TRS Reset Processing Notes

Workflow

• Global process is scheduled to run on a daily basis in a production setting

• The underlying price must be populated directly on the return leg for valuation date before processing the reset

  • Accounting does not automatically look to the underlying for reset prices

• Security Query Flag (1256) controls whether prices and FX rates must be loaded for the reset date (ACTUAL, default), or if the most recently available will be used (RECENT)

  • When ACTUAL is used and either prices or FX rates (for foreign TRS) are missing, the reset will fail

  • Using RECENT will prevent failures, but may lead to incorrect reset activity

• Resets should be scheduled to run prior to accruals to ensure financing is calculated on the correct notional on reset date

Calculation

The reset cash flow direction is determined by reset price being above or below initial price (trade price or last reset price). Positive amounts are disbursements when paying the return and receipts when receiving it. Conversely, negative amounts are receipts when paying the return and disbursements when receiving it.

• Shares: 1,000,000, Initial Price: $80, and Reset Price: $85

• Return Amount = 1,000,000 * (85 - 80) = $5,000,000

• New Notional = 1,000,000 * 85 = $85,000,000

Finance leg notional is recalculated based on return leg # of shares and reset price. The finance leg starts accruing on the new notional on reset date (valuation date + Lag/Coupon Delay Days). This is the 10th in the attached example.

Constant Notional: reset payments are calculated the same way as outlined above, except the initial price is always trade price. Notional and notional cost are established at trade time and do not change.

• To keep notional constant, Accounting divides it by reset price to calculate an updated # of shares