Interest Rate Swaps

TEMENOS T24 Interest Rate Swaps

User Guide

Information in this document is subject to change without notice. No part of this document may be reproduced or transmitted in any form or by any means, electronic or mechanical, for any purpose, without t he express written permission of TEMENOS Holdings NV. Copyright 2005 TEMENOS Holdings NV. All rights reserved.

Interest Rate Swaps

Table of Contents Introduction.............................................................................................................................................. Introduction............................................................................... ............................................................... 4 Application Overview ....................................................................................... ........................................................................................................................... .................................... 4 Products ............................................................................. ........................................................................................................................................... .............................................................. 6 IRS.................................................................................. IRS ................................................................................................................................................ .............................................................. 6 CIRS ............................................................................... ............................................................................................................................................. .............................................................. 6 Loan.............................................................................................................................................. Loan................................................................................................................................... ........... 7 Deposit.......................................................................................................................................... Deposit........................................................................... ............................................................... 7 Interest Options Options............................................................................... ................................................................................................................................ ................................................. 8 Fixed Rate ................................................................................... .................................................................................................................................... ................................................. 8 Floating Rate ............................................................................... ................................................................................................................................ ................................................. 8 Negative rates............................................................................. rates............................................................................................................................... .................................................. 8 Fixed Interest Amount ............................................................................. .................................................................................................................. ..................................... 8 Interest Day Basis Basis Option Actual/Actual....................................................................................... Actual/Actual....................................................................................... 9 Setting up the System ........................................................................... ........................................................................................................................... ................................................ 10 Parameter Files.................................................................................................. Files.................................................................................................................................. ................................ 10 SWAP.TYPE ................................................................................... .................................................................................................................................. ............................................... 10 SWAP.SCHEDULE.TY SWAP.SCH EDULE.TYPE.............................................................................................................. PE.............................................................................................................. 13 SWAP.AGREEMENT.TYP SWAP.AGR EEMENT.TYPE E ............................................................................................... .......................................................................................................... ........... 15 SWAP.PARAMETER SWAP.PARA METER ............................................................................................. ..................................................................................................................... ........................ 16 SWAP.ACTIVITY........................................................................................... SWAP.ACTIV ITY............................................................................................................................ ................................. 18 SWAP.ADVICES SWAP.ADVIC ES ............................................................................ ............................................................................................................................ ................................................ 19 PERIODIC.INTEREST PERIODIC .INTEREST ........................................................................................... ................................................................................................................... ........................ 20 EB.ACCRUAL.PARAM........ EB.ACCRU AL.PARAM........................................................................................................... ........................................................................................................... ........ 21 Overview of Input Input and Processing......................................................................................................... Processing......................................................................................................... 22 Swap Contracts.................................................................................................. Contracts.................................................................................................................................. ................................ 23 Interest Rate Rate Swap......................................................................................................................... Swap......................................................................................................................... 23 Currency Curren cy Interest Rate Rate Swap............................................................................................. Swap ......................................................................................................... ............ 25 Loan/Deposit Loan/Dep osit Contracts ............................................................................................. ..................................................................................................................... ........................ 26 Loan.................................................................................................................. Loan.......................... ...................................................................................................................... .............................. 26 Deposit ............................................................................... ........................................................................................................................................... ............................................................ 27 Upfront Profit Allocation ............................................................................................. ..................................................................................................................... ........................ 28 Principal Effective Effective Date...................................................................................................................... Date...................................................................................................................... 28 Non Stop Processing Processing.................................................................................................. ......................................................................................................................... ....................... 29 Group Fixing Fixing of floating floating legs legs .................................................................................... .............................................................................................................. .......................... 29 Group Fixing Fixing of floating legs legs – Close of of Business ............................................................................. 34

TEMENOS T24 User Guide Page 2 of 68

Interest Rate Swaps

SWAP.BALANCES SWAP.BALAN CES ............................................................................ ............................................................................................................................ ................................................ 35 SWAP.SCHEDULES SWAP.SCHE DULES .................................................................................................. ......................................................................................................................... ....................... 36 PX - Principal Exchange ...................................................................................... ................................................................................................................ .......................... 37 IP - Interest Payment............................................................. Payment...................................................................................................................... ......................................................... 37 RR - Rate Reset Reset ............................................................................. ............................................................................................................................. ................................................ 37 PI - Principal Increase, Increase, PIN or NI - Notional Principal Principal Increase..................................................... 38 PD - Principal Decrease, Decrease, PDN or ND - Notional Principal Principal Decrease............................................. 39 PM - Payment of of Premium Premium .................................................................................................. ............................................................................................................. ........... 39 RV - Receipt of Premium..................................................... Premium................................................................................................................ ........................................................... 39 RX - Re-exchange Re-exchange Principal........................................................................................................... Principal........................................................................................................... 40 IS - Issue Price Price ............................................................................... ............................................................................................................................... ................................................ 40 AP - Annuity Payment ........................................................................................... .................................................................................................................... ......................... 40 Amortisation of Premium Premium Paid/Received Paid/Received ........................................................................................... 41 PM/RV Schedule............................................................................................................................ 41 Brokerage ............................................................................. .......................................................................................................................................... ............................................................. 43 Accounting ............................................................................. ......................................................................................................................................... ............................................................ 44 Schedules............................................................................................................................... Schedule s....................................................................................................................................... ........ 44 Flexible Currency Swaps .................................................................................... ............................................................................................................... ........................... 49 Mkt.Exch.Profit/Loss................................................................................................ Mkt.Exch.Profit/L oss....................................................................................................................... ....................... 51 Principal Effective Date ......................................................................................... .................................................................................................................. ......................... 53 Limits.................................................................................................................................................. Limits..................................................................................................................... ............................. 54 Past Due ............................................................................... ............................................................................................................................................ ............................................................. 54 Charges and and Commissions................................................................................................................ Commissions................................................................................................................ 55 Position Managem Management ent ................................................................................................ ........................................................................................................................ ........................ 56 Delivery .................................................................................. .............................................................................................................................................. ............................................................ 58 Swap NPV Revaluation............................................................. Revaluation...................................................................................................................... ......................................................... 59 Future Rate Calculation........................................................................ Calculation.................................................................................................................. .......................................... 59 Zero Coupon Coupon Rate Calculation....................................................................................................... Calculation....................................................................................................... 60 Swap Valuation ............................................................................. .............................................................................................................................. ................................................. 61 Revaluation Revaluatio n Rate............................................................................................................................ Rate............................................................................................................................ 63 Close of Business Business Processing ................................................................................................ ........................................................................................................... ........... 64 Start of of Day Processing ............................................................................................. ..................................................................................................................... ........................ 67 Enquiries............................................................................................................................... Enquiries......................................... ....................................................................................................... ................. 68


Interest Rate Swaps

Introduction Application Overview The T24 SWAP module supports the recording and administration of both IRS (Interest Rate Swaps) and CIRS (Currency Interest Rate Swaps). It also supports ‘single-leg’ contract types (asset or liability), which are essentially loans or deposits. Additionally, Swaps are incorporated into the T24 Limits, Accounting and Position Management modules.

