BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 25 Jun 2020

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TABLE OF CONTENTS

OVERVIEW

This document applies to all releases of Eagle software V11 and above. It covers the full lifecycle including Accounting, Data Management, and Performance. Version-dependent functionality is noted with the initial release(s) it became available.

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Eagle Accounting supports both bilateral and cleared ILSs in V12.1.2 and above, with this document focusing on bilateral contracts. Refer to Cleared Swaps Best Practices for more information on processing cleared IRSs, which function identically to ILSs in terms of variation margin (VM) processing. The main difference is for an ILS is you will only have one or two VM records each day (contract and potentially one leg) vs. three VM records for an IRS (contract and both legs). This is described further in the Inflation-Linked Swaps (ILS) sectionBest Practices section.

Example reference data screens and fixed leg accrued interest calculations are attached:

• ILS Examples.xlsx

ENTITY SETUP

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

REFERENCE DATA

Storage & Configuration

Eagle has modeled ILSs as three rows in Data Management, each with its own Security Alias (10), linked by a common Primary Asset ID (14).

Market Data

ILSs are typically priced dirty in the market. To prevent any double-counting during valuation, inflation income must be turned off in Eagle Accounting. This is accomplished by setting both legs to be interest accrual legs, rather than one inflation leg and one interest accrual leg. As a result, you do not need to load any inflation index values for this security.

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• Interest rates must be loaded to the underlying index back to Dated Date (or previous coupon date if swap is traded off-cycle) and each subsequent coupon date minus Reset Look-Back Days

Security Data

ILSs can be set up and maintained in Issue Viewer, SRM, or RDC. Most data is entered on the contract and propagated to the legs. Specific reset and accrual conventions are entered separately on each leg.

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• Processing Security Type (3931) = SWLEAC (Swap Leg Interest Accrual)
  • This should be used for both legs
  • Do not use SWLEIF (Swap Leg Inflation Linked Interest Accrual)
• Coupon (70)
  • Inflation Leg: 0
  • Interest Leg: enter stated rate for fixed leg and zero for floating/variable rate legs to indicate that actual rates must be viewed from VARIABLE_RATE table
• Coupon Type (97)
  • Inflation Leg: F (Fixed Rate)
  • Interest Leg: F (Fixed Rate) or X (Floating Rate)
• Day Count Basis (471)
  • Inflation Leg: ACT/360
  • Interest Leg: as specified in contract
• Payment Frequency (472)
  • Inflation Leg: MAT (At Maturity)
  • Interest Leg: as specified in contract; often MAT (At Maturity) for ILS
• Business Day Convention (1536)
  • Inflation Leg: NONE
  • Interest Leg: typically Modified Following, which is ADJMBC (Modified Following - Adjusted) in V15 R2 and above, ADJMBC (Modified Business Day - Adjusted) below V15 R2
    • Set to NONE if Payment Frequency = MAT (At Maturity)
    • The following fields are conditionally required if Business Day Convention != NULL or NONE
      • Coupon Day of Month (10551): day of the month that payments are scheduled to be made, which will be automatically adjusted based on the Business Day Convention
      • Business Calendar (1480): as specified in the contract; a composite calendar (including dates from two different calendars) may need to be setup in some cases
• First (473) & Last Payment Date (474)
  • Inflation Leg: set to Maturity Date
  • Interest Leg
    • Set to Maturity Date if Payment Frequency = MAT (At Maturity)
    • For any other Payment Frequency, set to actual first and last payment dates, including any adjustments for weekends/holidays
• Floating Rate Fields (only applicable to the Interest Leg)
  • First Rate Reset Date (10911): enter the actual first reset date, including any adjustments for weekends/holidays (same as First Payment Date unless the rate resets more frequently)
  • Reset Frequency (476): same as Payment Frequency unless the rate resets more frequently
  • Reset Look-Back Days (10547): number of days prior to reset date to take new floating rate
  • Reset Look-Back Days Type (5075): whether reset look-back days are measured in business or 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): select appropriate floating rate index security
    
    • This can be used to store the Inflation Leg's benchmark index for reference and reporting purposes, but it is hidden in the core panel
  • 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

Open (transaction type: OPENSWAP)

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 (35)/settle (37) dates and click Submit to query for the security. Right-click it and select Open > Open Swap Contract. Most remaining trade information is entered on the contract, with the exception of a few accrual-related fields on the legs.

