1. Asset Liability Management User Guide
  2. Forecast Balance Rules
  3. Forecasting Methods

28.1 Forecasting Methods

The new business methods within the Forecast Balance rule determine how new business assumptions are applied per product leaf within each active currency. They consist of:

For the Target Growth, Target End, and New Add methods, you select one of two timing options to indi­cate when new business for a new account should be originated. The two options are:

  • No New Business
  • Target End Balance
  • Target Average Balance
  • Target Growth Percent
  • New Add Balance
  • Rollover
  • Rollover with New Add
  • Rollover with Growth %

For the Target Growth, Target End, and New Add methods, you select one of two timing options to indi­cate when new business for a new account should be originated. The two options are:

  • Distributed Option: Solves for the origination date of the new business account to reach an expected average balance, assuming even distribution of new business throughout the modeling bucket. For each modeling bucket, this calculation results in an average balance amount that is midway between the beginning balance and the ending balance.
  • Bucket End Method: Generates new originations at the end of the modeling bucket. Adding new business at the end of the modeling bucket is effective in terms of processing time, but may result in irregular average balances and interest accruals over the bucket.

For the Target Average method, the system automatically determines the timing of new originations to ensure that the user-input target is achieved. For Rollover business, the system assumes that the roll­over occurs at the time of runoff of existing accounts.

Note:

For distributed originations of Target Growth and Target End balances, Transaction Strategies and future origination in the current position may impact the distributed originations calculation. Because the origination date on Transaction Strategy and current position accounts cannot be modified, the timing algorithm may not be able to find an origination date for the remaining new business which achieves the expected average balance.

The application of each new business method, including how different timing options are applied, is described below:

No New Business

No New Business (forecasting zero changes in balances) is the default method for the Forecast Balance rule. This method allows runoff without replacement of the paid-down balances.

Target End Balance

Use the Target End Balance method to define the total expected balance by the end of each modeling bucket. The new origination amount and the timing of originations within each modeling bucket are determined during processing, as described below:

New Origination Amount

The new origination amount per bucket is calculated as:

Target Ending Balance - Beginning Balance + Total Runoff - Transaction Strategy Originations - Current Position Originations

New Business Timing

For the Target End method, you can choose either the At Bucket End timing option or the Distributed timing option.

At Bucket End: The new origination amount is added on the final date in the bucket. Interest starts accruing on the next day, the first date of the next bucket.

Distributed: The new origination amount is added on the calculated date(s) which allow the average balance to equal the beginning balance plus the ending balance divided by two, accounting for timing of runoff and other originations occurring during the modeling bucket.

Target Average Balance

Use the Target Average Balance method to define the expected average balance per modeling bucket. The new origination amount and the timing of originations within each modeling bucket are deter­mined during processing, as described below:

New Origination Amount

The new origination amount per bucket is calculated as:

2*(Target Average Balance - Bucket Beginning Balance) + Total Runoff - Transaction Strategies Origi­nations - Current Position Originations

New Business Timing

The new origination amount is added on the calculated date(s) which allow the average balance to equal the user-input target average. This calculation accounts for timing of runoff and other origina­tions occurring during the modeling bucket.

Note:

Here, Target Average formula is a general use statement that helps users to understand how Target Average Balance calculations are made and to validate output. Given the complexities of formula inputs, external detail calculation results may vary.

When you are using Target Average, it is recommend that only Target Average Balance is reported as other financial elements may fluctuate widely to achieve average targets from period to period.

Target Growth Percent

Use the Target Growth Percent method to define the expected percentage change in the balance over each modeling bucket, expressed as a percent of the bucket's initial balance. Target Growth can be used to model flat balance sheet by assuming a growth rate of 0%. This method can be set at the node level and inherited to leaf level,* making setup and maintenance efficient. The method does work on products that have no current business and will return 0 (zero) new business, but it is highly advised that you align the forecast balances to products that do have current business, so as not to cause unnecessary processing time. There is no restriction in the number of product/currency combinations that OFSAA can process. However, the duration of the process will increase depending on the number of product/currency combinations.

Note:

This is the only forecast balance method that allows inheritance.

The new origination amount and the timing of origination are determined during processing, as described below:

New Origination Amount

The new origination amount per bucket is calculated as:

(Beginning Balance * Target Growth Percent + Total runoff – Transaction Strategy Originations - Cur­rent Position Originations) for bucket end option, and,

(Beginning Balance * Target Growth Percent + Total Runoff - Transaction Strategy Originations - Cur­rent Position Originations) for distributed option

New Business Timing

For the Target Growth method, you can choose either the At Bucket End timing option or the Distrib­uted Originations timing option.

