10. Defining Security Preference Classes

10.1 Introduction

Preferences are the options available for defining the attributes of a security. The following are some of the preferences that you can indicate for a security:

It is your preferences that give a security its distinctiveness.

You can maintain several sets or classes of security preferences. Thus, you can maintain a class of preferences for short-term zero coupon bonds, another for medium-term zero-coupon bonds, a third for long-term zero coupon bonds, and so on.

When defining a security product of a certain type, say short-term zero coupon bonds, you only need to associate it with the appropriate preference class defined. The product will acquire, by default, all the attributes defined for the class associated with it. You can change these default attributes to suit specific security product.

This chapter contains the following sections:

10.2 Security Product Preference Classes

This section contains the following topics:

10.2.1 Specifying Security Product Preference Classes

Security preference classes are maintained in the Security Product Preference Class Definition screen, which is invoked from the Application Browser.

You can invoke the ‘Security Product preference Class Definition’ screen by typing ‘SEDXSECL’ in the field at the top right corner of the Application tool bar and clicking on the adjoining arrow button.

Class Code

You can identify a security preference class that you build with a unique ten-character Class Code. You can follow your own convention for devising the code.

Description

You can briefly describe the Security Preference Class that you are defining. The description that you specify is for information purposes only and will not be printed on any customer correspondence.

10.2.2 The Market of Issue

For a Securities Preference class, you can identify a Market of Issue. Only a market maintained in the Markets Maintenance screen can be specified. Your specification here will default to the security products associated with the class. However, when defining a product, while retaining the other preferences that default from the associated class, you can change the default market.

All securities maintained under a product, by default, will also be associated with the market specified for the product. However, when maintaining securities under a product, in the Securities Definition screen, you can identify different markets.

Security Type

The first preference defined for a class is the Security Type. Securities can be broadly classified into the following types:

By indicating the security type, you restrict the application of a class on the products of a particular type. For instance, you can associate a Security Preference Class with the Security Type defined as Bonds, only on products maintained for bonds.

The security type specified also determines the other preferences that you can define, for a preference class. For example, if you indicate the security type as Bond, you can also define details relating to interest.

10.2.3 Defining Interest Details for a Bond

When maintaining a preference class for bonds, you must define interest-related details. These interest details will default to the security (bond) product with which you associate the class. These default interest details can be modified to suit the product.

Interest Type

If you have indicated the security type for a preference class as Bond, you should also indicate the Type of Interest. It could be one of the following:

After defining the interest details, you can indicate the Coupon and Interest Rate Revision details.

The Interest Quotation Method

The Interest Quotation Method for a bond can be either of the following:

When the interest component is included in the market price of a security, the quotation method is referred to as Flat. A flat price of a security is also referred to as the ‘Dirty Price’.

When the interest component is excluded from the market price of a security, the quotation method is referred to as Plus Accrued.

Specifying the Coupon Frequency

When building a class of preferences, you can indicate if the coupons due for a bond are periodic. Coupons for bonds (maintained under the products with which you associate the preference class) will be calculated according to the periodicity that you specify.

For an interest-bearing bond, with a periodic coupon, you must indicate the Coupon Frequency. Some coupon frequencies are listed below:

If you indicate that the coupon frequency is weekly, you should also indicate the day on which the coupon is due. For instance, you can have a bond with a weekly coupon that is due on Wednesdays.

If the coupon frequency is in terms of a month, you can choose to indicate that the coupon days should adhere to Month Ends. The implication of this option is explained in the following example.

Example

You would like to maintain a product for Periodic Interest-bearing Bonds. The coupon frequency for securities maintained under this product is Half-yearly. You are defining a preference class that you would like to associate with this product, amongst others.

In the Product Preference Class Definition screen, in the Security Type field, choose the Bonds option and the Periodic Coupon option. Now, you can specify the Coupon Frequency, as Half-yearly. You can opt to indicate that the coupon dates should adhere to month ends.

Let us study the impact of the Adhere to Month End option, with relation to a security that you have maintained under the product. Assume the Issue Date of the Security is 30 June 2000, and the Maturity Date is 30 June 2002. The coupon frequency is half-yearly.

If you choose the Adhere to Month End option:

The coupons for this security would be due on the following dates:

If you do not choose the Adhere to Month End option:

The coupons for this security would be due on the following dates:

The coupon due dates for all securities maintained under the product (with which you associate the preference class) will be calculated in a similar manner, depending on the option you choose.

Specifying the Interest Rate Revision Frequency

You can revise the interest rates for bonds with floating interest. The revision frequency can be different from the coupon frequency and is referred to as Asynchronous (interest rate) Revision.

Asynchronous revision can be:

As part of your preferences for a Security Class, you can indicate Interest Rate Revision details. The revision details defined for the class will apply on all securities maintained under a product (with which you associate the class).

By default, interest rates will be revised according to the coupon frequency defined for a bond. If you would like to revise the interest rates at a different frequency, choose the Allow Asynchronous Revision option.

If the asynchronous revision of rates is periodic, click on the Periodic Revision option, and specify the Revision Frequency. For a frequency that is weekly, indicate the day on which the revision is due. (For instance, you could indicate that the interest rates for securities should be revised every Monday.)