The module supports the following types of SWAP: -

•

Plain vanilla interest rate swap

•

Currency interest rate swap with or without exchange of principal

•

Amortising swap

•

Accreting swap

•

Roller-coaster swap

•

Balloon swap

And covers options such as: -

•

IRS/CIRS Single Contract

•

Simple Loan/Deposit Contract

•

Definable Schedules (Date and Frequency Based)

•

Fixed/Floating/Spread/Caps/Collars/Floors

•

ISDA Day Convention

•

Payment Netting

•

Definable Delivery

•

Full T24 Integration

The details supporting the SWAP transaction are held on a single contract. Transaction details stored include the counterparty, the notional principal(s), interest rates, schedules for both swap legs, and payment instructions.


Interest Rate Swaps

The schedules for both swap legs (asset and liability) are maintained on the SWAP contract, and the cash flows and balances are stored on the SWAP.BALANCES file. One SWAP.BALANCES record exists for each leg; consequently any changes to the SWAP details, schedules, rate fixing, etc. take place on the contract.


Interest Rate Swaps

Products

The T24 SWAP module supports the following products : -

IRS

An interest rate swap is an agreement between two counterparties to exchange streams of interest payments over a period of time. It does not involve exchange of principal, and interest is calculated on the notional principal amount. Interest rates may be fixed or floating and the interest payment schedules may be generated from a frequency or manually defined. The notional principal amount may vary during the life of the swap according to the user definable payment schedule.

CIRS

A currency interest rate swap is the same as an interest rate swap where the two streams of interest payments are in different currencies. Additionally, with a currency interest rate swap, the principal amount may be exchanged between the counterparties at the beginning and end of the deal. Interest rates may be fixed or floating and the interest payment schedules may be generated from a frequency or manually defined. The principal amount may vary during the life of the swap according to the user definable payment schedule.

Flexible currency swaps (CIRS with SWAP field FLEX.PRIN.PAYMENT set to ‘Yes’): -

•

Can have PI, PD, NI, ND, PX and RX transactions added to them at any time, as long as the deal has not matured and the transaction is in the future

•

Can have the PX or RX transaction deleted at any time, as long as the deal has not matured and the transaction is in the future

•

Can have a RX without a PX or a PX without a RX on both asset and liability sides of deal

•

Allow early maturity by editing the maturity date and deleting all future transactions. If the customer settles the accrued interest, the deal needs an IP schedule on the new maturity date. If repayment is required, the deal needs a RX schedule on the new maturity date.

Note that SWAP.SCHEDULE.TYPE NI and ND are required.


Interest Rate Swaps

Loan The loan product is the extension of credit to a client with interest being charged in arrears. Interest rates may be fixed or floating and the interest payment schedules may be generated from a frequency or manually defined. The principal amount may vary during the life of the loan according to the user definable payment schedule.

Deposit The deposit product is the opposite of the loan. The interest is due to the client in arrears. Interest rates may be fixed or floating and the interest payment schedules may be generated from a frequency or manually defined. The principal amount may vary during the life of the borrowing according to the user definable payment schedule.


Interest Rate Swaps

Interest Options Fixed Rate The interest rate is fixed, usually for the life of the contract, at input time. However, it is possible to change the rate on an individual contract basis by specifying a ‘RR’ (rate reset) schedule.

Floating Rate The interest rate is reviewed on a fixed period, usually 1 to 12 months. A rate key for the appropriate floating rate is required, e.g. 03LIBOR, to differentiate it from the fixed rate. A spread can be applied to the rate before the interest calculation. Cap and/or floor rates can also be specified so that the applied interest rate is adjusted accordingly by the system.

Negative rates The SWAP module also supports negative interest rates and amounts, and the downstream processing of them. Negative interest rates can be in any of the forms of fixed rate, floating rate with or without spread, ST.GROUP.FIX , or interest amounts. This can be defined in field NEGATIVE.RATES in the SWAP application. This is a no change field defaulting to NULL, which is same as NO.

For negative rates to be allowed the LIQUIDATION.MODE field should only be set to ‘AUTOMATIC’. Annuity Payments (AP) schedules cannot be input.

Fixed Interest Amount The interest amount can be fixed by specifying an ‘IP’ (interest payment) schedule with an associated amount. This is useful when there is a requirement of maintaining the same interest amount for every interest period throughout the life of the contract.


Interest Rate Swaps

Interest Day Basis Option Actual/Actual The interest day bases C (366/366), C2 (366/366) and D (360/366) are available in the T24 SWAP module.

The interest calculation is weighted in case the calculation period falls on part of a non-leap year and a leap year. The Calculations differ on when the year period exists, between C (known as the ISDA method) and C2 (known as the AFB method). For the ‘C’ calculation, the period is broken down into actual years; for the ‘C2’ calculation the year starts at the maturity date and works backwards. If February 29 exists in that period then it counts it as 366 days, otherwise it is 365. If the period lasts more than a year, subsequent calculations are made for each yearly period.

For example: -

A loan of USD 100,000 at 11.5% for 3 months starts on 22/12/95 and matures on 22/03/96 with interest day basis ‘C’.

No. of Days

Days in Year

Interest

10

365

315.07

81

366

2545.08

Total Interest

2860.15

Table 1

A loan of USD 100,000 at 11.5% for 3 months starts on 22/12/95 and matures on 22/03/96 with interest day basis ‘C2’.

No. of Days

Days in Year

91

366

2859.29

Total Interest

2859.29

Table 2


Interest

Interest Rate Swaps

Setting up the System Parameter Files SWAP.TYPE The SWAP.TYPE file contains definitions of all types of SWAP contracts allowed on the system.

For example: -

IRS - Interest Rate Swap CIRS - Currency Interest Rate Swap

It also holds the following details with regard to the SWAP.TYPE : -

•

Description of the SWAP.TYPE

•

Product Category code

•

Transaction Index to indicate the characteristic of the SWAP

•

Balance Sheet to indicate whether the SWAP is to be treated as on-balance sheet or offbalance sheet instrument

•

Internal category code for the provision of unrealised profit generated by revaluation

•

Internal category code for the provision of unrealised loss generated by revaluation

•

Revaluation Type

•

Booking of unrealised profit allowed or not.

•

P&L Category for revaluation profit

•

P&L Category for revaluation loss

•

If the deal should be processed and limits updated during start of day (instead of Close of Business).

•

If the deal should default to a flexible currency swap (see CIRS).


