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Oracle Transfer Pricing User Guide
Release 12.1
Part Number E13524-03
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Prepayment Rules

This chapter describes the procedure for working with and managing Prepayment rules.

This chapter covers the following topics:

Overview of Prepayment Rules

Prepayment rules allow you to specify methodologies to model the prepayment behavior of products in your portfolio and quantify the associated prepayment risk in monetary terms. See: Setting Prepayment Rules.

The methodologies contained in the Prepayment rule are referenced by the Transfer Pricing Process rule. These prepayment methodologies are used in combination with cash flow based transfer pricing methods to generate transfer pricing results.

The procedure for working with and managing the Prepayment rule is similar to that of other Oracle Transfer Pricing business rules. It includes the following steps:

As part of creating and updating Prepayment rules, you can also define prepayment methodologies. See:

Oracle Transfer Pricing provides you with the option to copy, in total or selectively, the product assumptions contained within the Prepayment, Transfer Pricing, and Adjustments rules from one currency to another currency or a set of currencies. See: Copying Assumptions Across Currencies.

Related Topics

Standard Navigation Paths

Creating Prepayment Rules

You create a Prepayment rule to define prepayment assumptions for new products.

Procedure:

  1. Navigate to the Prepayment rule home page.

  2. Complete standard steps for this procedure. See: Creating Rules.

Important: In addition to the standard steps for creating rules, the procedure for creating Prepayment rule and version involves one extra step. After Standard Step 5, you can select a product hierarchy. You can define methodologies at any level of the hierarchical product dimension. The hierarchical relationship between the nodes allows inheritance of methodologies from parent nodes to child nodes.

You can also continue defining a methodology at the lowest level of the Line Item dimension without selecting a hierarchy.

Caution: Oracle Transfer Pricing does not support multiple value set hierarchies and hierarchies with multiple tops. In addition, all the hierarchies need to be stored in flattened format for processing by the application. See: Working with Hierarchies, Oracle Enterprise Performance Foundation User's Guide.

Related Topics

Overview of Prepayment Rules

Standard Navigation Paths

Defining Prepayment Methodologies

The definition of prepayment methodologies is part of the Create or Update Prepayment rule process where prepayment assumptions are made for product-currency combinations. When you click Apply in the Create Prepayment rules process, the rule and the version are saved and the Prepayment rule home page is displayed. However, the prepayment methodology has not yet been defined for any of your products at this point. Typically, you would start defining your prepayment methodologies for product-currency combinations before clicking Apply.

The Prepayment rule supports definition of prepayment assumptions for combinations of two dimensions: Product and Currency. Consequently, before you start defining the prepayment methodologies for your products, you need to decide the way you want to input the parameters. You can select any one of the following two paths:

Once you have created a Prepayment rule and a version, you can assign prepayment methodologies to product-currency combinations in any of the following two ways:

Prerequisites

Procedure:

This table describes some terms in the pages used for this procedure.

Selected Terminology
Term Description
Calculation Method The method used to model prepayment behavior of instruments. Oracle Transfer Pricing provides three prepayment calculation methods: Constant, Prepayment Table, and Arctangent.
Cash Flow Treatment Allows you to specify one of the following two ways in which prepayments are made for a particular product or product hierarchy:
  • Refinance: This is the most commonly used option. Select refinance to keep payment amounts after prepayment consistent with a portfolio-based assumption. This reduces the scheduled payment amount on each loan and maintains the same maturity term.

  • Curtailment: Select curtailment to change the periodic payment amounts due. The prepayments are treated as accelerated payments, with a payoff earlier than the originally scheduled term.

Market Rate The market rate is defined as the sum of the Index (the yield curve rate as described by the Interest Rate Code) and the Spread (the difference between the customer rate and market rate).
Associated Term Allows you to define the term for the point on the yield curve selected in the Market Rate Definition that will be used in obtaining the market rate.
  • Remaining Term: The number of months remaining until the instrument matures.

  • Reprice Frequency: The frequency with which the instrument reprices. This defaults to the original term for a fixed rate instrument.

  • Original Term: The number of months that was the originally scheduled life of the instrument.

Prepayment Rate Definition This table allows you to specify constant annual prepayment rate, or the associated factors, that you want to apply to the instruments having origination dates in a particular date range.
Seasonality This table allows you to specify seasonality adjustments. Seasonality refers to changes in prepayments that occur predictably at given times of the year.
Seasonality adjustments are based on financial histories and experiences, and should be modeled when you expect the amount of prepayments made for certain types of instruments to increase or decrease in certain months.
The default value for seasonality factors is 1, which indicates that no seasonality adjustment is made for a month. Changing the seasonality factors is optional. You can change the seasonality factors for none, one, or multiple months.
To make seasonality adjustments, you need to enter a value between 0.00 and 99.9999 for the seasonality factors associated with each month. Seasonality factors less than 1 mean that prepayments are decreased for a particular month. Seasonality factors greater than 1 indicate that prepayments are increased for a particular month.
  1. Navigate to the Prepayment methodology page.