If the revision frequency is in terms of a month, you can choose to indicate that the revision days should adhere to Month-Ends. The implication of this option is explained in the following example.

Example

You are defining a Security Preference Class that you would like to associate with a Security Product. You have maintained several securities under this product. We shall study the impact of the Adhere to Month End option with reference to a security maintained under the Product.

Assume the Issue Date of the security (with floating interest and an asynchronous rate revision) is 01 January 2000, and the Maturity Date is 31 December 2000.

You have specified that the interest rate revision frequency is quarterly.

If you choose the Adhere to Month End option:

The rate revisions for this security, would be due on the following dates:

If you do not choose the Adhere to Month End option:

The rate revisions for this security would be due on the following dates:

The rate revision dates for all securities maintained under the product (with which you associate the preference class) will be calculated in a similar manner.

If the interest rates for securities should be revised on a non-periodic basis, you should leave the Periodic Revision option blank. You can capture the revision details for a security with non-periodic rate revision, in the Security Online Definition screen.

10.2.4 Capturing Information Specific to a Security Type

Based on the security type, the information for a security is captured.

If the Security Type is ‘Bond’

If you specified the Security Type for a class as Bond, you can indicate if Call and Put options would be available.

The issuer of a bond may also offer the option of converting the bond into shares or equities. Such bonds are referred to as Convertible bonds. When defining a Security Preference Class, with the Type as Bond, you can capture this information by choosing the Convertible option.

Redemption Type

You can also indicate the mode of redemption. An issuer can redeem bonds in three ways:

The Redemption Mode that you specify for a class, will default to the products that you associate with the class. When defining the redemption mode for a specific product, you can change the default redemption mode.

If the Security Type is equity

The issuer of an equity can grant a holder, voting rights. You can capture this information when defining a Security Preference Class with the Security Type, Equity. The holders of all equities maintained under a product, by default, will have voting rights. You can change these default attributes when maintaining the product.

If the Security Type is Right or Warrant

Rights and Warrants can be renounced. To capture this information at the Security Preference class level, you can choose the Renouncable option.

10.2.5 Indicating Banker’s Acceptance

You can indicate whether or not the security that is defined under the product, which is based on this class, can be used for a Banker’s Acceptance deal. This implies that you can fund the issuer of the security through a loan contract or a money market placement deal. You can also trade in the security on your own behalf.

You will be allowed to select this option only if the Security Type is Zero Coupon Bond.

Refer to the Deal Online chapter of this User Manual for details on processing Banker’s Acceptances.

10.2.6 Capturing Trade-Related Information

The minimum trade quantity

You can define the minimum quantity in which a security should be traded, when building a Security Preference class. In the Lot Size field, you can enter your specifications.

Your specification will apply, by default, to all products with which you associate the class (and, in turn, to all securities maintained under the product). However, this default attribute can be changed, when defining the preferences for a security product.

Quantity Quotation

Securities can be quoted in the following terms:

When building a preference class, you can enter the preferred quotation method. This method will default to all products with which you associate the class. The default value can be changed. A security, maintained under a product acquires the quotation method specified for the product.

If you choose the Units Quotation option, you can also indicate if the securities can be traded in fractional units. You can specify the fractional units in the ‘Decimals’ field. Deals entered in fractional units of securities will be validated against the decimal value that you enter here.

Price Quotation

The method in which price is quoted, is a feature of the market where a security is traded. Each market may use a particular price quotation method. The price of a security can be quoted in the following ways:

Price − in this method, the total price of the security is quoted. The total price can be expressed as:

(Face Value ± Premium or Discount) + Accrued Interest (if the interest quotation method is ‘Flat’)

% Price — the price is quoted as a percentage. The same is expressed as follows:

% Price = (Market price / Face value) x 100

% Discount - in this case, the price is quoted on the basis of the discount percentage at which the security is bought or sold.

% Premium - in this case, the price is quoted on the basis of the premium percentage at which the security is bought or sold.

Premium - the price in this method is quoted on the basis of the premium at which the security is bought or sold. That is, the differential between the face value of the bond and the price at which it is bought or sold.

Discount - the price is quoted on the basis of the discount at which the security is bought or sold. That is, the differential between the face value of the bond and the price at which it is bought or sold.

YTM - the price is quoted on the basis of its yield to maturity. In Oracle FLEXCUBE, this price quotation method applies only on Zero Coupon Bonds.

The yield on a discounted instrument is measured by its yield to maturity (YTM). YTM is the yield on a security calculated from the purchase date to its maturity. The YTM changes with the market price. In case the market price increases above the straight discounted price, YTM would decrease, and vice versa.

Using this quotation method, the price is calculated as follows:

The deal amount is determined based on the deal quantity and the price quotation method. Irrespective of the price quotation method used, the net result is always the same.

For a Security Preference Class, you can identify a Price Quotation method. During trade, the securities maintained under a product (with which you associate the Preference Class) will, by default, be quoted in the manner that you specify. However, when maintaining a security, you can identify its price quotation method.