Interest Rate Swaps

Figure 1 Example of SWAP.TYPE record IRS

Figure 2 Example of SWAP.TYPE record CIRS


Interest Rate Swaps

There are two other standard SWAP.TYPE records released with this module which cater for simple loan and deposit contracts: -

•

LOAN

Asset side of swap

•

DEPOSIT

Liability side of swap

Figure 3 Example of SWAP.TYPE record LOAN


Interest Rate Swaps

SWAP.SCHEDULE.TYPE This file defines the schedules, which are permitted in a SWAP contract. The first two characters of the Id determine the type of schedules and are fixed as follows: -

Type

Description

AC

Interest accrual current month (system generated)

AM

Interest accrual previous month (system generated)

AY

Interest accrual previous year (system generated)

CI

Contract initiation (system generated)

CM

Contract maturity (system generated)

NR

NPV revaluation (system generated)

RL

Currency revaluation (system generated)

PX

Principal exchange

RX

Principal re-exchange

PI

Principal increase

PD

Principal decrease

PIN

Notional Principal increase

PDN

Notional Principal decrease

IP

Interest payment

RR

Rate reset

PM

Payment (premium, interest purchased, etc)

RV

Receipt (premium, interest received, etc)

IS

ISSUE price

AP

Annuity payment Table 3


Interest Rate Swaps

Different schedules can be added but the first two characters must be one of the above. For each schedule defined, the following associated information is also held: -

•

Description of schedule

•

Transaction code to be used on entries (Mandatory except CI, CM, NR, RL and RR; must be unique if IS)

•

P&L category code (Mandatory if PM, RV or IS)

•

Charge codes

•

Fee codes

Figure 4 Example of SWAP.SCHEDULE.TYPE record


Interest Rate Swaps

SWAP.AGREEMENT.TYPE This file is used to store the types of agreements used in SWAP contracts, e.g. ISDA, BBAIRS, and MASTER, etc. Each contract must be linked to an agreement type. The field AGREEMENT.TYPE on the SWAP contract is validated against the agreement type definitions on this file and enriched with the associated description.

Two swap agreement type records are released with this module: -

•

ISDA

the ISDA Definitions

•

OTHER specific such as simple loan and deposit contracts

Figure 5 Example of SWAP.AGREEMENT.TYPE record


Interest Rate Swaps

SWAP.PARAMETER This file holds the system level parameters for the processing of SWAP transactions, in a single SYSTEM record. This is the highest-level file within the SWAP module and must be set up before any data can be entered into the module.

The SYSTEM record consists of four major groups: -

•

Asset accrual categories

•

Liability accrual categories

•

Additional data such as transaction code to use on net payments and, date and frequency of accruals.

•

Revaluation related data such as P&L category for Currency Revaluation, revaluation transaction codes, coupon curve rate, categories of Upfront Allocation of P&L and periodic interest rate indices.

Please note that accruals are not performed until a valid accrual cycle has been defined.


Interest Rate Swaps

Figure 6 Example of SWAP.PARAMETER record


Interest Rate Swaps

SWAP.ACTIVITY This file is used to control the delivery output from the SWAP module. The records on this file define activities that produce delivery output. These activities relate to specific events during the life of the contract. The delivery relating to each of these events may, if required, be produced prior to the event itself. The number of days prior to event is defined on this file.

Whenever delivery output is produced via the SWAP module, the activity code of the relevant advice is recorded on the contract. When the contract is subsequently viewed, these activity codes are displayed and enriched with the description recorded on this file.

The Id is a three-digit code identifying the activity: -

ID

Description

101

Contract Confirmation

102

Principal Exchange

103

Principal Increase / Decrease

104

Contract Amendment

105

Interest payment

106

Contract maturity

107

Contract Reversal

108

Rate Reset

109

Principal Re exchange

110

Payment of premium

111

Receipt of premium

112

Issue Price

113

Annuity payment

114

Rate Reset

115

Rate Reset amendment

202

Payment

210

Advice to receive Table 4


Interest Rate Swaps

SWAP.ADVICES This file controls the output of delivery messages for a SWAP.ACTIVITY . The record key is the SWAP.ACTIVITY -SWAP.TYPE (the latter being optional) e.g. 101 or 101-CIRS.

A SWAP.ADVICES record can be linked to another defined SWAP.ADVICES record and provides the ability to define multiple message types, print formats and deal slips. This gives the capability to tailor the output of a SWAP activity.

The following details are held for each SWAP.ADVICES: -

•

Description of advices to produce

•

Use linked SWAP.ADVICES record

•

Message type to produce ( DE.MESSAGE )

•

Delivery print format

•

Optional deal slips to produce

Figure 7 Example of SWAP.ADVICES record


Interest Rate Swaps

PERIODIC.INTEREST Rates need to be defined within PERIODIC.INTEREST for each type of floating rate that is required. For example, 3 month LIBOR and 6 month LIBOR need to be set up as two different records within PERIODIC.INTEREST . E.g. 07USDyyyymmdd could represent the 3month LIBOR rate, and 08USDyyyymmdd could represent the 6month LIBOR rate for the same system date.

Each record must only have one entry other than the "Rest” entry. If a table has more than these two entries only the first value (by nearest date) is used; the second and any other subsequent values is ignored.

The system allows up to 99 different types of rate sets per day for each currency

Figure 8 PERIODIC.INTEREST


Interest Rate Swaps

EB.ACCRUAL.PARAM This table allows the user to define a principal effective date calculation routine, which can subsequently be applied in the SWAP field EB.ACCRUAL.PARAM.

Figure 9 EB.ACCRUAL.PARAM record

The field PRIN.ADJUST.RTN should be populated with a valid principal effective date calculation routine.


Interest Rate Swaps

Overview of Input and Processing A typical SWAP contract input screen consists of the following sections: -

•

Contract details

•

Asset details including schedules

•

Liability details including schedules

•

Settlement instructions

Most of the fields have default values except for the key elements such as counterparty, maturity date, agreement type, currencies, and principal amounts. Schedules can be entered directly onto the contract by using the schedule types, dates and frequencies, amounts, and rates. This simplifies the input of a relatively complex SWAP contract.

All schedules are processed on-line and at Close of Business (COB), with the exception of the ‘IP’ and the ’AP’ schedules which are due today. In the latter case, they are only processed at COB.

On validation, the system automatically checks and updates the customer’s credit limit, raises accounting entries and forward entries, applies any charges and/or fees, updates the delivery fields on the contract, and updates position management.

At the authorisation stage, the system generates all the necessary accounting entries and CRF entries and, populates and sends the messages in the delivery fields by SWIFT.

Broker / Customer confirmation is carried out using the Verify function, and stamps the contract with the terminal number, operator name and the time and date when the contract was confirmed. The type of confirmation required is specified as a prefix to the contract number (which is ignored for other functions) of either CU for customer confirmations or BR for broker confirmations.

By using the VERSION s SWAP,CUSTOMER and SWAP, BROKER, and the default ENQUIRY supplied with these VERSION s, the appropriate prefix is automatically appended to the contract number.


Interest Rate Swaps

Swap Contracts The following are two example SWAP contracts. The first is an IRS and the other a CIRS. As can be seen from the examples, the input screens are similar apart from the default SWAP type.

