1. Asset Liability Management User Guide
  2. Oracle Asset Liability Management Process
  3. Key Operational Concepts
  4. The Power of Assumption Rules

8.2.6 The Power of Assumption Rules

You can mix and match any set of combinations of assumptions: Forecast Rate Scenarios, Forecast Balances, Pricing Margins, Maturity Mix Strategies, Discounting Methods, Prepayments, Transaction Strategies, Formula-based Results, and Product Characteristics. The separation of each element of the scenario assumptions means that you can incrementally modify one piece of the modeling equation and easily test its effect. By defining assumptions as distinct rule sets, unlimited batching of scenarios is possible.

How the Model Works

While the specific operation of each section of the model is addressed separately in this guide, a general description of the modeling logic includes the following premises:

  • The current position data defines the existing base oftransactions.
  • New business volumes are generated byassumptions.
  • The maturity mix of new volumes is defined byassumptions.
  • Pricing of new volumes and repricing of existing volumes are defined by ratescenario assumptions and the contractual pricing characteristics of individual transactions.
  • Dynamic prepayment assumptions can be applied to anyaccount.
  • Incremental transaction strategies can beused.
  • Cash flows are determined through the integration of data andassumptions.
  • Assumptions can be flexiblybatched.

Current Position Data

OFS ALM forecasts based on modeling the behavior of existing transactions, as well as those that originate in future periods. The complete cash flow characteristics of each existing transaction are defined in the data structure that is imported into the OFSAA data model on a loan-by-loan and deposit-by-deposit basis. Accounts are also defined to simulate non-interest income and expense.

New Business Volumes

New Add volumes in each period are defined based on a forecast of new incremental volume for each account or calculated based on achieving a Target Balance in the account. The cash flow characteristics of newly originated volumes are determined by the Product Characteristics definitions. New volume assumptions apply to non-interest income and expense accounts as well.

The Maturity Mix of New Volumes

The maturity mix of forecasted volumes originated for an account is determined by assumptionsthat are applied to each element of the account.

Pricing of New Volumes andRepricing

Pricing of newly originated volumes, or repricing of adjustable and variable rate volumes, is determined by the integration of several factors. Each existing or newly originated transaction is linked to a single rate (a market rate) or a yield curve. The actual rate determined at origination or repricing takes into account the prevailing single rate or yield curve. The term of the transaction (if pricing is tied to a yield curve) is also taken into account, as well as other pricing characteristics (margin, life cap, period cap, and so on.). Incremental pricing margins can be applied to new originations on a period-by-period basis for each account.

Dynamic Prepayment Assumptions

You can apply dynamic prepayment assumptions to any account. Prepayments are applied on a loan- by-loan basis. Prepayment assumptions use individual instrument characteristics to driveprepayment behavior.

Incremental Transaction Strategies

Incremental transaction strategies can be defined which create actual originations or sales of assets and liabilities, or Off-Balance sheet transactions.

Cash Flows

Cash flows for every instrument are calculated in every modeling period according to the contractual terms defined in the incoming data and (or) product characteristics definitions, combined with interest rate scenario and prepayment assumptions. Principal and Interest cash flows are recalculated as contractually defined.

Batching Assumptions

Financial forecasts are built through the integration of current position data with each of the modeling scenario assumption elements:

  • Current Position Data (account-leveldata)
  • Forecast Rate Scenario Assumptions
  • Forecast Balance Assumptions
  • Maturity MixStrategies
  • Pricing MarginAssumptions
  • PrepaymentAssumptions
  • TransactionStrategies
  • Discount Method Assumptions (for market valuecalculations)
  • Product CharacteristicsAssumptions
  • Formula ResultAssumptions

The Flow of the Modeling Process

The organization of the OFS ALM menu structure is better understood in the context of the general flow of the modeling process, as follows:

  1. Set up Application Preferences, including:
    • Certain elements of Application Preferences (as of date for data, modeling leaves, andso on).
    • Default values and limitdetails.
  2. Load transaction-leveldata.
    • Load data into the system formodeling.
  3. Perform cash flowedits.
  4. Each of the individual instrument records must be quality controlled. For each instrument record, the cash flow edits check all of the columns used in cash flow calculations for internal consistency. For example, the maturity date must be greater than the origination date, and the payment frequency must be greater than zero. This process is available within ALMProcessing and is a critical step in ensuring that OFS ALM produces expected results.
  5. Define modelingassumptions.
  6. Define assumption sets. These include any number of the assumptions described in thismodule and will minimally include Time Buckets, Product Characteristics, and Forecast Rate Scenarios.
  7. Specify the modelrun.
  8. Select a combination of assumption sets which will be applied to the data you wish tomodel. You may define a single processing run, or a batch of several runs, including multiple sets of assumptions. The run or batch is launched, and results are produced into results tables.