Currency Redenomination

Best Practices

Last Update: 7/23/2017

OVERVIEW

Since the start of the 2008 financial crisis there has been speculation that some countries could abandon their currencies in favor of ones that provides more economic stability. This would lead all securities and positions that are currently established in the abandoned currency to be redenominated to the new or legacy currency.

The following outlines Eagle’s recommended approach for handling a currency redenomination. Testing has centered on the most likely targets, but each country’s unique conventions and regulations may necessitate gathering input from local authorities/sub-custodians and modifying the workflow. Please contact your Relationship Manager or Client Operations Manager with questions.

CONVERSION PLAYBOOK

1. Identify Impacted Positions & Securities

The database query below will return a list of securities from a given country (or set of countries) with open positions. Enter the relevant country code(s) in the line that begins “where nra_tax_country in...” Multiple two-letter country codes can be entered; each must be enclosed in single quotes (see example below) and separated by commas.

select x.security_alias, x.xref_security_id, x.xref_type, s.investment_type, s.process_sec_type
from security..xreference x, security..security_master s
where x.security_alias=s.security_alias
and x.security_alias in(select asset_id from estar..estar_cost_position where asset_id in (select security_alias from security..security_master where nra_tax_country in ('ENTER COUNTRY CODE HERE' - example: 'GR')))
and x.xref_type in ('CUSIP', 'SEDOL', 'ISIN', 'TICKER')
--and s.investment_type = 'FI'
order by x.security_alias

2. Investigate Special Considerations for Each Security

The redenomination process varies depending on the security type (equity, fixed income, etc.), but considerations must also be made for the issue country. Countries have different laws that can affect the legality of a redenomination, and therefore must be incorporated into the workflow. The guidelines below were created under the assumption that redenomination is mandated and agreed upon by all applicable courts of law.

3. Establish New Currency

If the new or legacy currency is not yet established in Accounting, set up a new currency with the appropriate ISO currency code. Operationally, the Accounting engine has to be recycled for the system to recognize the new currency. Please contact your Relationship Manager or Client Operations Manager before proceeding with this step as Eagle would prefer to provide a script to ensure that all clients have and use the same ISO currency code information.

4. Populate Published Exchange Rates

The published exchange rate (local-to-local) is critical to ensuring that the correct cost is established in the new or legacy currency. This rate must be populated in the exchange rates table for redenomination ex-date prior to processing any transactions. In addition, the new local-to-base exchange rate will also need to be populated. Redenomination must be run as a start-of-day activity in order to ensure that the correct rate is utilized.

5. Create New Securities

Impacted securities must be duplicated with the new or legacy currency code. The expectation is that all other information (day count, coupon, payment frequency, reset frequency, maturity date, etc.) will remain the unchanged. This must be validated in the market when the event takes place.

For audit purposes the old security ID can be appended with ‘O’ (for ‘old’) or another letter, while the new security will carry the industry identifiers (CUSIP, ISIN, SEDOL, etc.). The old security should be updated to set to Inactive = Yes so that it is not used for trading at a later date.

6. Process Redenomination

Equity

Redenominating an equity security can be performed in two ways:

• V12 & Above: set up and run the Assimilation corporate action
  • The Assimilation functionality works by closing out each tax lot at cost and establishing new tax lots at the same cost
    • This ensures that there are no realized gains/losses and that new tax lots take on the same characteristics as the original pre-assimilation lots
  • Note: the Assimilation functionality was backported to multiple prior versions, so please contact your Relationship Manager or Client Operations Manager to find out if it is available in your specific branch
• V11 & Below: deliver off Security A (denominated in abandoned currency) and receive on Security B (denominated in new or legacy currency)
  • The deliver/receive functionality is a valid but more time-intensive alternative to the assimilation functionality
  • Deliver messages must be established for each tax lot held and for each entity or portfolio basis
    • Although the original trade date FX rate is not absolutely required for the deliver message - it will reduce cost to zero regardless of the FX rate used - Eagle does recommend that the same trade date FX rate be used for both the deliver and receive messages to ensure consistent reporting
    • A critical check after processing the delivers is to validate that cost is zero and there is no realized gain/loss
  • Similar messages must be created for processing new lots of the redenominated security using the receive functionality
    • Should the conversion date rate or factor not equal 1, certain fields will need to have the factor applied in order to calculate the correct local values and appropriate share quantities; calculations using the factor should be done offline
    • If the factor is 1, local cost of the redenominated security should equal local cost of the original security
  • Note: during testing an issue related to delivering short positions was identified; any positions held short will require an extra piece of data
    • Offset Account (tag 1825) must be populated
    • This issue has been resolved in V10.1.5, V11.0.X end-of-life, V11.1.2, and all subsequent versions

Fixed Income

Redenominating a fixed income security can be performed in two ways as well:

• V12 & Above: set up and run the Redenomination of Bonds corporate action
  • Note: the Redenomination of Bonds functionality was backported to multiple prior versions, so please contact your Relationship Manager or Client Operations Manager to find out if it is available in your specific branch
• V11 & Below: deliver off Security A (denominated in abandoned currency) and receive on Security B (denominated in new or legacy currency)
  • Similar to the equity process, the deliver and receive transactions will have to be run for each tax lot and entity or portfolio basis and the units/par value may need to be adjusted based on the conversion factor, if applicable

SPECIAL CASES

These are situations that Eagle has already identified as needing local input. These must be addressed on a case-by-case basis in collaboration with local authorities/sub-custodians.

Trades with Open Payables/Receivables & Pending Trades

Treatment of open payables/receivables and pending trades varies by country.

Open Dividends & Tax Reclaims

There is no standard process for handling open dividends and tax reclaims.

Tax Lots

A question was raised regarding whether or not it is valid to establish tax lots with historical open dates prior to conversion date. Clients will have to check local tax laws as no clear guidance was available. The assimilation/redenomination functionality will produce historical open dates equal to the legacy lots.

Tax Lots - Wash Sales

Eagle recommends manual tracking of wash sales for the first 30 days after conversion. This is standard practice for all Eagle conversions.

Fixed Income - Open Accruals

Treatment will vary on a security-by-security basis. Local conventions must be followed to determine proper accounting of accrued income and future income payments.