Interest Rate Swap

Figure 10 Input of Asset Details on IRS transaction


Interest Rate Swaps

Figure 11 Input of Liability Details on IRS transaction


Interest Rate Swaps

Currency Interest Rate Swap

Figure 12 Input of Asset Details on Currency IRS transaction

Figure 13 Input of Liability Details on Currency IRS transaction


Interest Rate Swaps

Loan/Deposit Contracts As mentioned above, the T24 SWAP module is capable of handling loan and deposit contracts. Below are two example contracts: -

Loan

Figure 14 Input of Asset Details on Loan Swap transaction


Interest Rate Swaps

Deposit

Figure 15 Input of Liability Details on Deposit Swap transaction


Interest Rate Swaps

Upfront Profit Allocation The field TREASURY.CUSTOMER in the SWAP application is used to identify a customer as a Non treasury customer and allow the input of a treasury rate if it is required. This field either holds the value ‘NULL’ or ‘NO’. By default it holds the value as NULL, which means the counterparty is a treasury customer. However, if set as ‘NO’, it is construed that the counterparty is not a treasury customer The difference between the Treasury rate and the Customer Rate will be the Market Exchange Profit/Loss. The former is input in AS.TRSY.FIXED.RATE and the latter in AS.FIXED.RATE. The prefix AS indicates the Asset side and the prefix LB indicates the Liability Side. Within the AS.TYPE and LB.TYPE, the Treasury Rate has to be input in the field AS.TRSRY.RATE/LB.TRSRY.RATE and the Customer Rate has to be input in AS.RATE/LB.RATE . The Upfront Profit Allocation functionality does not support cases where the Interest Amount is entered as an amount instead of a rate. The functionality supports Fixed Side only.

Principal Effective Date

Figure 16 SWAP record

The field EB.ACCRUAL.PARAM is used to identify which principal effective date calculation routine the user wishes utilise. By default the value set in this field is “NULL” and in the absence of this field being populated with a valid value, standard T24 calculation methods apply.


Interest Rate Swaps

Non Stop Processing The SWAP application can be enabled as a ‘Non Stop’ application. This allows the input of new Swap transactions for the next day (backdated contracts not allowed), while the Close of Business is in progress. These contracts can be amended, deleted and reversed while COB is in progress. Contracts input prior to commencement of COB are viewable only, when the COB is in progress.

Group Fixing of floating legs The SWAP module provides the capability to allow the fixing of floating rates to be grouped in a semior fully-automatic operation without the need to review each trade manually.

Trades matching certain user-specified parameters are fixed using the ST.GROUP.FIX application. This application allows the group fixing (also known as rate reset) operation to be run intra day or at Close of Business (COB), and may be rerun e.g. in cases where the wrong rate has been used.

The ST.GROUP.FIX application provides an interface for the User to select which swap trades are to be fixed and then executes the fixing operation upon authorisation. A group fixing operation must be authorised for it to be executed since it involves changes to transaction data.

When creating group rate fixing requests, various parameters are specified (e.g. instrument, instrument type, currency, rate fixing code and effective date) along with operational parameters (e.g. whether a report is necessary). This application will automatically detect trades requiring a rate reset and sets the rate accordingly.

When a spread rate is defined, the fixing operation will add this to the fixing rate to derive the actual fixing rate. This is needed for cases where a coupon with a floating rate is being fixed, such as LIB3M + 0.5%.

The fixing operation creates an individual “RR” schedule record for each effective date, containing the fixing rate (which includes the spread component if defined for that trade).

If a frequency code is input in the “RR” schedule date field, the fixing program creates the next “RR” schedule, after advancing the date to be that of the next reset date as determined by the frequency.


Interest Rate Swaps

For example, for an existing schedule of: -

Schedule

Date

Rate

“RR”

20000228M0328

-

A rate fix of 5.4% for 28/2/2000 results in the following, after the fixing operation: -

“RR”

20000228

5.4%

“RR”

20000528M0328

-


Interest Rate Swaps

An example of ST.GROUP.FIX is shown below: -

Figure 17 ST.GROUP.FIX

The instrument type defines the application. E.g. SWAP or FRA.

The effective date is the date on which the new rate takes effect and is not necessarily the date on which the fixing operation itself happens. Typically, fixing occurs two days before or on the day the new rate takes effect, depending on the currency.

The ST.GROUP.FIX record specifies whether the SWAP trade becomes authorised or unauthorised after the fixing operation is executed.

The rate fixing code determines which PERIODIC.INTEREST rate set to use. The link to the PERIODIC.INTEREST table is handled via the MARKET.RATE.TEXT record (in fields and SWAP.LB.RATE.KEY). The rate fixing code represents the SWAP.AS.RATE.KEY MARKET.RATE.TEXT key. The same code must be input in ST.GROUP.FIX as that used to flag the floating rate within the trades.

Rates are derived from PERIODIC.INTEREST . The key to this table is NNCCYYYYMMDD e.g. 10GBP20020602, which allows up to 99 individual records be captured per currency per day. This enables individual tables for individual products.


Interest Rate Swaps

When an unfixed leg is due for fixing the SWAP application downloads the rate from the source rate file and automatically updates the SWAP transaction record with the relevant rate.

Reports are available that provide details of the fixing operations carried out and any errors encountered.

If several overnight requests are required, for example on an IMM fixing date, one record per combination of instrument/currency/rate fixing code/effective date, will need to be input and authorised, and marked to run at COB.


Interest Rate Swaps

A detailed explanation of the ST.GROUP.FIX fields is as follows: -

INSTRUMENT-

Defines the application (e.g. SWAP)

TYPE-

Sub-type within SWAP group. This can be any type defined in the application SWAP.TYPE .

CURRENCY-

Currency to be fixed; only one currency may be specified.

RATE.CODE-

The descriptor for the rate set supplying the fixing rates. In SWAP this is the value in MARKET.RATE.TEXT .

RATE.SELECTION-

Use mid or bid-offer rate from the rate table. Allowed values are: MIDDLE: The fixing process will calculate and use the mid rate between the BID and OFFER rates as defined in the rate table. BIDOFFER: The fixing process will use either BID or OFFER as appropriate for the deal type (asset legs will use the OFFER, liability legs will use the BID).

EFFECTIVE.DATE-

The date on which the new rate will take effect. For the SWAP application this is the date in the “RR” schedule date/frequency field.

TIMING-

Specifies when the operation is executed. Allowed values are: WID (Executed immediately the ST.GROUP.FIX record is authorised). COB (Executed by ST.EOD.GROUP.FIX [see below] as a batch in the Close of Business processing). (Left blank) – The operation will be suspended.

REFIX-

The fixing operation will overwrite rates for trades, which may already have been fixed (manually or automatically) previously. Allowed values are YES or NO.

FIXING.LIST-

Whether the list of trades fixed is required so that the user can see a list of trades about to be fixed. Allowed values are YES or NO.

ERROR.LOG-

Whether the process should write to the log. Values are YES or NO.

TRADE.STATUS-

Whether a fixed trade goes directly to authorised status or whether it goes to unauthorised status. Allowed values are: AUTH: Trade will be authorised. WAIT: Trade will not be authorised.

LAST.RUN-

Controlled and updated by the system; contains date as well as status (started/completed) and number of errors if completed.


