5.376 total return swaps -...

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW

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5.376 Total Return Swaps: Asset Group TW 1 Overview: Total Return Swaps – Asset Group TW ..................................................... 1 2 Glossary Of Terms ................................................................................................ 3 3 Total Return Swaps .............................................................................................. 4 4 Total Return SWAP vs CFD contract ........................................................................ 6 5 Security SET UP of a total return swap .................................................................... 7 6 Total Return Swap Transaction SET UP: DETRSC .................................................... 10 7 Opening A Total Return Swap .............................................................................. 15 8 Expiration Of A Total Return Swap ........................................................................ 17 9 Total Return Swap Transaction Entry: DETRT......................................................... 21 10 Security Definition Guidelines ......................................................................... 24 11 Valuing A Total Return Swap .......................................................................... 25 12 Payments/Receipts For A Total Return Swap ..................................................... 26 13 Tax withholding and reclaim processing ........................................................... 28 14 IMPACT OF UNDERLYING SECURITY: CORPORATE ACTIONS/Interest Payment ..... 29 15 Holdings Definition: VSHO/Holdings View: VSHB ............................................... 31 16 Swap Association Entry: DESWAS ................................................................... 32 17 Transaction Processing Codes For Total Return Swaps ....................................... 33 18 Reporting and Messaging ............................................................................... 35

18.1 BATCH REPORTING ......................................................................................... 35 18.2 MESSAGING ................................................................................................. 35 18.3 SPECTRA ................................................................................................... 35

19 General Ledger Entries .................................................................................. 36 19.1 TOTAL RETURN SWAPS: ASSET GROUP “TW” .......................................................... 36 19.2 SWAPS INTEREST PAYMENT TRANSACTIONS: ASSET GROUPS “CW”, “DW”, “IW”, “TW” ..... 39

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW OVERVIEW


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1 OVERVIEW: TOTAL RETURN SWAPS – ASSET GROUP TW Swaps are an exchange of two payment streams. The purpose of a swap is to allow each counter-party to dispose of one stream of payments and acquire another stream of payments in return. Swaps can be entered into for either hedging or speculative purposes. Swaps are OTC (Over-The-Counter) instruments and can be valued using various fixed income methods. Total Return Swap is a generic name for any non-traditional swap where one party agrees to pay the other the total return of a defined underlying asset in return for a defined stream of cash flows. The Total Return Swap may be applied to any underlying asset but is most commonly used with equity indices (Equity Swap), bonds and defined portfolios of loans and mortgages. For the purposes of this document, this is considered the index leg of the swap. A Total Return Swap trades a stream of interest against the total movement of the index. The movement in the index includes both market gain/loss and income. The value of the income is included in the price of the index. The open specifies the par value of the index to be swapped and the index price of the swap open. The open also defines the stream of income for the other leg of the swap. It could be either a fixed or floating rate. The par value of the interest leg is calculated based on the asset leg’s par value and the index price. Therefore, there is no amortization. Note that the asset leg could be either the payable or receivable side of the swap. Payments on the swap can either be on a periodic schedule or at the end of the swap. At a payment date, a payment is generated for the “income stream” leg of the swap. For the asset leg of the swap, a payment is generated for the difference between the value of the leg at the beginning of the income period and the current value of the leg. For example, if the index leg opened with a par of 1000 at a price of 1.50 and the price at payment date was 1.70, a payment of $200 is generated ($1700 - $1500). Depending upon the type of Total Return Swap, at the payment date, the par value of the income leg may be updated to match the current value of the asset leg. In the example given, the income stream leg was established as $1500. At payment date, the par value of the income stream leg is changed to $1700. Accounts are allowed to enter multiple open transactions against a single swap security. The following cost relief methods are valid for Total Return Swaps through the Account Definition Screen (AAAD) or Account/Asset Group Override Screen (AAGO):

Cost Assignment

Code Description A Average Cost B Purchase Price C Low Cost (regardless of term) E LIFO (last in first out) F FIFO (first in first out) H High Cost (long term first) L High Cost (regardless of term) P Pro-Rata Relief

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW OVERVIEW


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Total Return Swaps that exist prior to the 07.210 Release continue to use Average Cost unless a cost assignment conversion is ran through the Account/Asset Group Override Screen (AAGO). If the account is defined as using a cost assignment invalid for swaps, an edit requires the users to enter a valid method on AAGO before entering a swap opens transaction (on DETRT). Scope limitations are as follows:

• No matrix valuation of swaps. • Swaps are not allowed for Japanese Institutional Funds and Shadow Accounts. • For accounts that are set up for Interim Earnings (Local Process flag on AASP), the

field Post income Payment to Income or Gain/Loss must be set to post to income with value of “I”.

• Batch/Online Capture not allowed for the swaps transaction codes. • Interim Earnings Calculation not supported. • No changes to Global Client Reporting (GCR). • Explicit Taxlot Relief.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW GLOSSARY OF TERMS


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2 GLOSSARY OF TERMS

Term Description

Clean Price Price of the security that excludes the value of accrued income.

Dirty Price Price of the security including the value of accrued income.

Discounted Cash Flow A method used to determine the current value of cash to be received at a future date.

Total Return Swap Non-traditional swap where on party agrees to pay the other the total return of a defined underlying asset in return for a defined stream of cash flows.

LIBOR (London Interbank Offer Rate)

This is the rate of interest at which banks borrow funds from other banks, in marketable size, in the London interbank market. This is a widely used benchmark or reference rate for short term interest rates.

Present Value The current value of the swap agreement. Calculated using the discounted cash flows of each leg of the swap. In Investment Accounting (InvestOne) terms, this is the current market value. In this document, Present Value and Market Value has the same meaning.

Tenor The open time period (maturity) of swap.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW TOTAL RETURN SWAP TRANSACTION SETUP: DETRSC


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3 TOTAL RETURN SWAPS Total Return Swaps consist of asset and interest legs. The asset leg is also referred to as the index leg; similarly, the interest leg is also referred to as the non-index leg. The asset leg represents the underlying asset whose total return is being swapped. For example, if the total return of a bond portfolio was being swapped for a LIBOR based return, the bond portfolio is represented by the asset leg. The LIBOR leg is the interest leg. Often Total Return swaps are setup using an established bond or equity index with published index prices. In other cases, the value of the underlying asset must be determined to establish an index price. The underlying index must be established as a security on Investment Accounting (InvestOne). The account does not need to hold the index. It is used much like a benchmark security when determining the payments attributable to the asset leg. Just as an account does not hold the benchmark, the account does not hold the index. However, the rates and prices on the benchmark and index are used to calculate payments for securities held by the account. The interest leg of a Total Return Swap is identical to the leg of an Interest Rate Swap. It has par value and sufficient data to calculate a payment stream for the leg. In most cases, both legs have no cost. However, if the swap is opened with a fee or premium, the fee or premium becomes the cost of the asset leg. There are five major processing components of Total Return Swaps:

• Security Set up • Opening a swap • Valuing a swap • Processing payments for a swap • Expiration of a swap



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4 TOTAL RETURN SWAP VS CFD CONTRACT Total return swaps (TRS) and CFDs are very similar products. In looking at the definitions: Total Return Swap - A swap agreement in which one party makes payments based on a set rate, either fixed or variable, while the other party makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. The underlying asset that is used can be anything, but is usually an equities index, loan or a basket of assets. CFD contract - Is a contract between two parties, buyer and seller, stipulating that the seller will pay to the buyer the difference between the current value of an asset and its value at contract time. Such a contract is an equity derivative that allows investors to speculate on share price movements, without the need for ownership of the underlying shares. The biggest difference is a TRS is calculated based of the PAR value while a CFD is based of the Market Value. User-defined asset group is used in order to make a distinction between CFD contract and total return swap if the user requires. For a CFD contract that does not pay any financing fees, the interest rate of zero must be entered for the interest leg of the contract on the transaction entry screen.



