Prepayment Events are associated with Assets and Liabilities that have fixed maturities and have experienced a full prepayment and partial prepayment. Any prepaid amount that causes a change to scheduled contractual cash flows on a fixed maturity instrument, results in a prepaid event and needs to be captured.
This chapter covers the following topics:
· Overview of Prepayment Rate Calculation Process
· Creating a Prepayment Rate Calculation Process
· Executing a Prepayment Rate Calculation Process
· Performance Tuning Prepayment Rate Calculation Processes
The Prepayment Rate Calculation Process allows you to perform the following tasks:
· Determine the data that you want to process (Product Selection block).
· Specify the parameters for the process. The parameters include As-of-Dates reference term, threshold prepaid amount, and Market rate calculation parameters.
· Execute or run the Prepayment Rate Calculation request and generate results (Prepayment Rate Calculation Process Summary Page).
To define and execute a Prepayment Rate Calculation process. The Prepayment Rate Calculation Process compares the current period instrument data with prior period instrument data to identify prepaid events. When prepayments are detected, the related instrument records are copied into the FSI_O_HIST_PPMT_RATE_DETAILS table. This table then becomes the source table for prepayment rates modelling.
To create a Prepayment Calculation Process, follow these steps:
1. From the LHS menu, select Funds Transfer Pricing, select FTP Processing, and then select Prepayment Rate Calculation Process to display the Prepayment Rate Calculation Process screen.
Figure: Prepayment Rate Calculation Process
Description of Prepayment Rate Calculation Process as follows
The following table describes key terms used for this procedure.
|
Term |
Description |
|---|---|
|
Folder |
The folder where you can save the definition. You can give other users, read/write or read only privileges. |
|
Filter |
Filters allow you to restrict your data selection based on any attribute that exists within an instrument table. You define filters under Common Object Maintenance and reference your filter within the Product Selection block of your Process. The choice of the data filter determines the instrument records that needs to be picked up from the As-of-date and the prior period date for comparative analysis. The supported Filter Types are: Data Filter, Hierarchy Filter. |
|
Source |
Allows you to select one or more source Instrument tables to include in your process. Based on the Instrument Table(s) selected, the instrument records on the As-of-date and the prior period date are chosen for comparison. |
|
Minimum Prepaid Amount |
Minimum Prepaid amount applies to both Positive and Negative prepaid amounts. If the user enters minimum prepaid as 1000, it means that minimum prepaid amount ranges from -1000 to +1000. If the Prepaid Amount that is calculated is less than or equal to the Minimum Prepaid Amount, then it is ignored from further calculations. |
|
Freeze Process |
The freeze process block allows you to finalize the assumptions made in the Process definition flow or to clear all assumptions. |
2. Create a new Prepayment Rate Calculation Process.
3. Product Selection Block:
Figure : Prepayment Rate Calculation Process – Product Selection Block
Description of Prepayment Rate Calculation Process Product Selection Block as follows
§ Select a Filter (optional) to constrain the data to be included in the process.
§ Select the source table(s) that you want to include in the process.
4. Parameters:
Figure: Prepayment Rate Calculation Process - Parameters
Description of Prepayment Rate Calculation Process Parameters as follows
§ Input the Minimum Prepaid Amount as a positive value. The engine applies the absolute value of the amount input ranging from - input amount to + input amount. For example, if the input is 100, then prepaid amounts between -100 and +100 is excluded. This input allows you to filter very small / insignificant prepaid amounts, reducing the amount of data copied into risk factor table for further modelling process.
§ Note there are two approaches for determining the Prior Period Date. You can input the Prior Period Reference Term and based on the current As-of-Date set in application preferences, the Prior Period Date will be calculated, or you can select the “Use Nearest Prior Date” option, and the engine looks back at the historical data to determine the nearest prior As-of-Date and uses this as Prior Period Date.
§ One of the risk factors is customer rate. It is generally picked from CUR_NET_RATE, but f user has specifically chosen gross rate from UI by checking ‘Model with Gross Rate”, CUR_GROSS_RATE is picked from the instrument record.
5. Market Rate Calculation Parameters:
You must select an IRC from the list of IRCs defined in Rate Management > Interest Rates. The selected IRC (Index in Parameter screen) provides the base value for the market rate.
Spread can be positive as well as negative values and both are to be added to base market rate. Therefore, if the base market rate is 5 and spread given is 1.2, the final rate is be 5+(1.2) = 6.2
Similarly, if spread is -1.2, then final market rate is 5+(-1.2) = 3.8
Additionally, you must specify the reference term you want to use for IRCs that are yield curves.
The following are the options for you to select:
§ Original Term: The calculation retrieves the interest rate from the term point equaling the original term on the instrument.
§ Reprice Frequency: The calculation retrieves the interest rate from the term point equaling the reprice frequency of the instrument. If the instrument is fixed rate and, therefore, does not have a reprice frequency, the calculation retrieves the interest rate associated with the term point equaling the original term on the instrument.