Interest Rate Swaps

Group Fixing of floating legs – Close of Business The ST.EOD.GROUP.FIX batch process detects any COB rate fixing requests that are created. The COB process activates ST.GROUP.FIX using the up-to-date rates available in PERIODIC.INTEREST .

If the request is made that trades are authorised by the fixing process, then the effect of the updated transactions will be included in the same-day P&L.


Interest Rate Swaps

SWAP.BALANCES The SWAP.BALANCES file is automatically updated and maintained by the T24 SWAP module. The record Id is made up of contract number and leg identifier (i.e. ‘A’sset or ‘L’iability). It holds all balance information, principal outstanding, rates, accruals, past schedules, and charges details.

The fields relating to past schedules on the SWAP.BALANCES file are the basis of the ENQUIRY SWAP.SCHEDULE .

The corresponding save file (SWAP.BALANCES.SAVE ) and the history file (SWAP.BALANCES.HIST ) are copies of the data held in the SWAP.BALANCES file at various stages. The save file stores the last authorised version of the balances record whereas the history file stores the reversed version of it.

Figure 18 SWAP.BALANCES record


Interest Rate Swaps

SWAP.SCHEDULES SWAP.SCHEDULES is a live file that records data regarding the unprocessed schedules for a SWAP contract, based upon the schedule date. The recorded data includes the activity to be triggered from a Delivery viewpoint. The field ORIG.SCHED.DATE records the original date of the schedule. When this falls on a non business day, processing is handled according to the PROCESS.DATE which is arrived at as per the DAY.CONVENTION on the SWAP contract. I.e.: -

•

When the PROCESS.DATE is earlier than the ORIG.SCHED.DATE , the schedule is processed on the PROCESS.DATE .

•

When the PROCESS.DATE is after the ORIG.SCHED.DATE, a new SWAP.SCHEDULES record is created during COB of the ORIG.SCHED.DATE, with the PROCESS.DATE as part of the Id.

•

Contracts with a DAY.CONVENTION of ‘Modified F’ or ‘Following’ that cause the PROCESS.DATE to be later than the Contract Maturity Date, are processed as if they bear the DAY.CONVENTION ‘Null/Day Adjustment Null’.

Whenever a SWAP contract is amended the SWAP.SCHEDULES record for the contract is deleted and rebuilt. When the schedule is processed, the related SWAP.SCHEDULES record is removed.

Figure 19 SWAP.SCHEDULES record


Interest Rate Swaps

An extensive set of SWAP.SCHEDULE.TYPE records are released with the T24 SWAP module. These give the flexibility and capability to enter most types of SWAP contract.

All schedules are processed on-line and at Close of Business, except for IP and AP schedules which are due today. In the latter case, these schedules are only processed at Close of Business.

PX - Principal Exchange One off schedule, no amount or rate is allowed. Exchanges the principal amount specified on the contract and changes NOTIONAL to ‘NO’.

These variations are allowed: -

•

PX at start and RX at maturity on both asset and liability sides

•

No PX or RX

•

PX and RX on asset side only (exceptional; warning displays)

•

PX and RX on liability side only (exceptional; warning displays)

For deals with the SWAP field FLEX.PRIN.PAYMENT set to ‘Yes’ (flexible currency swaps), the following additional variations are allowed: -

•

PX only on both asset and liability sides of deal

•

PX can be added to or deleted from a deal before start date

IP - Interest Payment Amount is mandatory if neither rate nor rate key is specified. Performs final accrual and will correct interest amount if necessary.

Multiple IP schedules are allowed provided that there is no frequency attached to them. Also, the IP schedules can have associated amounts.

RR - Rate Reset No amount is allowed and will not be processed until a rate is entered. It updates the current rate on the contract and the rate fields on the SWAP.BALANCES record.


Interest Rate Swaps

PI - Principal Increase, PIN or NI - Notional Principal Increase Amount is mandatory and rate is not allowed. It updates the principal fields on the SWAP.BALANCES record.

All three schedules (PI, PIN and NI): -

•

Increase the principal on the deal

•

Result in changes to subsequent interest payments

•

Affect the RX transaction, if there is one. It re-exchanges the modified principal

•

Affect the customer's credit limit

The differences between the three schedules are illustrated below: -

Deal

PI

PIN

Swap with PX and RX

The increase causes actual Causes movements of cash across nostro and cash customer accounts movements

Swap without PX or RX

The increase is notional – there are no No cash Not allowed movements of cash movements

field Causes cash movements FLEX.PRIN.PAYMENT set to ‘Yes’ CIRS

with

SWAP

Figure 20


Not allowed

NI Not allowed

No cash movements

Interest Rate Swaps

PD - Principal Decrease, PDN or ND - Notional Principal Decrease Amount is mandatory and rate is not allowed. It updates the principal fields on the SWAP.BALANCES record.

All three schedules (PD, PDN and ND): -

•

Decrease the principal on the deal

•

Result in changes to subsequent interest payments

•

Affect the RX transaction, if there is one. It re-exchanges the modified principal

•

Affect the customer's credit limit

The differences between the three schedules are illustrated below: -

Deal

PD

PDN

Swap with PX and RX

The decrease causes actual Causes movements of cash across nostro and cash customer accounts movements

Swap without PX or RX

The decrease is notional – there are No cash Not allowed no movements of cash movements

field Causes cash movements FLEX.PRIN.PAYMENT set to ‘Yes’ CIRS

with

SWAP

Not allowed

ND Not allowed

No cash movements

Figure 21

PM - Payment of Premium Amount is mandatory and no rate is allowed. Amount is always payable regardless of asset or liability leg.

RV - Receipt of Premium Amount is mandatory and no rate is allowed. Amount is always receivable regardless of asset or liability leg.


Interest Rate Swaps

RX - Re-exchange Principal The RX schedule is not allowed if neither PX nor IS are previously defined. It is a one off schedule and no amount or rate is allowed. It re-exchanges the principal outstanding on the SWAP.BALANCES record and changes either asset or liability status to ‘MAT’.

These variations are allowed: -

•

PX at start and RX at maturity on both asset and liability sides

•

No PX or RX

•

PX and RX on asset side only (exceptional; warning displays)

•

PX and RX on liability side only (exceptional; warning displays)

For deals with the SWAP field FLEX.PRIN.PAYMENT set to ‘Yes’ (flexible currency swaps), the following additional variations are allowed: -

•

RX only on both asset and liability sides of deal

•

RX can be added to or deleted from a deal before start date

A flexible currency swap can be matured early, by bringing the maturity date and RX forward, and deleting all forward transactions.

IS - Issue Price A one off schedule and must have either amount or rate specified. As with the PX schedule, it changes NOTIONAL to ‘NO’.

It is similar to the drawdown issue price in Loans and Deposits. The issue price can be expressed as a % (0-500) of the nominal amount or a flat amount. It may be below or above 100% of the nominal amount. The final drawdown issue price will be net of any charges and/or fees.

AP - Annuity Payment The AP schedule is similar to the annuity in Mortgage. It uses the standard repayment calculation routine to work out a theoretical repayment amount. If no amount is entered, the theoretical amount will be used. Otherwise, the amount entered must be greater than or equal to the theoretical amount.