  2. Select a Calculation Method, Constant, Prepayment Table, or Arctangent, and click Go.

    Note: The default value for the Calculation Method drop down list is None. If you select None as the calculation method, no prepayment assumptions will be assigned to the particular product-currency combination.

  3. Select a Cash Flow Treatment type, Refinance or Curtailment, and click Go to refresh the screen with the relevant parameters.

    Note: Refinance is the most commonly used method.

  4. Define the parameters and annual prepayment rates for the selected calculation method: Constant, Prepayment Table, or Arctangent.

    Important: The parameters displayed on the Prepayment methodology page vary depending on the calculation method (Constant, Prepayment Table, or Arctangent) that you have selected. See:

  5. Click Apply.

    The Prepayment version definition page is displayed.

    At this point you can:

Note: Oracle Transfer Pricing provides you with the option to copy, in total or selectively, the product assumptions contained within the Prepayment, Transfer Pricing, and Adjustments rules from one currency to another currency or a set of currencies. See: Copying Assumptions Across Currencies.

Related Topics

Prepayment Methodologies and Rules

Creating Conditional Assumptions

Copying Assumptions Across Currencies

Overview of Prepayment Rules

Standard Navigation Paths

Defining the Constant Prepayment Method

Use this procedure to define prepayment assumptions using the Constant Prepayment method.

Prerequisites

Procedure:

  1. Select the Start Origination Date using the date picker. Alternatively, you can enter the Start Origination Date in the space provided.

    Note: The first cell in the Start Origination Date column and all of the cells in the End Origination Date column are read only. This ensures that all the possible origination dates are included in cash flow calculation runs. Each row in the End Origination Date column is filled in by the system when the you click Add Row and Refresh Table or save the rule.

    The first Start Origination Date (in row 1) has a default value of January 1, 1900. When you enter a Start Origination Date in the next row, the system inserts a date that is a day prior to the previous End Origination Date field.

  2. Enter the annual prepayment rate percent that you want to apply to the instruments having origination dates in a particular Start Origination-End Origination Date range.

    Note: The Percent column represents the actual annualized prepayment percentage that the system uses to generate the principal runoff during the cash flow calculations.

  3. Click Add Another Row to add additional rows and click the corresponding Delete icon to delete a row.

    You can add as many rows in this table as you require. However you need to enter relevant parameters for each new row.

  4. Define the Seasonality as required.

Related Topics

Constant Prepayment Method

Defining Prepayment Methodologies

Standard Navigation Paths

Defining the Prepayment Table Method

Use this procedure to define prepayment assumptions using the Prepayment Table Calculation method.

Prerequisites

Procedure:

  1. Select an Index from the list of values.

  2. Enter the Spread.

    A Spread is the difference between the Customer Rate and the Market Rate.

  3. Select an Associated Term: Remaining Term, Reprice Frequency, or Original Term.

  4. Specify the Prepayment Table parameters.

    1. Select the Start Origination Date using the date picker. Alternatively, you can enter the Start Origination Date in the space provided.

    2. Enter the Coefficient by which the Prepayment Rate should be multiplied.

      This multiple is applied only to the instruments for which the origination date lies in the range defined in the Start Origination Date-End Origination Date fields.

    3. Select a predefined prepayment table from the Prepayment Table Rule list of values.

      The system uses the prepayment table assumptions to calculate the prepayment amounts for each period. You need to associate a prepayment table for every Start Origination-End Origination Date range.

    4. Click Add Another Row to add additional rows and click the corresponding Delete to delete a row.

      You can add as many rows in this table as you require. However you need to enter relevant parameters for each new row.

  5. Define the Seasonality as required.

Related Topics

Prepayment Table Method

Prepayment Table Rules

Defining Prepayment Methodologies

Standard Navigation Paths

Defining the Arctangent Calculation Method

Use this procedure to define prepayment assumptions using the Arctangent Calculation method.

Prerequisites

Procedure:

  1. Select an Index from the list of values.

  2. Enter the Spread.

    A Spread is the difference between the Customer Rate and the Market Rate.

  3. Select an Associated Term: Original Term, Reprice Frequency, or Remaining Term.

  4. Specify the Arctangent Argument table parameters.

    1. Select the Start Origination Date using the date picker. Alternatively, you can enter the Start Origination Date in the space provided.

    2. Enter the values for the Arctangent parameters (columns K1 through K4) for each Start Origination Date in the table. The valid range for each parameter is -99.9999 to 99.9999.

    3. Click Add Another Row to add additional rows and click the corresponding Delete to delete a row.

      You can add as many rows in this table as you require. However you need to enter relevant parameters for each new row.

  5. Define the Seasonality as required.

Related Topics

Arctangent Calculation Method

Defining Prepayment Methodologies

Standard Navigation Paths