Overview

This document applies to all current releases of Eagle software. Version-dependent functionality is noted with the initial release(s) it became available.

A Sinking Inflation-Linked Bond (ILB) is a blend of a sinking security and a traditional ILB. Interest and principal are adjusted for inflation throughout the life of the security, but principal is also reduced following a pre-defined schedule. Eagle has core support for both sinking securities and ILBs, but the sink functionality cannot be directly applied to ILBs. Instead, Eagle recommends setting up these securities as ILBs and processing the sink payments using closes. This document explains the details, assuming you already have a basic familiarity with ILB processing in Eagle. If not, please refer to Inflation-Linked Bonds (ILB) Best Practices and/or the Understand Inflation-Linked Bonds section of Manage Fixed Income Processing.

Example reference data screens, trade screens, and reports are attached:

Entity Setup

Entities trading ILBs do not require any special setup. However, it is important to make note of the Variable Rate Source and ensure that the underlying CPI values are loaded to this same source.

Reference Data

Storage & Configuration

Each Sinking ILB is represented by a single row in Data Management. It should not have Sink Flag/Sinkable (1780) = Yes because this will cause earnings errors. Instead, you will book closes in lieu of the sink payments. Because all ILBs of a given calculation type use common CPI data, each underlying CPI only needs to be set up once, and all the ILBs pointing to that index will pull in the appropriate CPI values automatically.

Market Data

Underlying CPI information should be set up as usual based on the Sinking ILB's issue country, the same way as if no sink terms applied.

The workflow in this document assume you are using nominal clean prices (excluding both inflation and interest) because Accounting is going to calculate both of these components. If you are using real (including inflation) and/or dirty (including interest) prices, you must turn off inflation processing and/or interest processing to avoid double-counting. Prices also should not be adjusted for the affect of any sink payments.

Security Data

Sinking ILBs should be set up as regular ILBs in Eagle, using Processing Security Type (3931) = DBFLTP and Sink Flag = No. Enter the stated interest rate and define the inflation-related fields as appropriate for the issue country. More details on country support and associated setup in Inflation-Linked Bonds (ILB) Best Practices.

Trade Processing

Open (event type: BUY or SHORTSELL)

Trades should be booked at par value as of trade date, not including any inflation adjustments. If this is prior to any scheduled sink dates, it will be the full original par value of the trade. If the initial open is after a scheduled sink date it will be the current outstanding principal, not including any inflation adjustments.

Accounting will automatically calculate the inflation-adjusted par, cost, traded interest, and net amount.

Close (event type: SELL or BUYCVR)

When partially or fully close a Sinking ILB position, enter the actual amount of par to be closed based on outstanding par value as of trade date. For example, if a 1,000,000 position has been factored down to 500,000 and you need to close out half the position, enter a close for 250,000. As with the open, this should not include any inflation adjustments.

Mature/Expire

You can mature a Sinking ILB position using the core Mature/Run Mature Process.

Cancel & Rebook

You can cancel and rebook a Sinking ILB position using Cancel & Rebook Trade. Because the Sinking ILB workflow involves using close trades for sink payments in addition to regular closes, there is the potential for rollback/reply issues when booking backdated activity. For example, if a close for a sink payment was processed incorrectly and resulted in an incorrect quantity on a subsequent regular close. If you only rebook the close for the sink payment the subsequent trade will be replayed at the same incorrect quantity.

We recommend using Cancel Trade instead and canceling all relevant trades sequentially starting with the most recent, then rebooking while ensuring the details are correct.

Accounting

Sinking ILBs will be picked up in Eagle's global workflow, with interest and inflation adjustments calculated automatically. Intervention is only required for sink payments.

Sink Payments

Sink payment are processed using close trades. Enter data on the close as described below.

• Trade Date (35): effective date of the sink payment

• Settlement Date (37): payment date of the sink payment

• Units (40): absolute value of the change in par

  • For example, if a sink payment were bringing a position from 1,000,000 to 980,000, the close should be booked with Units = 20,000

• Price (45): same as the open price

  • Closing at the open price (cost) ensures no price-based gain/loss is realized on the sink payment (you will still see realized gain/loss based on movement in the ILB index ratio)

Valuation

Assuming nominal clean prices are used, valuation will be calculated correctly as a function of par value, price, inflation, and interest. These individual components are also broken out in Accounting for more granular analysis.

Reporting

When looking at Sinking ILB reports, Units will always represent par value as of the report date. Because we are using closes to process sink payments, you will not see a record of original face vs. current face like you would with a true sinking bond or mortgage backed security.