§ Remaining Term: The calculation retrieves the interest rate from the term point equaling the remaining term of the instrument.
Effective Date for Market rate Curve:
§ Select the market rate as per the given curve for prior As-of-Date.
§ Select the market rate with some lag say 15 days, 30 days. Lag Term can be defined with a dropdown containing days, months and years.
§ Similarly, market rate can be defined as arithmetic average over historical range of 1 month, 6 months starting prior As-of-Date. Historical term is also given with a drop-down containing days, months and years.
6. Freeze Process:
Figure: Prepayment Rate Calculation Process – Freeze Process
Description of Prepayment Rate Calculation Process Freeze Process as follows
7. Select Freeze to complete the process.
8. Select Reset to erase all selections made previously within the process definition flow.
9. Select Confirm.
To view any of the saved processes, you can select the process using check box next to each process and click on view button.
To edit any of the saved processes parameters, you can select the process using check box next to each process and click on edit button.
To copy any of the saved processes, you can select the process using check box next to each process and click on copy button.
A message window opens to confirm the Name, Folder and Access Type for the copied process.
Enter the details and click Save to save the details.
To delete any of the saved processes, you can select the process using check box next to each process and click on delete button.
You execute a Prepayment Rate Calculation to compare current period and prior period data to identify different prepayment events.
Performing basic steps for creating or editing a Prepayment Rate Calculation Process is the prerequisite for this.
Procedure
Following two approaches are available to execute the process:
· UI Based Procedure
· Batch Based Procedure
To execute the process using UI based procedure, follow these steps:
1. Navigate to the Prepayment Rate Calculation Process summary page.
2. Select a Process that you want to execute or run.
NOTE |
The status column indicates whether or not a process can be run. The following are the possible status conditions: · Complete: Indicates the process is fully defined and ready to be run. · Incomplete: Indicates the process is partially defined and cannot be run. · View Log: Indicates the process has already been run and also indicates a process can be re-run. In this case View Log is a hyperlink that allows you to navigate to the Log Viewer page where you can review any processing errors or alerts related to this process. |
3. After executing the preceding process, select the View Log Hyperlink.
4. Select the Task ID (also known as the unique system identifier) to view a report for any processing errors.
NOTE |
If significant processing errors exist, you should re-run your process. |
5. The Prepayment Rate Calculation process is complete.
Prepayment Rate Calculation Processes can also be executed as batch processes. The following approaches are available:
To execute the batch with Simplified Batch, follow these steps:
1. From the LHS menu, select Financial Services Applications, select Administration, and then select Simplified Batch.
2. Create a New Simplified Batch.
3. Select Task Type as Transform Data.
4. Select Historical Prepayment Batch from the list of seeded process types.
5. Input the following in the Optional Parameters text box:
'Prepaid Detection Process System ID','User ID', for example, '200883','TPUSER'
6. Save the rule and Execute.
To execute the batch with ICC Batch, follow these steps:
1. From the LHS menu, select Financial Services Applications, select Operations, and then select Batch Maintenance.
2. Create a new batch.
3. Select the Batch Name to add the task.
4. Click the Add button under the Task Details section.
5. Define the Task ID and Description.
6. Select Components as Transform Data.
7. Select Historical Prepayment Batch rom the list of seeded process types.
8. Input the following required parameters:
§ Prepaid Detection Process System ID
§ User Name.
These parameters must be given in the follow format (sys Id, User Id), for example: 101000, TPUSER.
9. Save the rule and Execute.
To execute the batch with Run Rule Framework, follow these steps:
1. From the LHS menu, select Financial Services Applications, select Manage Runs, and then select Process.
2. Create a new rule.
3. Define the Folder, Code, and Name of rule.
4. Select the Component as Transform Data.
5. Select Historical Prepayment Batch from the list of seeded process types.
6. Input the following required parameters:
§ Prepaid Detection Process System ID
§ User Name
These parameters must be given in the follow format (sys Id, User Id), for example: 101000, TPUSER.
7. Save the rule and Execute.
Processing time for Prepayment Rate Calculation Processes can be reduced by modifying parallel processing parameters in the FSI_PARALLEL_PARAMETERS table.
Parallel execution related parameters for Prepayment Rate Calculation are seeded by the application with a process_engine_cd value of "3" in the FSI_PARALLEL_PARAMETER table.
The Prepayment Rate Calculation process looks for the value given in parallel_query field. If the value is given as "ENABLED", the engine uses the PARALLEL_DEGREE input and sets the degree of parallelism for execution of the queries within the Prepayment Rate Calculation engine.
These values must be set by the user or implementation team, when they want to take advantage of parallel query executions. The optimal value for the PARALLEL_QUERY input depends on the environment and must be iteratively tested to arrive at the appropriate value.