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5 SECURITY SET UP OF A TOTAL RETURN SWAP Security set up of a Total Return Swap is done in the Total Return Swap – Security Set up screen (DETRSC). Both securities are created with an Asset Group “TW”. The security short name of the generated securities uses the security description, prefaced by RECV or PAYB for the receivable and payable securities respectively. The upper section of the screen includes the Security number and description fields as well as the REC/PAY field. This field is of extreme importance since it determines if the Asset Leg is a Receivable (“R”) or Payable (“P”). The user has the choice of choosing what type of swap to create based on this: if “R”, the Asset Leg is the receivable leg; if “P”, the Asset Leg is the payable leg. Securities for the receivable and payable legs are created on DETRSC. Here is how they are added on the system: INDEX leg=Receivable leg = SCTY + no qualifier - if the REC/PAY field is equal to R. INDEX leg=Payable Leg = SCTY + qualifier 1 - if the REC/PAY field is equal to P. NON-INDEX LEG=Receivable Leg = SCTY+ no qualifier - if the REC/PAY field is equal to P. NON-INDEX LEG=Payable Leg = SCTY+ qualifier 1 - if the REC/PAY field is equal to R. The rest of the screen is divided between the Asset leg and the Interest leg characteristics. Here the user inputs more details about the Total Return Swap Security. It is important to understand that the data input on this screen contributes to the creation of 2 securities in the system. If desired, a Model Security may be defined on the transaction. If used, the Model Security must also be Asset Group TW and forward categorization data for the new securities. Any rate, payment, and currency data forwarded from the Model Security are overlaid by transaction data. ASSET LEG The asset leg includes features like the POST DIVD/INT, INCOME/GAIN, 1ST PAYMENT, FREQ, PAYMENT MM/DD, CURRENCIES, COUNTRIES and the UNDERLYING SECURITY. The POST DIVD/INT flag is used to determine if the Asset Leg is to accrue and pay interest/dividends or post corporate actions based on the Underlying Security. If the POST DIVD/INT field is “Y”, the INCOME/GAIN must be set to “G” for gain/loss. If the POST DIVD/INT field is “N”, then the asset leg is prohibited from accruing dividends/interest or have any purchased/sold interest. On the Asset Leg the Trade, Issue, Income and Coupon currencies can all be different, as well as the Country of Risk and Taxation. The Country of Taxation on the Asset Leg of the swap does not have to match the Country of Taxation on the Underlying Asset. Any reclaims or withholdings that accrue or generate for the Asset Leg are based off the Asset Leg’s Country of Taxation and not of the Underlying Security. Currency values on either leg cannot be changed once the security is active/transactions records are created.



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Total Return Swaps assume that the Trade, Issue and Income currency of the Underlying Asset will always be equal to the Asset Leg of the swap. It does not incorporate functionality to automate conversion of local prices received from pricing vendors if the underlying has a different currency than the asset leg of the swap. It is important to note that the user can set these currencies differently on the underlying asset and total return swap however automated price feeds or rate feeds for the underlying are not converted - this has to be done manually. Here is an example of the currency matrix illustrating how the currencies may be set up and what is supported.

Trade Currency

Issue Currency

Income Currency

Coupon Settle Currency

Trade Settle Currency

Asset Leg USD USD EUR RUB MXN Underlying Asset USD USD EUR GBP JPY Financing Leg DKK DKK DKK ARG BRL

For a debt security, coupon rates are assumed to be stated in an issue currency (as they represent a percentage of par). Therefore, the issue currency should always be the same between underlying (bond like) and the asset leg since the rates are entered on the underlying. However there is no edit in place that requires them to be the same. In the case of an equity security, dividend rates are stated in an income currency. Thus, the income currency must match between the underlying (stock like) and asset leg of the swap. Income currency on the asset leg that is bond like can be different from the income currency in the underlying. Valid asset groups for the Underlying Security on the Asset Leg of the Total Return Swap are: B - Corporate bond FB - Foreign bond CB - Convertible bond G - Government bond FS - Foreign stock G1 - GNMA1 G2 - GNMA2 I - Index MB - Mutual bond fund MR - Mortgage related M - Municipal bond P - Preferred stock S - Common stock GNMA1, GNMA2 and Mortgage Related securities behave like any other bond that is underlying to a swap contract. Payup and paydown transactions processed against the Underlying Security do not affect the swap. Also, the MBS orginal face value is disregarded in the valuation of the swap.



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The price code on the Asset Leg automatically defaults to “B” if the Underlying Security is bond-like and “S” if the Underlying Security is stock-like. The user is allowed to change the price code to “B”, “S” or “U” on the Security Definition Screen (BOBD). INTEREST LEG The Interest Leg of the swap also includes some of the features found on the asset leg, but also introduces fields like POST ACCRUAL, INT PUR, CALC PAR, RATE, ACCRUAL METHOD and PRICE CODE. The interest leg may accrue interest based on the accrual method and rate chosen if the POST ACCRUAL flag is “Y”. If the POST ACCRUAL flag is “N”, then the interest leg does not accrue income, but pays on pay date of the security. Price code “F” (face value) is valid only in average cost accounts or positions. When the Interest Leg of the Total Return Swap has “F” as the price code, it can only be opened in an average cost account or if the asset group TW has an override of average cost on AAGO. If the cost assignment is taxlot for the account or asset group, an edit is issued when trying to open the total return swap on DETRT. Trade, issue, income and coupon currency can be different between interest leg and asset leg of the swap. Swaps set up with different currencies between asset and interest legs, are required to use CALC PAR option of “C” or “E”. Ultimately, all par adjustments have to be manually processed. If the account or swap is using a taxlot cost assignment, all closing transactions calculate the Notional Par on the Interest Leg no matter what the CALC PAR option is.



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6 TOTAL RETURN SWAP TRANSACTION SET UP: DETRSC The DETRSC Screen allows the set up of Total Return Swaps.

DETRSC Screen NEXT DETRSC MODE ADD FDMP667 TOTAL RETURN SWAP - SECURITY SETUP SCTY NUMBER..... MODEL ID........ DESC............ REC/PAY - ASSET LEG.. EXPIRATION DATE. ASSET LEG: POST DIVD/INT INCOME/GAIN 1ST PAYMENT FREQ PAYMENT MM/DD CURRENCY: TRADE. ISSUE..... INCOME.. COUPON.. COUNTRY: RISK. TAXATION.. UNDERLYING ASSET.. AMORT INTEREST LEG: POST ACCRUAL. INT PUR INCOME/GAIN CALC PAR RATE OFFSET ACCRUAL METH DAY CNT PRICE CODE.. ACCRUAL START DATE. ACCRUED INCOME OPTION. COMP OPT 1ST PAYMENT FREQ PAYMENT MM/DD MOD PMT BENCHMARK SPREAD C/C FREQ INCR MN END 1ST CHANGE ANN RATE TYPE CN CURRENCY: TRADE. ISSUE..... INCOME.. COUPON.. COUNTRY: RISK. TAXATION..

Field Description. Fields Shaded Gray are Required.

SECURITY NUMBER Security number used to identify the swap. This is the security that is created for an engagement transaction. Qualifier is not allowed.

MODEL ID Enter the model security code if using a model to set up this security. Otherwise, it remains blank.

DESC Security description. The security short name to be used for the swap security.

REC/PAY –ASSET LEG Defines if the index leg of the swap is Receivable or Payable. Valid Values: R - Index Leg Receivable. P - Index Leg Payable.

EXPIRATION DATE Represents the Date the Swap is scheduled to expire (mature).

ASSET LEG Does not represent a fill-in field but it is rather a headline indicating all the fields that follow and have the purpose of creating the asset leg of the swap.

POST DIVD/INT This field has two options and posts accruals based on these flags: Y - Process the dividends or interest that is on the referenced asset or N - Do not process the dividend/interest.

INCOME / GAIN Post income payments to income or gain/loss. The value of this field dependent to the values in POST DIVD/INT field. If POST DIVD/INT is equal to “Y” then INCOME/GAIN field has to be G otherwise it can be either “I” or “G”. I - Post to income. G - Post to gain/loss.

1ST PAYMENT The date of the first income or gain receipt for the asset leg.

FREQ Frequency of payments for the income or gains associated with the asset



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leg only.

PAYMENT MM/DD Month and day of the recurring payments for the asset leg. DD of 99 indicates last day of the month.

CURRENCY: Includes trade, issue, income and coupon currencies

TRADE Trade currency for asset leg.

ISSUE Issue currency for asset leg.

INCOME Income currency for asset leg

COUPON Income currency for asset leg.

COUNTRY: Includes fields Risk and Taxation

RISK Country of risk for asset leg.

