BEST PRACTICES GUIDE

BNY Mellon Data and Analytics Solutions

Instrument Engineering Team

Last Update: 19 May 2020

TABLE OF CONTENTS

OVERVIEW

Eagle supports end-to-end processing of Options on Currency (FX Options) in the Eagle product suite. This document covers the full lifecycle including Accounting, Data Management, and Performance.

An FX Option is a contract giving the holder the right, but not the obligation, to buy (call option) or sell (put option) one currency in exchange for another currency at a pre-arranged exchange rate on a specified future date. The payouts are as follows:

• The writer (seller) of an FX Option receives a premium based on the trade price
• The buyer of a call is betting that the FX rate between the two underlying currencies will rise above the strike rate/price, allowing the Option to be exercised
• Conversely, the buyer of a put is betting that the FX rate between the two underlying currencies will fall below the strike rate/price, allowing the Option to be exercised
• In either case, the writer is betting that the FX Option will not be exercised and therefore expire worthless, allowing the premium to be recorded as a gain

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

• FX Option 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 FX Option security master files (SMFs) as single rows in Data Management.

Market Data

Because they are exchange-traded, FX Option prices are readily available from a number of vendors.

Security Data

FX Options can be set up and maintained in Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). The list below contains all fields required to configure an FX Option SMF.

• Issue Name (961)
• Primary Asset ID (14) & Type (1432)
• Processing Security Type (3931) = OPOPCR
• Contract Size (19): units of currency to which each contract is entitled
• Issue Country (1418)
• Asset Currency (85)
• Expiration Date (38): date when Accounting will automatically expire the FX Option, unless the entity-level Options and Futures Expiration Delay Days field has been populated
• Strike Price (67): FX rate/price at which the contract can be exercised or assigned
• Option Type (1142)
  • American: contract can be exercised or assigned at any time until expiration, assuming the strike price has been reached
  • European: contract can be exercised or assigned on expiration date only
  • Bermudan: functions the same way as American in Accounting; this option exists for reference data purposes only
• Put/Call Flag (1350)
• Pay Currency (1356)
• Receive Currency (1357)

TRADE PROCESSING

Trades are entered using Book Trade once the entity and reference data have been configured. Enter the appropriate entity, security identifier, and trade/settle dates and click Submit to query for the security. Right-click it and select Open or Close. The submenus depend on your entity election for Net Option Positions. The lists below contains all fields required to book an FX Option trade, which are the same for both opens and closes.

• Contracts (40): number of contracts being transacted
• Price Per Contract (45): multiplied by Contracts, Contract Size, and Price Multiplier to calculate the premium
• Commission Per Contract (971): this is multiplied by Contracts to calculate Commission Amount Local, which is factored into the net amount
• Tax Amount (46), SEC Fee (48), Stamp Duty Tax (51), Other Fee (3752): these are added to the premium and commission to generate the total net amount
• Broker (88)

Note: if an FX Option’s trade premium settles in a currency that differs from its Asset Currency, Settlement Currency (tag 63) on the trade must be changed to the appropriate currency.

Net Option Positions = No

Open

• Buy: creates a long position (long with positive quantity)
• Write: creates a short position (short with positive quantity)

Close

• Sell: closes (partially or fully) a previously established long position
• Buy to Cover: closes (partially or fully) a previously established short position

Net Option Positions = Yes

Open

• Buy: creates a long position (long with positive quantity) or closes a previously established short position (long with negative quantity)

Close

• Sell: creates a short position (long with negative quantity) or closes a previously established long position (long with positive quantity)

ACCOUNTING

Once an FX Option position has been established it will be picked up in Eagle’s global workflow. Accounting valuation is calculated when posting unrealized gain/loss and Data Management valuation is calculated in STAR to PACE.

• These can be triggered manually via Global Process Center
  • 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

Valuation

FX Options are valued using unit prices. The market value formula is:

• Market Value = # of Contracts * Contract Size * Price * Price Multiplier

Exercise/Assign

Exercises and assignments are processed using Book Trade > Other > Currency Option Cash Exercise or Currency Option Physical Exercise. By definition purchased FX Options are exercised and written FX Options are assigned, but they use the same process in Accounting.

