BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 03 Feb 2020

...

OVERVIEW

A collateralized loan obligation (CLO) is a security backed by a pool of debt. These are typically corporate loans that have low credit ratings, or leveraged buyouts made by a private equity firm to take a controlling interest in an existing company. A CLO is similar to a collateralized mortgage obligation (CMO), except the underlying debt is a different type and character: a company loan instead of a mortgage. With a CLO, the investor receives scheduled debt payments from the underlying loans and therefore assumes most of the risk if the borrowers default. In exchange for taking on the default risk, the investor is offered greater diversity and the potential for higher-than-average returns.

Eagle supports CLOs using the core mortgage-backed security (MBS) functionality. This document covers the details specific to CLOs. More information about general MBS processing is available in the Understand Mortgage-backed (MBS) and Asset-backed (ABS) Securities section of Eagle's Manage Fixed Income Processing guide.

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

• CLO Examples.xlsx

ENTITY SETUP

Entities trading CLOs do not require any special setup.

REFERENCE DATA

Storage & Configuration

Eagle models CLO security master files (SMFs) as single rows in Data Management.

Market Data

CLO payments are derived from an underlying index, which is linked by entering its ID in the Underlying Information section of the CLO SMF. Index SMFs can be set up and maintained using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). Other than identifiers, the only information that must be entered is the currency.

...

CLOs are also eligible to have paydowns. These are treated as corporate actions in Eagle Accounting, which involve a two-step process of first setting up an announcement, then triggering the event. More details are provided in the Accounting section.

Security Data

Eagle recommends modeling CLOs as MBS and setting up separate SMFs to represent different tranches. Most fields are the same as other fixed income securities, but those specific to CLOs are highlighted below.

• Processing Security Type (3931) = DBFBFB (Factor Based Debt Instrument)
• Price Multiplier (18) = 0.01
• Quantity Scale (19) = 1.00
• Issue Price (69) = 100
• Maturity Price (42) = 100
• Coupon Type (97) = X (Floating Rate)
• Floating Rate Fields
  • First Rate Reset Date (10911): same as First Coupon Date (473)
  • Reset Frequency (476): same as Payment Frequency (472)
  • Reset Look-Back Days (10547): # of days prior to the floating rate reset to grab new floating rate
    • Reset Look-Back Days Type (5075): measure look-back in B (Business) or C (Calendar) days
  • Fixing Date Business Center (16407, V15 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 the Reset Look-Back Days for fixing dates
  • Underlying Security (1347): floating rates will be automatically retrieved from this underlying index
  • Spread/Index Offset (215): spread above or below the floating rate, entered in basis points (0.55% = 55)
    • When a floating rate (0.25%) plus negative spread (-55 bps) goes negative (effective rate = -0.3%), accruals and coupons are posted in the appropriate direction

TRADE PROCESSING

Buy

Trades are entered using the Book Trade module once entity and reference data have been configured. Enter the appropriate entity, security identifier, and trade (35)/settle (37) dates and click Submit to query for the security. Right-click it and select Open > Buy or ShortSell. The list below contains all fields required to book a CLO trade.

• Original Face (41)
• Current Factor (91): this is looked up automatically from any existing Final Factor corporate action records, otherwise it defaults to 1.00
• Current Face (40): this is calculated automatically as Original Face * Current Factor
• Price (45)
• Traded Interest (49): the accrued interest bought (or sold) on the trade
  • You can either enter this or have Eagle Accounting calculate it
• Broker (88)

Sell

The Book Trade module should also be used to process both full and partial closes. Enter the same identifiers as the open to query for the security. Right-click it and select Close > Sell or BuytoCover depending on whether the existing position is long or short. All fields on the close are the same as the open, except Lot Selection Method (27). This defaults to the entity-level election, but can be overridden.

Maturity/Expiration

CLOs are captured by Eagle’s core maturity process. Maturities are triggered using:

• V17 & Above: Accounting Center > Processing and Exceptions > Global Processes > Expirations & Maturities > Run Mature Process
• Prior to V17: Global Process Center > Expirations > Mature

ACCOUNTING

Once a CLO trade is booked, it will be picked up in Eagle’s global workflow. Daily accruals and periodic coupon payments are generated as part of the earnings process, Accounting valuation is calculated when posting unrealized gain/loss, and Data Management valuation is calculated in the STAR to PACE push.

Valuation

CLOs are valued using real clean prices, entered via Add Issue Price or Pricing Center.

• Market Value = Current Face * Clean Unit Price * Price Multiplier * Quantity Scale

Paydowns

To process a paydown on a CLO in Eagle Accounting, a Final Factor corporate action must be created and processed. Eagle Accounting maintains a record of both current and original face, plus the specific impacts of each individual paydown.

...

Set Corporation Action Begin (220) & End Sweep Date (221) to a range that includes the Sweep Date entered on the announcement.

REPORTING

STAR to PACE (S2P)

Almost all reports in Eagle leverage data from Data Managament, 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 single rows for each CLO 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 CLO 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.

Data Management Reporting

General Reporting (Eagle OLAP)

OLAP reports provide the maximum level of customization, allowing any column in Data Management to be pulled into a report. These go beyond the Eagle Accounting Grid Reports because they are not limited by core queries, can support multiple sources and various types of calculations, and provide drill-down functionality based on user-defined groupings.

AUTOMATION

CLO 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 the Supported Generic Interfaces guide for more information. Include PageINSTRUMENTENG:Best Practices End PageINSTRUMENTENG:Best Practices End Page