Entity Setup

Before any trades can be booked, the target entity must be set up appropriately. Futures & Options with Margin Transaction Fees (3889) must be populated any time the Option or underlying Future has Variation Margin (4533) = Yes. The other Future-related fields are only required if the Option will be physically exercised into the underlying Future.

Note: Future Options are always processed as Identified cost regardless of an entity's Cost Method (22) setting.

Reference Data

Storage & Configuration

Eagle has modeled Option security master files (SMFs) as single rows in Data Management. The underlying Future can be set up ahead of time and then linked to the Option via the Underlying Security fields. The Underlying Security fields are optional on the SMF, but are required for physical exercises or assignments.

Market Data

Future Option prices must be loaded directly to the contract (they will not be pulled from the underlying security).

Security Data

Options can be set up and maintained in Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). The list below contains all fields required to configure a Future Option SMF.

• Issue Name (961)
• Primary Asset ID (14) & Type (1432)
• Processing Security Type (3931) = OPOPCM (Future Option)
• Contract Size (19): number of Futures that each Option is entitled to
• Issue Country (1418)
• Asset Currency (85)
• Expiration Date (38): date when Accounting will automatically expire the Option, unless the entity-level Options and Futures Expiration Delay Days field has been populated
• Strike Price (67): price at which the Option can be exercised or assigned
• Option Type (1142)
  • American: Option can be exercised or assigned at any time until expiration, assuming the strike price has been reached
  • European: Option can be exercised or assigned on expiration date only
  • Bermudan: functions the same way as American in Accounting; this option exists for reference data purposes only
• Premium Type (3302)
  • Cost: Option premium is settled to cash and valuation is the same as a vanilla equity option
  • Notional Cost: Option premium is not settled to cash, but instead held as a notional cost similar to Futures without variation margin (VM)
    • Variation Margin (4533, only if Premium Type = Notional Cost)
      • Yes: VM is calculated and settled to cash, resulting in a MV of zero on the Option
      • No: Accounting does not calculate VM, resulting in a MV on the Option equal to its URGL
    • Variation Margin Rule (2289, see the Valuation section for calculation details): defines how VM or unrealized gain/loss is calculated
      • Standard Life to Date: most US and foreign Future Options use this calculation
      • 10-Year Australian Government Bond (10Yr AUDGOVTBND): for Future Options on 10-year Australian government bonds; requires that Underlying Coupon Rate and Payment Frequency be populated as well
      • 3-Year Australian Government Bond (3Yr AUDGOVTBND): for Future Options on 3-year Australian government bond; requires that Underlying Coupon Rate and Payment Frequency be populated as well
      • Australian 90-Day Bank Bill (AUD 90 Day Bank Bill): for Future Options on Australian 90-day bank bills
      • US Treasury: for Options on US Treasury Futures
• Put/Call Flag (1350)

Trade Processing

Trades are entered using the Book Trade module once 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. When you right-click the security, the options for opening and closing it will depend on whether the entity-level Net Option Positions field is set to Yes or No.

Open & Close

The fields below are used for both opens and closes.

• Contracts (40): number of contracts being transacted
• Price Per Contract (45): this is multiplied by Contracts and Contract size to calculate the premium
• Commission Per Contract (971): this is multiplied by Contracts to calculate Commission Amount Local (47), which is factored into the net amount
• Tax Amount (46), SEC Fee (48), Stamp Duty Tax (51), & Other Fee (3752): these are added to the premium and commission to generate the total net amount
  • These fields are only available when Variation Margin = No
• Broker (88)
• Clearing Broker (1237): only required when Variation Margin = Yes

Commission/Fees

Any commissions and fees involved in the transaction can be entered at trade time. For Future Option with Variation Margin = Yes, the entity-level Futures & Options with Margin Transaction Fees determines how commissions and fees are treated (the default election is Capital).

• Capital: commission + fees are added to the notional amount used for calculating VM
  • They will be reflected in CASH when the VM process is run for Trade Date, Approved, and Settled
  • Notional Cost = (contracts * price) + commission + fees
• Expense: commission + fees will be expensed and excluded from cost for subsequent gain/loss calculations
  • The commission + fees are still included in margin approval process and will be reflected in CASH when the VM process is run for Trade Date, Approved, and Settled
  • Notional Cost = Contracts * Price

Exercise/Assign

Exercises and assignments are processed using Book Trade > Other > Exercise. By definition, purchased Options are exercised and written Options are assigned, but they use the same process in Accounting. Note: exercises of Australian Government Bond Future Options are not currently supported.

