Due to their highly customized nature, each Portfolio Swap can have unique attributes that may be different than the examples used to create this document. Please contact Instrument Engineering to discuss your particular contract in greater detail.

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.

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

• Portfolio Swap - Multiple TRS Examples.xlsx (this simplified example was created by Instrument Engineering to focus on lifecycle processing without introducing too many additional complications)

Entity Setup

Before any trades can be booked, the entity that will hold the Portfolio Swap TRSs must be set up appropriately.

Reference Data

Storage & Configuration

Eagle models Portfolio Swaps as multiple TRS security master files (SMFs), each with three rows in Data Management. Every row of a TRS has its own Security Alias (10), linked by a common Primary Asset ID (14) across the contract and legs.

Market Data

Return leg payments are derived directly from the value of each underlying equity, whether paying or receiving the return. Equity prices must be entered directly on the TRS return legs (this is discussed in detail in the Valuation section). Corporate action processing can be automated starting in V17, but announcements must be created individually for each TRS return leg in lower versions. Refer to the Corporate Actions section below for details. 

The financing for each underlying equity generally floats against the same underlying interest rate index, but often with different spreads. Setting up a separate TRS for each constituent allows you to enter the appropriate spread for each one for automated accrual processing and provides the most granular level of reporting for each constituent's financing costs. Many Portfolio Swaps also involve financing spread changes to accommodate changes in borrowing costs for the underlying equities. These can be supported using Time Sensitive functionality starting in V17. Refer to Time Sensitive for details.

The underlying interest rate index must be set up as an Index security using Issue Viewer, Security Reference Manager (SRM), or Reference Data Center (RDC). Other than identifiers, the only information that must be entered is the currency. 

Security Data

Portfolio Swap TRSs can be set up and maintained using Issue Viewer, SRM, or RDC. Every TRS for a given underlying equity portfolio will have an identical setup other than the IDs, underlying security, and pay/receive leg directions. Long underlying positions should be set up as TRS that are paying financing/receiving return while short underlying positions are paying return/receiving financing. Most data is entered on the contract and propagated to the legs. Specific reset and accrual conventions are entered separately on each leg.

Contract

• Issue Name (961)
• Primary Asset ID (14) & Type (1432): ensure duplicate IDs are allowed (see Storage & Configuration section above)
• Processing Security Type (3931) = SWCOTR (Total Return Swap Contract)
• Issue Country (1418)
• Asset Currency (85)
• Notional Reset Type (4409): typically Recalc Notional (R) for Portfolio Swaps (financing notional changes at each reset)
  • Select Constant Notional (C) if the financing notional should stay the same throughout the life of the swap
• Issue Date (68): first trade date of the swap
• Dated Date (1183): date accruals start, "Effective Date" in ISDA contracts
• Maturity Date (38): date swap expires, "Expiration Date" or "Termination Date" in ISDA contracts
• Lag/Coupon Delay Days (4908): number of days between valuation date (date from which price is pulled) and reset date (date when reset takes effect)
  • NULL/0, 2, and 3 are most common
  • Finance leg continues to accrue on the old notional during this period
  • If a value greater than zero is used, each reset will be projected as valuation date + X days
  • Applies to floating rate resets (the first one occurs on First Rate Reset Date + X days)
• Lag/Coupon Delay Days Type (3999): measure the delay between valuation date and payment date in B (Business) or C (Calendar) days; typically B (Business) days
• Maturity Delay Days (3997): delays core maturity process X days to allow a close transaction to be entered in lieu of maturity (during this period valuations will still be calculated if the security is priced); the maturity process will trigger as normal after this delay
  • Using this field does not affect the actual Maturity Date stored in Eagle on the cost object, in the position table, etc.; instead, the maturity process checks for Maturity Delay Days on the fly
• Maturity Delay Days Type (3998): measure the maturity delay in B (Business) or C (Calendar) days
  • Note: you must have a business calendar populated in Calendar Name (1941) on your entity to use B (Business) days
• Generate Swap Reset Schedule (2299, V17): existence of the schedule is crucial for automated corporate action processing; refer to the Corporate Actions section below for details
  • Yes: Swap Reset Schedule is generated automatically for both legs when security is added or changed via Issue Viewer or SRM; this is the default for new securities
  • No: Swap Reset Schedule is not generated automatically when security is added or changed; this is the default when changing securities
  • Note: if set to Yes when changing a security, new Swap Reset Schedules will be generated for both legs and will overwrite any existing schedules

