10.2 Yield Accrual for Deals bought on Par

This topic describes the yield accrual for deal bought on par.

To handle Yield accruals for deals bought on par, you need to maintain the event YACR and define the following accounting entries as part of the event:

Table 10-13 YACR Table

Accounting Role	Amount Tag	Dr./Cr. Indicator
SEC PREM EARNED	SEC_PREM_ACCR	Debit
SEC PREM TBACRD	SEC_PREM_ACCR	Credit
SEC INT ADJ REC	SEC_INTADJ_ACCR	Debit
SEC INT ADJ INC	SEC_INTADJ_ACCR	Credit
SEC DISC TBACRD	SEC_DISC_ACCR	Debit
SEC DISC EARNED	SEC_DISC_ACCR	Credit

For sale from a long position, you need to maintain the SSLP event and the following accounting roles and amount tags:

Table 10-14 SSLP table

Accounting Role	Accounting Role	Dr./Cr. Indicator
SEC BRIDGE GL	ACCRUED_INT_ADJ	Debit
SEC INT ADJ	ACCRUED_INT_ADJ	Credit

Processing of the Yield accrual for deals bought on par

First, the system validates the Redemption Premium accrual frequency and Discount premium accrual frequency which needs to be the same at the Portfolio Definition level. This condition is validated only if the bank level parameter COMMON_YLD_ACCR is set to ‘Yes’. Secondly, the effect of the redemption premium accrued is included in the NPV calculation and the Redemption premium accrual is done before Discount Premium accrual. Then, the YACR event is triggered for accrual only if you have maintained the bank parameter ‘COMMON_YLD_ACCR’ as ‘Y’ and the security is a bond or a T Bill. During IRR computation, the acquisition type should also be identified. Acquisition type can be:

• Discount
• Premium, or
• Par

The system displays the corresponding amount tags based on the acquisition type.

The NPV is computed as shown below:

NPV = O/S Deal Nominal

+ O/S Interest Accrual

+ O/S Redemption Premium Accrual

+ (Premium TBA – Premium Accrued*)

- (Discount TBA – Discount Accrued*)

+ (Interest Adjustment Accrued Already + Interest Adjustment Accrued*)

Note:

While computing NPV the Premium, Discount, and Interest adjustment (On par) are mutually exclusive.

Trading P/L

At the time of sale discount/premium accrued, redemption premium accrued is included for calculation of the trading profit/loss. While processing SSLP, the system includes trading profit and loss with the following parameters:

• O/S Redemption Premium Accrual
• Un-accrued Premium
• Un-accrued Discount
• O/S Interest Adjustment Accrual

Processing Trade Date Accounting

During EOD, the system checks the ‘Trade Date Accounting’ checkbox setup for each portfolio:

• If Trade Date Accounting is followed for a portfolio, then the system triggers Portfolio Accounting Events (SPLP / SSLP / SPSP/ SSSP) for the deals booked in the portfolio.
• Entries for Securities Face (Nominal) Amount, Premium or Discount for the deal, Realized Trading PL from the deal (as applicable) are posted on the Trade date itself even if that results in Short position in the security.
• Unaccrued Premium or Discount, Realized PL and other related position information are updated on the trade date itself.
• The system triggers Reversal Accounting Events (RPLP/ RSLP / RPSP/ RSSP) for the deals reversed and post accounting entries for reversing all accounting entries posted for the deal till that time, including the entries posted on the trade date.

As part of Premium or Discount Amortization process (ACRD / ACRP / ACRR / BRVL / YACR), the system considers the positions movements updated while calculating the amount to amortize for the day and post entries for the same.

In the Coupon Accrual process (IACR), the system does not include the positions movements while calculating the amount to accrue for the day, irrespective of whether Trade Date Accounting or Settlement Date Accounting system is followed for the portfolio.

Securities balances with the Custodian (SKL/SKA) are updated only on the securities settlement date (Dstl date) for the deal, irrespective of whether Trade Date Accounting or Settlement Date Accounting system is followed for the portfolio.

Portfolio Accounting Events for Corporate Actions (Coupon, Dividend, Rights, Warrants, etc.) will continue to be initiated on the Event date irrespective of whether Trade Date Accounting or Settlement Date Accounting system is followed for the portfolio.

Sale deal triggered for Redemption (partial or full) of Securities is processed like a normal sale deal and follows the rules applicable for Trade Date Accounting or Settlement Date Accounting as configured for the portfolio associated.

The above processing changes are also applicable for ‘Securities Portfolio Product Definition’ and ‘Security Portfolio Definition’.

Computing Weighted Moving Average Amortization

The formula for calculating WMA method of amortization is given below:

((Minimum of (Previous year end holding, Current amort period holding)/(Total No. of months to maturity from beginning)

+ (Maximum of ((Current amort period holding - Previous year end holding),0) / (2* Total No. of months to maturity from beginning -- Current Month number in Amort period)) * (Closing discount value of previous year

* Current Month number in Amort period / Current amort period holding)

Where:

• Previous year end holding is the closing balance at the end of previous year
• Current amort period holding is the closing balance of the current amort period
• Total No. of months to maturity from beginning is the total number of months from the start of financial year when the first deal was booked till final redemption month
• Current Month number in Amort period is the current month number in current fin cycle. (yearly amort period so max value is 12 and min value 1)
• 2 is a parameterization in the parameter 'SE_WMA_WEIGHT_ADJUSTMENT' in the table ‘CSTB_PARAM

You can maintain accrual frequency as ‘Monthly’ to allow posting of ACRD and ACRP event on a monthly basis. As per the WMA formula, the weightage changes as per the month. There is no restriction on the frequencies of accrual other than 'Daily'. The WMA formula ,as such, is applicable for frequencies ‘Monthly’ and above. So ‘Daily’ accrual frequency is restricted for WMA method of amortization/accrual.

In case of revaluation, MTM Revaluation starts from trade month and Weighted Moving Average Amortization Accrual of Premium/ Discount will start from Deal settlement month. This is as per the normal revaluation functionality.

Amortization of Premium/ Discount ends as on the sale deal date/ maturity date of the instrument. During the end of year, the system realizes ‘Weighted Moving Average’ method based amortized accrual amount.

During End of year, the system does not reverse discount/premium accrual and accrued Weighted Moving Average amortized discount/premium accrual amount will be realized.

RCRD (Reversal of Weighted Moving Average Amortization Discount accrual) and RCRP (Reversal of Weighted Moving Average Amortization Premium accrual) accounting entries are generated by system during BOD. The event RCRD and RCRP will post reversal of ACRD and ACRP entries posted on previous day except year end date for cases wherein Portfolio is marked with ‘Reversal of Discount/Premium Accrual’.

Note:

The 3 events, RCRD, RCRP and RACR, and their accounting entries are automatically generated by the system based on the entries in the events ACRD, ACRP and ACRR respectively. The entries will be posted with a negative sign.

During the end of year, the system realizes Weighted-Moving-Average-amortization /accrual-amount and will mark accrual amount as settled. The first BOD after year end does not have any reversal of realized amortized amount.

The sub-batch function 'Reversal of Weighted Moving Average Discount/Premium Accrual'” (RCRA) runs on first BOD of every month (that is, the BOD after End of Month) except first day of the year. It identifies Discount/Premium accrual entries posted on the previous day and post reversal of accrual entries as part of BOD process.

You can view the Weighted Moving Average amortized accrual and reversal of accrual accounting entry in the 'Security Portfolio Definition' screen, in the 'Events' tab.

Note:

WMA amortization is not applicable on portfolios having a position/holding on securities with redemption type other than 'Bullet'