11. Maintaining Portfolio Preference Class

11.1 Introduction

'Preferences' are the options that are available to you for defining the attributes of a portfolio. Based on the type of portfolio (bank, customer, and issuer) you are defining the following are some of the preferences that you can define:

A set of such preferences can be grouped together into what we call in Oracle FLEXCUBE, a ‘Preference Class’. You can maintain several portfolio preference classes. The preferences that you define will shape a portfolio and give it a distinctness that is unique to the type it represents.

The Advantage of Defining a Portfolio Preference Class

While creating a portfolio product, instead of specifying preferences for each product, you need to just associate the appropriate portfolio preference class to the product. All the attributes defined for the class will be made applicable to the portfolio product. You can change the defaulted preferences to suit the product.

The preferences that you specify for a portfolio are comprehensive and cover all types of securities that can constitute it. Depending on the type of security the preferences will apply.

Note

Once defined, a portfolio preference class can be made applicable to any number of prod­ucts.

This chapter contains the following sections:

11.2 Portfolio Preferences Classes

This section contains the following topics:

11.2.1 Specifying Portfolio Preferences Classes

You can maintain portfolio preference classes in the Portfolio Product Preference Class Definition screen.

You can invoke the ‘Securities Portfolio Product Preference Class Maintenance’ screen by typing ‘SEDXPFCL’ in the field at the top right corner of the Application tool bar and clicking on the adjoining arrow button.

If you are calling a portfolio restriction class record that has already been defined, choose the Summary option.

From the Summary screen double-click a class of your choice to open it.

11.2.2 Identifying Portfolio Preference Class

Class Code

You can specify a code to identify a class. In Oracle FLEXCUBE, each portfolio preference class that you maintain is identified by a unique ten-character code called a Class Code. One of the characters of the code should necessarily be a letter of the English alphabet. You can follow your own convention for devising this code.

Description

You can specify a short description that will enable you to identify the portfolio preference class quickly.

The short description that you specify is for information purposes only and will not be printed on any customer correspondence.

11.2.3 Portfolio Type

An important detail in defining a portfolio class is to specify the type of portfolio for which you are defining preferences. The portfolio type identifies the basic nature of a portfolio. In Oracle FLEXCUBE you can set up the following type of portfolios:

This is the basic feature of a portfolio and will determine the subsequent entries that you make. This preference will be defaulted to a portfolio product and subsequently to the securities portfolios to which the product is associated.

11.2.4 Costing Method

A costing method is used to determine your holding cost in a portfolio. While trading in the securities that constitute a portfolio, you can arrive at the profitable price at which you can trade, using one of the costing methods.

You can indicate a costing method only if you are setting preferences for a bank type of portfolio. This is because you maintain the books of accounts only for a bank portfolio. Based on the preference of your bank you can select an option from the picklist.

The costing methods that you can use includes:

For an Issuer type of portfolio the Weighted Average Cost (WAC) method will be applicable.

The costing method preference does not apply to a customer portfolio as you merely perform a custodial function and are not involved with maintaining a book of accounts for the customer.

To understand the accounting methods mentioned above we will examine an example and apply all the costing methods to it.

The following deals have been struck for a bank portfolio:

Sequence Purchase Date Deal Asset Cost Number of Units Proceeds
A 1 January Buy $95 100 $ 9500
B 1 January Buy $96 100 $ 9600
C 15 January Buy $96.5 100 $9650
D 1 February Sell $97 150 $14550

Weighted Average Cost (WAC)

The acquired cost of each security in a portfolio is maintained as an average cost. So the realised profit in this case would be computed as follows:

Cost Details Description
Total Cost of the securities $28750 for 300 units
Average cost $95.83
Total cost price of the securities sold $14374.5 for 150 units
Total sale proceeds $14550 for 150 units
Realised profit $175.5

The remaining 150 securities would be held at an average cost of $95.83

Last in first out (LIFO)

In this method of cost accounting, the securities that have been bought last by a portfolio would be sold first. In this case the cost of the securities that have been sold would be $96.

Cost Details Description
Total cost price of the securities sold $96 arrived at thus: $9650 for 100 units and $4800 for 50 units
Total sale proceeds $14550 for 150 units
Realized profit $100

The remaining securities would be held at:

First in first out

In this case the securities that have been bought first by a portfolio would be sold first. In this case the computation of accrued interest would remain the same but the cost of the securities that have been sold would be $96.

Cost Details Description
Total cost of the securities sold $96 arrived at thus: $9500 for 100 units $4800 for 50 units
Total sale proceeds $14550 for 150 units
Realised profit $205

The remaining securities would be held at:

Deal matching

In the case of deal matching you can indicate against which of the earlier buy deals the sell deal is to be matched. Thus the realised profit would change depending on the deals selected as the matched deals. We will consider one possibility, but in reality the number of combinations is infinite.

