BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 29 Apr 2020

TABLE OF CONTENTS

OVERVIEW

Forward Contracts (Forwards) allow two parties to buy and sell assets, most often currencies, at given prices on a specified future date. Eagle supports end-to-end processing of Forwards in V11.0 and all subsequent releases. This document covers the full lifecycle including Accounting, Data Management, and Performance. Refer to Bond Forwards Best Practices for information about processing Forwards on fixed income securities.

Non-Deliverable Forward (NDF) Contracts are FX transactions used as hedging mechanisms where a currency is so thinly traded that it cannot be physically delivered at expiration. Instead, it is replaced by a settlement between counterparties for the net profit/loss on the contract, calculated using the prevailing "spot fixing rate" from two days prior. The settlement occurs in a predetermined deliverable currency, often USD. Because NDF Contracts are similar to traditional Forwards until they reach "fixing" and settlement dates, Eagle’s core Forward functionality can also be leveraged for NDF Contracts, with some minor additional processing for fixing and rolling forward.

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

• Forward: Forward Contract Examples.xlsx
• NDF Contract
  • NDF Contract Examples.xlsx
  • NDF Contract Examples with Roll.xlsx

ENTITY SETUP

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

REFERENCE DATA

Storage & Configuration

Eagle models Forward security master file (SMF) as two separate rows in Data Management, each with its own Security Alias (10), linked by a common Primary Asset ID (14). One row represents the buy side and the other represents the sell side.

Market Data

There are two options for pricing Forwards in Eagle. The first is to load prices the same way as other securities, except values are required on both legs. The other option is to have Eagle calculate prices based on prevailing spot FX rates and forward points, using either Prices and Exchange Rates Center or Pricing Center. Refer to the Valuation section for details about this process.

Security Data

There are also two options for setting up Forwards in Eagle depending on your entity-level value of Forward Security Exists. The first is to create SMFs before processing trades, the same way as other securities (Forward Security Exists = Yes). The other is to create SMFs on the fly at the time of trade booking (Forward Security Exists = No). Refer to the Trade Processing section for details about the latter workflow

Forwards can be set up and maintained using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). Some data is shared across the legs, while other fields can be unique. Some tag numbers differ between Issue Viewer/SRM and RDC due to architectural differences.

• Shared
  • Primary Asset ID Type (1432)
  • Primary Asset ID (14)
  • Processing Security Type (3931) = FWXXXX
  • Expiration/Maturity Date (38)
  • Match Broker Indicator (3913): specifies whether the broker is used in the matching criteria for forward trading; select No if Forward Position by Broker is set to No on your entity, or Yes if it is set to Yes
    
    • When set to Yes you also have to populate the Broker (88), which gets included in the Issue Name concatenation
• Sell Side
  • Issue Name (961): concatenated automatically
  • Currency (85 or 363)
  • Alternate Asset ID (1795) and Type (5501)
  • FWDXREF (11449 or 1952)
  • Internal (1976 or 1955)
• Buy Side
  • Issue Name (961 or 1104): concatenated automatically
  • Currency (85 or 313)
  • Alternate Asset ID (1795 or 2294) and Type (5501 or 2292)
  • FWDXREF (11449 or 2300)
  • Internal (1976 or 5300)

NDF Contracts should be set up with the true non-deliverable currency on the buy or sell side.

TRADE PROCESSING

There are two options for trading Forwards in Eagle depending on your entity-level value of Forward Security Exists.

• Yes: you must query for the SMF you set up in advance
• No: you must query for the currency SMF to be bought or sold (CASHGBP, CASHEUR, etc.)

Trades are entered using the Book Trade module once entity and reference data have been configured. Enter the appropriate entity, security identifier (for the Forward SMF or the currency SMF), and trade (35)/settle (37) dates and click Submit to query for the security. Right-click it and select Book Foreign Exchange > Buy Currency - Forward Contract or Sell Currency - Forward Contract (you will only see the latter option if Forward Security Exists = Yes).

Forward Security Exists drives the data requirements at trade time as well. If it is set to No, you must enter the fields from the Security Data section in addition to the fields listed below. This also provides the option to create a unique Primary Asset ID automatically by setting Process For Creating Primary Asset ID (2284) = System Generated.

• Sell Quantity (366)
• Buy Quantity (316)
• Commission Amount Local (47)
• Other Fee Local (3752)
• Fee Settlement Date (9357)
• Settlement Currency (63): defaulted based on the entity-level Forward Settlement Currency, but can be overridden
• Broker (88)

NDF Contracts

Open

NDF Contract open trades should be booked just like any other Forward.

Fixing

On fixing date, an offsetting transaction must be entered for the non-deliverable currency to a) prevent any cash settlement of the non-deliverable currency and b) determine the net settlement amount of convertible currency. This transaction should have Trade Date = fixing date and Settlement Date = original Settlement Date. Both of the attached NDF spreadsheets show examples.