A PX schedule must be specified at the beginning of the contract in order to generate the principal movement. Otherwise, the principal will remain NOTIONAL.


Interest Rate Swaps

Amortisation of Premium Paid/Received

PM/RV Schedule The field AS.AMORT.DATE or LB.AMORT.DATE, as the case may be, contains the date up to which Amortisation of the PM/RV Schedule Amount is done, starting from the Schedule date: -

Figure 22 SWAP CONTRACT


Interest Rate Swaps

The amount of Premium is credited to the customer if the PM Schedule is used, and debited to the customer if the RV Schedule is used. If the AS.AMORT.DATE or LB.AMORT.DATE is specified, then the amount of premium will be amortised daily from Schedule date until the AS.AMORT.DATE/LB.AMORT.DATE. If the AS.AMORT.DATE or LB.AMORT.DATE is not specified, then the premium/discount will be posted to the Profit and Loss account on the same day without Amortisation. The amount of Premium amortised is displayed in the SWAP.BALANCES file.

Figure 23 SWAP.BALANCES


Interest Rate Swaps

Brokerage

Figure 24 Brokerage fields on SWAP record

The brokerage base, asset or liability, indicates which side of the contract is to be used for the brokerage calculation. The brokerage amount will be calculated by reference to the BROKER record indicated by the broker code, unless an overriding amount is entered. The broker currency, that is the currency in which the brokerage will be paid, and the corresponding amount will also be defaulted unless input. Refer to the BROKER section in the SYSTEM.TABLES User Guide for the explanation of the brokerage calculation.

Brokerage is posted to the brokerage account contra profit and loss when the contract is authorised. It cannot then be changed in the contract.


Interest Rate Swaps

Accounting Schedules The accounting process is initiated from schedule processing in the SWAP module. As with schedule processing, it can be called on-line as well as at Close of Business. The following table is a summary of the accounting entries raised by various schedules: Schedule

Asset

Liability

AC

DB – IENC *

DB – P&L

CR – P&L

CR – IENC *

Forward

DB – FORWARDDB

CR – FORWARDCR

Live

DB – NOTIONALDB

CR – NOTIONALCR

(CR – FORWARDDB)

(DB – FORWARDCR)

DB – FORWARDDB

CR – FORWARDCR

F Entry for Customer CR

F Entry for Customer DR

F Entry for Internal Acc DR

F Entry for Internal Acc CR

CR - FORWARDDB

DB – FORWARDCR

DB – SWOFFBALDB

CR – SWOFFBALCR

Live Entry for Customer CR

Live Entry for Customer DR

Live Entry for Internal Acc DR

Live Entry for Internal Acc CR

Forward

DB – SWFWNOTLDB

CR – SWFWNOTLCR

Live

CR – SWFWNOTLDB

DB – SWFWNOTLCR

DB - NOTIONALDB

CR – NOTIONALCR

CI

PX

Interest Accrual

Contract Initiation

Principal Exchange – CIRS with Principal Movements (OFF Balance Sheet) Forward

Live

PX

Principal Exchange – IRS without Principal Movements (OFF Balance Sheet)

Figure 25 Accounting entries raised by Swap Schedules


Interest Rate Swaps

Schedule PX

Asset

Liability

DB – FORWARDDB

CR – FORWARDCR



CR – FORWARDDB

DB – FORWARDCR

DB – LIVEDB

CR – LIVECR



No Spec Entry

No Spec Entry



CR – SWOFFBALDB

DB – SWOFFBALCR





Forward

No Spec Entry

No Spec Entry

Live

CR – NOTIONALDB

DB – NOTIONALCR

Principal Exchange – CIRS with Principal Movements (ON Balance Sheet) Forward

Live

RX

Re-exchange Principal – CIRS with Principal Movements (OFF Balance Sheet) Forward

Live

RX

Re-exchange Principal – IRS without Principal Movements (OFF Balance Sheet)



Interest Rate Swaps

Schedule RX

Asset

Liability

No Spec Entry

No Spec Entry



CR – LIVEDB

DB – LIVECR



CR – NOTIONALDB

DB – NOTIONALCR

No Spec Entry

No Spec Entry



DB – SWOFFBALDB

CR – SWOFFBALCR





Forward

No Spec Entry

No Spec Entry

Live

DB – NOTIONALDB

CR – NOTIONALCR

Re-exchange Principal – CIRS with Principal Movements (ON Balance Sheet) Forward

Live

CM

Contract Maturity

PI

Principal Increase – CIRS with Principal Movements (OFF Balance Sheet) Forward

Live

PI

Principal Increase - IRS without Principal Movements (OFF Balance Sheet)



Interest Rate Swaps

Schedule PI

Asset

Liability

No Spec Entry

No Spec Entry



DB – LIVEDB

CR – LIVECR



No Spec Entry

No Spec Entry



CR – SWOFFBALDB

DB – SWOFFBALCR





Forward

No Spec Entry

No Spec Entry

Live

CR – NOTIONALDB

DB – NOTIONALCR

No Spec Entry

No Spec Entry



CR – LIVEDB

DB – LIVECR



Principal Increase – CIRS with Principal Movements (ON Balance Sheet) Forward

Live

PD

Principal Decrease – CIRS with Principal Movements (OFF Balance Sheet) Forward

Live

PD

Principal Decrease – IRS without Principal Movements (OFF Balance Sheet)

PD

Principal Decrease – CIRS with Principal Movements (ON Balance Sheet) Forward

Live



Interest Rate Swaps

Schedule IP

IS

Asset

Liability

Forward

DB – Client Forward

CR – Client Forward

Live

DB – Client

CR – Client

CR – IENC *

DB – IENC *



(issue price)

(issue price)

CR – Client (issue price)

DB – Client (issue price)

DB – price)

CR – price)

Interest Payment

Issue Price Forward

Live

LIVEDB

CR/DB – difference) AP

P&L

(price

Live

DB/CR – difference)

(price


(repay amount)

(repay amount)

DB – Client (repay amount)

CR – Client (repay amount)

CR – IENC* (interest amt)

DB – IENC* (interest amt)

CR – LIVEDB (remain amt)

DB – LIVECR (remain amt)

Payment of Premium Forward


Live

CR – Client

Receipt of Premium Forward


Live

DB – Client CR – P&L Figure 29 Accounting entries (cont’d.)