Match 150 sold as 50 to each of the buys:

Cost Details Description
Total cost price of the securities sold $14375 arrived at thus: $4750 for 50 @ 95 $4800 for 50 @ 96 $4825 for 50 @ 96.5
Total sale proceeds $14550 for 150
Realized profit $175

The remaining securities would be held as

11.2.5 Processing

Processing preferences refer to specifications that you indicate for the functioning of Oracle FLEXCUBE. Based on the preferences that you indicate, Oracle FLEXCUBE will validate or perform functions.

The processing preferences that you can specify include:

Automatic Liquidation of Corporate Actions

The corporate actions that are applicable for securities in the portfolio can be automatically liquidated on the Event date (the date on which the corporate action is due).

Check against this option to indicate that the corporate actions applicable to securities in a portfolio should be automatically liquidated on the due date.

Leave it unchecked to indicate that it should be manually liquidated.

If you select the automatic option, the corporate action will be automatically liquidated on the liquidation date as part of the automatic processes run as part of beginning of day (BOD) or End of day (EOD).

Short Positions Allowed

A short position is selling a security without sufficient holdings. As a preference you can indicate whether while trading in securities of a portfolio you can have a short position.

Check against the option 'short positions allowed' to allow short positions for the portfolio. This check box works in combination with the value in the field ‘Contra Holdings Validation’. If you check this box, you have to select a value for ‘Contra Holding Validation’.

While creating a Repo deal in a portfolio, you should uncheck this box.

If ‘Repo on Today’s Projected Holdings’ is checked, you should not check this box.

Contra Holdings

Contra Holdings is value dated projected holdings based on the unsettled deals.

Contra Holdings Validation

Select the method of validating the position. The drop-down list displays the following options:

It is mandatory to specify the validation method if you have checked the box ‘Short Position Allowed’. If that check box is not checked, then you need not specify the validation method.

If Short Position Allowed is unchecked, then the value of this field has to be null.

Note

For a contract with the sell quantity greater than the value dated holdings for a particular security code, if you check ‘Short Position Allowed’ and set ‘Contra Holding Validation’ to ‘No Check - Unlimited’ or ‘EOTI’, then the system will display an override message when you save or modify the contract

Banker’s Acceptance

You can indicate whether or not the portfolio that is defined under the product, which is based on this class, can be used for a Banker’s Acceptance deal.

You will be allowed to select this option only for ‘Issuer’ type portfolios.

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

Repo on Today’s Projected Holdings

Check this box to enable Repo on projected holdings for the day. If you check this, the system will allow you to create a Repo deal based on the projected holdings for the day.

However, this option does not allow you to create a Repo deal based on future dated projected holdings.

If you check this box, you should leave the box ‘Short Positions allowed’ unchecked.

11.2.6 Book Discount Premium

You can indicate how an asset belonging to a portfolio should be booked. In other words, the basis for asset accounting in a portfolio.

In Oracle FLEXCUBE an asset can be booked on the following basis:

To understand these asset accounting methods, we will examine an example and apply each basis method to it.

You have purchased a USD 10 bond for USD 15 on 1 January from a customer portfolio. You have paid a premium of USD 5 for the bond. On 30 January, you sell the bond for USD 20.

Non-accrual basis

Using the non-accrual basis, the following accounting entries will need to be passed:

Dr Premium to be accrued USD 5
Cr Customer USD 15
Dr Asset USD 10

On 1 March, when you sell the bond:

Dr Customer USD 20
Cr Asset USD 10
Cr Premium USD 5
Cr Profit and Loss USD 5

Accrual basis

If you select this accrual basis for asset accounting, then on 1 January you would:

Dr Premium to be accrued USD 5
Dr Asset USD 10
Cr Customer USD 15

On 30 January the amount to be accrued is USD 1. The following entries will need to be passed:

Cr PTBA USD 1
Dr Expense USD 1

When you sell the unit at USD 20

Dr Customer USD 20
Cr Asset USD 10
Cr PTBA USD 4
Cr Profit and Loss USD 6

11.2.7 Book Intrinsic Value

A warrant or right attached to a security entitles the holder to convert it into common stock at a set price during a specified period. Thus rights and warrants attached to a security have a hidden or intrinsic value. To recall, you have already defined the intrinsic value of a right or warrant in the Securities Warrants Definition screen.

As a portfolio preference you can choose to book or ignore the intrinsic value of rights and warrants for asset accounting purposes.

11.2.8 Rekey for Authorization

Authorisation is a way of checking the entries made by a user. All operations on a portfolio, except placing it on hold, should be authorised before the end-of-day operation is begun.

When a portfolio is invoked for authorisation - as a cross-checking mechanism, to ensure that you are calling the right portfolio − you can specify that the values of certain fields should be entered before the other details are displayed. The complete details of the portfolio will be displayed only after the values to these fields are entered. The fields for which the values have to be given are called the “re-key” fields.

11.2.9 Rekey Fields

You can specify any or all of the following as re-key fields:

If no re-key fields have been defined, the details of the portfolio will be displayed immediately when the authoriser calls the portfolio for authorisation. The re-key option also serves as a means of ensuring the accuracy of inputs.

