5.9 FX Contracts with Netted Limits-tracking
This topic describes risk tracking on the netted amounts of the FX contracts can be enabled only when the netted risk tracking options are checked at the contract level (‘Netting’ screen of FX contract).
The risk tracking on netted amounts will be done even when the contract is not marked for netting of settlements. The settlement netting and limits netting are totally independent features.
The non netted risk tracking options and netted risk tracking options are totally independent features. In case both are checked then Oracle Banking Treasury Management supports tracking of risk contract wise as well as netting bucket wise. In case both features need to be tracked it is better you maintain a separate set of credit lines. The system will not cross validate the credit lines maintained for contract wise risk tracking and netting bucket wise. However the system will validate the credit lines maintained for netted risk tracking alone.
The netted risk tracking will be done on both bought leg and sold leg separately. The risk netting reference number of the bought leg in FX contract Online will identify the contracts for which the bought leg is tracked. The risk netting reference number of the sold leg in FX contract Online will identify the contracts for which the sold leg is tracked.
Oracle Banking Treasury Management will internally store the net inflow/outflow amount for both sold and bought legs of FX contracts which have risk netting feature set for any of the three risks.
The following details will be stored in net inflow/outflow details:
- Branch
- Customer
- value date
- currency
- currency pair
- Netted reference number
- Netted amount for settlement risk
- Netted amount for pre settlement risk
- Netted amount for weighted risk.
When the FX contract which forms part of netting bucket is input the following will be done:
- The system will check if the netted limits tracking options are set for the contract. If it is not set then the system will not do netted limit tracking.
- If either of the netted limit tracking options is set then the system will check the netting type.
- Depending on the netting type the system will check if any net inflow/outflow details are stored for the customer + branch + currency +value date combination or customer + branch + currency + value date + currency pair combination. This will be checked for both the sold and bought legs.
- If no match is found then the system will insert the inflow/outflow details for both bought and sold legs. During insertion of buy leg, the system will calculate net settlement amount as bought currency amount and net weighted risk amount will be computed using risk percent on bought amount. During insertion of sell leg, the system will calculate net settlement amount as sold currency amount and net weighted risk amount will be computed using risk percent on sold amount. The system will create new utilization for respective credit lines if the net amount is inflow. The risk reference number for both the legs will be displayed in FX contract online.
- If any match is found then the system will add/subtract the bought/sold leg amount to the netted settlement amount to arrive at new netted settlement amount. For the risk weighted amount, the system will compute new netted risk weighted amount using risk percent.
- If the new and old netted amounts are inflow and the new netted amount is greater than the old netted amount then the system will increase the utilization of the line with the incremental value. If the old netted amount was an outflow and the new netted amount is inflow then the system will increase utilization for the net inflow amount.
- If the new netted amount is inflow but is lesser than the previous netted amount then the line utilization will be decreased with the differential amount (provided the line is revolving).
- If the new netted amount is outflow and the old netted amount was inflow then the system will reduce the line utilization to 0(provided the line is revolving).
- If the new netted amount is outflow and the old netted amount was also an outflow, then there won’t be any utilization.
During the above process the tenor will be calculated based on rolling tenor of the contract.
When FX contract which forms part of netting bucket is deleted then the system will compute the new netted amounts in the net inflow/outflow details and accordingly increase/decrease the utilization depending on old and new netted amounts. During deletion or reversal of the contract, the system will always force decrease the utilization of the credit line irrespective of the type of line.
The same logic will apply for other events like Liquidation, Amendment, cancellation and Rollover. In all these events new netted amount is calculated using liquidated/amended/canceled amount and the system will either decrease/increase utilization based on old and new netted amounts.
If the option Netted Limit Tracking for Pre-Settlement Risk is set for the contract then system will net the revaluation gain/ loss of all such contracts using netting limits reference of the contract. If the netted amount is a revaluation gain then the system will create utilization for the difference between the total gain amount and old utilization.
If the netted amount is a revaluation loss then no utilization will be done and the previous utilization if any will be nullified.
The BOD revaluation reversal process will reinstate the limit utilization for pre-settlement risk.
During limits tracking the credit lines will be picked from netting agreement for the counterparty.
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