BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 28 Mar 2020

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TABLE OF CONTENTS

OVERVIEW

This document applies to all releases of Eagle software V12 and above. Version-dependent functionality is noted with the initial release(s) it became available.

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Due to their highly customized nature, each Portfolio Swap can have unique attributes that may be different than the examples used to create this document. Please contact Instrument Engineering to discuss your particular contract in greater detail.

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

• Portfolio Swap - Multiple TRS Examples.xlsx (this simplified example was created by Instrument Engineering to focus on lifecycle processing without introducing too many additional complications)

ENTITY SETUP

Before any trades can be booked, the entity that will hold the Portfolio Swap TRSs must be set up appropriately.

REFERENCE DATA

Storage & Configuration

Eagle models Portfolio Swaps as multiple TRS security master files (SMFs), each with three rows in Data Management. Every row of a TRS has its own Security Alias (10), linked by a common Primary Asset ID (14) across the contract and legs.

Market Data

Return leg payments are derived directly from the value of each underlying equity, whether paying or receiving the return. Equity prices must be entered directly on the TRS return legs (this is discussed in detail in the Valuation section). Corporate action processing can be automated starting in V17, but announcements must be created individually for each TRS return leg in lower versions. Refer to the Corporate Actions section below for details. 

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The underlying interest rate index must be set up as an Index security 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. 

Security Data

Portfolio Swap TRSs can be set up and maintained using Issue Viewer, SRM, or RDC. Every TRS for a given underlying equity portfolio will have an identical setup other than the IDs, underlying security, and pay/receive leg directions. Long underlying positions should be set up as TRS that are paying financing/receiving return while short underlying positions are paying return/receiving financing. 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 Interest Accrual Leg)
• Coupon (70): enter zero for floating (or variable) rate to indicate that rates must be viewed from underlying index, or fixed rate if applicable
• Coupon Type (97): typically X (Floating Rate) or F (Fixed Rate)
• Day Count Basis (471): as specified in contract
• Payment Frequency (472): as specified in contract
• Business Day Convention (1536), Coupon Day of Month (10551), & Business Calendar (1480): same values as return leg
• Delay Days (1799) & Delay Days Type (5074): typically same values as return leg, but can be different if necessary
• First (473) & Last Payment/Valuation Date (474): same dates as return leg
• Floating Rate Fields
  • First Rate Reset Date (10911): same as First Payment/Valuation Date; this is used with Lag/Coupon Delay Days and Reset Look-Back Days to calculate fixing dates
  • Reset Frequency (476): same as Payment Frequency
  • Reset Look-Back Days (10547): # of days prior to each reset date (or Dated Date for the initial period) to grab the 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 is used in lieu of the main Business Calendar when applying 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
    • Refer to Time Sensitive for details about modeling spread changes

TRS Reset Schedules

There are two options for defining the schedule of TRS reset dates, automated and manual, as described below.

Option 1: Automated Scheduling

Valuation and payment dates are calculated automatically based on SMF attributes.

• First Payment/Valuation Date + Lag/Coupon Delay Days is used to project all future reset dates
• By default, reset schedules are calculated on the fly in releases prior to V17, but they can also be stored in the SCHEDULE table for verification and modification
  
  • This is done using Generate Swap Reset Schedule, and once created it can be viewed using List Schedule
  • Generate Swap Reset Schedule on the SMF defaults to Yes in V17 because existence of the schedule is required for automated corporate action processing
• If any of the dates are incorrect due irregular resets, they can be updated by deleted, changed, or added using the Schedule tools
  • Note: once an automatically generated schedule is amended, the remaining schedule can only be updated manually (all changes are overwritten when a schedule is regenerated)
• If dates in the SMF-level Business Calendar are modified subsequent to the schedule being generated, it will need to be regenerated for the changes to take effect
  • We recommend regenerating schedules annually and/or whenever a security's Business Calendar is updated, unless the schedule has been customized

Option 2: Manual Scheduling

Unscheduled/Ad Hoc Resets

Some Portfolio Swaps can have unscheduled/ad hoc resets when predefined exposure levels are breached, among other reasons. This is more common than with traditional TRS on indexes or single-name equities. In these cases, the schedule for both legs must be edited to add the new reset date. Follow the steps below to edit the current period and add a new period. Example: resets occur on the last day of each month (ignoring non-business days) - 1/31/16, 2/29/16, 3/31/16, etc. - and a reset is required on 3/13/16.

TRADE PROCESSING

TRSs are traded based on a number of shares and a price, which allows the Portfolio Swap's underlying trading activity to be mapped directly to the associated TRSs. A batch of open trades is booked at inception to establish the initial values of the Portfolio Swap, all with the same trade/settle dates. These transactions will not create any cash settlements because TRS opens are cashless (unless there is an explicit fee, which can be entered if necessary).