TAXATION Country of taxation for asset leg.

UNDERLYING ASSET Indicates the asset which is at the base of the swap’s asset leg.

AMORT Amortization method used by the swap. N – No Amortization Y – Straight Line Amortization (default)

INTEREST LEG Does not represent a fill-in field but it is rather a headline indicating all the fields that follow and have the purpose of creating the interest leg of the swap.

POST ACCRUAL Indicates whether the interest leg should carry an accrual after purchase. Y - YES, POST ACCRUALS FOR SWAP POSITION. N - NO, DO NOT POST ACCRUALS FOR SWAP POSITIONS.

INT PUR Interest purchased field; used in conjunction with Asset Group “TL” and Accrual Method “E” and “F” and with accrual methods 4, 5, and 6. Y – Interest expected to be purchased or sold on trades with contractual

settle dates between payment dates. N – Interest is not expected to be purchased or sold on trades with

contractual settle dates between payment dates. Blank – Interest accrual and payment assumptions are based on the accrual

method.

INCOME/GAIN Post income payments to income or gain/loss. Interest leg only. Valid Values: I - Post to income. Default. G - Post to gain/loss.

CALC PAR Indicates if the non-index leg par is user-entered, System calculated, or System calculated and recalculated when payments are made. Valid Values: E - User entered (no recalculate). C - Calculated, not recalculated on payments. R - Calculated, recalculated on payments.

RATE Interest rate for the non-index income stream. Used for fixed rate legs only.



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OFFSET Used in conjunction with a variable or floating rate security that uses Benchmark Processing. Any value entered here overrides the DECAL screen value for the security. Valid values: Blank – Do not override the Calendar Set (DECAL) Fixing Date Offset. 00-00 – Override the Calendar Set (DECAL) Fixing Date Offset with this value. For variable/floating rate bonds/swaps using a calendar set per their security definitions and relying on benchmark rates processing, the benchmark rate used to derive the bond/swap rate at a given reset date is the rate in effect at the date found by adding this number of business days to the effective date of the benchmark rate entered on the DEBE screen.

ACCRUAL METHOD Accrual method used in the calculation of the non-index income stream. A - CPN BOND (ACT/ACT) D - CPN BOND (30/360) E - FLOATING RATE (30/360)* F - FLOATING RATE (ACT/ACT)* H - CPN BOND (ACT/365) Q - CPN BOND (30/360 EURO) R - CPN BOND (ACT/360) T - DISC NOTE (30/360) V - VARIABLE RATE (CLOS POS) W - VARIABLE RATE (OPEN POS) 4 – FLOATING/VARIABLE/FIXED (ACT/360) 5– FLOATING/VARIABLE/FIXED/COMPOUNDING (252 BUSINESS DAYS) 6– FLOATING/VARIABLE/FIXED/COMPOUNDING (ACT/360) 7- FIXED ACT/ACT 30/360 8 – ACTUAL/365l *For accrual methods E and F, the fixed payment schedule must be defined due to the index leg of the swap. This includes the first coupon date, frequencies and month/day.

DAY COUNT Day Count is for additional flexibility and in order to handle different day conventions. Blank – Valid for existing accrual methods. A – For accrual method 7, the interest accrual is calculated based on ACT/ACT. D – For accrual method 7, the interest accrual is calculated based on 30/360.

PRICE CODE Price code for the interest leg of the swap. Two valid options are “B” (bond like) or “F” (market value=shares/par or units). Again, this price code is only used by the security representing financing leg. The price code on the index leg is still determined by the asset type of the underlying.

ACCRUAL START DATE Start date of the income accrual on the non-indexed leg of the swap.

ACCRUED INCOME OPTION

Accrued income payment option. Determines if income earned on payment date is included in the payment. Valid Values: 0 - Do not include income earned on payment date. 1 - Include income earned on payment date. The accrued income option on “BOSB” overrides the accrued income option on “AAAD” when defined with a value of “0” OR “1”. Blank defaults to “AAAD”.

COMP OPT For investment contracts, the appropriate compounding options are: D - Daily compounding. M - Monthly compounding. Blank - No compounding. For Accrual Methods 5 and 6, the appropriate compounding options are:



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Y – Interest is compounded per the rate change schedule. Blank – Interest is not compounded. Default.

1ST PAYMENT The date of the first income receipt for the receivable income stream. Interest leg only. Defaults to asset leg if blank.

FREQ Frequency of the payments for the income stream associated with the interest leg only. Defaults to asset leg if blank.

PAYMENT MM/DD Month and day of the recurring payments for the interest leg income stream. DD of 99 indicates last day of the month. Interest leg only. Defaults to asset leg if blank.

MOD PMT Determines whether contractual interest payments or actual settle dates for interest payments originally falling on a non-business day are left unmodified or are modified to the next or the preceding business day. Valid values for all accrual methods: Blank – Payment Date is unmodified. Valid values for Accrual Method 4: F – Payment Date modified following. For accrual method 4, an initially

computed contractual interest payment date falling on a non-business day is modified to the nearest business day immediately following the non-business day.

P – Payment Date modified preceding. For accrual method 4, an initially computed contractual interest payment date falling on a non-business day is modified to the nearest business day immediately preceding the non-business day.

Valid values for Accrual Method 6 and select other accrual method/asset group combinations: A – Payment Actual Settle Date Modified Following. For accrual method 6 and

select other accrual methods, the actual settle date of an interest payment or maturity transaction to be generated having its contractual settle date fall on a non-business day is modified to the nearest business day immediately following the non-business day.

BENCHMARK If the non-index interest stream is a variable interest tied to a benchmark, the benchmark security is entered here. Must be a valid benchmark security.

SPREAD If a benchmark is used, the number of basis points to add to the benchmark rate to determine the rate of non-index income stream. May be positive or negative. Spread is also extended to accrual methods E, F, V and W that do not use benchmark processing.

C/C FREQ The rate change or compounding cycle. For Compounding, only values “D”, “M”, “Q” or “S” are valid. Valid Values for rate change: D Daily or multiples thereof MO A given Monday of each month W Weekly or multiples thereof TU A given Tuesday of each month M Monthly or multiples thereof WE A given Wednesday of each month B Bi-monthly or multiples thereof TH A given Thursday of each month Q Quarterly or multiples thereof FR A given Friday of each month S Semi-annually or multiples thereof SA A given Saturday of each month A Annually or multiples thereof SU A given Sunday of each month

INCR Rate change increment for benchmark rates. Multiple of the defined rate change frequency. Valid values are 01 – 99.

MN END Determines if benchmark rate changes occur on month-end. A value of “Y” indicates changes occur on month-end.

1st CHANGE Date of first rate change of benchmark rates. See Notes.



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ANN RATE TYPE Annual rate type for the payable income stream. 360 ANNUAL INT % (360-DAY YR) 365 ANNUAL INT % (365-DAY YR) 360R REAL INT % (360-DAY YR) 365R REAL INT % (365-DAY YR) 360F ALLOCATE 360R METHOD OVER ACTUAL 252R Annual Rate/252 = Daily Interest Rate 365l ACTUAL / 365l

CURRENCY: Includes trade, issue, income and coupon currencies


TRADE Trade currency for interest leg. Defaults to asset leg if blank.

ISSUE Issue currency for interest leg. Defaults to asset leg if blank.

INCOME Income currency for interest leg. Defaults to asset leg if blank.

COUPON Coupon currency for interest leg. It is used as the settle currency on all income transactions. Defaults to asset leg if blank

COUTRY: Includes fields Risk and Taxation

RISK Country of risk for interest leg. Defaults to asset leg if blank.

