5.1 Automatic Events Executed during End of Day

This topic describes the automatic events such as revaluation (revl), amortization, auto exercise and Rate Reset (RTFX and EXER), knock in and knock out (Event KNIN and KNOT), auto settlement (EXST, KNST, KIST, PRPT), auto expiry (EXPR), and auto expiry (EXPR).

This section contains the following topics:

Revaluation (REVL)

Revaluation of a contract is performed as per your specification for the product involving the contract. If you have indicated that revaluation must be performed for the product, all entries for a product is netted based on a common currency and buy-sell indicator.

Revaluation of a contract is performed as per your specification for the product involving the contract. If you have indicated that revaluation must be performed for the product, all entries for a product is netted based on a common currency and buy-sell indicator.

Revaluation is performed for the specified frequency for the following events:

• BOD/EOD
• Contract Exercise (Final exercise only in case of IRO’s)
• Contract termination
• Contract Expiry

Table 5-1 Revaluation - Events

Event	Function
BOD/EOD	The BOD operations for revaluation runs 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 is 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 is triggered at Fair Value of the contract, captured at the time of terminating the contract. The termination gain loss is 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 is triggered at zero. This means that if the contract expires worthless, the buyer of the option incurs 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 is 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 is triggered at zero which would essentially mean that the option buyer paying for in-the-money Floor loses the option premium and the settlement amount during the final exercise along with an income or a loss as can 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 is triggered at zero.

During final exercise,

• Revaluation is done at the contract level even though the revaluation level can be marked as Product in the product Preferences screen.
• Premature termination, knock out or expiry of the contract, final revaluation gain/loss is recognized as income/expense and posted to the respective GLs.

Note:

Revaluation event is not triggered if the fair value of the option has not changed since the last revaluation was done.

External Revaluation

Here the revaluation is done based on the external values which is provided as the input (revaluated profit or loss) to the system.

Once the External revaluation option is enabled at branch parameter, the EOD batches in the system does not calculate any profit or loss for the contracts. Instead add OBTR will post accounting entries for external revaluation, on receiving profit/loss amount from external system.

Note:

If the option external revaluation is enabled and the MTM value is not received, the system skips the revaluation for the particular contract and the system logs exception into a table.

External MTM upload through Webservice

The External MTM value received is in XML format for a contract.

An Operation CreateExtMTMValue is used to upload OT external value for a contract through the gateway.

The following fields are mentioned in the incoming file:

Table 5-2 Fields in the incoming files

Field	Description
Source Code	Source Code of the upload
Upload Date	Date when XML is uploaded
Upload time	Time of the upload
Effective Date	Revaluation/Value Date used in accounting
Market Date	MTM fair Value date
Branch Code	Branch Code of the bank.
Contract Ref No	Reference Number of the contract for which MTM value upload is being done.
Profit & Loss CCY	Revaluation CCY
Profit & Loss Value Calculated	Profit and Loss (External System)

An error is raised when

• The Contract reference number is not valid.
• Duplicate record exists for the contract reference number and revaluation date.
• Revaluation date is greater than the application date.
• Contract is not active.

External MTM upload through GI

The Bulk Upload of external MTM value is supported though GI.

User can define properties, formats and components associated with interface file in the Interface Definition (GIDIFTDF) screen. For uploading the rate fixed contracts from external system into OBTR, select the interface type as Incoming and the interface code as OTDETMTM.

The following fields are mentioned in the incoming file:

Table 5-3 Fields in the incoming file

Field	Description
Source Code	Source Code of the upload
Upload Date	Date when XML is uploaded
Upload time	Time of the upload
Effective Date	Revaluation/Value Date used in accounting
Market Date	MTM fair Value date
Branch Code	Branch Code of the bank.
Contract Ref No	Reference Number of the contract for which MTM value upload is being done.
Profit & Loss CCY	Revaluation CCY
Profit & Loss Value Calculated	Profit & Loss (External System)
No of Records	Total number of records in the file

The Error code validations are same as the web services, refer to the above section.