Return Leg

• Processing Security Type (3931) = SWLXEQ (Swap Leg Total Rate Return on Equity)
• Price Multiplier (18) = 1.00
• Reset Price Timing/Calc Price (3314): defines whether the price used in the reset process is taken as of payment date, or X number of days prior to payment date
  • Typically Reset Day if Lag/Coupon Delay Days = NULL/0 or Prior Business Day if Lag/Coupon Delay Days > 0
  • Prior Business Days/Preceding Business Day (10548): # of days prior to reset date to pull the reset price; typically set to same value as Lag/Coupon Delay Days to use the price from valuation date
    • Setting this to 0 has the same effect as setting Reset Price Timing/Calc Price = Reset Day
• Payment Frequency (472): select appropriate payment frequency
• Business Day Convention (1536): typically Modified Following, which is ADJMBC (Modified Following - Adjusted) in V15 R2 and above, ADJMBC (Modified Business Day - Adjusted) below V15 R2
  • Coupon Day of Month (10551): required if Business Day Convention != NULL/None (NONE); enter the regular valuation day of month
    • Allows for valuation dates that are out of sync with the true first valuation date
    • Example: if the first valuation date were the 11th due to a holiday, but all other valuation dates were the 10th, the 10th would be entered and used to project future valuation dates
• Business Calendar (1480): as specified in the contract; a composite calendar (including dates from two different calendars) may need to be set up if multiple business calendars are observed
  • This is required even if Business Day Convention is set to NULL/None (NONE)
• Delay Days (1799): number of days to delay cash settlement of the reset payment; these are applied to the reset date
  • Delay Days Type (5074): measure cash settlement delay in B (Business) or C (Calendar) days
• First Payment/Valuation Date (473): enter the first valuation date; Lag/Coupon Delay Days will be added to this to determine the first reset date
• Last Payment/Valuation Date (474): enter the valuation date associated with the last reset prior to termination; Lag/Coupon Delay Days will be added to this to determine the last reset date
• Final Valuation Date (1369): only enter if applicable, typically for Bullet Swaps where there is a single reset at maturity
• Underlying Security (1347): mainly for reporting purposes as Eagle Accounting does not automatically retrieve the underlying’s prices for trading and valuation
  • Note: the return leg must be priced directly
  • Pricing Center rules can be configured to automatically pull the underlying price up to the return leg; refer to TRS Underlying Pricing in Pricing Center for details

Finance Leg

• Processing Security Type (3931) = SWLEAC (Swap Interest Accrual Leg)
• Coupon (70): enter zero for floating (or variable) rate to indicate that rates must be viewed from underlying index, or fixed rate if applicable
• Coupon Type (97): typically X (Floating Rate) or F (Fixed Rate)
• Day Count Basis (471): as specified in contract
• Payment Frequency (472): as specified in contract
• Business Day Convention (1536), Coupon Day of Month (10551), & Business Calendar (1480): same values as return leg
• Delay Days (1799) & Delay Days Type (5074): typically same values as return leg, but can be different if necessary
• First (473) & Last Payment/Valuation Date (474): same dates as return leg
• Floating Rate Fields
  • First Rate Reset Date (10911): same as First Payment/Valuation Date; this is used with Lag/Coupon Delay Days and Reset Look-Back Days to calculate fixing dates
  • Reset Frequency (1788): same as Payment Frequency
  • Reset Look-Back Days (10547): # of days prior to each reset date (or Dated Date for the initial period) to grab the new floating rate
    • Reset Look-Back Days Type (5075): measure look-back in B (Business) or C (Calendar) days
  • Fixing Date Business Center (16407, V15 R2.18): select calendar used for floating rate resets, which may be different than the calendar used for payment dates
    • This calendar is used in lieu of the main Business Calendar when applying Reset Look-Back Days for fixing dates
  • Underlying Security (1347): floating rates will be automatically retrieved from this underlying index
  • Spread/Index Offset (215): spread above or below the floating rate, entered in basis points (0.55% = 55)
    • When a floating rate (0.25%) plus negative spread (-55 bps) goes negative (effective rate = -0.3%) accruals and coupons are posted in the appropriate direction
    • Refer to Time Sensitive for details about modeling spread changes

TRS Reset Schedules

There are two options for defining the schedule of TRS reset dates, automated and manual, as described below.