For example, suppose that you define a customer portfolio in the currency INR. The portfolio involves a product for which the re-key fields assigned are the portfolio customer and currency.

By mistake the portfolio currency is entered as USD instead of INR. When the authorizer selects the portfolio for authorization and indicates the re-key fields of portfolio currency as INR, the details of the portfolio will not be displayed.

The portfolio details will not be displayed if:

When you have correctly captured the currency of the portfolio as INR and the authorizer makes an error while entering the re-key value. In such a case also, the details of the portfolio will not be displayed for authorisation.

11.2.10 Corporate Action Notice

When a corporate action is due for a security in a portfolio, you can generate Corporate Action notices to the holder of the security. You can indicate whether Corporate Action Notices should be generated for securities in a portfolio.

Check against the option 'Corporate Action notice required' to indicate that the notice should be generated. Leave it unchecked to indicate otherwise.

If you indicate that a corporate action notice should be generated, you can indicate preferences for its generation.

Notice Days

You can indicate the number of days before a corporate action is due on which the corporate action notice should be generated.

Notice Days Type

You can further indicate whether the number of days that you specified was expressed in calendar or working days.

For example, you have specified that a Corporate Action Notice should be generated ten days before a corporate action is due for securities in a portfolio.

Today's date is 15 December; a corporate action is due for a security that is part of this portfolio on 30 December. Your bank closes for a Christmas vacation on 25 and 26 December.

For calendar days:

A Corporate Action Notice will be generated on 20 December. Ten calendar days before the corporate action is due.

For working days:

Going by the calendar of the bank, the Corporate Action Notice will be generated on 18 December, ten working days before the corporate action is due.

11.2.11 Treasury Bills Accrual

Accrue Discount for Treasury Bills

The discount on Zero Coupon Bonds or T-Bills can be accrued over its tenure. If you indicate that accrual of discount is applicable to a portfolio preference class you can indicate accrual preferences.

For example, you have purchased a 90-day T-Bill having a face value of USD 100,000 for USD 98,000. The difference between the purchase price and the face value USD 2000 can be accrued over the 90-day tenor of the T-Bill or can be realised on its maturity.

Check against the 'Accrue discount for Treasury bills' option to indicate that the discount on zero coupon bonds and T-Bills that form part of the portfolio should be accrued. In this case you can indicate accrual preferences like the:

The accrual preferences that you specify will be made applicable to all portfolio products to which the class is associated.

Accrual Frequency

The discount on T-Bills can be accrued over the tenor of the T-Bill. The frequency at which the discount has to be accrued is specified as a portfolio preference. Thus, the discount components of all T-Bill in a portfolio will be accrued at the same frequency.

The frequency can be one of the following:

Accrual Start Day

In the case of monthly, quarterly, half yearly or yearly accruals, you should specify the date on which the accruals have to be done during the month. For example, if you specify the date as “30”, accruals will be carried out on that day of the month, depending on the frequency.

If you want to fix the accrual date for the last working day of the month, you should specify the date as “31“ and indicate the frequency. If you indicate the frequency as monthly, the accruals will be done at the end of every month -- that is, on 31st for months with 31 days, on 30th for months with 30 days and on 28th or 29th, as the case may be, for February.

If you specify the frequency as quarterly and fix the accrual date as 31, the accruals will be done on the last day of the month at the end of every quarter. It works in a similar fashion for the half-yearly and yearly accrual frequency.

Accrual Start Month

If you set the accrual frequency as quarterly, half yearly or yearly, you have to specify the month in which the first accrual has to begin, besides the date on which the accruals should be done.

For example, you have selected the half-yearly option and specified the start date as 31 and the start month as June. The first accrual will be done on 30 June for the period from January 1 to June 30 and the second one on 31 December for the period from 1 July to 31 December.

If the accrual date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

11.2.12 Purchase Interest

While defining non-WAC portfolios you can indicate the point at which Purchase Interest is to be adjusted. (For portfolios with WAC as the costing method, this option is always set to Sale and Coupon and the purchase interest is taken into accruals and not tracked separately). The options are:

This option can be overwritten at the product level.

Note

The option of adjusting purchase interest at Sale is applicable only for purchase interest in the CUM period. You must handle adjustments for interest exchanged in the EX period operationally.

Coupon liquidation takes place for a Portfolio + Security + SK Location combination. Therefore, for adjusting deal level purchase interest at the event CPLQ, the purchase interest of all deals contributing to the position are considered proportionately.

Note

You have to maintain the accounting entries for the CPLQ and SSLP events keeping in mind whether you have set the Wipe Deal Purchase Event as Sale and Coupon or Sale.

For Capitalized Bonds, purchase interest is wiped-off at the time of coupon liquidation as part of the SPLP (Security Purchase) event. You will need to maintain accounting entries for the same.

