Creating a Stochastic Transfer Pricing Process

30.2 Creating a Stochastic Transfer Pricing Process

Create a Stochastic Transfer Pricing Process:

To define and execute Option Cost Processing requests.
To calculate option cost and Related Charge/Credit Amounts.
To propagate option costs or adjustment rates for any applicable instrument table from a prior period.
To migrate charges or credits, for funds provided or used, to the Management Ledger Table.
To select alternate columns to Output Option Cost results for each record in an instrument table for a Transfer Pricing Process Run.
To generate Audit Trail Output for Assumption Rule or for All Data.

Figure 30-10 Transfer Pricing - Stochastic Process

This screen allows you to select the Stochastic Process for the Transfer Pricing.

The prerequisites for defining and executing the stochastic transfer pricing processing requests are:

Performing basic steps for creating or editing a Transfer Pricing rule.
Performing basic steps for creating or editing an Adjustment rule.
Performing basic steps for creating or editing a Stochastic Rate Indexing Rule.

To create and execute the stochastic transfer pricing process:

From the LHS menu, select Funds Transfer Pricing, select FTP Processing, and then select the Stochastic Process.

Figure 30-11 FTP Processing - Stochastic Mode summary page

This screen displays the summary of the Stochastic Mode for the FTP Processing.

The following table describes the key terms used for this procedure:

Table 30-2 Fields and Descriptions from the FTP Processing - Stochastic Mode summary page