Option 1: Automated Scheduling

Valuation and payment dates are calculated automatically based on SMF attributes.

• First Payment/Valuation Date + Lag/Coupon Delay Days is used to project all future reset dates
• By default, reset schedules are calculated on the fly in releases prior to V17, but they can also be stored in the SCHEDULE table for verification and modification
  
  • This is done using Generate Swap Reset Schedule, and once created it can be viewed using List Schedule
  • Generate Swap Reset Schedule on the SMF defaults to Yes in V17 because existence of the schedule is required for automated corporate action processing
• If any of the dates are incorrect due irregular resets, they can be updated by deleted, changed, or added using the Schedule tools
  • Note: once an automatically generated schedule is amended, the remaining schedule can only be updated manually (all changes are overwritten when a schedule is regenerated)
• If dates in the SMF-level Business Calendar are modified subsequent to the schedule being generated, it will need to be regenerated for the changes to take effect
  • We recommend regenerating schedules annually and/or whenever a security's Business Calendar is updated, unless the schedule has been customized

Option 2: Manual Scheduling

Unscheduled/Ad Hoc Resets

Some Portfolio Swaps can have unscheduled/ad hoc resets when predefined exposure levels are breached, among other reasons. This is more common than with traditional TRS on indexes or single-name equities. In these cases, the schedule for both legs must be edited to add the new reset date. Follow the steps below to edit the current period and add a new period. Example: resets occur on the last day of each month (ignoring non-business days) - 1/31/16, 2/29/16, 3/31/16, etc. - and a reset is required on 3/13/16.

Trade Processing

TRSs are traded based on a number of shares and a price, which allows the Portfolio Swap's underlying trading activity to be mapped directly to the associated TRSs. A batch of open trades is booked at inception to establish the initial values of the Portfolio Swap, all with the same trade/settle dates. These transactions will not create any cash settlements because TRS opens are cashless (unless there is an explicit fee, which can be entered if necessary).

TRSs are always held with the contract and receive leg as long positions and the pay leg as a short position. Buys and sells of an underlying constituents are booked against TRSs set up to pay financing/receive return, while short sells and buys to cover are booked against TRSs set up to pay return/receive financing. Additional lots, new positions, partial closes, and full closes can be processed against the TRS just as they would be against the equities. The only difference is that buys and short sells will use the same event types, as will sells and buys to cover. 

Open (transaction type: OPENSWAP)

Trades are entered using the Book Trade module once the entity and reference data have been configured. Enter the appropriate entity, security identifier, and trade (35)/settle (37) dates and click Submit to query for the security. Right-click it and select Open > Open Swap Contract.

Contract

• Traded Interest/Effective Date (2857): date to which traded interest is calculated; typically Trade Date or TD + 1
• Swap Fee Local (7510): paid, received, or zero; represents the fee paid to enter the TRS (typically zero)
• Broker (88)
• Counterparty (1144, optional): counterparty can be selected from a list of all Issuers that have been tagged as counterparties (see Setting Up Legal Entities Best Practices for more information)

Return Leg

• Shares (40): # of shares of the underlying equity
  • Do not enter Shares on the Contract, it will be automatically propagated from the return leg
  • Constant Notional: Notional (7782) is entered directly (instead of being calculated)
• Price (45): initial price of the underlying equity
• Commission (47) & Other Fee (3752): enter any commissions and/or fees; these are factored into the notional value calculation on the finance leg for the initial period, but not exchanged in cash
  • Notional = (Shares * Price) + return leg Commission + return leg Other Fee

