The End of Cycle (EOC) events constitute a set of programs, which are automatically triggered during the batch processes.
The EOD process is designed to tie up all the operations for a financial day and prepare the system for the next day.
During End of Day, the batch process should be run after End of Transaction Input (EOTI) has been marked for the day, but before End of Financial Input (EOFI) has been marked for the day.
As part of running the End of Day processes for OTC Interest Rate and Currency options, the system performs the following operations:
This section contains the following topics:
Revaluation of a contract is performed as per your specification for the product involving the contract. If you have indicated that revaluation should be performed for the product, all entries for a product will be netted based on a common currency and buy-sell indicator.
Revaluation will be performed for the specified frequency for the following events:
The BOD operations for revaluation will run only till the previous day, because in cases when the revaluation frequency falls on the current day, the market value of the contract can be different than it was the previous day.
During the BOD/EOD process, only the confirmed market fair value of the contract for revaluation will be picked up from the ‘Contract Fair Value Maintenance’ screen. An exception is raised if the system finds that a fair value has not been confirmed or if it is non-existent.
Revaluation during Contract Termination
During contract Termination, revaluation will be triggered at Fair Value of the contract, captured at the time of terminating the contract. The termination gain loss will be posted according to whether the contract being terminated is a trade/hedge contract and whether the bank has bought or sold (written the contract).
Revaluation during Contract Expiry
During contract Expiry, revaluation will be triggered at zero. This means that if the contract expires worthless, the buyer of the option will incur a revaluation loss equivalent to the option premium paid (by the buyer) at the time of the inception of the contract.
Revaluation during Contract Exercise
During contract Exercise, revaluation will be triggered at the Settlement Amount when the final exercise is done. The settlement amount is calculated by the system. For a purchased collar if the Floor is in-the-money in the final exercise, revaluation will be triggered at zero which would essentially mean that the option buyer paying for in-the-money Floor will lose the option premium and the settlement amount during the final exercise along with an income or a loss as may be the case in intermediate settlements. For a Collar with in-the-money Cap, Revaluation is triggered at settlement amount.
In case of a currency option being knocked out, revaluation will be triggered at zero.
What happens during Final Exercise
During final exercise,
Note
Revaluation event will not be triggered if the fair value of the option has not changed since the last revaluation was done.
Amortization of a contract is performed as per the amortization parameters specified for the product. If you have indicated that amortization should be at the product level all the entries for a product are netted based on a common currency and buy-sell indicator.
The system performs amortization for the following amounts:
Amortization of Deferred Inception Gains (AMRT)
Inception gain is amortized over the period from the contract value date till the contract maturity date (termination date, if the contract is terminated prematurely), even though the premium may be paid anytime between the booking date and the value date of the contract.
At the time of final exercise, premature termination or expiry of the contract, amortization gain will be recognized as income and posted to the respective GL. Inception loss will not be amortized and will be recognized as an expense upon saving the options contract itself.
Amortization of Deferred Termination Gains (AMDG)
Amortization of deferred termination gain is performed only if the Amortize Termination Gain option has been enabled while terminating the contract. Inception gain will be amortized over the period from the contract termination date till the contract maturity date.
At the time of expiry of the contract, deferred termination gain will be recognized as income and posted to the respective GL. Termination loss (if any) will not be amortized and will be recognized as an expense upon saving the option contract termination.
Amortization of deferred termination gains will be done only for hedge deals. For trade deals, termination gains will be recognized as income on the termination of the contract.
Amortization of Time Value (REVL)
Amortization of Time Value is meant only for hedge deals. The amortization will be done from the Value Date till the contract Maturity Date. If the contract is terminated prematurely (or at the time of final exercise), the remaining time value will be recognized as expense and will be posted to an expense GL.
Though time value is said to be amortized, it is a revaluation of the hedge contract in the real sense. This is why the revaluation parameters (Level, frequency etc.) you have specified at the product level will be used for this. Accounting entries for amortization of time value can also be defined under the revaluation event (REVL).
Auto Exercise
Interest Rate Options
Rate Reset is performed only for Interest rate options (Except Swaptions) depending on the rate revision schedule. The rate revision schedule in turn is derived from the Reset Lag, Reset Date Basis and Reset Date Movement defined for the contract.
The activities performed during Rate Reset are as follows:
Currency Options
For Currency options, settlement is done on the exercise day unless otherwise specified. For example, a rebate may be paid only at maturity for an option which has been knocked out.
In this case again a queue will be populated at the time of knocking out of the option (just like as in IROs) and actual settlement will happen with the counter party only at maturity. For European style currency options, only auto exercise is possible so the exercise (EXER) as well as the settlement (EXST) will happen on the same day (Contract maturity date). Also, again like IROs, auto exercise will happen only if the option is in the money at maturity.
Auto Exercise batch will run during BOD as well as EOD. During BOD only those contracts will be picked up which were maturing till yesterday, since rate reset date can be on the schedule maturity date (For IROs). For Currency options, spot rate can change on the date of maturity itself and they can become in the money.
For a detailed list of Amount tags and accounting entries to be passed during rate reset and exercise process, refer Annexure B. For messaging refer Annexure C. For event wise values to be populated in amount tags for exercise event refer Annexure D
The Knock-in and Knock-out events are applicable only for Currency Options. During this event the system identifies all active and authorized currency option contracts, and the processing date is between the Barrier Window Start date and Barrier Window End date as specified in the ‘Contract Online’ screen.
The Spot rates for the current processing date will be matched against the barrier and the lower barrier (If any), and the contract status will be updated to Knocked In or Knocked Out, as may be the case.
In case of a Knock Out event, a rebate can be paid/received to/from the counter party depending on whether the options contract has been purchased or written respectively. Rebate can be paid when the option gets knocked out (Hit) or during maturity. If the rebate is to be paid at the time of Hit, the system triggers the Knock Out Settlement (KNST) event along with KNOT and the settlement is performed. If the rebate is to be paid at maturity, the auto settlement batch process will process the settlement with the counter party at maturity.
In case a rebate is applicable in the case of an option not being knocked-in during the barrier window, the settlement will be processed at the time of expiry (maturity) of the contract. In this case the Knock In Settlement (KIST) is triggered along with Expiry of contract (EXPR) at the time of expiry (maturity).
This process is executed only during the EOD run.
As it is seen above, in many cases settlement is deferred until contract maturity (schedule maturity in IROs). In such cases during Auto Settlement the system will process the settlement with the counter party. This process is executed both during BOD and EOD and will process settlement for the following events:
This event will reverse the entries passed by the events above and process the settlement with the customer.
This process is executed during EOD as well as BOD and will expire the options contracts, which are out-of-the-money on their maturity dates. BOD will run only till one working day before the Current Date. In the case of a Swaption, the option will expire on maturity date if it is has not been exercised (An Interest Rate Swap is not entered into in case of a physical swaption).
As seen above, in some cases the event EXST may be triggered along with the EXPR event.
Before Auto Expiry event is triggered, revaluation at zero is done for the contract. This means that since the contract has expired worthless (It has not been exercised during its tenor), the loss borne by the buyer of the contract is equal to the option premium paid. In case of a written contract this would signify a profit for the writer.
Amortization of Deferred inception gain (AMRT) in case of trade deals and amortization of Deferred termination gains (AMDG) and Time Value (REVL) in case of hedge deals is also triggered before expiry of a contract. In case of event AMDG being triggered, expiry event EXPR will not be triggered since the option has already being terminated and only the deferred termination gains are being amortized.
All the revaluation gains/losses and inception gains are posted to Income or Expense GLs.