial trade price.

ACCOUNTING

Once an ELN position has been established it will be picked up in Eagle’s global workflow. There is no special processing required.

Valuation

ELNs will be valued on a daily basis using an equity-based price. Typically this is the underlying price, however there may be differences due to the many flavors of the instrument. Please review the term sheet to confirm.

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Please refer to ELN Underlying Pricing in Pricing Center for steps to configure pricing rules for the ELN to automatically retrieve its price from underlying security.

Corporate Actions

Mandatory and Voluntary Corporate Action Announcements must be added directly to the ELN, independent from the underlying security; an action on an underlying equity will not automatically flow through to the ELN. Corporate Actions are then applied by either triggering the global corporate process manually through Global Process Center or automatically through a scheduled event.

Mature

In order to accurately capture the equity return, close trades should be entered in lieu of maturity. Enter close trades at the final price, which is equal to the underlying's official closing price on Final Reference Valuation Date. Allowing Accounting to mature the position automatically will result in a significant impact to the fund.

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• Trade proceeds will cover the principal portion of the final payment
• The final coupon will cover the income portion of the final payment

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