Product Code

Business Scenario

The financial product IROP that is, Interest Rate Options Trade Cash Settled helps corporates/banks to provide the buyer with speculation or protection of underlying assets against an adverse movement in interest rates while providing the potential for profit in case of favorable movement of rates.

Targeted Customer Segment: Corporates/Banks who seek speculation/protection against adverse interest rate movement.

Introduction

Product IROP covers the interest rate options of cash settled trade type deals. Product IROP holds good for all the interest rate option types of both buy and sell with European expiry style, the exception being the swaptions which has three expiration styles like European, American and Bermudan.

Synopsis (ex. High level features etc.)

Covers all the IRO types of Yield-based
Payment\Settlement is done on schedule basis based on the arrears\advance method of payment type.
All IRO types covered uses only European style of expiry. Additionally American and Bermudan style are used by Swaptions.
Amortization and Revaluation setup is done with daily frequency.

Detailed Coverage

Interest Rate Options can be cash settled as well as physically settled. Product IROP is meant for cash settled interest rate options. Product IROP covers the following features:

Table 8-1 Detailed Coverage

Features	Type
Types of the Deal Covered	Buy Deal Sell Deal
Types of the Contract Covered	Trade Deal
Delivery Type	Cash
Interest Rate Option Types Covered	Caps Floors Collars Corridors and Swaptions
Expiry Style’s Covered	European for Caps, Floors, Collars, Corridors European\American\Bermudan for Swaptions
Payment Method Covered	Actual/365 – Per Annum Basis Arrears Rate Fixing is setup on the each Schedule End Date and Reset Days is 0
Amortization and Revaluation Covered	Amortization of Deferred Inception Gain for trade deals. Fair Value Revaluation

Events Covered (including brief information on accounting)

Product IROP has the Life Cycle as listed below:

Table 8-2 Events Covered

Events Covered	Terminology
AMDG	Amortization of Deferred Gains-Hedge
AMND	Amendment Option Deal Contract
AMRT	Amortization Of Deferred Inception Gain
BOOK	Booking of the deal Contract
EXER	Exercise Of Option
EXPR	Expiry Of Option
EXST	Exercise Settlement Of Option
PRPT	Premium Payment\Premium Collection
REVL	Revaluation Of Option
REVR	Reversal Of Deal
RTFX	Rate Fixing
TERM	Termination of Option Contract

Advices Supported

Following Advices setup done in the IROP Product as part of Product Life Cycle:

Table 8-3 Advices Supported

Advices	Description
OT_IRO_AMND	IRO Amendment Advice
OT_IRO_CANC	IRO Cancellation
OT_IRO_CONF	IRO Confirmation
OT_IRO_DEAL_TKT	IRO Deal Ticket
OT_IRO_TERM	IRO Termination Advice
PAYMENT_MESSAGE	Payment Message
REVSWIFT	Cancellation of Contract

Messages

Following SWIFT Messages setup done in the IROP product as part of product life cycle.

Table 8-4 SWIFT Messages

SWIFT Messages	Contact Field
MT 360	IRO Confirmation Message
MT 360	IRO Amendment Message
MT 360	IRO Cancellation Advice
MT 364	IRO Termination Message
MT 362	Rate Reset Message
MT 202	Bank Transfer
MT 205	Bank Institutional Transfer

Premium/Charges/Brokerage

Premium

Product IROP enables the Premium Collection or Premium Payment through:

Option Premium is expressed as a percentage of the notional principal / contract amount.
Option Premium can be a flat amount as well.

Charges

In IROP product following Charge Component is parametrized

Component - OTBOOKCHG - OT Options Booking Charge
Rule - OTBKCHG - OT Options Booking Charge Rule
Flat Amount GBP 125

Brokerage

IROP product is parametrized to handle Brokerage feature. The details are available below:

Broker Identification\Code
Rule Code: OTBROK

Special/Other Features

Product IROP covers the following special features:

Limit Tracking Methods through which customer exposures are tracked,
- Fair Value Limit Tracking
- Notional Limit Tracking
- Risk Weighted Limit Tracking
Product IROP covers all the three types of expiry styles like
- American
- European (Default)
- Bermudan.
Revaluation is done on basis of the Confirmed Fair Value and ignored if it is Unconfirmed.

Additional information (ex. UDF & other Special Maintenance)

In case the Bank wants to capture any additional information regarding the agreement/customer, the Bank can capture the same by defining the User Defined Fields (UDF).

OT Options Module Maintenance

OT Options module has to be setup with the following furnished maintenance,

Option Branch Parameter Maintenance
Role To Head mapping Class Maintenance
Accounting Event Class Maintenance
OT Product Maintenance
Floating Rate Source Maintenance
DV Rate Type Maintenance
DV Float Rate Code Maintenance
Floating Rate Maintenance
Advice Format Maintenance