*

P&L

(nominal


DB – P&L RV

LIVECR

Annuity Payment Forward

PM

(nominal

IENC

-

Interest Earned Not Collected


Interest Rate Swaps

Flexible Currency Swaps The following table is a summary of the accounting entries raised by various schedules for flexible currency swaps (deals with the SWAP field FLEX.PRIN.PAYMENT set to ‘Yes’). Schedules not listed are the same as those for normal swaps: -

Schedule CI

Asset

Liability

Forward

CR – FORWARDCR

DB – FORWARDDB

Live

DB – NOTIONALDB

CR – NOTIONALCR

Contract Initiation

(DB – FORWARDCR previously credit) PX

if (CR – FORWARDDB previously debit)

if

Principal Exchange Forward



CR – NOTIONALDB

DB – NOTIONALCR

CR – Client

DB – Client

DB – Internal account

CR – Internal account

DB - Client Forward


DB – FORWARDDB

CR – FORWARDCR

DB – Client

CR – Client



Live

RX

Re-exchange Principal Forward

Live

(CR – FORWARDDB previously debit) CM

Contract Maturity

if (DB – FORWARDCR previously credit)

if

(CR – NOTIONALDB if no PX, (DB – NOTIONALCR if no PX, or if NI or ND exists) or if NI or ND exists) (DB – NOTIONALDB reverse (CR – NOTIONALCR reverse ND) ND )


Interest Rate Swaps

Schedule PI

Asset

Liability


DB - Client Forward

CR – FORWARDCR

DB – FORWARDDB

CR – Client

DB – Client



Principal Increase, real cash Forward

Live

(DB – FORWARDCR previously credit) PD

Live


CR - Client Forward

DB – FORWARDDB

CR – FORWARDCR

DB – Client

CR – Client


DB - Internal account

(CR – FORWARDDB previously debit)

ND

-

if

Principal Decrease, real cash Forward

NI

if (CR – FORWARDDB previously debit)

if (DB – FORWARDCR previously credit)

Principal Increase, Notional Forward

-

-

Live

DB – NOTIONALDB

CR – NOTIONALCR

Forward

-

-

Live

CR – NOTIONALCR

DB – NOTIONALDB

Early maturity

DB – P&L

CR – P&L

CR – IENC

DB – IENC

Principal Decrease, Notional

Figure 30 Flexible Currency Swap Accounting Entries


if

Interest Rate Swaps

Mkt.Exch.Profit/Loss The Mkt.Exch.Profit/Loss is booked immediately upon authorisation of the Contract and the entries applied to accounts as per the Categories defined in SWAP.PARAMETER. For Forward Value dated Swap Contracts, the Upfront Profit Entry is applied to the books on the Value date.

The Accounting Entries are as below (when there is Mkt.Exch.Profit) when the Fixed Rate is on t he

ASSET SIDE: On the value date of Contract: Debit Internal Account Credit Mkt.Exch.Profit (PL Category) Account

On Accrual Date: Debit Accrual Account Credit PL Category Account The accruals will take place at the Customer rate.

Debit PL Category Account Credit Internal Account. The Mkt.Exch.Profit/Loss pertaining to the period of Accrual is credited to the Internal Account.

On Interest Payment Date: Debit Customer Account Credit Accrual Account

On Maturity: The entire Mkt.Exch.Profit amount applied to the Internal Account will be amortised to NIL.


Interest Rate Swaps

LIABILITY SIDE: On the value date of Contract: Debit Internal Account Credit Mkt.Exch.Profit (PL Category) Account

On Accrual Date: Debit PL Category Account Credit Accrual Account

Debit PL Category Account Credit Internal Account.

On Interest Payment Date: Debit Accrual Account. Credit Customer Account

On Maturity: The entire Mkt.Exch.Profit amount applied to the Internal Account will be amortised to NIL.

Whenever there is an amendment to the Contract, the Mkt.Exch.Profit/Loss is recalculated. These amendments can be made before First Accrual/Interest Payment Date, after Accrual but before Interest Payment Date, after First Interest payment Date.

When the modification is before First Accrual Date/Interest Payment, the Mkt.Exch.Profit will be recalculated from the value date of the contract. The existing Profit is reversed and the new profit is posted. When the modification is after the Accrual but before first Interest payment Date, in addition to the above, the amortisation of the Internal account is adjusted in line with the new Mkt.Exch.Profit. Any changes after the First Interest Payment, will be given effect only from the Last Interest Payment Date.

The movement in Internal Account and the Category account will be recorded in the SWAP.BALANCES file.


Interest Rate Swaps

Principal Effective Date The following example illustrates the effect of using a Principal Effective Date calculation routine.

Consider the following deposit transaction:

•

Principal

= 10,000

•

Rate

= 5%

•

Value Date (Start Date)

= 15/09/2005

•

Maturity Date (End Date)

= 15/10/2005

T24 calculates interest as follows where the number of days is the inclusive period between the Start Date and the End Date less 1 calendar day.

•

The deposit will earn interest for the nights of 15/9 to 14/10 inclusive and the interest will be on 15/10.

•

This gives 30 days interest (16 days in September and 14 days in October).

Calculated Interest

= 10,000 * 5% * 30/360 = 41.67

Assume a Principal Effective Date calculation routine that dictates that no interest should be earned for the date the deposit is made (or subsequent additional deposit), or for the date of withdrawal. Therefore, the following is the correct calculation:

•

No Interest calculated for day of deposit so interest calculation starts 16/09/05 inclusive

•

No interest calculated for day of withdrawal so interest calculation ends 14/10/05 inclusive

•

Giving 29 days interest. 15 days in September and 14 days in October

Calculated Interest

= 10,000 * 5% * 29/360 = 40.28


Interest Rate Swaps

Limits The SWAP module uses standard calls to the LIMIT module. Whenever an asset transaction is input, it will check with the LIMIT module to verify the availability of a valid LIMIT for that product. If it does not exist, a default one will be created according to the values defined in the LIMIT.PARAMETER file and the product number range defined for SWAP. Checks are made against the expiry date, available amounts, global or sub-product LIMIT records according to the unique LIMIT structure of the bank. However, a default deposit LIMIT is always used for every liability transaction.

For more information see the LIMIT User Guide.

Past Due The SWAP module links to the PAST.DUE module, in the same way as other modules i.e. MG, MM and LD. Only the asset side of the SWAP is used to construct the corresponding PAST.DUE contract.

The following two fields are available in the SWAP application.

LIQUIDATION.MODE

This field identifies the manner in which overdue payments are handled. The default for all contracts is AUTOMATIC, but can be changed to MANUAL so as to invoke the PAST.DUE processing.

OVERDUE.STATUS

This is a no-input field and identifies the status of the underlying PAYMENT.DUE contract (GRA, PDO, NAB, WOF, CUR…)

The following rules apply: apply: -

•

If the PAST.DUE product is not defined for the current company or only the liability side is specified then the only allowed setting is AUTOMATIC.

•

AUTOMATIC is not allowed if the OVERDUE.STATUS is not ‘CUR’ or ‘WOF’.

•

‘PI’ (Principal increase) is not allowed on the asset side if OVERDUE.STATUS is not set to ‘CUR’ or is not null.


Interest Rate Swaps

Charges and Commissions Charges and fees are associated to schedule types in the SWAP module. Charges are always receivable whereas fees are always payable. The calculation amount is the amount associated to the schedule with the exception of the IS schedule where the calculation amount is the original principal.

Charge and fee codes on the schedule type records must be valid keys in the FT.CHARGE.TYPE file or the FT.COMMISSION.TYPE file.

The FT.CHARGE.TYPE table defines the conditions relating to various types of standard flat charge that are available for use within T24 T24..