Term	Description
Product Hierarchy	Displays the selected product hierarchy. The Product Hierarchy allows you to select Product Members to include in the Process. Note, you have two methods for selecting data that will be included in the process. You can select Parents / Children from a hierarchy or you can use Source selection.
Source	Allows you to select one or more source tables to include in your process. If sources are selected directly then the Product Hierarchy will be disabled and selections made within the hierarchy will be lost. Users can utilize one method or the other to define data that will be included in the process, but not both methods at the same time.
Filter	Filters allow you to restrict your data selection based on any attribute that exists within an instrument table. You define filters under Common Object Maintenance and reference your filter within the Product Selection block of your Process. The supported Filter Types are Attribute Filter, Data Filter, Hierarchy Filter, and Group Filter.
Transfer Pricing rule	This LOV allows you to select a Transfer Pricing rule. The Transfer Pricing rule provides the application with assumptions that are applied to products to calculate their transfer rates and option costs.
Prepayment Rule	This LOV allows you to select a Prepayment rule. The Prepayment rule provides the application with prepayment assumptions that you want to apply to products in conjunction with cash flow transfer pricing methods.
Term Structure Model	An Option Cost parameter, governs the generation of one-month stochastic rates, discount factors for each scenario, and discrete rates for any maturity used in calculating the option-adjusted spread.
Smoothing Method	An Option Cost parameter is used to interpolate rates on the valuation curve for terms that fall between given points.
Stochastic Rate Index Rule	An Option Cost parameter is used to define the rates used to index adjustable-rate Instruments under the different Rate Paths generated by stochastic processing. The rates are defined automatically in terms of the valuation curve.
Number of Rate Paths	An Option Cost parameter ranges between 1 and 2000. Greater numbers of rate paths increase accuracy but also increase processing time. Experiment to find the optimal level for your institution's portfolio.
Random Number Generation Method	An Option Cost parameter determines how the Monte Carlo process selects random numbers. The Random Number Generation Method has two variations: Low Discrepancy Sequences: Low-discrepancy sequences, also known as quasirandom sequences, are designed to fill the space uniformly. These achieve better accuracy than pseudorandom sequences when applied to numerical problems, integration in high dimension, and so on. Pseudorandom Sequences: These are the traditional random numbers generated by most compilers. They are designed to do well on some statistical tests: low autocorrelation, the high period before the sequence repeats itself.
Adjustments Rule	This LOV allows you to select an Adjustments rule. The Adjustments rule lets you apply transfer pricing add-on rates to an instrument record for purposes of determining specific charge and credit amounts.
Alternate Rate Output Mapping Rule	This LOV allows you to select an Alternate Rate Output Mapping rule. The Alternate Rate Output Mapping rule lets you select the alternate columns to output option cost, and adjustment calculation results for each record in an instrument table for a stochastic transfer pricing process run. This functionality allows you to output more than one option cost, or adjustment calculation result for each record in the instrument table through multiple transfer pricing process runs.
Calculation Method	Within the Calculation Selection block, there are two calculation options: Standard or Remaining Term. Standard is the most commonly used method and applies traditional transfer pricing logic. The remaining Term allows you to assign Transfer Rates based on current period rates.
Smoothing Method	A calculation selection parameter, Smoothing Method allows users to decide between Linear, Cubic Spline, or Quartic Spline interpolation methods. This selection affects how rate lookups happen for terms that fall between anchor points on your Interest Rate Curves.
Charge Credit Method	A migration block parameter, the Charge Credit Method selection determines how the Ledger Level TP Charge or Credit is calculated during the migration process. There are two options available: Instrument Level: With this method, the instrument level charges and credits that were posted during the Stochastic process are added and posted to the Ledger table, together with the weighted average Option Adjusted Spread and Static Spread. Ledger Level: with this method, the balance of the instrument (average, ending, or other) to arrive at weighted average rates weights the instrument level OAS and Static Spread. The weighted average rates are migrated to the Ledger table and multiplied by the corresponding Ledger Balance (average or ending) to arrive at the charge/credit amount.
Charge/Credit Accrual Basis	Select the Charge/Credit Accrual Basis on the Transfer Pricing Process Migration block or, define the Accrual Basis as an attribute for each Product dimension member in the Dimension Management – Members screen. In case no selection is made, a default Accrual Factor of Actual/Actual should be applied. Charge/Credit Accrual Basis denotes the basis on which the Ledger level interest accrual is calculated. You need to select the accrual factor to be applied when calculating the Ledger Level cost of funds. For instrument-level charges and credits, the accrual basis from the instrument record is always used. When the Ledger Level charge/credit method is selected, the cost of funds is calculated using the following formula: Option Cost Charge = (Static spread - OAS ) x Balance x (1 - percent sold/100) x accrual basis The type of balance is determined by the TP Charge Credit Balance selection made within TP Application Preferences. Choices include Average Balance, Ending Balance, or Other Balance. Oracle Funds Transfer Pricing offers the following accrual basis options: 30/360: This is the default Charge/Credit Accrual Basis option. It applies the accrual basis calculation of 30 days divided by 360 days. Actual/360: Applies the accrual basis calculation of the number of days in the month divided by 360 days. Actual/Actual: Applies the accrual basis calculation of the number of days in the month divided by the number of days in the year. 30/365: Applies the accrual basis calculation of 30 days divided by 365 days. 30/Actual: Applies the accrual basis calculation of 30 days divided by the number of days in the year. Actual/365: Applies the accrual basis calculation of the number of days in the month divided by 365 days. Business/252: Applies the accrual basis calculation of the number of business days in the month divided by 252 days. A Holiday calendar selection is required if the business/252 accrual basis is selected. If the holiday calendar is not selected, the engine considers Accrual type ACT/ACT as a default for calculation.
Accrual Type	A Calculation Selection Parameter and Migration Block Parameter. Users have the option to choose between Monthly and Daily charge/credit accrual. The default selection is Monthly. If Daily is selected, a holiday calendar is also required to determine the number of days to accrue. For example, on weekdays (Monday - Thursday), 1 day of accrual will be posted and on weekends (Friday), 3 days of accrual will be posted at Friday's rate. When additional holidays are encountered on any other day of the week, similar logic is applied to extend the number of accrual days accordingly.
Currency Output	A migration block parameter allows you to select the output currency. Oracle Funds Transfer Pricing offers you the following currency output options: Entered and Functional Currency Functional Currency Only The following example illustrates the difference between entered and functional currency. A bank's loan may have Yen as entered currency. However, the bank might use the US dollar to display its consolidated annual results. In this case, the US dollar is the functional currency. In other words, the currency in which an organization keeps its books is its functional currency.
Migration Dimensions	Dimensions for which you want to migrate charges or credits, for funds provided or used, to the Management Ledger Table. Oracle Funds Transfer Pricing provides you with a Shuttle Control component to specify migration dimensions.
Available Dimensions	One of the two Shuttle Control windows, it contains the names of the dimensions available, in addition to the selected Product, for inclusion during the migration process. The dimensions available are: Common Chart of Account Organizational Unit GL Account Product Legal Entity Note: Only the Management Table processing key dimensions are available for inclusion during the migration process.
Selected Dimensions	One of the two Shuttle Control windows, it contains the names of the dimensions, in addition to the selected Product dimension that has already been selected for migration.
Audit Options	Within the Audit Options block, you have the option to output detailed cash flows. Select the check box to enable this option and define the number of instrument records for which you would like to output details. Note, the Administrator can limit the maximum number of instruments for which you can compute cash flows because this can be a time-consuming process. In any case, the maximum allowable value is 10,000 instruments. Additionally, the Enable FTP Audit Trail Output option allows you to select the relevant option to either reading the Audit Preference from the assumption table or generating an Audit Trail for all data. If you select the check box Enable FTP Audit Trail Output, then it is mandatory to select one of the options for the Audit Trail. When you select the Enable Audit Trail Output option, by default Read Audit Preferences from Assumption Rule is selected.
Freeze Process	The freeze process block allows you to finalize the assumptions made in the Process definition flow or to clear all assumptions.