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• Lot Level Dated Date (4411, optional): for swaps traded in multiple lots, this field specifies the date from which traded interest will be calculated for each lot (the contract's dated date if null)
  • To have Eagle Accounting calculate zero traded interest, set this field equal to Traded Interest/Effective Date
  • This can be ignored if you are not accruing in Eagle Accounting
• First Period Coupon Rate (1360, floating rate legs only, optional): for swaps traded in multiple lots, this field can be used to override the floating rate for the first accrual period (Eagle Accounting will start using the floating rate index after the first reset is processed)
  • This can be ignored if you are not accruing in Eagle Accounting

Close (transaction type: CLOSESWAP)

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. Right-click it and select Close > Close Swap Contract. Like the open, most information is entered on the contract. Almost all fields on the close are the same as the open.

• Lot Selection Method (27): ILS can be closed using either FIFO or IDLOT
  • If Lot Level Dated Date is used to override the initial rate and a FIFO close is booked before the next reset, traded interest calculated by Eagle Accounting may be incorrect because it will be based on the SMF attributes
    • In these cases, traded interest can be entered instead of calculated
    • This can be ignored if you are note accruing in Eagle Accounting
• Accrual End Date (4412): defaults to Settlement Date, which results in Traded Interest through Settlement Date - 1 (similar to a bond)
  • To calculate through Trade Date (typical for ), populate with T+1
  • This can be ignored if you are not accruing in Eagle Accounting

Cancel & Rebook

Faulty transactions must be cancelled using Batch Cancel Trades, with the transaction rebooked using the Book Trade module. ILSs are not supported in the Cancel & Rebook Trade process. Maturities must also be canceled using Batch Cancel Trades.

ACCOUNTING

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

Valuation

Eagle Accounting values ILSs using unit prices on a par-zero basis (around zero rather than around 100). Prices are entered at the contract level using Add Issue Price. The market value formula is:

• Market Value = Notional Amount * Price * Price Multiplier * Quantity Scale
  • If you are using an all-in dirty price (inclusive of both inflation and interest), both legs should be up with fixed rate coupons of zero
  • If you are using a dirty price that only includes inflation, the accrued interest portion of an ILS's MV will be captured in its Market Value Income (MVI)

Accruing on Negative Interest Rates

This can be ignored if you are not accruing in Eagle Accounting.

Mature/Expire

ILSs will be picked up by Eagle Accounting’s core maturity process. This will be scheduled in production environments, but can be triggered manually via Accounting Center > Processing and Exceptions > Global Processes > Expirations & Maturities > Run Mature Process (V17) or Global Process Center > Expirations > Mature (prior to V17).

There is no cash component to the maturity event itself because swaps have a Maturity Price of zero and final coupon payments are dropped as part of the accrual process.

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.

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• 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
• For an ILS, the pay leg and/or receive leg will be zero (both if you use an all-in dirty price)

Accounting Reports

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

ILSs 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).

Insurance Reporting

Data Management Reporting

PERFORMANCE

The performance toolkit calculates market value-based performance for ILSs at the contract (price changes) and leg (accruals paid/received, if applicable) levels using data supplied by the S2P process. However, this 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 returns. Please contact Instrument Engineering if you are interested in these analyses for ILSs.

AUTOMATION

ILS prices must be loaded to the contract only. Make sure you set tag 4590 = C in your price message. Include PageINSTRUMENTENG:Best Practices End PageINSTRUMENTENG:Best Practices End Page