Swap Netting Processing Notes

Owned by Jawann Swislow
Last updated: Sept 18, 2024 by Jawann Swislow
3 min read

Overview

This document applies to all releases of Eagle software V17 and above, plus select legacy branches. Version-dependent functionality is noted with the initial release(s) it became available.

Central clearing of swaps resulted in standardization across various contracts, allowing long and short positions in the same contract to be netted together. For clients who trade in large volumes, this reduces gross notional outstanding and the number of individual positions without affecting cash flows.

Phase 1 of swaps netting in Eagle Accounting is limited to cleared Interest Rate Swaps (IRS) and Credit Default Index Swaps (CDX) with variation margin (VM) and amortization both turned off. Single-Name Credit Default Swaps (CDS) are also supported when following Eagle’s best practice of using the CDX functionality for all credit swaps. Netting is rules-based to support different configurations across clearinghouses and securities. It can be triggered manually or scheduled. Rules are configured based on Processing Security Type (3931), Primary Asset ID (14), and Primary Exchange (17).

Trade Processing

The market convention for cleared swaps is that all trades are opens and netting is used to collapse the offsetting positions, as shown in the scenarios below. To align with this convention in Eagle Accounting, only OPENSWAP transactions would be used. This may require remapping of inbound messages if closes/sells are being instructed.

Scenario

Existing Position

Activity

Netted Position

Scenario

Existing Position

Activity

Netted Position

Reduce Position By Half

1,000,000 Long

Open 500,000 Short

500,000 Long

Cross Zero (500,000 Short to 250,000 Long)

500,000 Short

Open 750,000 Long

250,000 Long

Configuration

Swaps netting is a four-step process:

  1. Establish Accounting Rule

  2. Define Netting Rule Details

  3. Add Netting Rule to Entity

  4. Trigger Netting

Netting is designed to work with Identified cost. Average cost entities require a Mixed Cost Basis Rule to specify Identified cost for Processing Security Type = SWCDCX and SWCOIR. See for more information.

Step 1: Establish Accounting Rule

  • Open Create Accounting Rule (Add Accounting Rule prior to V17)

  • Enter Rule Name (3197, must be unique) and Rule Description (1166)

  • Set Rule Type (1882) = Swap Netting

  • Click Submit

Step 2: Define Netting Rule Details

  • Open Create Netting Rule (Add Netting Rule prior to V17)

  • Select the Rule Name (3197) you created in Step 1

  • Set Processing Security Type (3931) = SWCOIR for IRS or SWCDCX for CDX

  • Select a clearinghouse from the Exchange Code (9036) list

  • Enter the appropriate Lot Selection Method (27) to use for the netting transaction

  • Asset ID (14) and Issue Name (961) can be used to apply the netting rule to an individual security

  • Enter a Rule Begin Date (71) less than or equal to the earlier possible date netting should take place

    • You can set this to 19000101 if you want all positions to be eligible regardless of date

  • Click Submit

Note: additional rows with different criteria can be added to the same netting rule by right-clicking in the lower multi-row section of the screen and selecting Add Row(s).

Step 3: Add Netting Rule to Entity

  • Open Create/Edit Entity (Add Entity or Change Entity prior to V17)

  • Set Netting Rule Name (1887) to the Rule Name you created in Step 1

  • Click Submit

Step 4: Trigger Netting

  • Open the Run Swap Netting global process (SWAP Netting prior to V17)

  • Set Select Query Option (2283) to capture the universe of securities you want to net

  • Enter Net Date (221) equal to effective date of the netting, plus any other fields required based on Select Query Option

  • Click Submit

Netting transactions should be cancelled using Batch Cancel Trades to ensure all constituents are rolled back together.

Examples

Credit Default Index Swaps

  • Open 1 million notional long (sell protection) @ 101 with trade date 12/1/2015

  • Open 1 million notional short (buy protection) @ 100 with trade date 12/15/2015

  • Trigger netting with Net Date = 20151215

    • Both lots are closed out with Reason (56) = NETTING and no cash is generated

Interest Rate Swaps

  • Open 3 million notional long @ 0.1 with trade date 12/15/2015

  • Open 4 million notional long @ 0.4 with trade date 12/16/2015

  • Open 5 million notional long @ 0.2 with trade date 12/22/2015

  • Open 2.5 million notional long @ 0.5 with trade date 12/28/2015

  • (Net Position = 14.5 million notional long @ 0.2862069 weighted average unit cost)

  • Trigger netting with Net Date = 20160113

    • All lots are closed @ weighted average unit cost

    • A single new lot for 14.5 million notional long is opened @ weighted average unit cost

    • No cash is generated