11.4.2.1 Breakage Charge – Economic Loss

Figure 11-30 Adjustment Rule Details - Adjustment Method as Economic Loss

The Economic Loss Breakage Charge method sets out to compute the cost to the organization (economic loss) incurred for terminating the funding liability (also known as the shadow liability). The calculation assumes the funding liability has the exact attributes of the funded/terminated instrument. The rate of the funding liability is equal to the Transfer Rate. Economic Loss is computed as follows:

For Assets:

Economic Loss =BV - MV

For Liabilities: Economic Loss = MV– BV

Where:

• MV: Market Value of the funding Liability
• BV: Book Value of the broken instrument

The following is a simplified example of the Economic Loss calculation for a standard Term Deposit:

• Book Value: $1,000.00
• Original Term: 24 Months
• Break after: 12 Months
• Original TP Rate: 2.40% (based on straight term method)

Table 11-11 Reference Rates

Effective Date	1 M	12 M	24 M
At Origination	2.00	2.40	1.75
At Month 12	2.00	2.40	1.75

Table 11-12 Cash flows of remaining funding after break event

		Original
		TP COF	Total
Month	Principal	@ 2.40%	CF Orig TP
13		$ 2.00	$2.00
14		$2.00	$2.00
15		$2.00	$2.00
16		$2.00	$2.00
17		$2.00	$2.00
18		$2.00	$2.00
19		$2.00	$2.00
20		$2.00	$2.00
21		$2.00	$2.00
22		$2.00	$2.00
23		$2.00	$2.00
24	$1,000.00	$2.00	$1,002.00
Market Value at Month 12		1,003.957
Book value		-1,000.00
Breakage charge		3.957

Note:

If you are calculating Breakage Charges, using the Economic Loss method, you must select the "Remaining Term" option in your Transfer Pricing Process, to generate the correct cash flows for the funding liability.

Both Current and Prior period cash flows will be logged which are used for Break Charge calculations in FSI_O_PROCESS_CASH_FLOWS, table using the Record Sequence (n,n+1) for Prior/Current period record respectively. Thus, the ID Number and Record Sequence can help to identify if Cash Flows in the FSI_O_PROCESS_CASH_FLOWS belong to prior or current period record.