1. Asset Liability Management User Guide
  2. Prepayment Rate Calculation Process
  3. Creating a Prepayment Rate Calculation Process

23.1 Creating a Prepayment Rate Calculation Process

The Prepayment Rate Calculation Process will compare current period instrument data with prior period based on the ID number to identify prepaid events. When prepayments are detected, the related record's prepayment rate and following risk factors:

  • Original Term
  • Repricing Term
  • Remaining Term
  • Expired Term
  • Term to Reprice
  • Coupon Rate
  • Market Rate
  • Rate Difference
  • Rate Ratio

This is copied to the FSI_O_HIST_PPMT_RATE_DETAILS table. Later, this table will be used as source for prepayment rates modelling.

To create a Prepayment Calculation Process, follow these steps:

  1. From the LHS menu, select Asset Liability Management, select ALM Processing, and then select Prepayment Rate Calculation Process to display the Prepayment Rate Calculation Process screen.

    The following table describes key terms used for this procedure.

    Table 23-1 Fields for creating a Prepayment Rate Calculation Process

    Term Description

    Folder

    The folder where you can save the definition. You can give other users, read/write or read only privileges.

    Filter

    Filters allow you to restrict your data selection based on any various account attributes like fixed/floating rate, amortization code etc. You can define filters under Common Object Maintenance and reference your filter within the Product Selection block of your Process. The choice of the data filter would determine the instrument records that should be picked from current and prior As-of-date for comparative analysis.

    Source

    Allows you to select one or more source Instrument tables to include in your process. Based on the Instrument Table(s) selected, the instrument records from current and prior As-of-date date would be picked for comparison. Following table are available as source:

    Loan Contracts

    Mortgages

    Term Deposits

    Minimum Prepaid Amount

    Minimum Prepaid amount applies to both Positive and Negative prepaid amounts. If the user enters minimum prepaid as 50, it means that minimum prepaid amount ranges from -50 to +50. If the Prepaid Amount falls within this range, then the record would not be considered for any calculations.

    Freeze Process

    The freeze button will help you to confirm if the process is complete and ready to run or further changes are required and it is an incomplete process which can not run.

  2. Product Selection: This block will help you to define the accounts where prepayments took places and should be considered to learn prepayment behavior.
  3. Product Selection Block:

§ Select a Filter (optional) to constrain the data to be included in the process.

§ Select the source table(s) that you want to include in the process.

4. Parameters:

§ Input the Minimum Prepaid Amount as a positive value. The engine applies the absolute value of the amount input ranging from - input amount to + input amount. For example, if the input is 100, then prepaid amounts between -100 and +100 is excluded. This input allows you to filter very small / insignificant prepaid amounts, reducing the amount of data copied into risk factor table for further modelling process.

§ Note there are two approaches for determining the Prior Period Date. You can input the Prior Period Reference Term and based on the current As-of-Date set in application preferences, the Prior Period Date will be calculated, or you can select the “Use Nearest Prior Date” option, and the engine looks back at the historical data to determine the nearest prior As-of-Date and uses this as Prior Period Date.

§ One of the risk factors is customer rate. It is generally picked from CUR_NET_RATE, but f user has specifically chosen gross rate from UI by checking ‘Model with Gross Rate”, CUR_GROSS_RATE is picked from the instrument record.

5. Market Rate Calculation Parameters:

You must select an IRC from the list of IRCs defined in Rate Management > Interest Rates. The selected IRC (Index in Parameter screen) provides the base value for the market rate.

Spread can be positive as well as negative values and both are to be added to base market rate. Therefore, if the base market rate is 5 and spread given is 1.2, the final rate is be 5+(1.2) = 6.2

Similarly, if spread is -1.2, then final market rate is 5+(-1.2) = 3.8

Additionally, you must specify the reference term you want to use for IRCs that are yield curves.

The following are the options for you to select:

§ Original Term: The calculation retrieves the interest rate from the term point equaling the original term on the instrument.

§ Reprice Frequency: The calculation retrieves the interest rate from the term point equaling the reprice frequency of the instrument. If the instrument is fixed rate and, therefore, does not have a reprice frequency, the calculation retrieves the interest rate associated with the term point equaling the original term on the instrument.

§ Remaining Term: The calculation retrieves the interest rate from the term point equaling the remaining term of the instrument.

Effective Date for Market rate Curve:

§ Select the market rate as per the given curve for prior As-of-Date.

§ Select the market rate with some lag say 15 days, 30 days. Lag Term can be defined with a dropdown containing days, months and years.

§ Similarly, market rate can be defined as arithmetic average over historical range of 1 month, 6 months starting prior As-of-Date. Historical term is also given with a drop-down containing days, months and years.

6. Freeze Process:

7. Select Freeze to complete the process.

8. Select Reset to erase all selections made previously within the process definition flow.

9. Select Confirm.