5.3.2.2.1 Forecasting Methods
The new business methods within the Forecast Balance rule determine how new business assumptions are applied per MDBSS node within each active currency. They consist of:
- No New Business
- Target Growth Percent
- New Add Balance
- Target End
- Target Average
- Rollover
All forecast methods use the Distributed timing option.
Distributed Timing 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.
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:
Forecasting at a Mid-Branch Node
Forecast Methods can be assigned at any node on the MDBSS. When assigning a Forecast Method to a non-terminal MDBSS node it may require the Application to consider the balance effects of all the child nodes. For example, when using Target Growth Percent at a non-terminal node, that target node will consider the balances of its child nodes when calculating the forecast amount. The target node's new business originations will occur on the target node.
Forecast Methods that must consider the balances of any child nodes:
- Target Growth Percent
Because the MDBSS can retain balances on any node at any level, the forecasting at a parent node must account for the consolidated balances of its child nodes. These balances in aggregation will be taken into consideration when computing the amount of new originations needed at the target node. All child balances includes both existing and new business originations.
Child nodes may also use any forecast method supported. If one or more child nodes of the target nodes contains a forecast method then those new originations will be computed first and, working up the branch, will be included when the parent node is reached.
In this hypothetical MDBSS branch, all planning and evaluation starts at node "L4" first, then systematically works its way up the branch to L1 which will be evaluated last. Each node's existing new business originations, if any, are evaluated in this manner.
For all target types there is only one timing option to indicate when new business for a new account should be originated.
- Distributed: 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.
Forecasting from an MDBSS Currency Node
In the MDBSS one or more nodes may be of the currency dimension. Any currency dimension member and all of its child nodes inherit this identity for all forecasting. For example, if an MDBSS node is currency member "GBP" then all forecast balances placed on this node (or its child nodes, if any) will also be GBP. If the currency of the Forecast Balances page filter is not the same as the MDBSS node currency then that node or its child nodes cannot be modified.
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 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 placed on any node of the MDBSS, even if that node has no existing balances for itself. If the method is placed at a node that has one or more child nodes then the balances of those child nodes are taken into account when calculating the amount of new originations. The new business generated will appear on that node and not on its child nodes. If the target node and all of its child nodes have no new or existing balances then the target node will return no new business.
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 depends upon whether the MDBSS node has one or more child nodes.
MDBSS Node with no child nodes:
(Beginning Balance * Target Growth Percent + Total Runoff - Transaction Strategy
MDBSS Node with one or more child nodes:
(Sum(Beginning Balance * Target Growth Percent) + Sum(Total Runoff) - Sum(Transaction Strategy) - Sum(Current position originations + child New Add balances)
- New Business Timing
For all forecast methods, only the distributed originations is supported
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. This forecast method can be placed on any node in the MDBSS. 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 all forecast methods, only the distributed originations is supported.
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.
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 all forecast methods, only the distributed originations is supported.
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
If MDBSS node has child node:
2 * (Target Average Balance - sum (Beginning Balance)) + sum (Total Runoff) - sum (Trans Start) - sum (Cur Pos Orig)
- sum (Foreign node rollover) - sum (Child New Add)
- 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 the timing of runoff and other originations occurring during the modeling bucket.
Note:
Here, Target Average formula is a general statement that helps users 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.
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.
Account Types and New Business
All MDBSS nodes may use all available Forecast Methods regardless of the Account Type attribute.