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Overview

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

Variance and Volatility Swaps (VVSs) allow investors to speculate on the volatility, or magnitude of movement, of a given underlying reference against a volatility strike. This can be the price of an index, FX rate, interest rate, or just about any other reference that has a measurable level. They function almost identically to Swaptions, except there are no calls/puts or exercise/assign process. Cash is settled based on the difference between the actual volatility vs. the established strike level. Another flavor, called a Dispersion Swap, allows investors to go long (buy) or short (sell) the volatility associated with an index and take the opposite position on particular components of that index. This document covers the full lifecycle including Accounting, Data Management, and Performance. Include PageIE Formatting NotesIE Formatting Notes

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There are two models available for VVS depending on your current Eagle release.

  • V17 R2.27 & Above: use Swaption functionality (OPOPSW)

    • This supports positive/negative pricing and holding the position long/short

    • The Credit Default Swap model can also be used if preferred

  • Prior to V17 R2.27: use Credit Default Swap functionality (SWCDCO)

    • This allows you to price positive and negative, but the position is always held long

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Entity Setup

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

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OPOPSW Entity Setup

Refer to Options Entity Setup Processing Notes

Swap

 for details.

SWCDCO Entity Setup

Refer to Swaps Entity Setup Processing Notes for details.

Reference Data

Storage & Configuration

Eagle models VVSs by leveraging the Credit Default Swap (CDS) security master file (SMF), which has a single row

Both OPOPSW/SWCDCO security master files (SMFs) have single rows in Data Management. Security Type (82) and Sub Security Type (1464) can be used to distinguish VVS from regular

CDS

OPOPSW/SWCDCO. In V17 R2.28, a dedicated security field named Variance/Volatility Swap (18275) was added to further identify VVS.

Market Data

Leveraging the CDS model provides a

Both models provide familiar processing

workflow

workflows that also aligns with

the way VVS are priced. Par-zero prices are expected, so

VVS pricing in the market. Both models use par-zero pricing, which allows positive and negative prices

can

to be entered directly.

In addition, leveraging the CDS par

Par-zero pricing

model

also allows for extreme price fluctuations, which would be capped if using par-based/percentage pricing.

For

There should be no price manipulation required for the OPOPSW model. When using the SWCDCO model for Dispersion Swaps, you may need to flip the price from positive to negative, or vice versa, because

CDS

SWCDCO are always held long in Eagle.

Security Data

VVS can be setup and maintained using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). The list below contains all fields required to configure a VVS SMF.

OPOPSW Security Data

  • Issue Name (961)

  • Primary Asset ID (14) & Type (1432)

  • Processing Security Type (3931) = OPOPSW (Swaptions)

  • Price Multiplier (18): 1.00 is most common for VVS, but 0.01 may be correct depending on your price source

  • Contract Size (19): typically 1.00 for VVS

  • Issue Country (1418)

  • Asset Currency (85)

  • Expiration Date (38): date when Eagle Accounting will automatically mature the VVS, unless the entity-level Options and Futures Expiration Delay Days field has been populated

  • Strike Price (67): used for reference/reporting purposes, not required for processing

  • Option Type (1142): any value can be selected because the exercise/assignment process is not used for VVS

  • Underlying Security (1347): if you set up the index SMF ahead of time, you can add it here for reference purposes

SWCDCO Security Data

  • Issue Name (961)

  • Primary Asset ID (14) & Type (1432)

  • Unique Product (1955) & Swap

Identifiers
  • Identifier (1958, V12.1.2 and above)

  • Processing Security Type (3931) = SWCDCO (Credit Default Swaps)

  • Security

Type
  •  (82) & Sub Security Type (1464): can be used to distinguish VVS from regular

CDS
  • SWCDCO

  • Price Multiplier (18): 1.00 is most common for VVS, but 0.01 may be correct depending on your price source

  • Issue Country (1418)

  • Asset Currency (85)

  • Buy/

Sell
  • Sell Indicator 

Indicator 
  • (1364): required for securities using the

CDS
  • SWCDCO model, but has no impact on Accounting for VVS; can be used to denote buying or selling the variance/volatility

    • Buy: long exposure to variance/volatility

    • Sell: short exposure to variance/volatility (typically the broker side or party writing the contract)

  • Coupon (70) = 0.00

    • This suppresses income accruals

  • Coupon Type (97) =

 
  • F (Fixed Rate)

  • Day Count Basis (471) = ACT/360

  • Payment Frequency (472) =

 
  • MAT (At Maturity)

  • Business Day Convention (1536) = NONE

  • Issue Date (68): first trade date of the swap

  • Dated Date (1183):  "Effective Date" in ISDA contracts; typically same as Issue Date for VVS

  • First Coupon Date (473) = Maturity Date

  • Last Coupon Date (474) = Maturity Date

  • Maturity Date (38): "Final Observation Date," "Expiration Date," or "Termination Date" in ISDA contracts

  • Cleared Security (5027) = No

Trade Processing

OPOPSW Open

(transaction

& Close

The fields below are used for both opens and closes.