Complete standard steps for this procedure.
Additional Steps to Specify Stochastic Transfer Pricing Process Parameters.
Product Selection Block:

Figure 30-12 Stochastic Process - Product Selection
1. Select a Product Hierarchy and select nodes from the hierarchy corresponding to data you want to include in the process.
2. Alternatively, select the Source Selection button, and select the instrument tables corresponding to the data you want to include in the process.
3. Select a Filter (optional), to constrain the data to be included in the process. Filters work as a secondary constraint, applied after the data set is determined based on Product Hierarchy Member Selection or Source Selection.
  
  Tip:
  Before using the product hierarchy approach for selecting data to include in your process, there is a procedure that must be Run (“PRODUCT TO INSTRUMENT MAPPING”). This procedure can be executed from the Batch Scheduler – Run - interface.
  
  The purpose of the Product to Instrument mapping procedure is to scan all instrument tables (FSI_D_xxx) and populate the mapping table (“FSI_M_PROD_INST_TABLE_MAP”) with a listing of the product dimension members that exist within each instrument table. When you select Products (parents or children) within an ALM or FTP process definition, the process refers to this mapping table to identify the instrument tables to include in the process.
  
  It is recommended that you establish an internal process whereby this procedure is executed after every data load to ensure that mappings are up to date.
  
  For more information on the Product to Instrument Mapping Procedure, see OFS Data Model Utilities User Guide.
4. Select Source from Source Selection.
  You can select both Ledger Stat and New Management Ledger table at the same time. You can select only one Ledger Table per FTP process, either Ledger Stat or the Management Ledger. Multiple Instrument tables are allowed as usual. The engine is using the selected Ledger Table for both Direct Transfer Pricing of Ledger Balances and Ledger Migration. Therefore, the engine will work only on one Ledger Table, not on multiple within any single FTP Process.
5. Select Apply.
Calculation Selection Block:
1. Select one or more calculation elements required for the process. You must select at least one calculation item from Option Cost, Adjustments, or Migration.
2. Choose Skip Non-Zero rates (optional) if you have already populated Option Costs or Adjustments through a separate process.
3. Choose the Charge / Credit calculation (optional), to calculate and output the Instrument level TP charges and credits. If you select the Instrument Charge/Credit option, you must also choose between Monthly and Daily charge/credit accrual. The default selection is Monthly. If Daily is selected, a holiday calendar is also required (defined within the TP Rule for each applicable product/currency) to determine the number of days to accrue. For example, on weekdays (Monday - Thursday), 1 day of accrual will be posted and on weekends (Friday), 3 days of accrual will be posted at Friday's rate. When additional holidays are encountered on any other day of the week, similar logic is applied to extend the number of accrual days accordingly.
4. Choose Option Cost Propagation/Adjustment Propagation (optional) after selecting Option Cost, to pull forward rates from a prior period based on the Propagation Pattern definition.
5. Choose All-in Transfer Rate (optional) if you want the TP process to calculate and post the All-in Transfer Rate for each instrument record. This option allows you to define the aggregation logic for combining any Add-on Rates with the base Transfer Rate. When you select the search icon, you can define for each product the rates to include in the calculation and the related signage for each rate.
  