11.2.13 Holdings Statement

Statement of Holdings required

You can indicate whether a statement of holding should be generated for portfolios associated to the portfolio preference class. Check against this option to indicate that it is applicable to the class. Leave it unchecked to indicate otherwise. If it is applicable to the class, you can indicate preferences for its generation.

Statement Frequency

You can indicate the frequency, with which a statement of holdings should be generated.

The frequency that you specify can be:

Statement Start Day

Based on the frequency that you specify you can indicate the start date for the generation of the statement. The system generates a statement of holding automatically, as part of the end of cycle processing based on the preferences that you specified here.

If the statement generation date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

Statement Start Month

You can also indicate the start month for the generation of the statement.

11.2.14 Transaction Statement

Statement of Transactions Required

You can indicate whether a transaction statement should be generated for portfolios associated to the class. Check against this option to indicate that it is applicable to the class. If it is applicable to the class, you can indicate preferences for its generation.

Statement Frequency

You can indicate the frequency, with which a transaction statement should be generated. The frequency that you specify can be:

Statement Start Day

Based on the frequency that you specify you can indicate the start date for the generation of the statement. The system generates transaction statements for the portfolio, automatically as part of the end of cycle processing based on the preferences that you specified here.

If the statement generation date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

Statement Start Month

You can also indicate the start month for the generation of the statement.

11.2.15 Contra Holding

A contra (short for Customer and Bank/long for Issuer) holding is when you sell more than your holdings in a security (buy back more than the issued quantity in case of issuer portfolios). As a preference you can indicate whether while trading in securities of a portfolio you can have a contra holding (negative projected holdings for bank portfolios and positive projected holdings for issuer portfolios).

Contra Holding

Contra holding is the value dated projected holdings based on the unsettled deals.

Contra Holding Validation

While saving a securities deal, the system checks the holdings on the basis of the settlement date. You can choose to allow the holdings in a portfolio to go negative based on the projected holdings as per the Settlement Date by enabling the Contra Holdings validation option.

You need to indicate whether the projected holding can go negative for the portfolio. Select the Online option if you don’t want the position to go negative at any point in time.

If you have selected the EOTI option, you will not be allowed to mark the EOTI stage if the projected holding in the portfolio is negative on any given settlement date.

In case of Buy Deals viz. Bank Buys, Customer Buys or Reversal of Sell Deals, the positions are updated on authorization of the respective buy deals. In case of Sale Deals viz. Bank Sells, Customer Sells or Reversal of Buy Deals, the positions are updated on saving the respective Sell deals. The settlement dated position checks are done for Sell Deals and Reversal of Buy Deals at the time of saving the deal and also during authorization of the deal.

For contra holdings of type ‘Online’, if the projected holdings on the settlement date are going short, then an error message will be displayed while saving a Sell deal or while reversing a Buy deal.

If the contra holding is of type ‘EOTI’, if the projected holdings on the settlement date are going short, then system throws up an override while saving a Sell deal or while reversing a Buy deal. The projected settlement date holdings are checked again at the time of marking EOTI for the branch. If the projected holdings have gone short for any of the settlement dates, system displays an error message and stops any further processing. You are not allowed to configure this error message as an override.

11.3 Detailed Preferences

This section contains the following topics:

11.3.1 Specifying Detailed Preferences

Click on the tab tilted 'Details' from the Securities Portfolio product to define further preferences for the portfolio.

11.3.2 Premium/Discount Accrual

The premium or discount on coupon bearing instruments can be accrued over a period. If you indicate that accrual of discount or premium is applicable to a portfolio product preference class, you can indicate accrual preferences.

For example, you have purchased a USD1000 bond for USD 1200 and hold it for 5 years to maturity. You have paid a premium of USD 200 for the security.

You can choose to accrue the premium of USD 200 over the tenure of the bond or book it as a loss when the bond matures.

Accrue Premium

Check against this option to indicate that premium should be accrued.

Accrue Discount

Check against this option to indicate that discount should be accrued. You will also have to specify the method to be used to accrue the premium and discount. The options available are:

However, if the Costing Method is ‘WAC’ (Weighted Average Cost), the accrual will be based on any one of the following methods:

In addition, you should also ensure that accrual of both discount and premium is based on the same method i.e. either Straight Line or Constant Yield method. Yield for deals involving WAC portfolios with Constant Yield method of premium/discount accrual will not be calculated at deal input. Instead, it will be calculated on deal settlement as a part of the EOD batch process. This yield will be updated for all the deals in the particular holding. Yield for the holding will be calculated on settlement of Bank Buy deals for all WAC portfolios other than Issuer portfolios where in the yield will be calculated on settlement of Bank Sell deals. The computed yield will be stored at branch + portfolio + security level.

Note

The yield computation for WAC portfolio will be triggered for the following events:

If you have chosen to accrue premium or discount, you need to specify the following accrual preferences also:

The accrual preferences that you specify will be made applicable to all portfolio products to which the class is associated.