TAXATION Country of taxation for the interest leg. Default value is blank.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW OPENING A TOTAL RETURN SWAP


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7 OPENING A TOTAL RETURN SWAP A Total Return Swap agreement is opened using OPTRS / OPTRSP transaction codes. The OPTRS transaction code may be entered on the Total Return Swap Transaction Entry (DETRT) Screen or interfaced through Transaction Messaging, which causes the OPTRSP to be system-generated. Other transaction screens and Batch/Online Capture do not support opening a Total Return Swap. Swap securities must be set up prior to the open transaction on DETRSC. When opening the swap, the Security ID is used to identify the swap. Similar to a BUY transaction, the opening transaction has the asset leg shares/par value in the carry value and the price of the index in the price field. However, unlike a BUY, the price does NOT post to the Price File. The position should not be valued with this price. The opening transaction is also copied to establish the interest leg position. The copied transaction has the interest par value in the carry value. The copied transaction can represent either the payable or receivable leg. The copied transaction receives its own memo number and is linked to the original transaction. The transaction is flagged as a generated “second leg” transaction. The user is not able to directly access the generated transaction. Rather, any changes to the swap setup are made on the original transaction. All changes are applied to the System generated transaction. In most cases, no cash or currency changes hands on the opening of an Index Total Return Swap. It simply establishes an agreement to exchange the future movement of an index for a stream of interest. However, fees and premiums are allowed on the Asset Leg of the Total Return Swap. Any cost associated with the positions from the fee or premium are used when establishing the gain/loss on the swap position. Total Return Swaps use different transaction codes for the open of the payable leg. For the other types of swaps, the payable leg transaction codes are generated and cannot be user entered. For Total Return Swaps, the user always enters against the index leg. Therefore, the user may be entering against either the receivable or payable leg and must enter the appropriate transaction code (OPTRS) for the index leg of the swap. While it is expected that the price used to value the asset leg closely follow the price of the index, the prices may not be an exact match. The asset leg receives its own price. The payment frequency and dates are populated from the security set up. The opening transaction establishes a holding under each of the two securities. The shares/par of each position is the appropriate par value from the opening transaction. Like other types of swaps, the cost of each position is zero. The qualifier zero position carries the receivable par value as a positive value for a long position. The qualifier one position carries the payable par value as a negative value for a short position. The holdings are used to establish the ongoing value to the account of each leg and to determine the payments to be made on each leg; (covered under the Valuation and Income Processing sections). If the Asset Leg and Interest Leg of the Total Return Swap have different currencies, a Contract Exchange Rate is required when opening the swap. The value entered on the contract exchange rate field is used to calculate the Notional value on the Interest Leg. If the swap is set up with two different currencies (trade) then the system requires the user to enter a value in the contract exchange rate field. The rates stored on the currency exchange table arenot used if the user leaves the contract exchange rate field blank. For a swap/CFD

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW OPENING A TOTAL RETURN SWAP


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contract with the same currencies (issue and trade) across asset and interest leg the contract exchange rate field is disabled. Notional/Par (interest leg) = Par (asset leg) / Contract Exchange Rate * Price If the user manually enters the Income Effect amount on the transaction, the original Income Effect amount can be restored by spacing out the original amount of income. If the asset leg of a TRS is the payable side and given that the underlying is a bond like the interest accrual on the asset leg will is a negative amount. With all of that provided plus the PURCH/SOLD INT of “Y” the interest from last coupon date through the day prior to contractual settle date is considered sold interest. The sold interest is calculated the same as interest on the short sale of a bond. If the index leg of a TRS is the receivable side and given that the underlying is a bond like the interest accrual is be a positive amount. With all of that provided plus the PURCH/SOLD INT of “Y” the interest from last coupon date through the day prior to contractual settle date is considered purchased interest. The purchased interest is calculated the same as interest on the purchase of a bond. The premium/fee or purchased/sold interest (income effect) on an entry for TRS is always stated in the trade currency of the asset leg of the swap. Income effect (interest leg) on the other hand is stated in the income currency of the Interest leg. Fees/Premiums are always stated in the trade currency of the asset leg on both opening and closing transactions.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW EXPIRATION OF A TOTAL RETURN SWAP


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8 EXPIRATION OF A TOTAL RETURN SWAP When a swap agreement is defined, the term of the swap (also known as tenor) is also defined. On Investment Accounting (InvestOne), the term is defined by entering the maturity date of the swap. A swap may stay open until expiration (maturity date) or may be closed early. When the swap stays open until expiration, the final payment for each leg is made on the maturity date and the par values of each leg are closed. The swap has no value past the maturity date. A swap may be closed prior to the scheduled expiration date. Partial closes of Total Return swaps are allowed. The user defines the par value of the asset leg to be closed and also enters the par value of the interest leg if the swap was set up with a user-entered interest leg par value. The user is not allowed to fully close the par value of one leg without fully closing the par value of the other. If the System calculates the interest leg’s par value, it calculates the par value of the interest leg to be closed proportionately. That is, if 30% of the asset par is closed, 30% of the interest par is closed as well. Thirty percent of the basis for future payments on the index leg is taken down as well. Future payments of the index leg are determined based on the remaining 70%. The user also specifies the index price when closing the swap. This price is used when calculating the asset leg payment. Note that on closes, the interest par value is not adjusted based on asset leg payment amounts. Like opening transactions, the closing transactions are “entered” against the asset leg of the swap. Also, closing transactions are copied to the qualified security to close the opposite position. Note that the asset leg may be either the receivable or payable leg. The copied transaction receives its own memo number but is flagged as a generated “second leg” transaction and cannot be accessed directly. Rather, any change to the swap close is made on the original transaction and these changes are applied to the generated transaction by the System. Processing partial or full closing entry against the TRS (bond like security as the underlying) may result in generation of interest on the asset (index) leg on the closing entry based on the PURCH/SOLD INT flag. It is important to note that on a CLTRS transaction one can enter a “Y” as long as underlying security is a bond and the income/gain definition on VSTRSC is “G” to post to realized gain/loss. Interest sold displays in the INCOME EFF field. The system generated value is updateable by manually entering a value to override the calculated value. User override can also be entered as zero. This amount is re-calculated by blanking out the value. Income sold on the non-index leg is displayed in both INCOME EFF and EARNINGS field. The system generated value is updateable by manually entering a value in the INCOME EFF field to override the calculated value. User override can also be entered as zero. This amount is re-calculated by blanking out the value. Value in PURCH INT has no impact on income sold on the non-index leg. Total Return Swaps use different transaction codes for the close of the payable leg. For the other types of swaps, the payable leg transaction codes are generated and cannot be entered. For Total Return Swaps, the user always enters against the asset leg. Therefore, the user may be entering against either the receivable or payable leg. The user must enter the appropriate transaction code (CLTRS) for the asset leg of the swap. All swap closing transactions calculate the realized gain/loss on the swap position as the difference between



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the “proceeds” of the close (fee/premium of the closing transaction) and the remaining cost of the position (fee/premium from the swap open transaction, if any, which has not already been amortized). The realized gain/loss on the swap is the net of the realized gain/loss on the receivable leg and payable leg securities. The two values can be netted by the user for client reporting. Note it is unusual to have realized gain/loss under both securities. The calculation of generated income entry accompanying partial or full sell entry is no different than computation of interest sold on the sell of a bond. If the swap was opened with a fee or premium and the currency of the swap does not match the base currency of the account, exchange gain/loss may also be realized on the expiration. In this case, the 988 Bond Netting Rules are applied in the gain/loss calculations. The closing transactions generate interest payments based on the income characteristics of the underlying asset and purch/sold income flag. However the closing transactions for swaps with stock like underlying have no sold income on index leg because the dividends pay according to the rates/dates setup on DECR for the underlying asset. In fact the dividend may be received once the swap is no longer held. As stated, the swap closing transactions also pay any residual payments on the positions. Investment Accounting (InvestOne) calculates the payment for each leg of the swap. The respective CLTRS transaction is updated with the income amounts. The two payment amounts are displayed on the DETRT screen. Note, however, that each transaction only stores the amount for its leg of the swap. These amounts are updateable by manually entering a value in one or both legs to override the calculated value. User override can also be entered as zero. This amount is re-calculated by blanking out the value in one or both legs. Additionally, if an adjustment is required when a swap is closed, interest adjustment (SWINR+, SWINR-, SWINP+, SWINP-) transactions are entered. If the swap is not closed early, at expiration, the Transaction/GNMA Generator generates a closing transaction (CLTRS) much the way it generates a maturity transaction for a bond. It generates a closing transaction for each leg of the swap. The closing transaction for the receivable leg is flagged as a normal generated (“G”) transaction and a memo number is created for the transaction. For the payable leg, the transaction is flagged as a generated second leg (“W”) transaction. The Transaction/GNMA Generator calculates the earnings on each leg of the swap and adds the values to the generated transactions. The earnings are added to either income or gain/loss depending upon the option used for the swap. When the closing transactions are generated at maturity, the Generator uses the price of the index security when calculating the payment amounts. This is the same process it uses when generating periodic payments. If the index security is missing the price for the maturity date, the earnings are posted as zero on the transaction. If this occurs, the user can use DATRT to enter the value or enter an earnings adjustment transaction to correct the earnings on the. Where Advisor Accounting and/or Relief by Strategy Taxlot processing applies, only those swap taxlots which are assigned to the advisor or strategy code specified on the close transaction are considered for relief. Where Relief by Strategy Taxlot processing applies, if the wildcard strategy code (ZZZZ) is specified on the closing transaction, all taxlots for the specified swap are considered eligible for relief.



