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

• • This simplified example was created by Instrument Engineering to focus on lifecycle processing without introducing too many additional complications

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 Processing Notes 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. Each TRS representing a given equity portfolio will be set up identically, other than the IDs, underlying securities, and pay/receive leg directions. Long underlying positions should be set up as pay financing/receive return, with short underlying positions as pay return/receive financing. See Total Return Swaps (TRS) Best Practices | Security Data for general information about SMF setup. Details specific to Portfolio Swaps are highlighted below.

We recommend using Decoupling for your SMF setup to ensure the Lot Selection Method (27) for each TRS close can match the equity portfolio. See Total Return Swaps (TRS) Best Practices | Decoupling for more information.

Contract

• 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

Return Leg

• Processing Security Type (3931) = SWLXEQ (Swap Leg Total Rate Return on Equity)

• Payment Frequency (472): indicates how often the Portfolio Swap resets

• Underlying Security (1347): select the applicable equity from the underlying equity portfolio

  • Pricing Center rules can be configured to automatically pull the underlying price up to the return leg; see TRS Price from Underlying Processing Notes for details

Finance Leg

• Processing Security Type (3931) = SWLEAC (Swap Interest Accrual Leg)

• Coupon Type (97): typically X (Floating Rate)

• Spread/Index Offset (215): spread above or below the floating rate, entered in basis points (0.55% = 55)

  • The spread may vary for different equities in the same portfolio

  • Changing spreads are supported using Time Sensitive functionality, see Time Sensitive Processing Notes for details

TRS Reset Schedules

Refer to Total Return Swaps (TRS) Best Practices | TRS Reset Schedules for details about how reset schedules are modeled in Eagle Accounting.

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.

Follow the steps in Swap Unscheduled/Ad Hoc Resets Processing Notes to edit the current period and add a new period.

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. Long buys and sells in the equity portfolio are booked against pay financing/receive return TRSs, while short sells and buys to cover are booked against pay return/receive financing TRSs. Additional lots, new positions, partial closes, and full closes can be processed against the TRS just as they would be against the equities.

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.

• Shares (40): # of shares of the equity

  • Constant Notional: Notional (7782) is entered directly

• Price (45): initial price of the equity

• Commission (47) & Other Fee (3752): enter any commissions and/or fees

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

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 in accordance with the equity trade. Eagle Accounting automatically calculates the proceeds and gain/loss entries are posted.

• Lot Selection Method (27): ensure this matches the equity portfolio

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.

See TRS Global Processing Notes for details about the global events for TRS.

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.  

Corporate Actions

See TRS Corporate Actions Processing Notes.

Reporting

The sum of MARKET_VALUE_INCOME across all of the TRS representing a given Portfolio Swap represent the total values of the swap. If these TRS are held in a dedicated entity, reporting at the entity level shows the whole Portfolio Swap as a single line item.