Accrual Method

Select the method to be used to calculate the amount of premium or discount to be accrued from the adjoining drop-down list. This list displays the following values:

Accrual Frequency

The premium or discount on securities can be accrued over the tenor for which you hold the security. The frequency at which these components have to be accrued has to be specified as a Portfolio product preference. Thus, the premium or discount components of all securities in a portfolio will be accrued at the same frequency.

The frequency can be one of the following:

Accrual Start Day

In the case of monthly, quarterly, half yearly or yearly accruals, you should specify the date on which the accruals have to be done during the month. For example, if you specify the date as ‘30’, accruals will be carried out on that day of the month, depending on the frequency.

If you want to fix the accrual date for the last working day of the month, you should specify the date as ‘31’ and indicate the frequency. If you indicate the frequency as monthly, the accruals will be done at the end of every month -- that is, on 31st for months with 31 days, on 30th for months with 30 days and on 28th or 29th, as the case may be, for February.

If you specify the frequency as quarterly and fix the accrual date as 31, the accruals will be done on the last day of the month at the end of every quarter. It works in a similar fashion for half-yearly and yearly accrual frequency.

Accrual Start Month

If you set the accrual frequency as quarterly, half yearly or yearly, you have to specify the month in which the first accrual has to begin, besides the date on which the accruals should be done.

For example, you have selected the half-yearly option and specified the start date as 31 and the start month as June.

The system will do the first accrual on 30 June for the period from January 1 to June 30, and the second one on 31 December for the period from 1 July to 31 December.

If the accrual date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

11.3.3 Limit Tracking

Your liability in holding a security is tracked under a Credit Line. You have already specified security limits, which indicate the maximum limit upto, which you can trade in the security.

For limit tracking purpose you can indicate the basis on which your liability to the security should be determined. In Oracle FLEXCUBE you can use one of the following options:

If you indicate face value, then the face value of the instrument will be used to track your liability in holding security. Your liability using the face value is calculated thus:

Liability = Face Value * Number of units held

The market price indicates the price at which the security is currently quoted in the market. Your liability to the security is calculated by using the current market value of the security; multiplied by the number of units held.

Liability = Market Value * Number of units held

The book price refers to the price at which you hold a security. The book price of a security is derived using the costing method that you specified for the portfolio.

Your liability is the book price multiplied by the total number of units held:

Liability = Book Price * Number of units held

For example, you enter a deal in Oracle FLEXCUBE to buy 100 units of equity for a bank portfolio. The face value of the equity is USD 10. Currently the equity is quoted in the market for USD 15. The book price of the security using the Weighted Average Costing method is USD 12.

For simplicity, assume that you have set up your exposure limit to the equity as USD 1200. You have indicated that an exposure beyond this amount is an exception and further processing of the deal should be stalled. If your exposure to the security reaches USD 1200 an override should be sought.

Face value

Your liability in holding 100 units of the security is:

Face Value * Number of Units = Liability

USD 10 * 100 = USD 1000

The deal will go through smoothly as it is below the security limit that you set up.

Market Value

Your liability in holding 100 units of the security is:

Market Value * Number of Units = Liability

USD 15 * 100 = 1500

In this case Oracle FLEXCUBE will not allow you to process the deal as you have exceeded the security limit that was set up.

Book value

Your liability in holding 100 units of the security is:

Book Price * Number of Units = Liability

USD 12 * 100 = USD 1200

When you save the deal, Oracle FLEXCUBE will prompt you with an override message. If you choose to ignore the override the deal will go through.

You can specify limit-tracking preferences for each of the following security types:

Note

You can have different limit tracking methods for the same security type depending on the type of portfolio to which it belongs.

11.3.4 Forward Profit and Loss Accrual

Forward PL Accrual

The forward profit or loss on a deal can be accrued over a period starting from the deal spot date to the settlement date of the deal. As a preference for a portfolio, you can indicate whether the forward profit or loss should be accrued.

Your profit or loss in a deal is determined thus:

Check against the 'Forward profit and loss accrual' option to indicate that the forward profit or loss should be accrued.

Example

You strike a forward deal on 1 January to buy 100 units of a security. The settlement date of the deal is 10 January. Your deal strike rate is USD 100 and the market price of the security stands at USD 120.

Market Value (120) - Strike Rate (100) x No of units (100)= USD 2000 Profit

You have made a profit of USD 2000. You can choose to accrue the USD 2000 over the 10 days or realise it as a profit on the settlement date of the deal.

If you indicate that accrual of profit or loss is applicable to a portfolio class you can indicate accrual preferences like the:

The accrual preferences that you specify will be made applicable to all portfolio products to which the preference class is associated.

Note

The forward profit or loss amount is accrued over the period starting from the deal spot date to the deal settlement date. We will call this the regular accrual cycle.

However, based on the accrual frequency preferences that you specify, the accrual start date can fall before or between the regular accrual cycle.

If the accrual start date that you specify falls before the spot date of the deal, no accrual will be carried out until the spot date.

