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Overview

This document describes how Eagle’s Pricing Center can be used to automatically pull the price from a Total Return Swap’s (TRS's) underlying security and apply it to the Return Leg for valuation.

The Price from Underlying process also supports scenarios where the underlying security currency differs from its parent security. The underlying security's price is converted based on the specified source, field, and date rule.

Implementation requires a moderate to advanced understanding of Pricing Center, and that it already be configured (or is in the process of being configured) for all general pricing purposes. You cannot use Pricing Center exclusively for TRS (or for any other subset of securities). Price from Underlying does not exist for Best Pricing because it only composites data and there are no validations, enrichments, or price adjustments.

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TRS Pricing

  • TRS are priced at the Return Leg level in Eagle Accounting (Processing Security Type = SWLXEQ or SWLEDB)

  • The following Processing Security Types can be stored as underlying securities on the Return Leg:

    • EQCSCS (Common Stock)

    • EQCSPF (Preferred Stock)

    • INXXXX (INDEX)

    • DBIBFD (Interest Bearing Debt Instrument)

Pricing Center

To implement Price from Underlying for TRS, demand must exist for both the underlying security itself and for the Return Leg (SWLXEQ) of the TRS that is being priced. A composited underlying security price must also be available at the target source for the TRS price rule.

For scenarios where the underlying security's currency differs from its parent security, System Parameter 40 controls whether the FX Rate is applied as "divide by" or "multiply by". Eagle Accounting uses "divide by". If your FX rates follow this standard, System Parameter 40 should be set to 1. You can confirm and edit it if necessary in System Management Center > System Settings > System Parameters. Locate Sys Item 40. The current value is shown under the Sys Value column. If it needs to be changed, right-click the row, click Edit, update the Value (1 for "divide by" or 0 for "multiply by"), click Save, and cycle the PACE Application Server.

The below process details the Pricing Center configuration, assuming target source prices are already available for the underlying index or security.

Rule

A rule must be created to allow the underlying security’s price to be applied to the TRS’s Return Leg.

  • Under Price Rules, click the “Create” link to create a new pricing rule

  • Create the pricing rule definition by selecting the PST to which the underlying’s price should be applied (SWLXEQ - Swap Leg Return on Equity)

  • Within Price Rule Options, check the box for Create Demand for Underlying Securities, as shown below

    • This will ensure demand is created for the underlying security even if no entity holds it

    • A price rule must still exist for the underlying security type, but this will cause demand to be created using that price rule from the underlying record, instead of a holding record

  • You can add Entity Criteria to define which entities hold the TRS that are having their underlying prices applied to their Return Legs, if necessary

    • This is optional and should be skipped if you want your TRS pricing process to be consistent across all entities

  • Select Price in the Field Selection tab

    • You can right-click the source hierarchy rule to create or edit a new one to assign to the rule

    • The source chosen in the source hierarchy rule will be overridden by the Price Adjustment, so any source can be used If you will always be pricing your TRS from their underlyings

  • Create a Price Adjustment to assign the underlying price to the TRS return leg

    • Set Type = Calc Price from Underlying Security and define the Target Security Criteria as the TRS Return Leg (screenshots below)

    • Price Source should be the source where the validated underlying security price is stored

  • Define Target Security Criteria for the Price Adjustment

  • The Priority can be either Override or Underlay

    • Override: the price adjustment source will override any source in the source hierarchy

    • Underlay: the rule will first look for a validated price within the source in the source hierarchy rule, and if none is available, it will look to the price adjustment

Execution

After the Price Rule has been created it can be submitted.

  • Note: the securities being priced must be pushed to Data Management via STAR to PACE before the rule is submitted

There are three steps to the price calculation process:

  • Create demand using the price rule

  • Validate using the validation rule

  • Push to target using the Calculate Price Values function in the price rule

To create demand, select the rule and click Submit at the top of the screen

  • Check the Create Security List box, then click OK

After this is complete you should be able to see a demand record for the TRS Return Leg on the original source. Next, submit your Price Validation Rule.

  • If a validation rule already exists that includes TRS Return Legs it can be run

    • If not, create a simple validation rule for the TRS equity leg with the desired validations

  • Finally, once the validations have been run, rerun the Price Rule with Calculate Price Values selected

    • This will push the priced Return Leg of the TRS to the target source so it is available for use

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