Manage Forward Starting Total Return Swaps

Eagle Accounting allows you to process forward starting total return swaps. A forward starting total return swap is a contract that the two parties involved agreed upon, but it does not become effective until a date in the future. You can process the swap prior to knowing the open price, notional amount, or units.

When you use Eagle Accounting to process a typical total return swap, the key component necessary for booking a trade is the number of shares for the return leg (the underlying asset) and the price (index level). The system uses those two components to calculate the notional amount for the finance leg. However because the effective date, or dated date, for a forward starting total return swap occurs in the future, the price is unknown. Identifying a security as a forward starting total return swap allows you to book a trade without providing a price. When you lock in the price, the system processes a reset, but this first reset is "cashless." The first reset only locks in price/cost, but does not generate a cash exchange.

Set Up the Security as a Forward Starting Total Return Swap

When you set up the Security Master, you can identify the security as a forward starting total return swap by setting the contract-level Notional Reset Type (tag 4409) field to a value of either:

• Constant Notional - Forward

• Recalc Notional - Forward

Otherwise, if the swap is not forward starting, you select a value of Constant Notional or Recalc Notional.

You can use Reference Data Center to create the total return swap. For more information, see Create and Delete Securities. Otherwise, you can use Issue Viewer to create the total return swap. For more information, see Manage Total Return Swaps in Issue Viewer. A description of the options for the Notional Reset Type field follows.

Book Open Trades for Forward Starting Total Return Swaps

In the Open Total Return Swap trade panel, you can process forward starting open trades. The system can process forward starting open trades with a price of zero, and allows you to process the trades with either Shares or Notional values.

To manually book an open trade for a forward starting total return swap contract, pay leg, and receive leg:

1. In the Accounting Center, in the left navigation pane, click Transactions > Trades > Book Trade/Rebook Trade > Book Trade.
   You see the Book Trade workspace.

2. Complete the options in the Search Details pane and click Search.
   You see the search results based on the criteria you selected.

3. Select the row with the forward starting total return swap security you want to trade.

4. On the Book Trade tab, in the Actions group, click Action Rules, point to Open, and then click Open Swap Contract.
   You see the Open Total Return Swap panel.

5. Under Issue Information, review the value of the Notional Reset Type field. 
   If you selected a forward starting total return swap, you see a value of CF (Constant Notional Forward) or RF (Recalc Notional - Forward).

6. Complete the contract, pay leg, and receive leg options on the Open Total Return Swap panel.
   Once you enter the basic trade details, the multi row pane at the bottom of the panel opens. The panel refreshes when you click the contract, pay leg, or receive leg rows in the multi row pane. Options available for the legs vary depending on the value you selected at the security level for the Notional Reset Type field.

7. If you selected a value of Recalc Notional - Forward for the security, you can set the Notional / Units field to Enter Units, enter the equity leg units in the Shares field, and enter a Price field amount that is equal to zero.
   The panel assigns the equity units to the Finance leg.

8. If you selected a value of Constant Notional - Forward for the security, you can set the Notional / Units field to Enter Notional, enter the notional amount in the Notional field, and display a Price field amount that is equal to zero.
   The panel assigns the Notional amount to the units of the Equity and Finance leg.

9. Click Submit.
   Once you book the trade, it follows all core accounting processes. The system uses the core cost tags to store the notional cost values at the position, open, and close Cost object levels for the equity leg of total return swap.

Valuing Forward Starting Total Return Swaps

When you booked the trade for a forward starting total return swap, you entered a price of zero or you valued the equity leg position at cost. When you run the unrealized gain loss (URGL) process for the position, the system does not create an unrealized gain/loss.

Reset the Forward Starting Total Return Swap

You can use the Reset Total Return Swap panel to reset total return swaps. If you process resets at the beginning of the day, you can modify the beginning of day reset process to exclude forward starting total return swaps. To do so, set the Swap Type field to Exclude Forward Starting. For forward starting total return swaps, you can process a reset at the end of the day and after you enter the equity price. If you want to reset only total return swaps at the end of the day, you can set up the Reset Total Return Swap panel to include only forward starting total return swaps for processing. To do so, set the Swap Type field to Forward Starting. For details, see .Reset Total Return Swaps 

For a security identified as a forward starting total return swap, the total return swap reset process can process the swap to a reset on the dated date. The reset does not adjust the return leg and finance leg notional but does not create a cash record.

On the effective date of the security, the reset process recognizes that the position is forward starting, and the reset adjusts the position to set the correct units and notional amount. The system does not create a cash record.

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