If the accrual start date that you define falls between the spot date and the settlement date, accrual will begin on the start date that you specify. On the accrual start date accrual entries will be passed even for the lapsed period between the spot and the accrual start date.

Example

You strike a forward deal on 1 January to buy 100 units of a security. The settlement date of the deal is 20 January and the Spot date is 01 January. You have specified the following accrual preferences:

Start date: 10th.

Start month: January.

Based on the regular accrual cycle, accrual can start any time between 1 January and 20 January. Based on the accrual preferences that you specify accrual can start only on 10 January.

However when accrual is done on the 10 January it will be done also for the elapsed period (01 to 10 January).

Accrual Method

Select the method to be used to calculate the amount of forward profit or loss that is to be accrued from the adjoining drop-down list. This list displays the following values:

Accrual Frequency

The forward profit that you make or the loss that you incur while trading in securities of a portfolio can be accrued until the settlement date of the deal. The frequency with which these components have to be accrued has to be specified as a portfolio preference. Thus, the forward profit or loss will be accrued at the same frequency for all securities in the portfolio.

The frequency can be one of the following:

Accrual Start Day

In the case of monthly, quarterly, half yearly or yearly accruals, you should specify the date on which the accruals have to be done during the month. For example, if you specify the date as “30”, accruals will be carried out on that day of the month, depending on the frequency.

If you want to fix the accrual date for the last working day of the month, you should specify the date as “31“and indicate the frequency. If you indicate the frequency as monthly, the accruals will be done at the end of every month -- that is, on 31st for months with 31 days, on 30th for months with 30 days and on 28th or 29th, as the case may be, for February.

If you specify the frequency as quarterly and fix the accrual date as 31, the accruals will be done on the last day of the month at the end of every quarter. It works in a similar fashion for half-yearly and yearly accrual frequency.

Accrual Start Month

If you set the accrual frequency as quarterly, half yearly or yearly, you have to specify the month in which the first accrual has to begin, besides the date on which the accruals should be done.

Example

You have selected the half-yearly option and specified the start date as 31 and the start month as June.

The system will do the first accrual on 30 June for the period from January 1 to June 30, and the second one on 31 December for the period from 1 July to 31 December.

If the accrual date falls on a holiday

If the accrual date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

11.3.5 Redemption Premium Accrual

Accrual Redemption Premium

For instruments like bonds, which bear a redemption premium, you can choose to accrue the redemption premium due to the security over its tenor. Check against the 'Accrue redemption premium' option to indicate that the premium on redemption premium bearing instruments in the portfolio should be accrued.

Example

You have purchased a USD 1000 bond with a redemption value of USD 1100. You hold it for 5 years to maturity.

At the end of five years, you are paid USD 1100, USD 100 more than what you paid for it. You can choose to accrue this USD 100 over its 5 year tenor or realise it as a whole on the redemption of the bond.

If you specified that redemption premium should be accrued you can indicate accrual preferences like the:

The accrual preferences that you specify will be made applicable to all portfolio products to which the preference class is associated.

Accrual Method

Select the method to be used to calculate the amount of premium that is due for holding the bond from the adjoining drop-down list. This list displays the following values:

The values of accrual method maintained in this screen get defaulted in portfolio product creation for the selected class code.

Accrual Frequency

The redemption premium can be accrued over the tenor of a security. The frequency at which it has to be accrued has to be specified as a Portfolio Preference. Thus, the redemption premium of all redemption premium-bearing instruments in a portfolio will be accrued at the same frequency.

The frequency can be one of the following:

Accrual Start Day

In the case of monthly, quarterly, half yearly or yearly accruals, you should specify the date on which the accruals have to be done during the month. For example, if you specify the date as “30”, accruals will be carried out on that day of the month, depending on the frequency.

If you want to fix the accrual date for the last working day of the month, you should specify the date as "31" and indicate the frequency. If you indicate the frequency as monthly, the accruals will be done at the end of every month -- that is, on 31st for months with 31 days, on 30th for months with 30 days and on 28th or 29th, as the case may be, for February.

If you specify the frequency as quarterly and fix the accrual date as 31, the accruals will be done on the last day of the month at the end of every quarter. It works in a similar fashion for half-yearly and yearly accrual frequency.

Accrual Start Month

If you set the accrual frequency as quarterly, half yearly or yearly, you have to specify the month in which the first accrual has to begin, besides the date on which the accruals should be done.

Example

You have selected the half-yearly option and specified the start date as 31 and the start month as June.

The system will do the first accrual on 30 June for the period from January 1 to June 30, and the second one on 31 December for the period from 1 July to 31 December.

If the accrual date falls on a holiday

If the accrual date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

11.3.6 Revaluation of Positions

Market based securities are driven by market forces of demand and supply, the price of such securities tends to rise or fall in value. These fluctuations have a direct effect on the value of the portfolios to which a security belongs.

