11.6.1 Transfer Pricing Process and the Propagation Pattern

Transfer Pricing theory suggests that a Transfer Rate on a fixed-rate instrument should apply throughout its entire life (for Fixed Rate Instruments) or Repricing Term (for Adjustable Rate Instruments). We apply this theory to Transfer Rate propagation.

Note:

Adjustment Rates will be propagated regardless of their fixed or adjustable-rate characteristic.

The Propagation Patterns allow you to pull forward (propagate) the Transfer Rate and Matched Spread on any applicable instrument record from a prior period of history. Propagation methodologies are defined at the application level and apply to all TP process rules. When Propagation is Run in a single process, together with Transfer Pricing rate calculations, the TP Engine first propagates rates and then calculates rates for the remaining un-priced records.

Note:

Use the skip non-zero rates selection option in the TP Process to avoid overwriting TP rates on records that have either propagated rates or rates previously populated.

The Propagation process refers to details on the individual instrument records to determine if Transfer Rates are eligible for propagation. For example,

• If an instrument is a fixed rate, then propagate.
• If an instrument is adjustable, and a repricing has not occurred between the prior period and current period, then propagate.

In addition to the general logic, if Transfer Rate calculation is also selected in the same TP Process, then an additional test to confirm whether the TP Method for the applicable products is a “Bulk update” TP method then additionally, the propagation does not happen for related instrument records.

The test to determine if a TP method is a bulk method is as follows:

Spread from Interest Rate Code with mid-period repricing not selected.

Moving Average

Spread from Interest Rate Code or Redemption Curve with mid-period repricing not selected and Origination Date = As-of-Date.

The Standard Transfer Pricing Process allows you to propagate Transfer Rates and Adjustment Rates, and the Stochastic Transfer Pricing Process allows you to propagate Options Costs and Adjustment Rates. Depending upon your requirements, you can choose to propagate prior period results on the Transfer Pricing Calculation Selection block.

The main goal of using propagation is to improve performance. Since Propagation uses a bulk processing approach, it provides a significant performance improvement over processing instruments with a row-by-row approach. Although precise performance numbers may vary depending on the hardware and database configuration, processing a set of instrument records using propagation is significantly faster than doing it on the same set of records on a row-by-row basis.

Note:

The Transfer Pricing engine propagate rates for instruments where it finds a matching ID_NUMBER for the As_of_Date data set and the selected prior period data set. The engine supports maximum ID_NUMBER up to 19 digits.