Settlement

FX Options can be exercised or assigned using cash or physical settlement. Cash settlement is simply an exchange of money based on the exercise price. Physical settlement results in spot transactions against the underlying pay and receive currencies.

Cash Settlement

Purchased (Long) Call or Put

• Cash Receipt = # of contracts exercised * exercise price * Contract Size * Price Multiplier
• Gain (Loss) = # of contracts exercised * (exercise price - open price per contract) * Contract Size * Price Multiplier

Written (Short) Call or Put

• Cash Disbursement = # of contracts exercised * exercise price * Contract Size * Price Multiplier
• Gain (Loss) = # of contracts exercised * (open price per contract - exercise price) * Contract Size * Price Multiplier

Physical Settlement Cash Flows

Purchased (Long) Call or Put

• Sell Currency: Pay Currency from SMF, a disbursement will be created for this amount
  • Disbursement = # of contracts exercised * Contract Size * Price Multiplier
• Buy Currency: Receive Currency from SMF, a receipt will be created for this amount
  • Receipt = (# of contracts exercised * Contract Size * Price Multiplier) / Strike Price
  • Set Buy to Base FX Rate (9) to the inverse of Strike Price from the SMF
    • Example: if the strike price is 1.25, then Buy to Base FX Rate would be 1.00 / 1.25 = 0.8
    • This will result in the Sell to Buy FX Rate (7) calculation being equal to Strike Price from the SMF

Written (Short) Call or Put

• Sell Currency: Receive Currency from SMF, a disbursement will be created for this amount  
  •  Disbursement = # of contracts assigned * Contract Size * Price Multiplier
• Buy Currency: Pay Currency from SMF, a receipt will be created for this amount   
  • Receipt = (# of contracts assigned * Contract Size * Price Multiplier) / Strike Price
  • Set Buy to Base FX Rate (9) to the inverse of Strike Price from the SMF
    • Example: if the strike price is 1.25, then Buy to Base FX Rate would be 1.00 / 1.25 = 0.8
    • This will result in the Sell to Buy FX Rate (7) calculation being equal to Strike Price from the SMF

Canceling Exercise/Assign Events

Canceling an exercise or assign event requires the use of Batch Cancel Trades. Query for the appropriate date range, entity, and security, then set Choose Trade to Cancel (962) = the target exercise/assign event. This will roll back the exercise/assign event by removing the actions on underlying currencies and restoring the original position. FX Option trades can be canceled using the regular Cancel Trade panel or rebooked using Cancel & Rebook Trade.

Expire

If the contract is not closed prior, Accounting will expire the FX Option on expiration date plus the number of days defined in the entity’s Options and Futures Expiration Delay Days election.

REPORTING

STAR to PACE (S2P)

Almost all reports in Eagle 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 a single row for each FX Option in the position, position_detail, trade, and cash_activity tables.

Accounting Reports

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

Insurance Reporting

Data Management Reporting

PERFORMANCE

The performance toolkit calculates market value-based performance for FX Options using data supplied by the S2P process. However, this can be misleading because traditional market values do not capture an Option’s true exposure. Exposure-based analyses, which can be implemented using Eagle Enrichment, calculate more accurate returns. The documentation and .egl files linked below as attachments are available for beta testing. Additional details are available in Exposure Reporting and the Eagle Enrichment User Guide.

• Currency (FX) Options Enrichment Rule R_164.egl
• Currency (FX) Options Enrichment Inventory R_164.xlsx

AUTOMATION

FX Option security master files (SMFs) and trades can be loaded through the standard Message Center streams. The SMF must be loaded prior to the trade (trades do not spawn SMFs). Refer to the Supported Generic Interfaces guide for more information.

• When Net Option Positions is set to Yes, short positions are maintained using standard Buy and Sell transactions
• When Net Option Positions is set to No, short positions are maintained using Write and BuytoCover transactions; to process such trades through Message Center, the Event Type (55) must set to WRITE or BUYCVR

Below are the standard interfaces provided out-of-the-box for Message Center.