The FT.COMMISSION.TYPE table defines the conditions relating to all types of commission used by SWAP and other T24 modules. Each commission type can be defined as a flat amount or as a percentage. In the latter case different percentages can be defined for different Bands or Levels of deal amounts. Minimum and maximum commissions can be specified for each Band or Level together with overall min/max. commission charges.

The exact amount of the fee and/or charge is recorded on the SWAP.BALANCES record.


Interest Rate Swaps

Position Management The T24 SWAP module is fully interfaced with the T24 Position Management module. A set of position classes is defined for the SWAP module. The parameter file, PM.SW.PARAMETER is used to identify and breakdown the products associated with the SWAP processing into individual activities and to allocate them a unique PM.POSN.CLASS.

A single record, IRS, is released with this module: module : -

Figure 31 PM.SW.PARAMETER record


Interest Rate Swaps

Figure 32 PM.SW.PARAMETER record (cont'd.)


Interest Rate Swaps

Delivery The SWAP module produces the following SWIFT messages to confirm financial events and, contract input and amendments, as appropriate. It provides advices through the standard delivery interface in T24 and accommodates the following message/advices: -

Message

Description

MT100

Payment Advice for non bank counterparty

MT202

Payment Advice

MT210

Notice to Receive

MT360

Single Currency Interest Rate Swap Confirmation

MT361

Cross Currency Interest Rate Swap Confirmation

MT362

Interest Rate Swap Reset

Figure 33 SWIFT messages generated by the SWAP module


Interest Rate Swaps

Swap NPV Revaluation The T24 SWAP module provides a revaluation mechanism for all generic interest rate swaps. The revaluation calculates the net present value of each leg of the SWAP by discounting all future cash flows of that leg using the zero coupon rates.

The revaluation involves: -

1.

Future Rate Calculation;

2.

Zero Coupon Rate Calculation, and

3.

Swap Valuation.

Future Rate Calculation The future rate of the floating leg is calculated using the formula below (see the “FRA User Guide” for further details): -

FWD. RATE =

( R3 * D3) − ( R1 * D1) ⎛ R1 * D1 ⎞ + 1⎟ ⎜ ⎝ B * 100 ⎠ D3 − D1

Where: -

R1 =

rate for short period (reval date to start date of next interest period)

D1 =

number of days in short period

R3 =

rate for long period (reval date to end date of next interest period)

D3 =

number of days in long period

B

interest day basis

=


Interest Rate Swaps

Zero Coupon Rate Calculation The zero coupon rates are derived from the coupon curve rates using the formula below. The coupon curve rates are theoretical rates constructed to represent the future rates on the fixed side of a SWAP.

100 =

N

100 (1 + ZCRn)

n

+∑ i =1

CF

⎛ ZCRi * E ⎞ ⎜1 + ⎟ ⎝ YD ⎠

i

Where: -

N

=

number of interest payments between reval date and maturity date

CF

=

cash flow of interest period (Coupon.Curve.Rate * E / YD)

ZCR =

zero coupon rate of interest period

E

=

number of days in interest period

YD

=

number of days in year


Interest Rate Swaps

Swap Valuation The Profit/Loss of a SWAP is: -

Profit.or.Loss = NPV of Asset leg - NPV of Liability leg

The net present value of each leg is calculated using the following formula: -

N

NPV =

∑

CFi

i =1

⎛ ZCRi ⎞ ⎜1 + ⎟ ⎝ freq ⎠

DSC ( i −1+ ) E

A ⎞ ⎛ − ⎜ CF 1 * ⎟ ⎝ E ⎠

N

=

number of interest payments between reval date and maturity date

CF

=

cash flow of interest period

ZCR =

zero coupon rate of interest period

freq

number of interest payments per year

=

DSC =

number of days from reval date to next interest payment date

E

=

number of days in interest period

A

=

number of days from start of interest period to reval date


Interest Rate Swaps

This is illustrated by the example below: -

Example

Bank has on its books a 5-year interest rate swap of notional CHF 1,000,000. Counterparty pays fixed 6.5% and Bank pays CHF LIBOR +0.5%, interest paid net annually.

Assume that the forward 12-month LIBOR rates are 4.5%, 5.0%, 6.5%, 7.0% and 5.5% for year 1, 2, 3, 4 and 5 respectively. Also assume that the zero coupon rates are 5.2%, 5.4%, 6.7%, 7.0% and 6.1% for year 1, 2, 3, 4 and 5 respectively.

The net present value of the fixed side will be: -

NPV A =

1 M * 0.065 1052 .

+

1 M * 0.065 (1054 . )2

+

1 M * 0.065 (1067 . )3

+

1 M * 0.065 (107 . )4

+

1 M * 0.065 (1061 . )5

= 61,787.07 + 58,510.27 + 53,50817 . + 49,58819 . + 48,34332 . = 271,737.02 The net present value of the floating side will be: -

NPV L =

1 M * 0.05 1052 .

+

1 M * 0.055 (1054 . )2

+

1 M * 0.07 (1067 . )3

+

1 M * 0.075 (107 . )4

+

1 M * 0.06 (1061 . )5

= 47,528.52 + 49,508.69 + 57,62418 . + 57,21714 . + 44 ,624.60 = 256,50313 . The Bank will therefore record an unrealised profit of CHF 15,233.89.


Interest Rate Swaps

Revaluation Rate The P/L is converted to the local currency using the MID.REVAL.RATE unless the REVAL.RATE field is populated on the relevant CURRENCY record. All revaluation types except rebates (RB) use the REVAL.RATE field, unless it is blank.


Interest Rate Swaps

Close of Business Processing The T24 SWAP module includes Close of Business procedures, which process all the swap contracts, which have not matured. The Close of Business process includes: -

•

Processing of unauthorised contracts

•

Processing of any schedules due

•

Performance of interest accruals

•

Currency Revaluation report

•

Currency Revaluation

•

Swap NPV Revaluation Report

•

Swap NPV Revaluation

•

Processing of any static changes


Interest Rate Swaps

Figure 34 BATCH record for Swap Close of Business processing


Interest Rate Swaps

Figure 35 BATCH record for Swap Close of Business processing (cont'd.)


Interest Rate Swaps

Start of Day Processing Swaps can be processed at Start of Day. The Swap is processed in the overnight batch before the system goes live to intra day activities on the day of Value/Maturity. In this way funds are available to meet other requirements as soon as the system is live on the day in question. This happens if SOD.MAT is set to ‘Yes’.

The SW.START.OF.DAY batch job matures all contracts with SOD.MAT set to ‘Yes’, where the maturity or value date equals the processing date. (The DATE.CHANGE task occurs before the SW.START.OF.DAY and SYSTEM.LIMIT.SOD tasks in the overnight batch process so the processing date now equals the appropriate start of day date).

All STMT.ENTRY , CATEG.ENTRY and CONSOL.ENT.TODAY are raised during the start of day process. The system recognises that these accounting entries have been made so that they are not duplicated in the Close of Business process. Similarly, the SYSTEM.LIMIT.SOD batch job updates all limits during start of day.


Interest Rate Swaps

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