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When processing closing transactions for the swap, each leg is treated independently. The system displays short of available message in case one or both of the legs have insufficient shares and closing entry is processed against the swap. On expiration of a swap contract, Investment Accounting (InvestOne) automatically generates an appropriate close transaction (or transactions). In a case where there are multiple taxlots held at the time the expiration transaction(s) is generated, one swap close transaction is generated for each leg, equal to the to the sum of the taxlots. Where Advisor Accounting is in use, there is a single close transaction for each leg and the close transactions includes the wildcard Advisor code (“**”).



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An exception to the above statement exists where the account uses the Relief by Strategy option. In this case, there is one close transaction for each strategy on each leg, equal to the sum of the taxlots assigned to the strategy. The close transaction for each strategy includes the strategy code.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW TOTAL RETURN SWAP TRANSACTION ENTRY: DETRT


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9 TOTAL RETURN SWAP TRANSACTION ENTRY: DETRT The DETRT Screen allows the entry of Total Return Swap opening and closing transactions. DETRT Screen

NEXT DETRT MODE ADD FDMP668 TOTAL RETURN SWAP - TRANSACTION ENTRY ACCOUNT NUMBER.... SCTY NUMBER... EFFECTIVE DATE.... TRAN CODE.................... EXT ID. TRADE DATE........ CONTRACTUAL SETTLE DATE.... ACTUAL SETTLE DATE......... ADVISOR TRADE BROKER CLEARING BROKER. SIDE POCKET... STRAT/DEAL ASSET LEG: SHARES/PAR.. PURCH/SOLD INT STL CC. PRICE CONTRACT EXCHANGE RATE FEE/PREM FLAG AMT INCOME EFF EARNINGS INTEREST LEG: NOMINAL PAR. PURCH INT STL CC. INCOME EFF EARNINGS CONFIRM..... SWP=>


ACCOUNT NUMBER Account number for the transaction. System displays the account short name.

SCTY NUMBER Security number used to identify the swap. This is the security that is created for an engagement transaction. Qualifier is not allowed.

EFFECTIVE DATE Effective Date. The date the accounting effects (if any) of the transaction begin. The swap position is established as of this date. TRADE DATE must be earlier or equal to the EFFECTIVE DATE. CONTRACTUAL and ACTUAL SETTLEMENT DATE must be equal to or later than the EFFECTIVE DATE.

TRAN CODE Transaction code. Valid transaction codes for this screen: OPTRS - Open Total Return Swap. CLTRS - Close Total Return Swap. RBOPTR - Rebook of Open Total Return Swap. RBCTRS - Rebook of Close Total Return Swap.

EXT ID External ID. Used to cross reference the transaction with other systems. TRADE DATE Date that the swap agreement was reached (defaults to Effective Date). CONTRACTUAL SETTLE DATE

Must be equal to or greater than the Effective Date (default Effective Date).



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ACTUAL SETTLE DATE Must be equal to or greater than the Effective Date (default Effective Date).

ADVISOR Advisor Code. Code of the fund manager responsible for the trade as defined on MDADV.

TRADE BROKER Trade Broker. Broker number defined for the broker/dealer through whom the transaction took place as defined on MDBR.

CLEARING BROKER Clearing Broker. Broker number defined for the broker/dealer through whom the transaction was cleared as defined on MDBR.

SIDE POCKET Four digit code which identifies Side Pocket for the transaction. Valid entries include any four digit code which has been previously defined in the Side Pocket Definition (MDSP) screen. See Section 5.5000 Hedge Fund Processing for further information.

START/DEAL STRAT is a six-character code which identifies the Strategy for this transaction. Valid entries include any six-character code which has been previously defined in the Strategy Code (MDSTC) screen. DEAL is any six alphanumeric character code which identifies the DEAL for this transaction. If DEAL is entered, STRAT is also required to be entered. See Section 5.5000 Hedge Fund Processing for further information.

RECEIVABLE ASSET LEG Indicates the name of the underlying security set up on DETRSC screen.

SHARES PAR Nominal par value of the index leg of the swap. PURCH/SOLD INT Y – Yes, allow purchased and sold interest to be manually entered or

system calculated. The POST DIVD/INT field must be “Y” for PURCH/SOLD INT to be “Y”.

N- No, do not allow purchased and sold interest to be entered or system calculated (default). Then POST DIVD/INT can have a value of “Y” or “N”.

It is important to note that on a CLTRS transaction one can enter a ‘Y’ as long as underlying security is a bond and the income/gain definition on VSTRSC is “G” to post to realized gain/loss

STL CC Settlement currency that the swap transaction uses for settlement. Defaults to Issue currency of swap if left blank. Must be a valid currency defined on MDCU.

PRICE Price of the index as of the opening of the swap. CONTRACT EXCHANGE RATE

Contract exchange rate stated in asset leg currency. For example, the currency of asset leg is MXN while financing leg is USD then the currency rate is stated in MXN/USD.

FEE/PREM FLAG Flag to indicate if the amount entered is a fee or premium. Always stated in currency of the swap (CURR field). Valid Values: Valid Values: F - Fee P - Premium

AMT Amount of fee or premium included on the transaction. INCOME EFF The amount of purchased/sold interest for the index leg. Always stated in

currency of the swap (CURR field) since income is a percentage of par value. Only valid for open transaction codes.



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EARNINGS Earnings included on the index leg close transaction. The field and label are only displayed for closing transactions. No updates are allowed. Field is displayed for both earnings applied to income and earnings applied to gain/loss.

PAYABLE INTERST LEG This is just a header indicating that the following fields pertain to the INT leg.

NOMINAL PAR Nominal par value of the non-index leg of the swap. This value is computed by the System based on the par and price of the index.

PURCH INT Purchased/Sold Interest on non-index leg. Valid Values: N - No purchased and/or sold interest is entered or system calculated for

open transaction codes. Y - Purchased and/or sold interest may be entered for system calculated for

open transaction codes. Value here for close transactions is immaterial.

STL CC Settlement currency that the swap transaction uses for settlement. Defaults to Issue currency of swap if left blank. Must be a valid currency defined on MDCU.

INCOME EFF The amount of purchased/sold interest for the non-index leg. Always stated in currency of the swap (CURR field) since income is a percentage of par value.

EARNINGS Earnings included on the non-index leg close transaction. The field and label are only displayed for closing transactions. No updates are allowed. Field is displayed for both earnings applied to income and earnings applied to gain/loss.

CONFIRM Confirm flag. Allows a transaction to be flagged as Confirmed or Unconfirmed. The confirm field defines whether the transaction is confirmed (all Details received) or unconfirmed (details missing). The field defaults to the value entered on the account definition screen (AAAD). Confirm default fields. Valid values are: U = TRANSACTION UNCONFIRMED C = TRANSACTION CONFIRMED

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW SECURITY DEFINITION GUIDELINES


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10 SECURITY DEFINITION GUIDELINES A swap security can be set up on both DETRSC and BOBD/BOSB. Following are guidelines to help add and change the security definition for a swap: • Updates to a swap held in only one account are made to the receivable and payable legs

using OPTRS transaction on BOSB and DATRT. For the receivable and payable legs, fields that effect the security definition are: 1ST Pay, Freq, MM/DD, Int Rate, Accrual Method, Etc. Accrual Start Date, Expiration Date, Currency and Country of Risk are also changed on DATRT and BOBD/BOSB if held by one account.