Oracle FLEXCUBE provides a feature to revalue a portfolio based on settled (Holdings) or unsettled positions (Positions). You can specify the revaluation method and the frequency at which the settled and unsettled positions of the portfolio should be revalued. Further, for settled positions, you can indicate whether realized revaluation should take place.

It is important to note that revaluation entries will be passed only for portfolios belonging to the bank. For customer portfolios however, revaluation is done solely for reporting the performance of the portfolio.

Indicating the Basis for Revaluation

In Oracle FLEXCUBE, portfolio revaluation can be done based on the settled, unsettled position or both. However, while specifying revaluation preferences, you can choose to revalue only the settled positions or settled and unsettled positions in a portfolio. You will not be allowed to specify revaluation of only the unsettled positions in a portfolio.

Revaluation of settled positions in a portfolio can be of two types:

In the case of realized revaluation, the profit, or loss entries passed after the revaluation would be posted to the relevant GL. The next revaluation will pass entries based on the market price as of the last time the revaluation was done.

In the case of unrealized revaluation, the profit and loss entries passed after the revaluation will also be posted to the relevant GLs. The only difference is, that when the next revaluation entries are passed, profit or loss entries are based on the original value of the portfolio.

Let us take the example of a portfolio with a holding of 100 units of a security. Each unit was bought at the rate of USD 10 on 1 January 2000. The value of the holding in the portfolio is USD 1000.

The portfolio is defined with realized revaluation of settled positions. We will examine a case where the revaluation for the portfolio is done daily.

Unrealized revaluation:

On 2 January the value a unit of the security falls to USD 9. Consequently, the value of the portfolio is reduced to USD 900. The revaluation will post a loss to the tune of USD 100 to the relevant profit and loss GLs.

On 3 January the value of a unit of the security increases to USD 11. The value of the portfolio now stands at USD 1100. When the revaluation is run again, the loss of USD 100 that was registered on 2 January is reversed and profit entries for USD 100 is passed to profit GLs.

Realized revaluation:

On 2 January the value a unit of the security falls to USD 9. Consequently, the value of the portfolio is reduced to USD 900. When the revaluation is done the profit and loss GLs will reflect the loss of USD 100.

On 3 January the value of securities increases to USD 11. The value of the portfolio now stands at USD 1100. When the revaluation is run again, the loss of USD 100 that was registered is not reversed but the profit GLs will record an increase of USD 200. The profit as of 3 January is calculated based on the revalued portfolio value of USD 900 arrived at on 2 January.

Revaluation Method

After you indicate the basis for revaluation, you can indicate the revaluation method to be used and the frequency with which revaluation should be carried out. The options available are:

The revaluation basis and method that you specify will determine the manner in which a portfolio is revalued.

You can select MTM – EIM method of revaluation for the portfolio that you are defining only if the following conditions are satisfied:

Specifying the Revaluation Basis if the Revaluation Method is LOCOM

For portfolios in respect of which you have opted for realized revaluation, and the revaluation method is ‘LOCOM’ and the costing method is ‘WAC’, you have two options with regard to revaluation basis (the basis for LOCOM):

If a portfolio product uses a preference class for which this specification has been made, the specification is defaulted from the class; you can change the default. If you do so, your specification here is defaulted to any portfolios using the product.

Realized revaluation using the LOCOM method, with the basis as ‘Acquisition Cost’ is done only for settled deals.

Revaluation Frequency

The frequency with which a portfolio should be revalued is specified as a portfolio preference. Once you have indicated the basis and method for revaluation, you can specify the frequency with which a portfolio should be revalued. The revaluation frequency can be one of the following:

Revaluation Start Day

In the case of monthly, quarterly, half yearly or yearly revaluation, you should specify the date on which the revaluation should be done during the month. For example, if you specify the date as “30”, revaluation will be carried out on that day of the month, depending on the frequency.

If you want to fix the revaluation date for the last working day of the month, you should specify the date as "31" and indicate the frequency. If you indicate the frequency as monthly, the revaluation will be done at the end of every month -- that is, on 31st for months with 31 days, on 30th for months with 30 days and on 28th or 29th, as the case may be, for February.

If you specify the frequency as quarterly and fix the revaluation date as 31, the revaluation will be done on the last day of the month at the end of every quarter. It works in a similar fashion for half-yearly and yearly revaluation frequency.

Revaluation Start Month

If you set the revaluation frequency as quarterly, half yearly or yearly, you have to specify the month in which the first revaluation has to begin, besides the date on which the revaluation should be done.

For example, you have selected the half-yearly option and specified the start date as 31 and the start month as June.

The system will do the first revaluation will be done on 30 June for the period from January 1 to June 30, and the second one on 31 December for the period from 1 July to 31 December.

If the revaluation date falls on a holiday, the revaluation is done as per your holiday handling specifications in the Branch Parameters screen.

Note

Realized and unrealized revaluation for a portfolio can be done at different frequencies. It is important to note that if the realized and unrealized revaluation frequencies fall on the same day, realized revaluation always takes priority over unrealized revaluation.