  • Contracts (40): notional amount of the VVS

  • Price Per Contract (45): multiplied by ContractsContract Size, and Price Multiplier (18) to calculate the premium

    • Can be positive, negative, or zero

  • Commission Per Contract (971): multiplied by Contracts to calculate Commission Amount Local (47), which is factored into the Net Amount fields

  • Tax Amount (46), SEC Fee (48), Stamp Duty Tax (51), & Other Fee (3752): added to the premium and commission to generate the total net amount

  • Broker (88)

Field

Open > Long

Open > Short

Close > Long

Close > Short

Event Type (55)

BUY

WRITE

SELL

BUYCVR

Long-Short Indicator (15)

L (LONG)

S (SHORT)

L (LONG)

S (SHORT)

Net Option Positions (639) = No

Creates a long position (long with positive quantity).

Creates a short position (short with positive quantity).

Closes (partially or fully) a previously established long position.

Closes (partially or fully) a previously established short position.

Net Option Positions (639) = Yes

Creates a long position (long with positive quantity) or closes a previously established short position (long with negative quantity).

N/A

Creates a short position (long with negative quantity) or closes a previously established long position (long with positive quantity)

N/A

SWCDCO Open (event type: CDSOPEN)

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. The list below contains all fields required to book a VVS trade.

  • Traded Interest/Effective Date (2857): date accruals begin in Accounting; leave default value as there is no impact for VVS

  • Select Values to be Calculated by STAR (7000) = Calculate None

  • Data Entry Method (10485):

Enter Price to supply a unit price or Enter Total Settlement Amount to supply a value representing all-inclusive trade proceeds (both can be positive or negative)
  • Enter Price: Net Amount is calculated as Notional Principal Value * Price * Price Multiplier 
  • Enter Total Settlement Amount: Net Amount is equal to Total Settlement Amount
  • Depending on the type of trade (open or close) and sign of the Price or Total Settlement Amount, Accounting will post either a premium payment or premium receipt; the chart below outlines this methodology
    • Open + Positive Price/Amount = Premium Payment
    • Open + Negative Price/Amount = Premium Receipt
    • Close + Positive Price/Amount = Premium Receipt
    • Close + Negative Price/Amount = Premium Payment
  • Open price/amount is typically zero for VVS as there is no upfront payment

    SWCDCO Close (

    transaction

    event type: SELL)

    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. All fields on the close are the same as the open, except Lot Selection Method

    . VVSs

    (27). OPOPSW can be closed using any option. SWCDCO can be closed using either FIFO or IDLOT.

    Cancel & Rebook

    Faulty VVS transactions can be cancelled and rebooked using the Cancel & Rebook Trade module, which will also replay the full lifecycle of the position. Alternatively, trades can be cancelled using Cancel Trade, with the transaction rebooked using the Book Trade module.

    Accounting

    Once a VVS position has been established it will be picked up in Eagle’s global workflow. Accounting valuation is calculated when posting unrealized gain/loss and Data Management valuation is calculated in STAR to PACE. These can be scheduled or triggered manually.

  • Accounting Center > Processing and Exceptions > Global Processes (V17)
    • Accounting Valuation: Unrealized Gain Loss Entries > Post Daily Fund Unrealized Gain Loss-Position
    • Data Management Valuation: Eagle STAR to Eagle PACE Direct Processing > Transfer Data - Batch
  • Global Process Center (prior to V17)
  • Accounting Valuation: Unrealized Gain Loss Entries > Post Daily Fund Unrealized Gain Loss-Position
  • Data Management Valuation: STAR to PACE Direct Processing > Transfer Data - Batch

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    Options Global Processing Notes
    Options Global Processing Notes

    Valuation

    Due to the broad universe of calculations underlying different flavors of VVSs, Eagle requires clean unit prices to generate accurate valuations. Eagle does not calculate the variance/volatility/dispersion based on underlying price/index/rate levels. The price loaded into Eagle, when multiplied by the notional and Price Multiplier, should equal the expected market value of the VVS.

    VVSs can be priced both positive and negative.

    Market Disruption Events

    Please contact Instrument Engineering for more information about processing these events.

    Reporting

    STAR to PACE (S2P)

    Almost all reports in Eagle 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 a single row for each VVS in the

    position

    POSITION,

    position

    POSITION_

    detail

    DETAIL,

    trade

    TRADE, and

    cash

    CASH_

    activity

    ACTIVITY tables. The

    market

    MARKET_

    value

    VALUE_

    income

    INCOME column captures the total market value, inclusive of price fluctuations and period-to-date accruals payable or receivable.

    Accounting Reports

    Eagle has a core set of

    Accounting

    accounting reports that can be used to review VVS and other security information. These

    were

    are designed to support the daily operational workflow for business users,

    so

    allowing Grid Reports

    can

    to be easily exported to Excel and customized to provide additional details

    that they need

    as needed. Advanced Reports are intended to be client-facing

    , but

    and do not provide the same level of customization.

    Insurance Reporting

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    Derivatives Insurance Reporting Processing Notes
    Derivatives Insurance Reporting Processing Notes

    Data Management Reporting

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    General Reporting (Eagle OLAP) Processing Notes
    General Reporting (Eagle OLAP) Processing Notes

    Performance

    The performance toolkit calculates market value-based performance for VVSs 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

    meaningful returns. Package content is available for

    CDS

    SWCDCO, which may be applicable to VVS, but there is no package content specific to VVS. Please contact Instrument Engineering to discuss implementation for VVS.

    Automation

    VVS security master files (SMFs) and trades can be loaded through the standard Message Center streams following the

    CDS

    OPOPSW or SWCDCO model. The SMF must be loaded prior to the trade (trades do not spawn SMFs). Refer to 

    Supported Generic Interfaces V17