Finance Leg

• Finance leg notional value (in Shares field) is automatically calculated based on return leg information.
  • Example: if # of equity Shares is 1 million, the initial Price is $10, and Commission and Other Fee are zero, the finance leg notional will be $10 million
  • Constant Notional: finance leg notional (in Shares field) is taken directly from Notional entered on the return leg and does not change as part of the reset process
• Select Values to be Calculated by STAR (7000): set to Traded Interest to have it calculated, or Calculate None to enter it manually
• Traded Interest Local (49): interest bought or sold, calculated since Dated Date or last coupon date
  • Lot Level Dated Date (4411): used to override when the lot starts accruing interest (accruals start on Dated Date by default)
  • First Period Coupon Rate (1360): overrides the interest rate for the first period; Eagle Accounting will automatically start using the appropriate interest rates after the next reset is processed

Booking Multiple Lots

By default, opens of additional TRS lots will not generate an upfront payment based on trade price. To prevent traded interest from being calculated and exchanged, set Lot Level Dated Date = accrual start date of the additional lot (same date should be used for Settlement Date, or Traded Interest/Effective Date if available).

• For a floating rate TRS, First Period Coupon Rate can be left blank to automatically pull the rate from the underlying index based on Lot Level Dated Date minus Reset Look-Back Days, and apply the appropriate spread
• Alternatively First Period Coupon Rate can be entered, with the supplied rate used up until the next reset date; this requires the all-in rate (floating rate + spread) to be entered
• After the next reset all lots are reset to same unit cost and all financing is calculated the same based on the original SMF configuration

Close (transaction type: CLOSESWAP)

The Book Trade module should also be used to process both full and partial terminations. Enter the same information as the open to query for the security. Right-click it and select Close > Close Swap Contract.

Enter Shares, Price, Commission, and Other Fee on return leg; Eagle Accounting will automatically calculate the proceeds on each leg and separate gain/loss entries will be posted. Any other cash fees can still be entered on the contract, although this is somewhat rare.

• Gain/loss on the return leg will be equal to the return leg Principal - finance leg Shares
  • This will tie to the realized gain/loss on the underlying equity
• Return Leg Principal: Shares * Price - Commission - Other Fee
• Finance Leg Shares: outstanding cost of shares to be closed
  • This is equal to total outstanding cost / total outstanding Position Shares * # of Shares to be closed
• Lot Selection Method (27): TRS closes must be processed using Identified Lot in versions prior to V12.1.5.18, V13.1.2.15, and V15 R2; a dropdown is used to select the appropriate lot to close

Traded Interest Local on the finance leg, if applicable, can either be entered manually or calculated by Eagle Accounting. This will be included in trade proceeds on the finance leg.

• By default the legs will continue to accrue through Settlement Date - 1 (similar to a bond); to accrue through Trade Date, populate Accrual End Date with Trade Date + 1

Constant Notional: similar to the open, constant notional TRS closes are entered based on notional value rather than # of shares.

• Close Notional (7782, Return Leg): portion of notional being closed; this is pulled into finance leg Shares directly
  • The screen calculates the proportional # of Shares to close for the contract and return leg as Close Notional / Position Notional (7783) * Position Shares (122)
  • Principal (165, Return Leg): number of Shares calculated * Price
• Gain/loss on the return leg is still equal to the return leg Principal - finance leg Shares

Booking Multiple Lots

There are two important notes about FIFO/LIFO closes when trading multi-lot TRS:

• If Lot Level Dated Date is used to override the initial rate and a FIFO close is booked before the next reset, traded interest calculated by Eagle Accounting may be incorrect because it will be based on the SMF attributes
  • In these cases, traded interest can be entered instead of calculated
• If multiple lots are opened at different prices and a partial FIFO close is entered that spans lots (open lots of 300 and 400, then a close of 500, for example), the amount of notional closed may be incorrect because it will be closed proportionately based on shares
  • In these cases, IDLOT closes are recommended

Cancel & Rebook

Faulty TRS transactions must be cancelled using Batch Cancel Trades, with the transaction rebooked using the Book Trade module. TRSs are not supported in the Cancel & Rebook Trade process or the Cancel Trade screen. Maturities must also be canceled using Batch Cancel Trades.

