5.1.1 Auto Exercise and Rate Reset for Interest Rate Options

This topic describes the auto exercise and rate reset (RTFX and EXER) for interest rate options.

a. Auto Exercise

Except for swaptions, which have to be exercised manually, Auto Exercise is performed for all options.

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.

b. Rate Reset (RTFX and EXER)

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.

For a detailed list of Amount tags and accounting entries to be passed during rate reset and exercise process, refer to Annexure B