4.23.4.2 Propagating Margin Components of Margin Basis as Drawdown

During the batch, the propagation for any margin floor/ceiling change for margin components of margin basis as Drawdown and VAMB/VAMI event is registered for the drawdown is as follows:

• If the Margin rate for the margin component for the active drawdown is less than the new floor value defined for the Margin rate at the Tranche level, then new Floor value is propagated as the Margin rate for the drawdown for the component. Value-Dated Amendment (VAMB/VAMI) event is triggered on the drawdown with application date as value date for the Margin rate change.
• If the Margin rate for the margin component for the active drawdown is greater than the new Ceiling value defined for the Margin rate at the Tranche level, then the new Ceiling value will be propagated as the Margin rate for the Drawdown for the component. Value- Dated Amendment (VAMB/VAMI) is triggered on the drawdown with application date as value date for the Margin rate change.

The system validates the necessary defaulting with the floor or ceiling rate if margin rate is less than floor value or margin rate is greater than the Ceiling value while creating the child contracts.

The initiation of the uninitiated drawdown on the drawdown value date fails if the Margin rate at the drawdown is not within the floor/ceiling defined for the margin component in tranche.Capturing All-In Rate Floor and Ceiling rates at Drawdown Level.

The system validates if the All-In Rate for the drawdown is within the Floor and Ceiling range for the interest component in following conditions:

• New drawdown Input
• Margin Revision
• Interest Rate fixing
• Interest Rate amendment
• Value dated amendment

If the All-In rate is outside the boundary of floor and ceiling values of the underlying interest components of the drawdown, the system prompts highlighting the All-in rate being less/more than the applicable Floor/Ceiling value and overwrite the default value with the Floor/Ceiling All in rate maintained at the Tranche level. The defaulting is as follows:

• If the calculated All-in rate is less than the applicable Floor value of All-in rate, the system considers the Floor value of All-in rate for interest computation.
• If the calculated All-in rate is more than the applicable Ceiling value of All-in rate, the system considers the Ceiling value of All-in rate for interest computation.

If the interest is calculated as part of online activity such as rate fixing, then the system displays an override message. If the validation happens as part of batch exercise such as margin rate revision, system does not display any override message, but apply the above logic to overwrite the all-in rate.

The system calculates the difference between the computed all-in rate and the corresponding floor/ceiling value of all-in rate as follows:

If the computed all-in rate is less than the floor value of all-in rate, then

• Adjustment Rate = Floor value – Computed value
• Revised all-in Rate = Computed all-in Rate + Adjustment Rate
• Where computed all-in Rate = Base Rate + Spread + Sum of margin rates

In this case, the Adjustment Rate is positive.

If the computed all-in rate is greater than the floor value of all-in rate, then

• Adjustment Rate = Ceiling value – Computed value
• Revised all-in Rate = Computed all-in Rate + Adjustment Rate
• Where computed all-in Rate = Base Rate + Spread + Sum of margin rates

In this case, the Adjustment Rate is negative.

Example

Assume the following values for an interest component at the time of new Drawdown Rate fixing.

• Floor value of All In rate 6%
• Ceiling value of All In rate 8%
• Applicable spread 0
• Sum of Margin Rates 3%
• As part of rate fixing, if the base rate is fixed to 2%
  • Computed all-in rate = Base rate (2%) + Spread (0%) and sum of margin (3%)
  • Computed all in rate = 5%

    The computed all in Rate is lesser than the Floor value of All-in rate. Hence, the system considers the Floor value as All-in rate for computation.

  • Adjustment Rate = Floor value (6%) – Computed value (5%)
  • Adjustment Rate = 1%
  • Revised all-in Rate = Computed All-in Rate (5%) + Adjustment Rate (1%)
  • Revised all-in Rate = 6%
• If the base rate is fixed to 6%
  • Computed all-in rate = Base rate (6%) + Spread (0%) and sum of margin (3%)
  • Computed all-in rate = 9%

    The computed all in Rate is greater than the Ceiling value of All-in rate. Hence, the system considers the Ceiling value as All-in rate for computation.

  • Adjustment Rate = Ceiling value (8%) – Computed value (9%)
  • Adjustment Rate = -1%
  • Revised all-in Rate = Computed All-in Rate (9%) + Adjustment Rate (-1%)
  • Revised all-in Rate = 8%
• If the base rate is fixed to 4%
  • Computed all-in rate = Base rate (4%) + Spread (0%) and sum of margin (3%)
  • Computed all-in rate = 7%

    The computed all in Rate is with the Floor and Ceiling range of All-in rate. Hence, the system considers the Computed Rate as All-in rate for computation.

  • Adjustment Rate = 0%
  • Revised all-in Rate = Computed All-in Rate (7%) + Adjustment Rate (0%)
  • Revised all-in Rate = 7%