Phase 1 of swaps netting in Eagle Accounting is limited to cleared Interest Rate Swaps (IRS) and Credit Default Index Swaps (CDX) with variation margin (VM) and amortization both turned off. Single-Name Credit Default Swaps (CDS) are also supported when following Eagle’s best practice of using the CDX functionality for all credit swaps. Netting is rules-based to support different configurations across clearinghouses and securities. It can be triggered manually or scheduled. Rules are configured based on Processing Security Type (3931), Primary Asset ID (14), and Primary Exchange (17).
Trade Processing
The market convention for cleared swaps is that all trades are opens and netting is used to collapse the offsetting positions, as shown in the scenarios below. To align with this convention in Eagle Accounting, only OPENSWAP transactions would be used. This may require remapping of inbound messages if closes/sells are being instructed.
Scenario | Existing Position | Activity | Netted Position |
|---|---|---|---|
Reduce Position By Half | 1,000,000 Long | Open 500,000 Short | 500,000 Long |
Cross Zero (500,000 Short to 250,000 Long) | 500,000 Short | Open 750,000 Long | 250,000 Long |
Configuration
Swaps netting is a four-step process:
Establish Accounting Rule
Define Netting Rule Details
Add Netting Rule to Entity
Trigger Netting
| Info |
|---|
Netting is designed to work with Identified cost. Average cost entities require a Mixed Cost Basis Rule to specify Identified cost for Processing Security Type = |
Step 1: Establish Accounting Rule
Open Create Accounting Rule (Add Accounting Rule prior to V17)
Enter Rule Name (3197, must be unique) and Rule Description (1166)
Set Rule Type (1882) =
Swap NettingClick Submit
Step 2: Define Netting Rule Details
Open Create Netting Rule (Add Netting Rule prior to V17)
Select the Rule Name (3197) you created in Step 1
Set Processing Security Type (3931) =
SWCOIRfor IRS orSWCDCXfor CDXSelect a clearinghouse from the Exchange Code (9036) list
Enter the appropriate Lot Selection Method (27) to use for the netting transaction
Asset ID (14) and Issue Name (961) can be used to apply the netting rule to an individual security
Enter a Rule Begin Date (71) less than or equal to the earlier possible date netting should take place
You can set this to
19000101if you want all positions to be eligible regardless of date
Click Submit
Note: additional rows with different criteria can be added to the same netting rule by right-clicking in the lower multi-row section of the screen and selecting Add Row(s).
Step 3: Add Netting Rule to Entity
Open Create/Edit Entity (Add Entity or Change Entity prior to V17)
Set Netting Rule Name (1887) to the Rule Name you created in Step 1
Click Submit
Step 4: Trigger Netting
Open the Run Swap Netting global process (SWAP Netting prior to V17)
Set Select Query Option (2283) to capture the universe of securities you want to net
Enter Net Date (221) equal to effective date of the netting, plus any other fields required based on Select Query Option
Click Submit
Netting transactions should be cancelled using Batch Cancel Trades to ensure all constituents are rolled back together.
Examples
Credit Default Index Swaps
...
Open 1 million notional long (sell protection) @ 101 with trade date 12/1/2015
Open 1 million notional short (buy protection) @ 100 with trade date 12/15/2015
Trigger netting with Net Date =
20151215Both lots are closed out with Reason (56) =
NETTINGand no cash is generated
Interest Rate Swaps
...
Open 3 million notional long @ 0.1 with trade date 12/15/2015
Open 4 million notional long @ 0.4 with trade date 12/16/2015
Open 5 million notional long @ 0.2 with trade date 12/22/2015
Open 2.5 million notional long @ 0.5 with trade date 12/28/2015
(Net Position = 14.5 million notional long @ 0.2862069 weighted average unit cost)
Trigger netting with Net Date =
20160113All lots are closed @ weighted average unit cost
A single new lot for 14.5 million notional long is opened @ weighted average unit cost
No cash is generated