  Figure 30-13 Stochastic Process - All-In Transfer Pricing Rate Mapping Definition Mode
  
  Note:
  If you select the Output Audit Trail checkbox, the engine reads this option and generate the output audit data (ALL_IN_TP_RATE) at the time of processing. By default, this checkbox will be unchecked.
6. Choose Alternate Rate Output Mapping (optional), to assign Option Cost results to alternate columns.
7. Choose Migration Options (optional), if you want to include migration of your Option Cost results to the Management Ledger Table.
8. Choose the Calculation Mode. The default selection is Standard, which applies traditional transfer pricing logic within the process. This entails calculating transfer rates for Fixed-Rate Instruments from the Origination Date (or TP Effective Date if provided) and Transfer Pricing Adjustable-Rate Instruments from the Last Repricing Date. If the remaining term is selected, the effective date for Transfer Pricing all instruments will be the current “As-of-Date”.
9. Select Apply.
  On selecting a calculation element, you will notice the corresponding assumption rule blocks become mandatory (shaded blue).
Rule Selection Blocks:

Figure 30-14 Stochastic Process - Rule Selection
1. Select the assumption rules corresponding to each calculation element. The blocks shaded blue are mandatory and the blocks shaded grey are optional.
  The standard assumption rules are included in this step. Notice the Stochastic Process Flow has one additional Parameter Block, Option Cost Parameters:
  - Select a Term Structure Model
  - Select the Number of Rate Paths
  - Select the Smoothing Method
  - Select the Random Number Generation Method
  - Select a Stochastic Rate Indexing Rule
2. Select Apply.
Select Migration Parameters:

Figure 30-15 Stochastic Process - Migration Parameters
1. Select the Migration Charge/Credit Method. Choose either Account Level or Ledger Level.
2. Choose between Monthly and Daily charge/Credit Accrual. The default selection is Monthly. If Daily is selected, a holiday calendar is also required to determine the number of days to accrue. For example, on weekdays (Monday - Thursday), 1 day of accrual will be posted and on weekends (Friday), 3 days of accrual will be posted at Friday's rate. When additional holidays are encountered on any other day of the week, similar logic is applied to extend the number of accrual days accordingly.
  
  Note:
  The Accrual Type selection is only available for Account Level migration when the "Daily" accrual option is also selected on the Calculation Selection page.
3. If the Ledger Level Charge / Credit method is selected, then also specify the Accrual Basis source as either the Product dimension attribute or constant value.
4. Select the Currency Output option. Choose either Functional Currency Only or Entered and Functional Currency.
5. Select the Migration Dimensions.
  
  Note:
  On selecting the Dimension Selection button (see above), Oracle Funds Transfer Pricing provides you with a Shuttle Control component to select the dimensions for the migration process. The two areas of the Shuttle Control are Available Dimensions and Selected Dimensions. You can move dimensions from Available Dimensions into Selected Dimensions and vice versa by using the Move, Move All, Remove, and Remove All buttons.
6. Select Apply.
Select Audit Options:

Figure 30-16 Stochastic Process - Audit Options
1. Select the Detailed Cash Flows option to output cash flow details for instrument records. This option is used for audit purposes when users want to validate the cash flows being generated by the cash flow engine for certain types of instruments.
2. Select the Number of Records to include in detail cash flows. This input is constrained by the FTP Application Preference setting and controlled by the Administrator. The selection of a large number of instrument records to include in detail cash flow output can result in a very time-consuming process. Within Transfer Pricing, the maximum value for the Number of Records input is 10,000.
3. Select additional parameters for detailed cash flows. The default values for the number of records is “Total Number” and “First n Rows”. It is also possible to specify the number of records per Product ID and Random selection as opposed to the First n.
4. Select 1 Month Rates and Forward Rates options to output rate details which can be accessed by the Business Intelligence applications for reporting.
5. Select Enable FTP Audit Trail Output to generate the audit data at the time of processing. You can select the relevant option for generating audit data for the entire data or read the audit preference from the assumption rule.
6. Select Apply.
Freeze Process:

Figure 30-17 Stochastic Process - Freeze Process
1. Select Freeze to save the process.
2. Select Reset to erase all selections made previously within the Process Definition Flow.
Select Confirm.