Settlement

Future Options can be exercised or assigned using cash or physical settlement. The section below focuses on Future Options with Premium Type = Notional Cost. For Future Options with Premium Type = Cost, refer to the Exercise/Assign section of Equity, Fixed Income, & Index Options Best Practices as these function more like standard Equity Options.

Cash Settlement

Cash settlement has no effect on the underlying asset and does not generate any cash. Enter the exercise/assign price in Price Per Contract (45). This is informational only.

Variation Margin = No

Cash settlement closes the specified number of Future Option contracts with associated cost treated as realized loss (purchased) or proceeds as realized gain (written).

Variation Margin = Yes

Cash settlement closes the specified number of Future Option contracts with gain/loss calculated as shown below.

• Purchased Call or Put
  
  • Gain (Loss) = # of contracts exercised * contract size * (exercise price - option open price) * price multiplier
• Written Call or Put
  
  • Gain (Loss) = # of contracts exercised * contract size * (option open price - exercise price) * price multiplier
• Note: realized gain/loss is not calculated based on initial price and exercise price

Physical Settlement

Physical settlement results in either opening or closing a position in the underlying asset. You must populate To Clearing Broker (5529) with the clearing broker for the underlying Future, even even if VM is turned off for the Future.

Variation Margin = No

Option cost/premium is allocated as URGL to underlying Future.

Variation Margin = Yes

Option gain or loss from VM is allocated as URGL to underlying Future

• Purchased Call: establishes long position
• Written Call: reduces long position; does not occur if underlying future is without VM
• Purchased Put: reduces long position; does not occur if underlying future is without VM
• Written Put: establishes long position

Physical Short Settlement

Not supported for Future Options.

Exercise/Assign Events

Accounting will automatically move the Option’s cost to the underlying security when the contract is exercised, via these events in Accounting:

• Close the Option contract
• Open or close the underlying security position (long or short)
• Allocate Option cost or premium to the underlying security position

Canceling Exercise/Assign Events

Canceling an exercise or assign event requires the use of the Batch Cancel Trades panel. Query for the appropriate date range, entity, and security, then set Choose Trade to Cancel (962) = the target exercise/assign event. This will roll back the exercise/assign event by removing the action on underlying shares and restoring the original position. Option trades can be canceled using the regular Cancel Trade panel or rebooked using the Cancel & Rebook Trades module.

Accounting

Once a Future Option 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.

• 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

• 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

For Future Options with Variation Margin = Yes, the VM process must also be triggered. Refer to Futures (FUT) Best Practices for detailed information on the VM workflow.

Valuation

Future Option valuation varies depending on the reference data elections for Premium Type and Variation Margin (if applicable).

• Premium Type = Cost
  • Market Value = # of Contracts * Contract Size * Price * Price Multiplier
• Premium Type = Notional Cost
  • Variation Margin = No
    • Market Value = # of Contracts * Contract Size * (Market Price - Trade Price) * Price Multiplier
  • Variation Margin = Yes
    • Market Value = zero (VM settled to cash each day based on day-over-day price movement)

Note: refer to Futures (FUT) Best Practices for detailed information on valuation when using Notional Cost and the calculations behind each Variation Margin Rule.

Expire

If the contract is not closed prior, Eagle Accounting will expire the Option on expiration date plus the number of days defined in the entity’s Options and Futures Expiration Delay Days election.

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 Future Option in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column captures the total market value. Cash activity is appropriately signed based on whether the Future Option is bought or written.

Accounting Reports

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

Refer to Derivatives Reporting Best Practices for additional guidance.

Insurance Reporting

To categorize derivatives for insurance reporting, such as the Schedule DB, Derivative Elections (56) must be set to Hedging Effective, Hedging Other, Income Generation, Replications, or Other on all trades. Leaving the default of Trade will prevent the transaction from appearing on insurance reports.

Data Management Reporting

General Reporting (Eagle 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 Eagle 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 calculates market value-based performance for Future Options using data supplied by the S2P process. However, this can be misleading because traditional market values do not capture an Option’s true exposure. Exposure-based analyses, which can be implemented using Eagle Enrichment, calculate more accurate returns. The documentation and .egl files linked below as attachments are available for beta testing. Additional details are available in Exposure Reporting Best Practices and the Eagle Enrichment User Guide 2015

• Options on Futures Enrichment Rule EGIE_008.egl
• Options on Futures Enrichment Inventory EGIE_008.xlsx

Automation

Sample messages for the standard interfaces are listed below.