Roll

NDF Contracts can be rolled forward prior to the fixing date to extend the settlement date out into the future. This is done by entering an offsetting transaction as described in the Fixing section above with Trade Date = roll date, combined with a transaction in the original direction with Trade Date = roll date and the new Settlement Date. The Roll Forward 5-27 worksheet of the attached NDF Lifecycle.xlsx spreadsheet shows an example.

In the example with a roll, two fixing transactions must be entered on fixing date: one to offset the original NDF, and another to offset the roll date offset. These are the steps from the example, which assumes Forward Close Eligible = No:

• We start by entering NDF A
• On roll date, we book NDF B to offset NDF A, and we book NDF C with the new Settlement Date
• On fixing date, we book NDF D to offset NDF B, and we book NDF E to offset NDF C
• On the original Settlement Date, both pairs of the offsetting transactions are reduced to zero and realized gain/loss is locked in
• The end result is NDF C outstanding with the new Settlement Date

Cancel & Rebook

Faulty Forward transactions can be cancelled using Cancel Trade or Batch Cancel Trade, with the transaction rebooked using Book Trade. Forwards are not supported in the Cancel & Rebook Trade process.

• Modify Cancel Accounting Date can be used to change the accounting date associated with a cancel

ACCOUNTING

Once a Forward trade is booked, 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.

• V17 & Above: Accounting Center > Processing and Exceptions > Global Processes
  
  • 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
  • Maturities: Expirations & Maturities > Run Forward Contracts Maturity
• Prior to V17: Global Process Center
  
  • Accounting Valuation: Unrealized Gain Loss Entries > Post Daily Fund Unrealized Gain Loss-Position
  • Data Management Valuation: STAR to PACE Direct Processing > Transfer Data - Batch
  • Maturities: Expirations > Mature Forward Contract

Valuation

If Forward prices are being sourced externally, they can be loaded directly to the appropriate leg.

To calculate Forward prices in Eagle, you must use either Prices and Exchange Rates Center or Pricing Center. In either case, the following steps must be completed first.

1. A Feed Type of BFX exists in Accounting; if it does not, it can be added as described in the Storage & Configuration section near the beginning of this document
2. The entity-level FX Source has a Feed Type of BFX listed as part of its Interfaces Details; this can be added using Add Interfaces Detail
3. The entity-level elections for Forwards have been populated: Forward Price Source, Forward Position by Broker, Forward Close Eligible, Forward Settlement Currency, and Forward Security Exists
   1. Note: these fields are not marked as required on the entity setup and there are no defaulted values
4. The Forward SMF exists, either from being set up in advance or created on the fly at trade time
5. The Forward is held in at least one entity

Prices and Exchange Rates Center

The rates and points Accounting uses to calculate forward prices can be loaded using the Window > FX Rates screen. Enter the Exchange Rate Source, To Currency Symbol, From Currency Symbol, and Effective Date and click SEARCH to submit the query. To Currency is the pricing currency (it should match entity-level Forward Price Source) and From Currency is the local currency of the leg. Effective Date is the date for which you are pricing.

If no spot rate or points have been loaded for the Effective Date, you will see a Tolerance Status of MissingFxRate.  Enter the spot rate and points (7-, 30-, 60-, 90-, 180-, 360-, and 720-day) and click Save Changes, after which the Tolerance Status should change to FxRate Success.

• If a spot rate already exists for query criteria, it will be pulled into this screen
• The day-over-day spot rates are verified against each other; entering an unrealistic rate may result in a Tolerance Status of FxRate Failure
  • This can be overridden if necessary
• Points can be negative
• Only the points for the lower and upper bounds are required, the rest are optional to improve accuracy
  • For example: if the number of days to maturity for a given Forward is 144 days, only the 3- and 6-month points are required to calculate the price

Forward Pricing Trigger

After the spot rate and points have been entered, the calculation can be triggered using the standalone Forward Pricing screen. This uses the ESTAR.PKG_ESTAR.INSERT_UKNOWN_PRICE stored procedure.

• Reprice Flag (1844)
  • No or NULL: prices will only be calculated for Forwards with no price or a zero price
  • Yes: allows repricing of Forwards that already have a price, if a spot rate or points changed, for example
    • This requires populating Currency to be Repriced (85), which will cause all held Forwards against that currency (both buy and sell) to be repriced
• Calendar Days Method (1257)
  • No: calculation assumes fixed forward point periods, such as 30-, 60-, or 90-days
  • Yes: calculation uses actual calendar days between Effective Date and Settlement/Expiration/Maturity Date
    • This requires populating Calendar Name (1941)

Once prices have been calculated, they can be viewed via the Window > Forwards screen. In this window, Forward Source is the entity’s Forward Price Source, not its FX Source. Successful pricing is indicated by a Tolerance Status of Forward Success. The calculated prices are stored in the PRICE table.

