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

• ZCIS 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 ZCISs 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

ZCISs are typically priced dirty in the market. To prevent any double-counting during valuation, inflation income must be turned off in Eagle Accounting. This is accomplished by setting both legs to be interest accrual legs, rather than one inflation leg and one interest accrual leg. As a result, you do not need to load any inflation index values for this security.

The interest accrual leg of an ZCIS uses either a fixed or floating rate. If you are using an all-in dirty price (inclusive of both inflation and interest), both legs should be up with fixed rate coupons of zero. If you are using a dirty price that only includes inflation, you can accrue the fixed or floating interest in Eagle Accounting. For floating legs, the underlying floating rate index must be set up using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). Other than identifiers, the only required information is the currency.

Once the index has been setup, floating rates can be loaded using Add Variable Rate. Eagle Accounting will automatically pull the appropriate rates into the accrual process based on the floating leg's First Rate Reset Date (10911), Reset Frequency (1788), and Reset Look-Back Days (10547).

• Interest rates must be loaded to the underlying index back to Dated Date (or previous coupon date if swap is traded off-cycle) and each subsequent coupon date minus Reset Look-Back Days

Security Data

ZCISs can be set up and maintained in Issue Viewer, SRM, or RDC. Most data is entered on the contract and propagated to the legs. Specific reset and 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 (ZCIS prices are sometimes supplied having already been multiplied by 0.01)
• Issue Country (1418)
• Asset Currency (85)
• Cleared Security (5027): cleared ZCIS are supported (refer to Cleared Swaps Best Practices for information on the VM process)
  • If you are using an all-in dirty price, you will have a single VM record for the contract each day
  • If you are accruing interest in Eagle and using a dirty price that only includes inflation, you will have two VM records each day: one each for the contract and interest accrual leg
• 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

Legs

The "Interest Leg" values should only be used if you are accruing in Eagle, otherwise both legs should use the "Inflation Leg" values)

• Processing Security Type (3931) = SWLEAC (Swap Leg Interest Accrual)
  • This should be used for both legs
  • Do not use SWLEIF (Swap Leg Inflation Linked Interest Accrual)
• Coupon (70)
  • Inflation Leg: 0
  • Interest Leg: enter stated rate for fixed leg and zero for floating/variable rate legs to indicate that actual rates must be viewed from VARIABLE_RATE table
• Coupon Type (97)
  • Inflation Leg: F (Fixed Rate)
  • Interest Leg: F (Fixed Rate) or X (Floating Rate)
• Day Count Basis (471)
  • Inflation Leg: ACT/360
  • Interest Leg: as specified in contract
• Payment Frequency (472)
  • Inflation Leg: MAT (At Maturity)
  • Interest Leg: as specified in contract; often MAT (At Maturity) for ZCIS
• Business Day Convention (1536)
  • Inflation Leg: NONE
  • Interest Leg: typically Modified Following, which is ADJMBC (Modified Following - Adjusted)
    • Set to NONE if Payment Frequency = MAT (At Maturity)
    • The following fields are conditionally required if Business Day Convention != NULL or NONE
      • 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)
  • Inflation Leg: set to Maturity Date
  • Interest Leg
    • Set to Maturity Date if Payment Frequency = MAT (At Maturity)
    • For any other Payment Frequency, set to actual first and last payment dates, including any adjustments for weekends/holidays
• Floating Rate Fields (only applicable to the Interest Leg): refer to the Security Data section of Inflation-Linked Bonds (ILB) Best Practices for more information

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 accrual-related fields can be ignored if you are not accruing in Eagle Accounting.

Conversion

The CONVERSION event is supported for ZCISs. 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. ZCISs are not supported in the Cancel & Rebook Trade process. Maturities must also be canceled using Batch Cancel Trades.

Accounting

Once an ZCIS trade is booked it will be picked up in Eagle’s global workflow. Daily accruals (if applicable) are generated 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 ZCISs 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
  • If you are using an all-in dirty price (inclusive of both inflation and interest), both legs should be up with fixed rate coupons of zero
  • If you are using a dirty price that only includes inflation, the accrued interest portion of an ZCIS's MV will be captured in its Market Value Income (MVI)

Accruing on Negative Interest Rates

This can be ignored if you are not accruing in Eagle Accounting.

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

ZCISs 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 ZCIS 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
• For an ZCIS, the pay leg and/or receive leg will be zero (both if you use an all-in dirty price)

Accounting Reports

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

ZCISs 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 ZCISs 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 ZCISs.

Automation

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

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