OVERVIEW

A Forward Rate Agreement (FRA) is the simplest form of an Interest Rate Swap (IRS), essentially a single period IRS. The major difference is that FRAs do not accrue interest income. Since FRAs are single period instruments, the payoff is known well before maturity. The price of an FRA remains constant after the Dated Date of the floating leg, so there is no need for the legs to accrue. This document covers the details of Accounting, Data Management, and Performance for FRAs.

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.

ENTITY SETUP

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

REFERENCE DATA

Eagle has modeled FRAs with three security master records. FRAs should be set up and viewed using Issue Viewer or Security Reference Manager > Add > Derivatives > Interest Rate Swap, or Reference Data Center.

• The contract as well as the pay and receive legs will have their own Security Aliases
• All three records share the same Primary Asset ID
• Payment Frequency: set to At Maturity (MAT)
• Stopping accruals on FRA legs: to keep the legs of an FRA from accruing, use Add Debt Default Period/Inhibit Earnings
  • Both legs of an FRA can be marked to not accrue, with appropriate Comments added
  • This will stop the legs from accruing even past Dated Date/Settlement Date
  • Default Start Date must be set to Issue Date of the FRA

TRADE PROCESSING

Open (transaction type: OPENSWAP)

Once the security reference and entity data is setup trades can be entered using the Book Trade module under the Trade tab. Other than basic information like Trade Date and Settlement Date, below are FRA specific required fields:

• Data Entry Method: Enter Price to supply a clean unit price or Enter Total Settlement Amount to supply a value representing all-inclusive trade proceeds (both can be positive or negative)
• Notional Principal Value: represents the notional of the FRA.
• Traded Interest Local = Calculate None

Close (transaction type: CLOSESWAP)

The Book Trade module should be used to process closes. Eagle Accounting can handle both full and partial terminations.

ACCOUNTING

Once an FRA trade is successfully booked it will follow all core Eagle Accounting processes.

Valuation

FRAs should be priced at the contract level. Accounting calculates the value of an FRA by using the formula below:

Market Value = (National Amount * Clean Unit Price * Price Multiplier * Quantity Scale)

Quantity Scale and Price Multiplier are typically 1 for FRAs, and accrued interest is 0.

Similar to a fixed income instrument, accounting assumes a swap has the same price across all accounts. If there is a need to use different prices across entities then account level price overrides have to be used. If there is a need to use dirty pricing, then the pay and receive legs of the FRA should be setup to not accrue. This can be accomplished by populating both legs with a coupon of zero. Note that this also implies that cash and payments will not be created.

STAR TO PACE

The STAR to PACE process will create three positions for each FRA in the position_detail table.

• The market_value_income column for each of these records captures a portion of the total market value and accrued income.
• Contract Position: captures the market value due to spread.
• Pay Leg Position: captures the market value due to period to date accrual payable. This is zero in the case of FRAs.
• Receive Leg Position: captures the market value due to period to date accrual receivable. This is zero in the case of FRAs.

Similar to other instruments, STAR to PACE creates data in position, position_detail, trade, and cash_activity tables.

OPERATIONAL REPORTING

Eagle has a core set of report queries that can be used to review FRA data along with other instruments. The reports were specifically designed to support the daily operational workflow. They are used to quickly identify differences and provide the necessary detailed information in order to resolve any discrepancies that may exist. The reports are primarily driven off of Data Management with data updated by the STAR to PACE Direct events. Eagle recommends following current best practices of using these core queries and building custom result profiles that fit your business needs.

INVESTMENT REPORTING

The STAR to PACE process moves position, cash activity, and trade data to PACE. This enables users to take advantage of all of the PACE OLAP reporting capabilities:

• Single/multi period lot, aggregate, and position reporting.
• Trade activity reporting.
• Cash activity reporting.
• Exposure reporting with full analytics integration; some data must be augmented to achieve complete exposure reporting

PERFORMANCE

The performance tool kit (originally introduced in 8.0) has full functionality to calculate market value based performance at the contract and leg levels. The tool kit process is pre-configured to read data supplied by the STAR to PACE process and calculate performance.

• The swap contract and the legs will be grouped under the correct bucket based on your existing performance model
  • Rollup level returns will be accurate, however the absolute return number might not make intuitive sense
  • Because the FRA typically has a beginning market value of zero and is valued relative to the market value, the individual returns may not be meaningful
    • In these instances reporting contribution to return will make more sense
• Clients needing returns at each instrument level can create a group based on Primary Asset ID; grouping the report by Primary Asset ID will aggregate the data at the FRA deal level with full drill through to the underlying legs
  • Contract: performance due to price change
  • Pay Leg: performance due to accrual paid to counter party; zero in case of FRAs
  • Receive Leg: performance due to accrual received from counterparty; zero in case of FRAs
• Once performance data is committed to the database, performance link analysis, risk analysis, and performance attribution analysis features are available to analyze FRA performance

AUTOMATION

Three legged swap security master files and trades (contract, 1 pay, and 1 receive leg) are supported through the standard Message Center streams. The security master file must be loaded prior to the trade (the trade will not create a security master file record). For both the security master file and trade loads, records must be sent at the contract, pay leg, and receive leg levels. Therefore a single trade or security master file record will not spawn the pay and receive legs. Refer to the Eagle Message Center STAR and CSV Format Default Streams Guide for more information.

OTHER NOTES

Eagle recommends using Workflow Manager (WFM) daily to identify failed events. This is the centralized tool for exception monitoring and reprocessing. Clients must monitor and review any errors when creating security master file records or booking trades for a swap and any other instrument. As with any multiple legged transaction event in STAR, it is possible that 1 or 2 legs of the legs will successfully process and the other could fail, resulting in a partial position and trade in Eagle. These scenarios can happen during an open or close transaction causing data integrity issues. In this case, the error will need to be corrected and the trade cancelled and rebooked. FRAs need to be cancelled through the Batch Cancel Trades panel.