At Bucket End: The new origination amount is added on the final date in the bucket. Interest starts accruing on the next day, the first date of the next bucket.

Distributed: The new origination amount is added on the calculated date(s) which allow the average balance to equal the beginning balance plus the ending balance divided by two. This calculation accounts for timing of runoff and other originations occurring during the modeling bucket.

New Add Balance

The New Add Balance method defines the absolute amount of new business that is added within a bucket. The new origination amount and the timing of origination are determined during processing, as described below:

New Origination Amount

The new origination amount is equal to the user-input new add balance.

New Business Timing

For the New Add method, you can choose either the At Bucket End timing option or the Distributed Originations timing option.

At Bucket End: The new origination amount is added on the final date in the bucket. Interest starts accruing on the next day, the first date of the next bucket.

Distributed: The new origination amount is added at the mid-point of the modeling bucket. If the mod­eling bucket contains an uneven number of days, the origination is apportioned evenly over the two days in the middle of the bucket.

Rollover

Use the Rollover method to base the amount of new business on the rollover (reinvestment of principal on a given or like products) of existing business. You can roll any combination of prepayments, matur­ing balances, and principal runoff from a product into itself or into another product. For multiple cur­rency processing, rollover processing occurs within each individual currency. Rollover cannot occur between two currencies. The new origination amount into a particular target leaf member and the tim­ing of that origination are described below.

New Origination Amount

For a single target leaf member within a single currency, the new origination amount depends on the rollover sources, which are product leaves of the same currency whose runoff drives the amount of new business generated into the target leaf member. For each rollover source, you must also define the components of principal runoff you would like to roll over. Your choices are:

  • Total: Total runoff includes runoff from all three categories of run-off: scheduled principal payments, prepayments, and maturing balances.
  • Prepay: Prepay includes runoff from prepayments, early repayment of principal balances.
  • Maturity: Maturity incorporates payment of principal on the maturity date, above that incorporated in the scheduled principal payment. Balloon payments and final principal repayment of non-amortizing instruments are included in this category.
  • Payment: Payment runoff includes scheduled principal payment on an amortizing instrument.

For each combination of source leaf and runoff type, you can input a different rollover percent. The new origination amount within a modeling bucket equals the runoff amounts multiplied by the per­centage rollover for all source leaves.

Timing of Rollover

All runoff from sources are added as new business into the target leaf with the proper currency at the average time of runoff.

The average time of runoff is calculated by taking an average of the runoff date weighted by the amount of runoff for all instruments which make principal payments during the modeling bucket.

Note:

Rollover of runoff components, prepayment, payment, or maturity requires that those components exist in the output data set. In a Dynamic Deterministic Process rule, you must select those financial elements from the Calculation Elements block. Otherwise, no new business is generated from those runoff components.

Rollover with New Add

Use the Rollover with New Add method to apply both rollover assumptions and new add assumptions to a single product within a single currency. It allows new business to be driven by reinvestment of existing accounts plus an expectation of new business amounts. The New Add method and the rollover method are applied independently, with the New Add applied first.

Rollover with Growth Percent

Use the Rollover with Growth Percent method to apply both rollover assumptions and an overall Growth Percent assumption to a single product within a single currency. It allows new business to be driven by reinvestment of existing accounts plus an expectation around growth percentage. Growth Percent defined in Target Growth, determines overall growth of product, including rollovers.

Rollover assumption is applied first and is calculated independently on Runoff type selected in rule. To determine Rollover Runoff, see the Rollover. New business via Target Growth is calculated thereafter, and is calculated as

(Beginning Balance * Target Growth Percent + Total runoff - Transaction Strategy Originations - Cur­rent Position Originations - Rollover New Business).

For more information on Target Growth, see the Target Growth Percent.

Account Types and New Business

The availability of a new business method depends on the account type of the product leaf member. The account type of a product leaf comes from its associated Common COA attribute. Setup require­ments for each of the account types are described below:

  • Interest Bearing Accounts:
  • Earning asset
  • Interest bearing liability
  • Off balance sheet receivable
  • Off balance sheet payable

Income Statement Accounts: The only method available is New Add. For these accounts, input the desired income statement value for each bucket. The following account types are classified as income statement:

  • Non-interest income
  • Non-interest expense
  • Interest income
  • Interest expense

Balance Sheet Accounts: The only method available is New Add. For balance sheet accounts, the input amount is interpreted as a balance. The following account types are classified as balance sheet:

  • Other asset
  • Other liability
  • Equity