For example, today’s working date is 31 January. You have defined realized and unrealized revaluation for the portfolio. The realized revaluation frequency is monthly and the unrealized revaluation is daily. On 31 January, only realized revaluation of settled positions in the portfolio will be done.

11.3.7 Interest Accrual Preferences

The interest on coupon bearing instruments can be accrued over the tenure of the instrument. As a portfolio preference, you can indicate whether interest should be accrued over the tenure of coupon bearing instruments that constitute it.

Interest Accrual

Check against this option to indicate that interest should be accrued for coupon bearing instruments in the portfolio. Leave it unchecked to indicate that accrual is not applicable.

In Oracle FLEXCUBE interest accrual is done for all un-matured securities with primary date less than the accrual date.

If you specified that interest should be accrued you can indicate accrual preferences like the:

Note

You do not specify the interest accrual method while defining preference classes. You can specify the same at the time you define a securities portfolio.

The accrual preferences that you specify will be made applicable to all portfolio products to which the preference class is associated.

Accrual Frequency

The frequency at which interest should to be accrued has to be specified as a portfolio preference. Thus, the interest components of all securities in a portfolio will be accrued at the same frequency.

The frequency can be one of the following:

Accrual Start Date

In the case of monthly, quarterly, half yearly or yearly accruals, you should specify the date on which the accruals have to be done during the month. For example, if you specify the date as “30”, accruals will be carried out on that day of the month, depending on the frequency.

If you want to fix the accrual date for the last working day of the month, you should specify the date as "31" and indicate the frequency. If you indicate the frequency as monthly, the accruals will be done at the end of every month -- that is, on 31st for months with 31 days, on 30th for months with 30 days and on 28th or 29th, as the case may be, for February.

If you specify the frequency as quarterly and fix the accrual date as 31, the accruals will be done on the last day of the month at the end of every quarter. It works in a similar fashion for half-yearly and yearly accrual frequency.

Accrual Start Month

If you set the accrual frequency as quarterly, half yearly or yearly, you have to specify the month in which the first accrual has to begin, besides the date on which the accruals should be done.

For example, suppose that you have selected the half-yearly option and specified the start date as 31 and the start month as June.

The system will do the first accrual on 30 June for the period from January 1 to June 30, and the second one on 31 December for the period from 1 July to 31 December.

If the accrual date falls on a holiday, the accruals are done as per your holiday handling specifications in the Branch Parameters screen.

11.3.8 Revaluation Exchange Rate Code

The revaluation profit and loss will be in the currency in which the cash flows are denominated.

Exchange Rate Code

You can specify the exchange rate code to be used for converting the profit/loss into the local currency.

11.4 Yield Accrual for Deals bought on Par

To handle Yield accruals for deals bought on par, you need to maintain the event YACR and define the following accounting entries as part of the event:

Accounting Role Amount Tag Dr./Cr. Indicator
SEC PREM EARNED SEC_PREM_ACCR Debit
SEC PREM TBACRD SEC_PREM_ACCR Credit
SEC INT ADJ REC SEC_INTADJ_ACCR Debit
SEC INT ADJ INC SEC_INTADJ_ACCR Credit
SEC DISC TBACRD SEC_DISC_ACCR Debit
SEC DISC EARNED SEC_DISC_ACCR Credit

For sale from a long position, you need to maintain the SSLP event and the following accounting roles and amount tags:

Accounting Role Amount Tag Dr./Cr. Indicator
SEC BRIDGE GL ACCRUED_INT_ADJ Debit
SEC INT ADJ ACCRUED_INT_ADJ Credit

Processing of the Yield accrual for deals bought on par

First, the system validates the Redemption Premium accrual frequency and Discount premium accrual frequency which needs to be same at the Portfolio Definition level. This condition is validated only if the bank level parameter COMMON_YLD_ACCR is set to ‘Yes’.

Secondly, the effect of the redemption premium accrued is included in the NPV calculation and the Redemption premium accrual is done prior to Discount Premium accrual.

Then, the YACR event is triggered for accrual only if you have maintained the bank parameter ‘COMMON_YLD_ACCR’ as ‘Y’ and the security is a bond or a T Bill.

During IRR computation, the acquisition type should also be identified. Acquisition type can be:

The system displays the corresponding amount tags based on the acquisition type.

The NPV is computed as shown below:

NPV = O/S Deal Nominal

+ O/S Interest Accrual

+ O/S Redemption Premium Accrual

+ (Premium TBA – Premium Accrued*)

- (Discount TBA – Discount Accrued*)

+ (Interest Adjustment Accrued Already + Interest Adjustment Accrued*)

Note

While computing NPV the Premium, Discount and Interest adjustment (On par) are mutu­ally exclusive.

Trading P/L

At the time of sale discount/premium accrued, redemption premium accrued is included for calculation of the trading profit/loss. While processing SSLP, the system includes trading profit and loss with following parameters: