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Overview

This document applies to all releases of Eagle software V11 and above. It covers the full lifecycle including Accounting, Data Management, and Performance. Version-dependent functionality is noted with the initial release(s) it became available.

Inflation-Linked Swaps (ILSs) allow one party to make fixed or floating interest payments to a counterparty in exchange for payments based on the level of inflation. This is benchmarked against a measure of inflation, such as the Consumer Price Index (CPI). In an Inflation-Linked Asset Swap (ILAS), the inflation leg mimics an underlying Inflation-Linked Bond (ILB). It uses the exact same accrual terms as the ILB and pays with the same frequency. For ILS contracts where there is a single bullet payment at maturity, refer to Zero-Coupon Inflation Swaps (ZCIS) Best Practices.

Eagle Accounting supports both bilateral and cleared ILASs in V12.1.2 and above. This document focuses on bilateral contracts. Refer to Cleared Swaps Best Practices for more information on processing cleared Interest Rate Swaps, which function identically to ILASs in terms of variation margin (VM) processing.

Pay special attention to underlined sections, as these highlight the most frequently encountered issues. Bold is used for navigation, modules, and screens. Italics are used for fields, tables, and errors. Fixed width indicates values for fields or code/text that should be entered. Tags are shown in parentheses (#) after field names.

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

Entity Setup

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

Entities trading swaps require a few specific pieces of data, which can be populated using Create/Edit Entity (V17) or Add/Change Entity (prior to V17).

  • Swap Accrual Method (1184): controls whether accruals are posted to Income/Expense or Unrealized ledger accounts (has no effect on cash or valuation)

  • Variable Rate Source (3301): specifies the source from which underlying floating rates will be pulled

    • If you receive an Expected number of underlying rates not found error, confirm the rates loaded to your underlying index match this source

  • Primary Amortization/Accretion Rule (3197): must be straight line (DEFAULTSL), straight line actual (DEFAULTSLA), or none (DEFAULTNONE)

    • If it is set to anything else, a security-level amortization/accretion rule must be established specifying one of the three above

  • Accrual Convention Offset (12038): leave the default of Settlement Date for standard accrual processing, or set to Settlement Date + 1 to put accrual calculations on a one-day delay (common in Canada)

    • When set to Settlement Date + 1, it can be overridden at trade time using Accrual Convention Offset Override (1604)

Swaps cannot be traded technical short even if Tech Short Eligible Indicator (57) is set to Yes.

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 in Allow Duplicate Cross Reference Identifiers Processing Notes.

To ensure each component of a swap always has a unique ID (other than Security Alias), SWAPID records are automatically added to the XREFERENCE table when a multi-leg swap is created. The Xreference Security ID Type (1234) is SWAPID and the Xreference Security ID (1233) is Primary Asset ID + C1, P1, or R1 for the contract, pay leg, and receive leg respectively

  • Example: if the swap's Primary Asset ID is SWAP175, the SWAPIDs will be SWAP175C1, SWAP175P1, and SWAP175R1

  • While swaps with more than three legs are not currently supported in Eagle Accounting, they are supported in Eagle's reference data products; swaps with additional pay and/or receive legs will be appended with P2, R2, P3, R3, etc.

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 https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978747/Inflation-Linked+Bonds+ILB+Best+Practices#Market-Data and https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978747/Inflation-Linked+Bonds+ILB+Best+Practices#Security-Data 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 https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978617/Interest+Rate+Swaps+IRS+Best+Practices#Market-Data 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 https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978747/Inflation-Linked+Bonds+ILB+Best+Practices#Security-Data 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 https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978617/Interest+Rate+Swaps+IRS+Best+Practices#Security-Data 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 https://eagledocs.atlassian.net/wiki/spaces/IE/pages/1658978617/Interest+Rate+Swaps+IRS+Best+Practices#Trade-Processing 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.

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