Overview
The most common corporate action that affects equity Option contracts is a stock split. Standard splits and reverse splits where the Option pricing is adjusted in the market based on the split ratio are supported in the core corporate action processing workflow. Non-standard corporate actions such as reverse stock splits where the Option pricing does not change and spin-offs are supported using the workflows described below.
Standard Stock Split
If there is a 2:1 split on the underlying stock, each Option contract is entitled to twice as many shares at half the original strike. If there is a 1:2 reverse split on the underlying stock, each Option contract is entitled to half as many shares at double the original strike. To process a stock split, start by opening the Stock Split corporate action announcement screen. After querying for the appropriate Option, populate the fields below as described. To trigger the event once the announcement has been created, use the Stock Dividends/Stock Splits global process with a date range that includes the Sweep Date from the announcement.
Sweep Date (1197): date when Eagle Accounting’s global corporate action process will pick up the Stock Split
Ex Date (65): set to ex-date of the underlying equity (date after which a buyer will no longer be entitled to previously declared stock split); also the same as Effective Date
Treatment of Fraction Shares (3965): European (requires From Shares and To Shares), Post Fraction Shares, Round Down, Round Up, or Round to Nearest Whole Share (requires Rounding Point)
Corporate Action Status (54): select Released to initiate stock split when invoking the global corporate action process, or select Pending or Incomplete to simply store the stock split announcement
Corporate Action Sub Priority (required to mark stock split as Released): order in which to process corporate actions with the same Ex Date (1 is first priority, 2 is second, etc.)
Split Contract Size (1698, unique to EQ Options): select
Yesto maintain same number of contracts while changing Contract Size, orNoto change the number of contracts while maintaining Contract SizeBoth elections will change information in the position object, but not the SMF (STAR to PACE reads Contract Size from the position object for Market Value calculations)
The same applies to Strike Price: it will be adjusted on all open lots based on Split Ratio (1001), but not on the SMF
You should have a security update process in place that also adjusts Contract Size and Strike Price on the SMF on Ex Date to ensure new trades are processed with the correct information
Market value is the same post split regardless of which election is chosen; take a 2:1 split, where the holder has 100 contracts and contract size is 100:
Split Contract Size =
Yes: after the split, Market Value = 100 contracts * 200 contract size * price = 20,000 * priceSplit Contract Size =
No: after the split, Market Value = 200 contracts * 100 contract size * price = 20,000 * price
Split Ratio (required to mark as Released): number of shares the holder is entitled to for each share they own; for a 2:1 stock split, enter
2Corporate Action Type (1728):
Stock SplitorReverse Split
Non-Standard Reverse Stock Split
There are two options for scenarios where the Option pricing is not adjusted in the market based on the split ratio:
Adjust the market price based on the split
This keeps the security reference data intact, but requires manipulating the price
Create a new SMF with a revised price multiplier and transfer the existing position
This allows the market prices to remain intact, but requires manipulating the security reference data and processing a corporate action
Create a new SMF with the updated Option terms
See Reuse Cross Reference Identifiers Processing Notes to reuse the same Primary Asset ID, or use a new one
Adjust Price Multiplier (18) to the Reverse Split Ratio (25 instead of 1.00 for a “1-for-25” reverse stock split)
Adjust Contract Size (19) based on the ratio
Adjust Strike Price (67) based on the ratio
Process Exchange Offer corporate action
Create Exchange Offer corporate action announcement to exchange old SMF for new SMF at a ratio of 1:1
Trigger corporate action using Exchange Offer global process
Load future prices and trades to the new SMF
Spin-Off
Unless or until an Option is exercised, a spin-off for the underlying has no impact on the economic terms of the Option itself. It may affect the Option’s pricing in the market, but this does not require any changes in Eagle Accounting. You can optionally add the spin-off security as an additional underlying of the Option for reporting purposes.
If the Option is exercised, the additional shares that resulted from the spin-off must be delivered. This is supported in Eagle Accounting through the use of a free receive and cost basis adjustment as described below.
Exercise the Option as usual
This moves the Option’s full cost to a new position in the original equity underlying
Book free receive for spin-off security
Cost Type (24) =
Trade "F"Quantity/Current Face (40): calculate number of child security shares to be received as # of Option Contracts * Contract Size * Spin-Off Ratio
Price (45): calculate the unit cost for spin-off security including both the equity cost and portion of the option premium in accordance with settlement allocation terms
Price = ((Equity Cost + Option Premium Cost) * Settlement Allocation % for Spin-Off Security) / # of Spin-Off Security Deliverable shares
Equity Cost = # of Option Contracts * Contract Size * Strike Price * Price Multiplier
Option Premium Cost = # of Option contracts * Contract Size * Option Trade Price * Price Multiplier
Process cost adjustment on the new position in the original equity underlying equal to the cost used in Step 2. b. for the spin-off security
If you do not already have one set up, you will need to add a code value to the
REC_DEL_ACCTScode category that offsets to the same memo account used by the free receiveThe Long Description can be set to anything, but the Short Description must be
9333333334(this is memo account TRANSFER OF ASSETS)
Add Comment