Cross Currency Forwards

Similar steps should be followed to price cross currency forwards, where both currencies differ from the base currency of a fund. The only difference is that two sets of rates and points must be entered. One set is required for each leg against the pricing currency, as indicated by the entity's Forward Price Source.

Forward Pricing Formula

Prices and Exchange Rates Center interpolates forward prices using the below formulas:

• IF DAYS <= 7 THEN (spot rate + 0 + (7day point - 0) * (days - 0) / (7 - 0))
• IF DAYS <=30 THEN (spot rate + 7day point + ((30day point - 7day point) * (days - 7) / (30 - 7)))
• IF DAYS <=60 THEN (spot rate + 30day point + ((60day point - 30day point) * (days - 30) / (60 - 30)))
• IF DAYS <=90 THEN (spot rate + 60day point + ((90day point - 60day point)* (days - 60) / (90 - 60)))
• IF DAYS <=180 THEN (spot rate + 90day point + ((180day point - 90day point)* (days - 90) / (180 - 90)))
• IF DAYS <=360 THEN (spot rate + 180day point + ((360day point - 180day point) * (days - 180) / (360 -180)))
• IF DAYS >360 THEN (spot rate + 360day point + ((720day point - 360day point) * (days - 360) / (720 - 360)))

After the price has been calculated, it is moved to the FX rate column and a price of 1.00 is is used for positional data to reflect any change as currency gain/loss.

In addition to the full walk-through example attached, there are two additional spreadsheets demonstrating the pricing calculations. Forward Price Calculations 8446.xlsx includes multiple different currency pairs, while Forward Price Calculations 8609.xlsx shows two different valuation dates for a single contract.

Pricing Center

Pricing Center differs from Prices and Exchange Rates Center in its data requirements for deriving a price. Pricing Center does not require the lower bound point to be loaded; instead, it substitutes the spot rate as the lower bound.

You have complete flexibility to store forwards points to any level of granularity you desire. The industry standard is a spot rate plus 7-, 30-, 60-, 90-, 180-, 270-, and 360-days. You can also store weekly/monthly points. Once Pricing Center determines the days to maturity of the forward, it gets the two closest lower and upper bound points available.

• Standard Formula = spot + point of lower bound + (point difference between lower and upper bound * (day range left over after getting to lower bound / total days in segment))

The Pricing Center process uses Exchange Rates - FX Rules to create demand for the original source and Exchange Rates - FX Validation Rules to move rates to the target source, which then become the basis for price interpolation. These events can be triggered manually, or scheduled to run as part of your daily workflow. Message Center streams to load exchange rates into Pricing Center are available in CSV and STAR formats: eagle_default_in_csv_pc_addfx and eagle_default_in_star_pc_addfx.

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 two rows for each Forward in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column captures the total market value. The following additional logic is also performed for Forwards:

• All local market value fields default to the leg quantity
• The price stored in the PRICE table is the one calculated by Pricing Center (or Prices and Exchange Rates Center) to be used to value the leg back to the base currency
• Price is set to 1.00 in the position and open lot tables

Accounting Reports

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

Insurance Reporting

Data Management Reporting

General Reporting (OLAP)

OLAP reports provide the maximum level of customization, allowing any column in Data Management to be pulled into a report. These go beyond the Accounting Grid Reports because they are not limited by core queries, can support multiple sources and various types of calculations, and provide drill-down functionality based on user-defined groupings.

PERFORMANCE

The performance toolkit has full functionality to calculate market value-based performance for Forwards using data supplied by the S2P process. Risk and performance attribution features are available to analyze Forward performance.

• Total performance of a Forward is calculated at the leg level

Note: there is an issue with performance when the entity election Forward Close Eligible is set to Yes. Refer to # 2 in the Other Notes section for more details.

AUTOMATION

Forward security master files (SMFs) and trades can be loaded through the standard Message Center (MC) streams. Unlike other securities, the SMF does not need to be loaded prior to the trade if Forward Security Exists = No. In this case, loading the trade will spawn an SMF (if necessary) in the same way as manual processing. Refer to the Supported Generic Interfaces guide for more information.

• Ensure Trade Ticket Number (761) is populated for all Forward trades because it is required to process cancels
• FX rates can be loaded via MC through the default eagle_default_in_csv_fxrate stream

OTHER NOTES

1. After posting the unrealized gain/loss, verify that the gain/loss values look reasonable.
2. Performance issue when Forward Close Eligible is set to Yes. The Global Professional Services team has created an exporter to correct this issue (TRADEFWD performance_flow_descr Issue).