• For swaps held in multiple accounts, changes are made to the receivable and payable legs on BOSB, but NOT on DETRT/DATRT. The receivable or payable leg definitions cannot be changed on DETRT/DATRT. Expiration Date, Accrual Start Date, and Country of Risk are changed in BOSB but both legs need to be consistent. These fields cannot be changed on DETRT/DATRT if held by multiple accounts.

• Changes to the receivable and payable legs when closing a swap (CLTRS) cannot be made.

• If the swap security definition is first setup on BOBD/BOSB and then a transaction is added to DETRT, the receivable and payable legs cannot be changed on DETRT. If held in one account, the user must either enter through to DATRT and makes changes to the receivable/payable legs or the appropriate changes are made to BOSB.

• A change to any data on DETRT or DATRT is invalid in Add or Change mode when: o Transaction code is open (OPTRS) or close (CLTRS). o Transaction code is a close (CLTRS). o Transaction code is an open and security is held in some other account. o Total Return swaps using accrual method V and W can use frequency of Semi-annual

and Annual.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW VALUING A TOTAL RETURN SWAP


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11 VALUING A TOTAL RETURN SWAP Many components contribute to the valuation of a Total Return Swap including the movement of the underlying index and discounted cash flows of the non-indexed stream of payments. Most are outside of the realm of what Investment Accounting (InvestOne) can reasonably calculate. For that reason, the entire value of the swap position is based on the prices used to value the legs. The price of the underlying index is not used nor the value of the accrued income stream. All of that value is assumed to be incorporated into the prices used to value the legs. The user has the ability to value one leg or both legs of the swap by either applying a price or plugging a market value for one or both of the securities. The user can price both, plug both, or price one and plug the other. When both legs are valued, the market value of the swap is the net of the market values of the two securities. Note that prices can be entered in as a positive or negative value. When pricing the swap using just one leg, it is the user’s responsibility to enter the price against either the long or short positions to reflect either a positive or negative value for the swap. A price of zero can be entered and stored for a swap security. This is required to avoid accidentally rolling forward an obsolete price during Stale Pricing if only one leg of the swap is priced. This would only be a problem if the swap was flipping between positive and negative market values. Pricing Exception Reporting only returns missing price exceptions for swap securities with both legs having a zero price. If either leg of the swap is priced, no exceptions occur.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW TAX WITHHOLDING AND RECLAIM PROCESSING


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12 PAYMENTS/RECEIPTS FOR A TOTAL RETURN SWAP The interest leg of a Total Return Swap calculates and pays interest in the same manner as an Interest Rate or Currency Swap. The interest can be applied to either income or gain/loss. The Transaction Generator calculates the payments for the interest leg of a Total Return Swap. The asset leg of the swap uses the same transaction codes to process its payments as well. However, the calculations of the payment amounts are entirely different. The payments for the indexed leg are for the gain or loss on the index since the last payment. The price of the index security is applied to the asset leg shares/par value to determine the current “value” of the index position. That value is compared to the value of the asset leg’s position as of the prior payment. The payment is for the difference of the two amounts. The payment process also stores the current calculated value on the holding for use when processing the next payment. When the first payment is made, it uses the opening value of the swap as the prior payment date value. This is taken from the price used to open the swap (not the index price) and is stored on the holding by the opening transaction. Note that the value of the asset leg’s position used to calculate the payments is using the price of the index security. It does NOT use the price used to value the asset leg of the swap. The valuation used to calculate payments is completely separate from the valuation of the swap position. When transactions are generated, the Generator uses the price of the index security to calculate the payment amounts. If the index security is missing the price for the payment date, the earnings are posted as zero on the transaction. If the swap recalculates the par value of the interest leg, a position adjustment (SWPAR+) with zero shares/par is generated as well. If this occurs, the user needs to update the interest and earnings adjustment transactions to correct the earnings on the swap. Note also that this “payment” amount could be either a positive or negative value. Two non-adjustment transaction codes are available for payments one for receivable leg payments (SWINRC) and one for payable leg payments (SWINPD). The receivable leg assumes earnings are received and the payable leg assumes payments going out. Two transaction codes support negative earnings with exactly opposite effects of the existing transactions. They are Swap Negative Receipt (SWINRN) and Swap Negative Payment (SWINPN). The transaction used depends upon the impact of the payment on the account. The account impact is determined based on the movement of the index price as well as whether the asset leg is the receivable or payable leg. For example, if the price of the index goes up and the asset leg is the receivable leg, a swap payment receipt (SWINRC) is generated. However, if the price goes up and the asset leg is the payable leg, a swap payment paid (SWINPD) is generated. If the index price goes down, the asset leg has negative earnings. In that case, if the asset leg is the receivable leg, a swap negative receipt (SWINRN) is generated. If the asset leg is the payable leg, a swap negative payment (SWINPN) is generated. The index payments impact cash if the swap is domestic to the account or currency if it is foreign. Currency transactions (CUP or CDN) are generated from Translation for foreign currency payments and receipts.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW TAX WITHHOLDING AND RECLAIM PROCESSING


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As stated earlier, the “value” (future payment basis) of the asset leg position is updated by the payment or receipt transaction to support subsequent payments. The same value may need to be applied to the interest leg of the swap to establish the basis for the next payment/receipt from that leg. If the swap is flagged to recalculate par on payments, a position adjustment transaction (SWPAR+, SWPAR-) is generated by the Transaction/GNMA Generator for the interest leg of the swap. The position adjustment transaction updates the nominal shares/par value of the position. This transaction has no accounting effect. Subsequent payments of that leg are based on the new nominal par value. Note that the user can change the values on the interest or position adjustment transactions. If that occurs, the notional par value is based on the positional adjustment and does not reflect the value of the payment or receipt. If the account or asset group is taxlot, the par adjustments are based off the taxlot’s open price or the last payment date price of the taxlot, not the position. Only one par adjustment is generated on the interest leg, but it affects the taxlots accordingly. When the cost assignment is taxlot, another par adjustment is generated on the asset leg, but has no value (does not affect the shares/par of the asset leg) or accounting affects to the asset leg. If the par adjustment on the interest leg is deleted or reversed, the par adjustment on the asset leg is also deleted/reversed. Manually entered par adjustments work the same as generated adjustments. As stated earlier, the Transaction/GNMA Generator creates the swap payment and receipt transactions, and where necessary, the position adjustment transactions. The user has the ability to enter these transactions manually or update the generated transactions. Interest payment and receipt adjustment transactions for Interest Rate Swaps are also available for manual entry. Pending Trade (Repair Station) processing does not support these transaction codes. If the transactions are manually updated, it is the user’s responsibility to maintain the position adjustment transactions in “sync” with the index earnings. To allow maximum flexibility in the swap processing, Investment Accounting (InvestOne) does not edit that the position adjustments match the index earnings.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW IMPACT OF UNDERLYING SECURITY:CORPORATE ACTIONS/INTEREST PAYMENT


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13 TAX WITHHOLDING AND RECLAIM PROCESSING The asset leg of the total return swap can accrue and post reclaims and withholdings on interest/dividends, depending on if the POST DIVD/INT flag is set to “Y” on the Total Return Swap Security Setup Screen (DETRSC). If the POST DIVD/INT flag is “Y”, in order for reclaims and withholdings to be calculated, the Country of Taxation also needs to be defined on the asset leg as well as rates entered on various Tax Withholding and Reclaim Rate Screens (DECW, DECR, DETW). Reclaims and withholdings are paid on the pay date of the asset leg’s underlying security payment date (BOBD) or pay date of the dividend on DECR. The payments of witholding and reclaim are processed using the same transaction codes as if they were processed on the underlying security (RECL, RECLOP, RECU, RECUOP, WEXP, WEXPOR), dependent upon whether the asset leg is the receivable or payable leg. Double reclaims are also included in the processing. Withholdings and reclaims transaction codes can manually be entered against a total return swap on the Transaction Entry Screen (DETE/DEFT). Withholding and reclaim transactions can only be applied/generated to the following transactions: category code class descr revcode short positions DIVD- INCM

DIVIDEND ADJUSTMENT - DECREASE INCOME CASH RDIVD-

short positions INT - INCM

INTEREST ADJUSTMENT - DECREASE INCOME CASH RINT -

Bonds INT INCM INTEREST COLLECTED RINT Stocks DIVD DIVD DIVIDEND RDIVD short positions BDIVD- INCM REBOOK DIVD ADJ DECREASE INCOME CASH RDIVD- short positions BINT - INCM REBOOK INT ADJ DECREASE INCOME CASH RINT - Bonds RBINT INCM INTEREST REBOOK RINT Stocks RBDIVD DIVD DIVIDEND REBOOK RDIVD



