1. Cash Flow Engine Reference Guide
  2. Cash Flow Dictionary
  3. Cash Flow Columns
  4. Net Margin Code (NET_MARGIN_CD)
  5. Module Usage

8.2.90.2 Module Usage

Fixed Net Rate (NET_MARGIN_CD = 1): This setting is used by financial institutions that maintain the loans of other financial institutions. For example, Bank A may service (operate and process) the loans of Bank B. Bank B pays Bank A a fixed spread or margin as payment for maintaining the loans. Because Bank A receives a guaranteed fixed spread, only Bank B gains or loses when the actual loan reprices. For this reason, if the record reprices, Bank A should not experience any change in interest income.

If the detail record's NET_MARGIN_CD field is set to 1 (fixed) and the Model With Gross Rates switch is turned on in the ALM Product Characteristics Rule, the existing business record does not reprice even if the record is an adjustable-rate product (CUR_NET_RATE does not reprice). It is assumed that the rate received by the bank (Bank A) equals the fixed spread that the bank is receiving as payment for maintaining the loans. The record's CUR_NET_RATE field represents this fixed spread and is used for interest income (financial element 430) calculations while the record's CUR_GROSS_RATE is used for prepayments and amortization.

With regards to new business (business originating beyond the AS_OF_DATE), if the Product Characteristics rule's Net Margin Flag is set to Fix Net Rate and the Model With Gross Rates switch is turned on, the rate used to derive new business interest income is taken from the Pricing Margin rule Net Margin and not from the Forecast Rates. This is because it is assumed that the Pricing Margin assumption contains the fixed spread that the bank is receiving as payment for maintaining the loans. The Net Margin from the Pricing Margin Rule is used for interest income calculations while the gross rate, which is derived from the Forecast Rates assumption, is used for prepayment and amortization calculations.

Note:

If the NET_MARGIN_CD is set to Fix Net Rate, but the Model with Gross Rates switch is not turned on, the cash flow engine treats the records as if they were Floating Net Rate.