BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 07 Oct 2020

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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.

An iBoxx Total Return Swap (TRS) is a standardized flavor of TRS issued by Markit that allows investors take a synthetic position on an iBoxx index. There are several flavors of iBoxx indices that can be used to acquire or hedge exposure to corporate bonds, leveraged loans, and commercial mortgage-backed securities, but they all use the same calculations and date schedule. Payments are made in accordance with the International Monetary Market (IMM) calendar (20th of March, June, September, and December), adjusted for non-business days. All flavors of iBoxx TRS can be modeled using Eagle's core TRS functionality. Refer to Total Return Swaps (TRS) for more details about general TRS processing.

Example reference data screens, trade screens, and reports along with the Markit iBoxx TRS User guide are attached:

• Full_First Coupon_iBoxx_TRS_Guide.pdf
• iBoxx TRS Examples.xlsx

ENTITY SETUP

As the iBoxx TRS is booked using Eagle’s core TRS functionality, you should be familiar with the entity fields required to trade TRS. Before any trades can be booked, the target entity must be set up appropriately.

REFERENCE DATA

Storage & Configuration

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

Market Data

Return leg payments are generally paid out at maturity (bullet) and derived from underlying iBoxx indices which can be linked to the return leg by entering its ID in the Underlying Information section. While TRS are valued based on the underlying's price, the price must be entered directly to the return leg.

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

Security Data

TRS 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 Interest Accrual Leg)
• Coupon Day of Month (10551): 20 per the Markit iBoxx TRS Guide
• Delay Days (1799) = 0
• Reset Look-Back Days (10547): 2 for USD/EUR, 0 for GBP per the Markit iBoxx TRS Guide
• Reset Look-Back Days Type (5075) = B (Business)

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 and select Open > Open Swap Contract.  

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• Shares (40): this represents the notional value and is calculated automatically as return leg Local Net Amount
• Traded Interest Local (49): interest bought or sold, calculated from Dated Date or last coupon date
  • This initial payment is made by the index seller to the index buyer to compensate for the floating rate over payment that the index will make at the end of the initial period
• Lot Level Dated Date (4411): optional; used to override Dated Date on a particular to suppress the calculation of traded interest
  • Setting this equal to Traded Interest/Effective Date will cause traded interest to be calculated as zero
• First Period Coupon Rate (1360): optional; overrides the interest rate for the initial income accrual period
  • Eagle Accounting will automatically start using the appropriate interest rates after the next reset is processed

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 and the panel calculates the proportional number of Shares being closed
• Return Leg Principal (165): number of Shares calculated by panel * Price
• Gain/loss on the return leg is still equal to the return leg Principal - finance leg Shares

Mature/Expire

TRS will be picked up by the Global Process Center > Expirations > Mature process automatically on Maturity Date. The final reset that occurs on Maturity Date must be triggered to generate the final return payment prior to maturity (the maturity event itself will not trigger the final reset). The final coupon payment is dropped as part of the accrual process.

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 and Rebook Trade process or the Cancel Trade screen. Maturities must also be canceled using Batch Cancel Trades.

ACCOUNTING

Once an iBoxx TRS 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 the STAR to PACE push. These can be scheduled or triggered manually.

Notes

1. The final IMM period of the swap requires the finance leg to accrue from start date to end date inclusive
   1. We recommend posting a miscellaneous income or expense entry for one additional day of accrued interest
2. In the final IMM period, the finance leg coupon should settle three days after the final fixing date
   1. We recommend changing Settlement Date manually in Run Multiple Settlements (V17)/Multiple Manual Settlements (prior to V2017) because the other coupon payments do not have a settlement delay

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.

The S2P process creates three rows for each iBoxx TRS in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column for each row captures a portion of the total market value.

• Contract: always zero
• Return Leg: market value due to unrealized gain/loss on underlying security
• Finance Leg: market value due to period-to-date accrual payable/receivable

Accounting Reports

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

iBoxx TRSs 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).

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Data Management Reporting

PERFORMANCE

The performance toolkit calculates market value-based performance for 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. Refer to Total Return Swaps (TRS) for details. Include PageINSTRUMENTENG:Best Practices End PageINSTRUMENTENG:Best Practices End Page