10.2.7 Identifying the Holder

The holder of a security can be either of the following:

If you would like the securities maintained under a product (with which you associate the Securities Preference Class you are defining) to be ‘Bearer’ type securities, choose the ‘Bearer’ option. Else, choose the ‘Registered’ option.

However, when defining a product, while retaining the other preferences that default from the associated class, you can change the default Registered/Bearer indicator. While maintaining a security under a product, in the Securities Definition screen, you could choose to retain the defaulted Registered/Bearer indicator.

10.2.8 Specifying the Material of a Security

Securities can be in different formats:

Option Description
Scrip-based Issued in a paper format
Dematerialized In an electronic format
Immobilized Securities in lieu of which proxies are traded
Combination Issued in one or more of the above formats

10.2.9 Indicating the Collateral Type

A customer can offer you securities as collateral against a liability. In the Central Liability module of Oracle FLEXCUBE, you can categorise different types of securities into Collateral Types. For example, you can define Government Bonds as one type of collateral, and Corporate Bonds as another type.

For a preference class, you can indicate a Collateral Type. All securities maintained under a product (with which you associate the preference class) will fall under the Collateral Type that you specify.

10.2.10 Opting for Automatic Initiation of Corporate Actions

Check against the option Auto Initiation of Corporate Action, to indicate that corporate action for securities should be automatically initiated. On choosing this option, corporate actions for a security will be automatically initiated on the due dates that you specified.

If you do not choose this option, you have to manually initiate all corporate actions required for a security.

10.2.11 Indicating the Price Code for Revaluation

Every security that you deal in must be associated with a Price Code. A Price Code identifies the price of a security in a specific market.

To ascertain the value of a security, with reference to the prevailing market rates, you need to constantly revalue it. When defining a Preference class, specify the Price Code that you would like to use, to revalue securities The value of a security in a market, will be determined with respect to the current rates of the corresponding price codes.

10.2.12 Tenor Details

You can specify tenor details for the Security Preference Class being defined. The tenor can be in terms of:

Securities maintained under a product should adhere to the minimum and maximum tenor limits that you specify here. For example, if you specify the tenor in Days, specify the Minimum Tenor as 2, and the Maximum Tenor as 100, the system ensures that the period between the Issue Date and the Redemption Date does not exceed 100 days.

10.2.13 Capturing SWIFT Related Information

If trade is restricted

Ownership or transfer of a security can be subject to restrictions imposed by the Issuer or Market. You can indicate if trade involving the securities maintained under a product is Restricted. You can choose the Restricted option to indicate this.

Securities with trade restrictions will be reported as such, in the SWIFT messages generated for deals. In Field 22F of the Market-Side Securities Trade.

If the position has been covered…

You can allow or disallow selling (of a security) from a short position. Enter this information when building a Preference Class. Your specification will default to all securities maintained under products. This default can be changed.

Choose the Covered option if your positions (on securities) should be covered. By not choosing the ‘Covered’ option, you indicate that securities (maintained under products with which you associate the class) can be sold from a short position.

This attribute of a security will be reported in Field 17B of the Market-Side Securities Trade Confirmation message (MT 518), generated for deals involving the security.

10.3 Defining Deal Limits for a Preference Class

You may not want to sell a security at a deal price that varies beyond a limit, with respect to the market price. In Oracle FLEXCUBE, you can ensure this by defining currency-wise deal price variance limits for a security preference class. These limits will apply to the securities maintained under products with which you associate the class.

You can invoke the Currency Wise Limits Definition screen by clicking ‘Limits’ button in the Security Product Preference Class screen.

Currency

When building a Security Preference Class, you can define deal price limits in several currencies. Deals involving securities in a currency will be governed by the limits that you define for the currency.

In this screen, you can express deal price limits in terms of:

Positive Override

This indicates the upper override limit.

Negative Override

This indicates the lower override limit.

With respect to the market price, if the deal price of a security varies beyond the Override Limits (positive and negative), you can save the deal by providing an ‘override’. All overrides provided at deal-time will be included in the reports that you generate for the deal.

With respect to the market price, if the deal price of a security varies beyond the Exception Limits, you cannot save the deal.

10.4 Defining Securities Conversion Rule

You can define securities conversion rule in 'Securities Conversion Rule Definition' screen. To invoke the screen, type 'SEDXCNRL' in the field at the top right corner of the application toolbar and click the adjoining arrow button.

You can capture the following in this screen:

Conversion Rule Id

Enter the conversion rule Id.

Conversion Type

Indicate the type of conversion that you are effecting. This release of Oracle FLEXCUBE supports only securities splits. This implies that you can convert an existing security into one or several units of a new security.

While re-denominating In currency securities to Euro, choose split as the conversion type. In Oracle FLEXCUBE, the re-denomination of and In currency security to Euro is handled in the same way as a split.

Process Status

Specify the process status from the drop-down. The options available are;

Conversion from

Security Id

Specify the security ID from which the conversion is required.

Ratio

Specify the ratio from which the security needs to be converted.

Conversion To

Security Id

Specify the security ID to which the conversion is required.

Ratio

Specify the ratio from which the security needs to be converted.