Manage Ex Interest Processing

About Ex Interest Processing

When a bond trades mid coupon period, the bond can trade flat, CUM, or EX. In Eagle Accounting, the bond can trade:

• Flat. The bond trades without interest. If you indicate that a security trades flat, by setting the security's Trading Flat (tag 3949) option to Yes, the system does not calculate accrued interest purchased or sold at the time of the acquisition or disposition. In the event of a disposition mid-coupon, the system creates a coupon at the end of the coupon period based on the interest earned during the period. 
• CUM. The trade is cumulative. If the bond trades mid coupon period, it trades with full period-to-date interest. The buyer receives the full coupon if held on final entitlement date. This is Eagle Accounting's default methodology.
• EX. The trade is ex interest. If the bond trades mid coupon period, the buyer is not entitled to any interest from the current coupon. The system deducts the amount of interest the buyer would ordinarily earn for the remaining days in the period from the net settlement of the trade, such that it trades with negative interest. In Eagle Accounting, you must set up ex interest processing to trade on an EX basis.

To enable Eagle Accounting to determine whether to use ex interest processing for a given trade based on the ex-date, you must perform several setup tasks. You must identify the entities that are eligible for ex interest processing, and you additionally either create an ex interest schedule for each eligible security or you can update eligible securities with criteria that the system can use to identify the security's ex-date. 

Set Up Entities

For each entity that is eligible for ex interest processing, set the entity's Ex Interest Processing Flag field to Yes. This field is available in the Create/Edit Entity panel, the Create Master Fund panel, and the Edit Master Fund/Sector panel. A description of this option follows. 

Set Up Securities

For each fixed income security that is eligible for ex interest processing, you can define the Ex-Interest Days value. Setting up the Ex-Interest Days value at the security level is optional. When the system processes a trade for an entity that uses ex interest processing, the system uses this security-level value only if it cannot identify an ex interest schedule for the security. 

You can use Reference Data Center to enter this value. Otherwise, if you use Issue Viewer, this option is available in the Coupon Periods section in Issue Viewer's Long Term Debt panel, Short Term Debt panel, and Mortgage Backed Security panel. A description of this option follows. 

Add an Ex Interest Schedule for a Security

When you use ex interest processing, you can set up ex interest schedules for securities for each period where the bond trades ex coupon. Or, you may receive ex interest schedules from third parties. 

If an entity is eligible for ex interest processing, the system uses the ex interest schedule for transactions associated with entities eligible to use ex interest processing to process accruals on the ex-date of a bond. If you do not set up an ex interest schedule for the security, ex interest processing for eligible entities uses the security-level Ex-Interest Days field to identify the ex- date when no ex interest schedule is available.

To add an ex interest schedule:

1. Follow the Reference Data Center instructions provided in Add a Schedule. Otherwise, if you use Issue Viewer, see Add a Schedule for a Security in Issue Viewer.
2. Identify the security associated with the schedule.
3. For each entry in the schedule, in the Schedule Type field, select Ex Interest Schedule. 
4. In the Effective Date field, specify the effective date of the transaction.
5. In the Ex Interest Date field, specify the date that each coupon period begins to trade ex interest to use for the corresponding effective date in the ex interest schedule.

Process Trades

During trade entry for fixed income securities, you can set the Accrued Interest Type (tag 3715) field of STAR Calculated, CUM, or EX. STAR Calculated is the default value, which allows Eagle Accounting to determine whether the trade is CUM or EX. 

When an entity uses ex interest processing, trade processing can determine whether a bond trades ex coupon. It can use a security's ex interest schedule to identify the ex-date so the system can properly set the trade-level EX/CUM indicator based on the settlement of the trade. If you do not provide an ex interest schedule, the system uses the security's ex interest days to identify the ex-date.

Fields related to ex interest processing are available in these trade panels:

• Open Debt Bond (pan-fixedopen.htm)
• Open Discount Bond (LT/ST) (pan-discountopen.htm)
• Open Inflation Linked Bond (pan-tipsopen.htm)
• Open MBS/ABS/IO/PO (pan-openmbs.htm)
• Close Debt Bond (pan-fixedclose.htm)
• Close Discount Bond (LT/ST) (pan-discountclose.htm)
• Close Inflation Linked Bond (pan-tipsclose.htm)
• Close MBS/ABS/IO/PO (pan-closembs.htm)

A description of the trade-level fields related to ex interest processing follows.

Process Earnings 

When you process accruals on the ex-date of a bond, the system creates a coupon entitlement for each settled lot. That is, any lot that is entitled to the coupon has a traded cash record created for the full coupon that is paid to the current holder of the bond.

The system records the full receivable on the ledger on ex-date to a new contra asset offset for the unearned interest. This contra offset account is called unearned interest. Because the first day of the ex-date period is accrued on ex-date, the following day’s (ex-date + 1 day) ex-date amount is the amount of remaining unearned income on ex-date. Each subsequent day, the ex-unearned interest account decreases by each day's income accrual until the original coupon entitlement date is reached, at which point the unearned interest account is zero, because all the income for coupon was received.