OT_MTMUPLOAD is defined and scheduled to pick the records from external system though GI for processing.

User can trigger the process of Generic Interface using through Interface Trigger GIDIFPRS screen.

For more information on GI, refer to GI User Guide.

On successful upload of external MTM Value, external revaluation event is triggered and the system posts the accounting entries.

External Revaluation Process

• External Revaluation is done based on OT Branch Parameter. If External Revaluation is at Branch Level, the branch revaluation is always executed externally.
• If External Revaluation is at Product Level, system checks the External Revaluation Required flag at Product. If the flag is checked, the revaluation happens externally and if the flag is Unchecked revaluation happens internally on EOD batch processing.
• If the MTM value is uploaded for only one contract, the data is received using Webservice, and on successful acknowledgment, the external revaluation (EXRV) event is triggered online to perform the revaluation entries online.
• In case of the bulk upload, the data is received though GI, and on successful acknowledgment the external revaluation (EXRV) event is triggered online to perform the revaluation entries online.
• If External revaluation parameter is enabled, the OT batch does not execute the internal revaluation.
• In case OBTR does not receive any MTM value for any particular day, system skips revaluation for the particular contract on the day.

  Note:

  The system supports the back dated External Revaluation.
• When OBTR receives back dated External revaluation after year- end, Profit and Loss adjustment entries are posted manually as Journal entry. User operationally handle the same.
• Events Impacted on Revaluation:
• TERM - On termination Contract fair value or manual termination is uploaded through gateway , and revaluation gain/loss calculated based on the uploaded value. Revaluation reversal and revaluation Gain/ Loss is posted in TERM event. EXRV Event triggers along with TERM event for income and expense GL movement.
• EXPR - Revaluation reversal and revaluation Gain/ Loss are posted in EXPR event. EXPR Event triggers along with EXPR event for income and expense GL movement.
• EXER - Revaluation reversal and revaluation Gain/ Loss are posted in EXER event. EXRV Event trigger along with EXER event for income and expense GL movement.
• KNOT - Revaluation reversal and revaluation Gain/ Loss are posted in KNOT event. EXRV Event triggers along with KNOT event for income and expense GL movement
• Calculation for external revaluation loss/gain is same as internal revaluation @ TERM, EXPR,EXER,KNOT.

Example for External Revaluation:

A CO Call Buy deal is booked on 15th July with external revaluation. On 17th receiving P&L amount as 150 GBP for 16th July.

Event EXRV (External Contract Revaluation) details as below:

Table 5-4 Event details

Accounting Role	Amount Tag	Debit/Credit	Amount	CCY	Transaction date	Value Date
MKT_VAL_PUR_OPT	PUR_REVL_GAIN	Dr	150	GBP	17-Jul-20	16-Jul-20
V_GAIN_PUR_OPT	PUR_REVL_GAIN	Cr	150	GBP	17-Jul-20	16-Jul-20

On 18th receiving P&L amount as -75 GBP for 17th July

Event EXRV (External Contract Revaluation) details are as below, also revaluation reversal entries fires along with current revaluations

Table 5-5 Event details

Accounting Role	Amount Tag	Debit/Credit	Amount	CCY	Transaction date	Value Date
RV_LOSS_PUR_OPT	PUR_REVL_LOSS	Dr	75	GBP	18-Jul-20	17-Jul-20
MKT_VAL_PUR_OPT	PUR_REVL_LOSS	Cr	75	GBP	18-Jul-20	17-Jul-20
RV_GAIN_PUR_OPT	PUR_LAST_REVL_GAIN	Dr	150	GBP	18-Jul-20	18-Jul-20
MKT_VAL_PUR_OPT	PUR_LAST_REVL_GAIN	Cr	150	GBP	18-Jul-20	18-Jul-20

