Product Code- IRFR

Business Scenario

The financial product IRFR 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 IRFR covers the interest rate options of cash settled trade type deals. Product IRFR 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 arrear\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 setup is done with daily frequency.
This instrument product supports risk free rates and supports all arrear Methods.
Issued by a large banks and corporations
IRFR product is configured with Alternate Risk Free Rate preference as Plain Method but it can be changed to any of the arrear method and also the below combination methods:
- Lookback and Lockout
- Lookback, Lockout, and Payment Delay

Detailed Coverage

Currency Options can be cash settled as well as physically settled. Product IRFR is meant for cash settled currency options.

Product IRFR covers the following features:

Table 8-33 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 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

Events Covered (including brief information on accounting)

Product IRFR has the Life Cycle as listed below:

Table 8-34 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
KNIN	Knock In of Currency Options
KIST	Knock In Settlement
KNOT	Knock Out of Currency Options
KNST	Knock Out Settlement
REVL	Revaluation Of Option
REVR	Reversal Of Deal
TERM	Termination of Option Contract

Advices Supported

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

Table 8-35 Advices Supported

Advices	Description
OT_CO_TRIG	Currency Options Barrier Event
OT_CO_CANC	Currency Options Cancellation
OT_CO_CONF	Currency Options Confirmation
OT_CO_DEAL_TKT	Currency Options Deal Ticket
OT_CO_TERM	Currency Options Termination Advice
OT_CO_TRIG	Currency Options Barrier Event
PAYMENT_MESSAGE	Payment Message
REVSWIFT	Cancellation of Contract

Messages

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

Table 8-36 SWIFT Messages

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

Premium/Charges/Brokerage

Premium

Product IRFR 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.

Special/Other Features

Product COHH covers the following special features:

Exotic Options (Options with barriers) are covered.
Payment of Rebate Amount is covered on Knock out Of Options either at Hit or Maturity.

Additional information (ex. UDF & other Special Maintenance)

In case the Bank wants to capture any additional information regarding the agreement\customer, the same could be captured 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
Other General Maintenance Needed For Branch