TRSs are always held with the contract and receive leg as long positions and the pay leg as a short position. Buys and sells of an underlying constituents are booked against TRSs set up to pay financing/receive return, while short sells and buys to cover are booked against TRSs set up to pay return/receive financing. Additional lots, new positions, partial closes, and full closes can be processed against the TRS just as they would be against the equities. The only difference is that buys and short sells will use the same event types, as will sells and buys to cover. 

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.

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• Finance leg notional value (in Shares field) is automatically calculated based on return leg information.
  • Example: if # of equity Shares is 1 million, the initial Price is $10, and Commission and Other Fee are zero, the finance leg notional will be $10 million
  • Constant Notional: finance leg notional (in Shares field) is taken directly from Notional entered on the return leg and does not change as part of the reset process
• Select Values to be Calculated by STAR (7000): set to Traded Interest to have it calculated, or Calculate None to enter it manually
• Traded Interest Local (49): interest bought or sold, calculated since Dated Date or last coupon date
  • Lot Level Dated Date (4411): used to override when the lot starts accruing interest (accruals start on Dated Date by default)
  • First Period Coupon Rate (1360): overrides the interest rate for the first period; Eagle Accounting will automatically start using the appropriate interest rates after the next reset is processed

Booking Multiple Lots

By default, opens of additional TRS lots will not generate an upfront payment based on trade price. To prevent traded interest from being calculated and exchanged, set Lot Level Dated Date = accrual start date of the additional lot (same date should be used for Settlement Date, or Traded Interest/Effective Date if available).

• For a floating rate TRS, First Period Coupon Rate can be left blank to automatically pull the rate from the underlying index based on Lot Level Dated Date minus Reset Look-Back Days, and apply the appropriate spread
• Alternatively First Period Coupon Rate can be entered, with the supplied rate used up until the next reset date; this requires the all-in rate (floating rate + spread) to be entered
• After the next reset all lots are reset to same unit cost and all financing is calculated the same based on the original SMF configuration

Close (transaction type: CLOSESWAP)

The Book Trade module should also be used to process both full and partial terminations. Enter the same information as the open to query for the security. Right-click it and select Close > Close Swap Contract.

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• Close Notional (7782, Return Leg): portion of notional being closed; this is pulled into finance leg Shares directly
  • The screen calculates the proportional # of Shares to close for the contract and return leg as Close Notional / Position Notional (7783) * Position Shares (122)
  • Principal (165, Return Leg): number of Shares calculated * Price
• Gain/loss on the return leg is still equal to the return leg Principal - finance leg Shares

Booking Multiple Lots

There are two important notes about FIFO/LIFO closes when trading multi-lot TRS:

• 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
• If multiple lots are opened at different prices and a partial FIFO close is entered that spans lots (open lots of 300 and 400, then a close of 500, for example), the amount of notional closed may be incorrect because it will be closed proportionately based on shares
  • In these cases, IDLOT closes are recommended

Cancel & Rebook

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

ACCOUNTING

Once portfolio swap TRS trades are booked, they 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 the STAR to PACE push. These can be scheduled or triggered manually.

Valuation

Portfolio Swap valuation is based on pricing the return leg of each TRS with the underlying equity price. TRS are valued with market value equal to unrealized gain/loss. The sum of the TRS return leg valuations represents the total value of the Portfolio Swap.

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Each TRS's market value and unrealized gain/loss, and their sums, tie to the underlying equity portfolio's unrealized gain/loss. Notional Cost Local (10791)/Base (10792) and Notional Market Value Local (10793)/Base (10794) tie to equity portfolio's costs and market values.  

Accruing on Negative Interest Rates

Reset Processing

Corporate Actions

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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The sum of these fields across all the TRS in a given Portfolio Swap entity represent the total values of the swap. Reporting at the entity level shows the whole Portfolio Swap as a single line item.

Accounting Reports

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

Each Portfolio Swap TRS is 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 individual Portfolio Swap TRSs at the return leg (price changes) and finance leg (accruals) 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. The documentation and .egl files for TRS enrichment are linked to Instrument Engineering's Total Return Swaps (TRS) best practices. Additional details are available in the Exposure Reporting Best Practices and Eagle Enrichment Quick Reference documentsUser Guide 2015 documents.

AUTOMATION

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Sample messages to create a security, book an open, and book a close are attached to Total Return Swaps (TRS). Include PageINSTRUMENTENG:Best Practices End PageINSTRUMENTENG:Best Practices End Page