4.23.4.2 Propagating Margin Components of Margin Basis as Drawdown
- 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.
- New drawdown Input
- Margin Revision
- Interest Rate fixing
- Interest Rate amendment
- Value dated amendment
- 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.
The system calculates the difference between the computed all-in rate and the corresponding floor/ceiling value of all-in rate as follows:
- 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
- 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
Example
- 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%