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14 IMPACT OF UNDERLYING SECURITY: CORPORATE ACTIONS/INTEREST PAYMENT

Total return swaps support 3 types of corporate actions: • Stock Dividends (STDV), • Stock Splits (SPLT) and • Reverse Stock Splits (RSPL) only. Stock Splits and Stock Dividends only affect the Asset Leg of the Total Return Swap. The Interest Leg of the swap is unaffected by these transaction types. Interest Payments, Dividend Payments, Stock Dividends, and Stock Splits can be processed by the Transaction Generator (BGTG) or reprocessed by the Transaction Regeneration (BGTGR). Stock splits and reverse stock splits can also be processed by the Corporate Action Generator (BGCAG) and reprocessed by Corporate Action Regeneration (BGCAGR). These are always processed as Mandatory corporate actions, regardless of the Mandatory/Optional value on DECORP. The Asset Leg of the Total Return Swap only accrues and pay dividends and interest if the POST DIVD/INT flag on DETRSC is set to “Y”. If the POST DIVD/INT flag is set to “Y” on the Asset Leg of the Total Return Swap, the accruals and payments of the dividends or interest take on the characteristics of the underlying asset. This includes accrual methods, rates, and payment schedules. The calculations are based on the characteristics of the Underlying Security multiplied by the current holdings of the Asset Leg of the Swap. Dividend entitlement is determined by the transaction‘s trade date and the ex-date of the dividend. In case of interest accrual, the Asset Leg starts to accrue income on the contractual settle date of the open transaction. Corporate actions such as regular dividends, stock dividends and stock splits are maintained on DECR or DECORP screens for the underlying security. An edit appears if a corporate action is entered against the swap itself. The split and stock dividends rates sustained on the underlying asset only affect the Asset Leg of the swap (receivable leg if the REC/PAY is “R” or payable leg if the REC/PAY is “P”). The corporate action entitlement is based on the trade date of the swap. Both stock splits and stock dividends are processed on the ex-date maintained on the underlying security. When the stock dividend or stock split are processed on the same date as the payment date of the swap, the stock split or stock dividend is processed first. For generated close transaction, the shares/par has to be adjusted so that the close transaction includes all the shares received by means of splits and stock dividends on top of regular lots. Stock Splits, Stock Dividends and Reverse Stock Splits can only be processed on swaps when the Underlying Security’s Asset Group is “S” (Stock), “P” (Preferred Stock), or “F” (Foreign Stock).



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If the Underlying Security is bond-like then the interest starts accruing on the contractual settle date of the swap. Accrued interest on the asset leg accrues using the same logic as interest accruals on bonds. The only difference is that the rates and payment dates are obtained from the Underlying Security instead of the swap. Both dividend and interest pay according to the payment cycle of the Underlying Security. The payments of dividend and interest are processed using the same transaction codes as if they were processed on the Underlying Security (example: INT). Tax method rules “H” and “S” on the Account Definition screen (AAAD) apply to the index leg of the total return swap when corporate actions such as splits or stock dividends are processed.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW HOLDINGS DEFINITION: VSHO/HOLDINGS VIEW:VSHB


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15 HOLDINGS DEFINITION: VSHO/HOLDINGS VIEW: VSHB There is no consolidated reporting of Total Return Swaps on VSHO and VSHB. The long (receivable) position is shown under qualifier zero. The short (payable) position is shown under qualifier one.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW SWAP ASSOCIATION ENTRY


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16 SWAP ASSOCIATION ENTRY: DESWAS The Swap Association Entry screen allows the users to associate other securities with a swap opens contract. There are no accounting implications to the associating securities. It is only used as information to explain the purpose of the swaps contract. After a Total Return Swap has been opened, the user has the ability to associate a security held by the account with the opens contract. The memo number must be that of an opens transaction (OPTRS) and the account must hold the associated security. Up to 12 securities can be associated with each swap. For details, see Section 5.370.

DESWAS Screen NEXT DESWAS MODE ADD FDMP117 * * * SWAPS ASSOCIATION ENTRY * * * MEMO NUMBER 0033249 ACCOUNT NUMBER . . . . . 000000000564518 MUTUAL FUND SECURITY NO. . . . . . SWAP82 RECV SWAP82 ASSOCIATED SECURITIES ------ SECURITY -------- -----SHARES/PAR----- COMMERCE 01 01 03 0001 1,000,000

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW TRANSACTION PROCESSING CODES FOR TOTAL RETURN SWAPS


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17 TRANSACTION PROCESSING CODES FOR TOTAL RETURN SWAPS ----- Accounting Effects ---- Code Description Inc Prin Share Cost Class CLTRS Close Total Return Swap – Long Position + + - - CTRS CLTRSP Close Total Return Swap – Short Position - - + + CTRP OPTRS Open Total Return Swap – Long Position - - + + OTRS OPTRSP Open Total Return Swap – Short Position + + - - OTRP MISCDI Miscellaneous Disbursement (Decrease Income) - N N N MISD MISCDS Miscellaneous Disbursement (Increase Expense) - N N N MIS- MISCRE Miscellaneous Receipt (Increase Income) + N N N MIS+ RBCTRS Rebook of Close Total Return Swap–Long + + - - CTRS RBCTRP Rebook of Close Total Return Swap–Short - - + + CTRP RBOPTR Rebook of Open Total Return Swap–Long - - + + OTRS RBOPTP Rebook of Open Total Return Swap–Short + + - - OTRP RBRGAN Rebook of Realized Gain N + N N RGAN RBRLOS Rebook of Realized Loss N - N N RLOS RBSPR+ Rebook of Notional Par Increase N N + N PAR+ RBSPR- Rebook of Notional Par Decrease N N - N PAR- RBSWNR Rebook of Swap Receivable Leg Payment + N N N SWIN RBSWNP Rebook of Swap Payable Leg Payment - N N N SWIO RBSWRN Rebook of Swap Negative Receipt - - N N SWIN RBSWPN Rebook of Swap Negative Payment + + N N SWIO RCLTRS Reversal of Close Total Return Swap–Long - - + + CTRS RCLTRP Reversal of Close Total Return Swap–Short + + - - CTRP RGAIN Realized Gain N + N N RGAN RGAIN- Realized Gain Adjustment N - N N RGAN RLOSS Realized Loss N - N N RLOS RLOSS- Realized Loss Adjustment N _ N N RLOS ROPTRS Reversal of Open Total Return Swap–Long + + - - OTRS ROPTRP Reversal of Open Total Return Swap–Short - - + + OTRP RRGAIN Reversal of Realized Gain N - N N RGAN RRLOSS Reversal of Realized Loss N + N N RLOS RSWNPD Reversal of Swap Payable Leg Payment + N N N SWIO RSWNRC Reversal of Swap Receivable Leg Payment - N N N SWIN RSWRN Reversal of Swap Negative Receipt + + N N SWIN RSWPN Reversal of Swap Negative Payment - - N N SWIO RSWPR+ Reversal of Notional Par Increase N N - N PAR+ RSWPR- Reversal of Notional Par Decrease N N + N PAR- SWINRC Swap Receivable Leg Payment + N N N SWIN SWINPD Swap Payable Leg Payment - N N N SWIO SWINRN Swap Negative Receipt - - N N SWIN SWINPN Swap Negative Payment + + N N SWIO SWPAR+ Notional Par Increase N N + N PAR+ SWPAR- Notional Par Decrease N N - N PAR- TXLSTC Taxlot Strategy Adjustment N TXST

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW TRANSACTION PROCESSING CODES FOR TOTAL RETURN SWAPS


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*RGAIN and RLOSS transactions are allowed to be posted against Total Return Swaps. These transaction codes post to a specified leg, as both receivable and payable legs are valid options. There is no difference in the transactional effects that are generated as a result of entering these transaction codes against one leg or the other. TXLSTC has no accounting effects. This code allows the user to change strategy codes on a taxlot as of a specific point in time (effective date). The only field available to this code is STRATEGY and is entered on DEXA.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW REPORTING AND MESSAGING


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18 REPORTING AND MESSAGING

18.1 BATCH REPORTING Total Return swap activity is reflected in various transactions and security related reports plus the following swap reports:

SWAPS OUTSTANDING (R145) A batch report that shows the value of all the swaps outstanding for an

account as of a specific valuation date. UNREALIZED GAIN/LOSS (R148) A batch report that shows the unrealized gain/loss of all the swaps

outstanding for an account as of a specific valuation date. CLOSED SWAPS (R149) A batch report that shows all swaps closed within the reporting period.