Amortization

Amortization of a contract is performed as per the amortization parameters specified for the product. If you have indicated that amortization must 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:

• Deferred Inception Gains
• Deferred Termination Gains (Hedge deals only)
• Time Value of Option Premium (Only for Hedge deals)

Table 5-6 Amortization - Amount

Event	Function
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 can 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 is recognized as income and posted to the respective GL. Inception loss is not amortized and is 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 is enabled while terminating the contract. Inception gain is 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 is recognized as income and posted to the respective GL. Termination loss (if any) is not amortized and is recognized as an expense upon saving the option contract termination. Amortization of deferred termination gains are done only for hedge deals. For trade deals, termination gains are 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 is 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 is recognized as expense and is 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, and so on) you have specified at the product level is used for this. Accounting entries for amortization of time value can also be defined under the revaluation event (REVL).

Auto Exercise and Rate Reset (RTFX and EXER)

Auto Exercise

• Except for Swaptions, which have to be exercised manually, Auto Exercise is performed for all options.
• Currency options with American and Bermudan Expiration styles are eligible for auto exercise only if they are in-the-money on the day of maturity.
• An option with Bermudan schedule is exercised automatically on maturity only if it is in-the-money and the maturity date is included as a possible Exercise Date.

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:

• The applicable reference rate is picked up and applied for an IRO contract maturing on the day, the Auto Exercise and Rate Reset batch is run.
• The net settlement amount for an interest rate option is calculated and stored after rate reset.
• The actual settlement in case of an interest rate option is done only on the maturity date (Arrears) or schedule start date (Advance).
• On rate fixing, net settlement amount is calculated and a queue is populated with the settlement amount and the actual settlement date. Auto Exercise is done after rate fixing only if the option is in the money.
• If the rate fixing date is the same as the schedule maturity date, settlement with the customer happens on the same day by triggering settlement of exercise (EXST).
• If the rate fixing date is different, then the net settlement amount is parked in an Asset GL (For purchase options) or a Liability GL (For written options). These entries are reversed on the schedule maturity date and the customer is debited or credited with the net settlement amount according to whether it’s a buy or a sell deal.

Currency Options

For Currency options, settlement is done on the exercise day unless otherwise specified. For example, a rebate can be paid only at maturity for an option which is knocked out.

In this case again a queue is populated at the time of knocking out of the option (just like as in IROs) and actual settlement happens 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) happens on the same day (Contract maturity date). Also, again like IROs, auto exercise happens only if the option is in the money at maturity.

Auto Exercise batch runs during BOD as well as EOD. During BOD only those contracts are 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.

Knock In and Knock Out (Event KNIN and KNOT)

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 is matched against the barrier and the lower barrier (If any), and the contract status is 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 is 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 processes 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 is 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.

Auto Settlement (EXST, KNST, KIST, PRPT)

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 processes the settlement with the counter party. This process is executed both during BOD and EOD and processes settlement for the following events:

• Rate Reset happening on a separate date from the schedule maturity date in case of an Interest Rate option (Except Swaption). In this case the event EXER is triggered along with RTFX (Rate fixing) but settlement happens at maturity of the schedule (EXST).
• A currency option being knocked out (KNOT) with rebate payment on maturity. The KNST event is triggered at maturity. In this case the EXPR event is not triggered.
• A currency option with a knock in barrier not being knocked in during the barrier window with rebate to be paid on maturity. In this case KIST (Knock in Settlement) is triggered along with EXPR on expiry.
• Premium payment (Event PRPT) happening on a date other than the contract booking date.

This event reverses the entries passed by the events above and process the settlement with the customer.

Auto Expiry (EXPR)

This process is executed during EOD as well as BOD and expires the options contracts, which are out-of-the-money on their maturity dates. BOD runs only till one working day before the Current Date. In the case of a Swaption, the option expires 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 can 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 is not 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.