1. Asset Liability Management User Guide
  2. Prepayment Rules
  3. Defining Early Redemption Assumptions

20.3 Defining Early Redemption Assumptions

If you are working with deposit products, it is possible to define Early Redemption assumptions within the Prepayment Rule. While defining assumptions, the Prepayment rule will consider whether or not the product is an asset or liability (based on the account type attribute defined in dimension member management). If the product is an asset, then the Prepayments tab will be active in the prepayment assumption detail page. If the product is a liability, then the Early Redemption tab will be active.

Prerequisites

  • Performing basic steps for creating or updating a Prepayment rule.
  • To define Early Redemption assumptions, the account type for the selected product must be a Liability.

Procedure

The procedure for defining Early Redemptions is the same as noted above for prepayments, with two exceptions:

  • The list of Calculation Methods is limited to Constant and Prepayment Models
  • The range definitions are based on Maturity Date ranges of the instruments rather than Origina­tion Date ranges

Users also have two options for determining the timing of the early redemption assumption. Options include:

  • Use Payment Dates: This is the default option. If selected early redemption runoff will occur on scheduled payment dates only.
  • User Defined Redemption Tenors: If selected, users can specify any runoff timing. For exam­ple, users might choose to define the early redemption to runoff on the first day of the forecast.

To define Early Redemptions within the Prepayment Rule, follow the steps given below:

Use Payment Dates

  1. Select the Use Payment Dates option.
  2. Enter the Start Maturity and End Maturity Dates.
  3. The first cell in the Start Maturity Date column and all of the cells in the End Maturity Date col­umn are read only. This ensures that all possible Maturity dates have supporting reference val­ues when Prepayment assumption lookups occur. Each row in the End Maturity Date column is filled in by the system when you click Add Row or save the rule. The first Start Maturity Date (in row 1) has a default value of January 1, 1900. When you enter a Start Maturity Date in the next row, the system inserts a date that is a day prior to the previous End Maturity Date field.
  4. Enter the annual prepayment rate percent that you want to apply to the instruments having orig­ination dates in a particular Start Maturity-End Maturity Date range.
  5. The Percent column represents the actual annualized prepayment percentage that the system uses to generate the principal runoff during the cash flow calculations.
  6. Click Add Row to add additional rows and click the corresponding Delete icon to delete a row.
  7. You can add as many rows in this table as you require. However you need to enter relevant parameters for each new row.
  8. You can use Data Input Helper feature. For more information, see Data Loader section.
  9. You can also use the Excel import/export feature to add the Prepayment rate information. For more details, see Excel Import/Export section.

User Defined Redemption Tenors

  1. Select the User Defined Redemption Tenors option. This option allows you to specify the term to runoff for the particular row.
  2. Enter the Start Maturity and End Maturity date ranges, add additional ranges as required using the Add Row button.
  3. You can calculate the prepayment rate based on Current/Reducing Balance and Annual/De-annual Prepayment Rate. Select the Balance Type as Current Balance or Reducing Balance.
  4. If the Balance Type is selected as Current Balance, then the prepayment amount will be calcu­lated using CUR_PAR_BAL on As of Date. That is, without reducing the balance by any payment/prepayment that may have occurred between as of date and prepayment date.
  5. If the Balance Type is selected as Reducing Balance, then the prepayment amount will be calcu­lated using balance as on Prepayment Date. That is, after reducing the CUR_PAR_BAL by any payment/prepayment that may have occurred between as of date and prepayment date.
  6. Select the Prepayment Rate Type as Annual Prepayment Rate Or De-annual Prepayment Rate.
  7. When Annual Prepayment Rate is selected then prepayment rate entered in screen is directly used. In the other case, rate entered in screen in de-annualised before calculating prepayment amount.
  8. Enter the Start Maturity Date and End Maturity Date ranges, add additional ranges as required using the Add Row button.
  9. Enter the term to runoff tenor and multiplier for each of the date ranges.
  10. Enter the early redemption runoff percentage for each of the date ranges.
  11. Enter 'Repeat' if you want same prepayment to occurs multiple times. By default it is set to 1.
  12. Click Add Row Delete.
  13. Define Seasonality assumptions as required to model date specific adjustments to the annual prepayment rate or early redemption rate. Inputs act as multiplier, for example an input of 2 will double the runoff rate in the indicated month.

The manner in which prepayment / redemption tenor is interpreted has changed from ALM 8.0.7.0.0 onwards in case of user defined prepayment and user defined early redemption. Earlier runoff occurred on “As of date + Prepayment / early redemption tenor”. From ALM 8.0.7.0.0 onwards only first runoff occurs on “As of date + Prepayment / early redemption tenor”. Subsequent runoff occur on “Previous prepayment / early redemption date + Prepayment / early redemption tenor”. Thus custom­ers who are upgrading or migrating to ALM 8.0.7.0.0 from a previous release must appropriately modify tenors in prepayment rules where user defined prepayment tenor and user defined early redemption tenor have been used.