BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 07 Aug 2019

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Overview

This document outlines Eagles best practice in handling the process for Forward-Starting Total Return Swaps (TRS) in versions prior to V17. A Forward-Starting TRS is a contract that has been agreed upon in principal by the two parties involved, but does not become effective until a date in the future.

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Trading Explanation

In Eagle, the key components necessary for booking a trade are the number shares for the Return Leg (underlying asset) and the price (index level). Without these two components the notional amount for the Finance Leg cannot be calculated.

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Because a Forward-Starting TRS has an Effective Date in the future, the price is unknown at trade time, which results in an inability to calculate the Finance Leg’s notional for trading. Therefore Eagle recommends that a dummy asset, in this instance a Swaption, be set up and traded from Trade Date until the Effective Date. An example portfolio valuation report is attached showing the Swaption with zero valuation:

• View file
  name Forward-Starting TRS Pre-

V2017

• V17 Portfolio Valuation Report.xlsx

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Reference Data

The swaption should be set up as shown below.

• Issue Name (961): recommend using something similar to the TRS with SWPTN or Swaption appended to the beginning or end

• Primary Asset

  ID Type

  ID Type (1432): recommend using INTERNAL or another type that allows many characters

• Primary Asset ID (14): recommend using recommend using something similar to the TRS

• Processing Security Type (3931) = OPOPSW

• Contract Size (19): amount of notional that each Swaption contract is entitled to; typically 1.00

• Issue Country (1418): same as TRS

• Asset Currency (85): same as TRS

• Expiration Date (38): set to TRS Effective Date, which is its Dated Date (1183) in Eagle

• Strike Price (67) = NULL

• Option Type (1142): any value can be used as there will be no exercise/assignment

• Underlying Security Issue Name (1141) and Asset ID (1348): if you set up the TRS SMF ahead of time you can add it here for reference purposes

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Trade Processing

Trades against the swaption should be booked at a price of zero to ensure the cost basis of the asset in the portfolio is zero.

Expire Swaption

On the swap's Effective Date (Dated Date) once the initial price is locked in, run Global Process Center > Expirations > Expire to drop the asset off of the books with no value.

• Set Expiration Processing Date (221) = swap's Effective Date

Book TRS

After the swaption has been expired, a new trade can be booked using the true TRS SMF intended for the deal and the confirmed price.

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