Example reference data screens and fixed leg accrued interest calculations are attached:

• ILAS Examples.xlsx

Entity Setup

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

Reference Data

Storage & Configuration

Eagle has modeled ILASs as three rows in Data Management, each with its own Security Alias (10), linked by a common Primary Asset ID (14). Eagle Accounting must be set up to allow duplicate IDs by following the steps here: Allow Duplicate Cross Reference Identifiers Processing Notes.

Market Data

The underlying inflation index must be set up and populated with the appropriate periodic values. If the underlying bond is a United States Treasury Inflation-Protected Security (US TIPS), this means monthly Consumer Price Index (CPI) values. Refer to the Market Data and Security Data sections of Inflation-Linked Bonds (ILB) Best Practices for more information about creating and populating underlying inflation indexes.

For floating legs, the underlying floating rate index must also be set up and populated with the appropriate periodic rates. Refer to the Market Data section of Interest Rate Swaps (IRS) Best Practices for more information about creating and populating floating rate indexes.

Security Data

ILASs can be set up and maintained in Issue Viewer, Reference Data Center (RDC), or Security Reference Manager (SRM). Most data is entered on the contract and propagated to the legs. Specific accrual conventions are entered separately on each leg.

Contract

• Issue Name (961)
• Primary Asset ID (14) & Type (1432): ensure duplicate IDs are allowed (see Storage & Configuration section above)
• Processing Security Type (3931) = SWCOIF (Inflation Linked Swap Contract)
• Price Multiplier (18): the default of 0.01 will be correct in most cases, but may need to be changed to 1.00 (ILAS prices are sometimes supplied having already been multiplied by 0.01)
• Issue Country (1418)
• Asset Currency (85)
• Cleared Security (5027): cleared ILAS are supported (refer to Cleared Swaps Best Practices for information on the VM process)
• Issue Date (68): first trade date of the swap
• Dated Date (1183): date accruals start, "Effective Date" in ISDA contracts
• Maturity Date (38): date swap expires, "Expiration Date" or "Termination Date" in ISDA contracts

Inflation Leg

Most accrual terms are identical to the underlying ILB. Key fields are noted below. Refer to the Security Data section of Inflation-Linked Bonds (ILB) Best Practices for more information about configuring the accrual terms for inflation-linked securities.

• Processing Security Type (3931) = SWLEIF (Swap Leg Inflation Linked Interest Accrual)
• Coupon (70): same as underlying bond
• Coupon Type (97): same as underlying bond
• Day Count Basis (471): same as underlying bond
• Payment Frequency (472): same as underlying bond
• Business Day Convention (1536): typically Modified Following, which is ADJMBC (Modified Following - Adjusted)
  
  • Coupon Day of Month (10551): day of the month that payments are scheduled to be made, which will be automatically adjusted based on the Business Day Convention
  • Business Calendar (1480): as specified in the contract; a composite calendar (including dates from two different calendars) may need to be setup in some cases
• First (473) & Last Payment Date (474): as specified in contract
  • These dates will align with the underlying bond payment schedule during the tenor of the ILAS contract
• Underlying Security (1347): populate with the appropriate underlying inflation index (CPI, RPI, etc.)
• Dated Date CPI (1550): reference inflation index value on dated date
• ILB Calculation Type (11808): select based on country of issue and series
• ILB Index Precision (11017): number of decimal places to which the ILB index ratios will be calculated (Eagle Accounting supports up to 12)
• ILB Deflation Protected Maturity (11809): defines if the initial principal investment is protected at the time of maturity
• ILB Min Index Ratio (3854): defines the lowest index ratio to which amortization will be calculated for the purposes of realizing gain/loss at maturity
  • This only applies when the entity-level Min ILB Ratio Flag = Yes

Interest Leg

The interest leg works identically to an IRS leg. It can be either fixed or floating rate. Refer to the Security Data section of Interest Rate Swaps (IRS) Best Practices for more information about configuring the accrual terms for fixed or floating legs.

Trade Processing

Open and close trades are booked identically to IRSs. The price is entered on the contract and accrued interest, if applicable, is calculated on the appropriate leg. Refer to the Trade Processing section of Interest Rate Swaps (IRS) Best Practices for more information about booking trades.

The one additional field for ILAS processing is ILB Index Ratio (4483) on the inflation leg. This is retrieved automatically and is used in the traded interest calculation.

Conversion

The CONVERSION event is supported for ILASs. This uses the core open swap screen, rather than the dedicated conversion screen.

Cancel & Rebook

Faulty transactions must be cancelled using Batch Cancel Trades, with the transaction rebooked using the Book Trade module. ILASs are not supported in the Cancel & Rebook Trade process. Maturities must also be canceled using Batch Cancel Trades.

Accounting

Once an ILAS trade is booked it will be picked up in Eagle’s global workflow. Inflation-adjusted daily accruals and periodic coupon payments are generated using underlying CPI values as part of the earnings process, 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

  • Accruals: Earnings > Run Income Accruals

  • 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

  • Accruals: Earnings > Accrue

  • Accounting Valuation: Unrealized Gain Loss Entries > Post Daily Fund Unrealized Gain Loss-Position

  • Data Management Valuation: STAR to PACE Direct Processing > Transfer Data - Batch

Valuation

Eagle Accounting values ILASs using clean unit prices on a par-zero basis (around zero rather than around 100). Prices must be entered at the contract level using Add Issue Price or Pricing Center. The market value formula is:

• Market Value = Notional Amount * Price * Price Multiplier * Quantity Scale
  
  • Leg-level accrued interest is captured in Market Value Income on each leg
  • Inflation leg accrued interest includes the inflation adjustment
  • The total value of the ILAS is the net MVI across the contract and legs

Accruing on Negative Interest Rates

If a swap leg is long, Eagle Accounting makes negative postings to a receivable account. If the swap leg is short, the negative postings are to a payable account. Swap accrual postings are not made to the opposite account (payable vs. receivable) when accruing on negative interest rates.

Mature/Expire

ILASs will be picked up by Eagle Accounting’s core maturity process. This will be scheduled in production environments, but can be triggered manually via Accounting Center > Processing and Exceptions > Global Processes > Expirations & Maturities > Run Mature Process (V17) or Global Process Center > Expirations > Mature (prior to V17).

There is no cash component to the maturity event itself because swaps have a Maturity Price of zero and final coupon payments are dropped as part of the accrual process.

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 three rows for each ILAS in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column for each row captures a portion of the total market value.

• Contract: market value due to price fluctuations
• Pay & Receive Legs: market value due to period-to-date accruals payable

Accounting Reports

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

ILASs are displayed as three separate rows. The contract and legs are intended to be displayed together, but may be broken into different areas depending on the report's groupings (long/short, for example).

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 ILASs at the contract (price changes) and leg (accruals paid/received, if applicable) levels 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 returns. Please contact Instrument Engineering if you are interested in these analyses for ILASs.

Automation

Refer to Multi-Leg Swap Automation Processing Notes for general information about multi-leg security setup and trade processing via Message Center.

ILAS prices must be loaded to the contract only. Make sure you set tag 4590 = C in your price message.