Accounting

Once portfolio swap TRS trades are booked, they will be picked up in Eagle's global workflow. Daily accruals and periodic resets are generated as part of the earnings process, Accounting valuation is calculated when posting unrealized gain/loss, and Data Management valuation is calculated in the STAR to PACE push. These can be scheduled or triggered manually.

• V17 & Above: Accounting Center > Processing and Exceptions > Global Processes

  • Accruals: Earnings > Run Income Accruals

  • TRS Resets: Swaps > Reset Total Return Swap

  • 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

• Prior to V17: Global Process Center

  • Accruals: Earnings > Accrue

  • TRS Resets: Total Return Swap Reset > Total Return Swap Reset

  • Accounting Valuation: Unrealized Gain Loss Entries > Post Daily Fund Unrealized Gain Loss-Position

  • Data Management Valuation: STAR to PACE Direct Processing > Transfer Data - Batch

Valuation

Portfolio Swap valuation is based on pricing the return leg of each TRS with the underlying equity price. TRS are valued with market value equal to unrealized gain/loss. The sum of the TRS return leg valuations represents the total value of the Portfolio Swap.

• Return Leg Market Value = Shares * (EOD Price - Open or Last Reset Price)

Each TRS's market value and unrealized gain/loss, and their sums, tie to the underlying equity portfolio's unrealized gain/loss. Notional Cost Local (10791)/Base (10792) and Notional Market Value Local (10793)/Base (10794) tie to equity portfolio's costs and market values.  

Accruing on Negative Interest Rates

If a swap leg is long, Eagle Accounting makes negative postings to a receivable account. If the swap leg is short, the negative postings are to a payable account. Swap accrual postings are not made to the opposite account (payable vs. receivable) when accruing on negative interest rates.

Reset Processing

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

Corporate Actions

Reporting

STAR to PACE (S2P)

Almost all reports in Eagle Accounting 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 three rows for each Portfolio Swap TRS in the POSITION, POSITION_DETAIL, TRADE, and CASH_ACTIVITY tables. The MARKET_VALUE_INCOME column for each row captures a portion of the total market value.

• Contract: always zero
• Return Leg: market value due to unrealized gain/loss on underlying security
• Finance Leg: market value due to period-to-date accrual payable/receivable

The sum of these fields across all the TRS in a given Portfolio Swap entity represent the total values of the swap. Reporting at the entity level shows the whole Portfolio Swap as a single line item.

Accounting Reports

Eagle has a core set of accounting reports that can be used to review TRS and other security 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.

Each Portfolio Swap TRS is displayed as three separate rows. The contract and legs are intended to be displayed together, but may be broken into different areas depending on the report’s groupings (long/short, for example).

Insurance Reporting

To categorize derivatives for insurance reporting, such as the Schedule DB, Derivative Elections (56) must be set to Hedging Effective, Hedging Other, Income Generation, Replications, or Other on all trades. Leaving the default of Trade will prevent the transaction from appearing on insurance reports.

Data Management Reporting

General Reporting (Eagle OLAP)

OLAP reports provide the maximum level of customization, allowing any column in Data Management to be pulled into a report. These go beyond the Eagle Accounting Grid Reports because they are not limited by core queries, can support multiple sources and various types of calculations, and provide drill-down functionality based on user-defined groupings.

Performance

The performance toolkit calculates market value-based performance for individual Portfolio Swap TRSs at the return leg (price changes) and finance leg (accruals) levels using data supplied by the S2P process. However, this can be misleading because swaps use notional values and typically start with a market value of zero. Exposure-based analyses, which can be implemented using Eagle Enrichment, calculate more accurate returns. The documentation and .egl files for TRS enrichment are linked to Total Return Swaps (TRS) Best Practices. Additional details are available in the Exposure Reporting Best Practices and Eagle Enrichment User Guide 2015 documents.

Automation

TRS prices must be loaded to the return leg only. Make sure you set tag 4590 = P or R in your price message depending on whether it is paying or receiving the return.

Sample messages to create a security, book an open, and book a close are attached to Total Return Swaps (TRS) Best Practices.