18.2 MESSAGING Total Return Swaps can be messaged in through Transaction Messaging. Swap Association Entry Screen (DESWAS) data can also be messaged in Swap Transaction Message (FDXIW01). See Software Developer’s Kit for further information including information specific to swaps in general and Total Return Swaps in particular.

18.3 SPECTRA Transaction Analysis includes data items from the Swap Association Screens (DESWAS). See SPECTRA Data Items for further information.

SYSTEM MANUAL – SECTION 5.376 – TOTAL RETURN SWAPS: ASSET GROUP TW GENERAL LEDGER ENTRIES FOR SWAPS INTEREST PAYMENT TRANSACTIONS: ASSET GROUPS CW, DW, IW, TW


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19 GENERAL LEDGER ENTRIES

19.1 TOTAL RETURN SWAPS: ASSET GROUP “TW” ------------- On Effective Date ---------------- ----------- On Actual Settle Date ----------

Tran Code Description Debit Entry Credit Entry Debit Entry Credit Entry CLTRS Close Total Return Swap

(Long Position) Other Receivables Securities Sold Receivable Amort/Accret

Other Payables Securities At Value Realized Gain/Loss

Other Payables Income

Currency Allowance Securities Sold Receivable Other Receivables Realized Exchange G/L

*CLTRSP Close Total Return Swap (Short Position)

Other Receivables Short Position Mkt Value Realized Gain/Loss

Securities Purchased Payable Other Payables Amort/Accret

Securities Purchased Payable Other Payables Income

Currency Allowance Other Receivables Realized Exchange Gain/Loss

MISCD Miscellaneous Disbursement (Decrease Income)

Income/Expense Classification

Other Payables

Other Payables

Cash MISCDS Miscellaneous Disbursement

(Decrease Income) Income/Expense Classification

Other Payables

Other Payables Cash

MISCRE Miscellaneous Disbursement (Decrease Income)

Other Receivables

Income/Expense Classification

Cash Other Receivables

OPTRS Open Total Return Swap (Long Position) *General Ledger effects only if fee and/or income.

Securities At Value Other Receivables

Securities Purchased Payable Other Payables


Currency Allowance Realized Exchange Gain/Loss Other Receivables



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------------- On Effective Date ---------------- ----------- On Actual Settle Date ---------- Tran Code Description Debit Entry Credit Entry Debit Entry Credit Entry *OPTRSP Open Total Return Swap

(Short Position) *General Ledger effects only if premium and/or income.

Securities Sold Receivable Other Payables

Short Position Mkt Value Other Receivables

Currency Allowance Realized Exchange Gain/Loss Other Receivables

Securities Sold Receivable Other Payables Income

RBCTRS Rebook of Close Total Return Swap (Long Position)

Other Receivables Securities Sold Receivable Amort/Accret




RBCTRP Rebook of Close Total Return Swap (Short Position)





RBOPTR Rebook of Open Total Return Swap (Long Position) *General Ledger effects only if fee.

Securities At Value Securities Purchased Payable

Securities Purchased Payable

Currency Allowance Realized Exchange Gain/Loss

RBOPTP Rebook of Open Total Return Swap (Short Position) *General Ledger effects only if premium.

Securities Sold Receivable

Short Position Mkt Value



RBSPR+ Rebook of Swap Par Adjustment Up

No effects No effects

RBSPR- Rebook Swap Par Adjustment Down




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------------- On Effective Date ---------------- ----------- On Actual Settle Date ---------- Tran Code Description Debit Entry Credit Entry Debit Entry Credit Entry RCLTRS Reversal of Close Total

Return Swap (Long Position)


Other Receivables Securities Sold Receivable Amort/Accret



RCLTRP Reversal of Close Total Return Swap (Short Position)





ROPTRS Reversal of Open Total Return Swap (Long Position) *General Ledger effects only if fee.


Securities At Value



ROPTRP Rebook of Open Total Return Swap (Short Position) *General Ledger effects only if premium.

Short Position Mkt Value




RSWPR+ Reversal of Swap Par Adjustment Up


RSWPR- Reversal of Swap Par Adjustment Down


SWPAR+ Swap Par Adjustment Up No effects No effects SWPAR- Swap Par Adjustment Down No effects No effects

* Transaction codes generated by the system. • The open and close transactions reflect fees and premiums. The earnings that is reported on the General Ledger effects for

the CLTRS reflects a loss for the index leg. • The securities are posting earnings to income rather than gain/loss. General Ledger effects are different when this option is

chosen. • GLINL can view Interest Rate Swap General Ledger effects only if there is an “R” (Receivable) or “P” (Payable) in the

Options field.



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19.2 SWAPS INTEREST PAYMENT TRANSACTIONS: ASSET GROUPS “CW”, “DW”, “IW”, “TW” ---------- On Effective Date ------------- -------- On Actual Settle Date -------

Tran Code Description Debit Entry Credit Entry Debit Entry Credit Entry RBSWNR Rebook of Swap Interest

Received (Long Position) Other Receivables

Income Cash (Income)

Other Receivables RBSWNP Rebook of Swap Interest Paid

(Short Position) Income

Other Payables Other Payables

Cash (Income) RBSWP+ Rebook of Swap Interest Paid

Adjustment Up (Short Position)

Income Other Payables

Other Payables

Cash (Income)

RBSWP- Rebook of Swap Interest Paid Adjustment Down (Short Position)

Other Receivables Income

Cash (Income) Other Receivables

RBSWRN Rebook of Swap Negative Interest Received (Long Position)


Other Payables

Cash (Income)

RBSWPN Rebook of Swap Interest Paid (Short Position)


Other Payables Cash (Income)

RBSWR+ Rebook of Swap Interest Received Adjustment Up (Long Position)



RBSWR- Rebook of Swap Interest Received Adjustment Down (Long Position)



RSWNRC Reversal of Swap Interest Received (Long Position)

Income

Other Receivables

Other Receivables

Cash (Income)

RSWNPD Reversal of Swap Interest Paid (Short Position)

Other Payables

Income

Cash (Income)

Other Payables

RSWNP+ Reversal of Swap Interest Paid Adjustment Up (Short Position)

Other Payables

Income

Cash (Income)

Other Payables

RSWNP- Reversal of Swap Interest Paid Adjustment Down (Short Position)

Income

Other Receivables

Other Receivables

Cash (Income)

RSWNR+ Reversal of Swap Interest Received Adjustment Up (Long Position)

Income

Other Receivables

Other Receivables

Cash (Income)



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---------- On Effective Date ------------- -------- On Actual Settle Date ------- Tran Code Description Debit Entry Credit Entry Debit Entry Credit Entry RSWNR- Reversal Swap Interest

Received Adjustment Down (Long Position)

Other Payables

Income

Cash (Income)

Other Payables

RSWPN Reversal of Swap Negative Interest Paid (Short Position)

Other Payables

Other Receivables

Cash (Income)

Other Payables

RSWRN Reversal of Swap Negative Interest Received (Long Position)

Other Payables

Income

Cash (Income)

Other Payables

SWINRC Swap Interest Received (Long Position)



SWINR+ Swap Interest Received Adjustment Up (Long Position)



SWINR- Swap Interest Received Adjustment Down (Long Position)



SWINRN Swap Negative Interest Received (Long Position)


Other Payables

Cash (Income)

SWINPD Swap Interest Paid (Short Position)



SWINP+ Swap Interest Paid Adjustment Up (Short Position)


Other Payables

Cash (Income)

SWINP- Swap Interest Paid Adjustment Down (Short Position)



SWINPN Swap Negative Interest Paid (Short Position)

Other Receivables Other Payables

Other Payables

Cash (Income)

If swap security is set up to post earning to gain/loss, the amount posts to realized gain/loss rather than income.

5.376 total return swaps -...

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