Before you can start to create any loan agreements, you must create the right kind of Instruments. New instruments can be created by clicking "Add new" or by copying an existing one.
When you are creating an IRS / CCIRS instrument, create it from "Add new IRS". You have the same items explained below.
When you are creating instruments for internal loans and you want to maintain the agreement from both angels in the system, you need to specify in ‘Instrument Settings’ that you are able to create mirror agreements from the main agreement. This can be done to an Instrument after the initial save. Usually, internal deals are created from the parent company point of view and then copied (mirrored to subsidiary). After you have saved the Instrument for the first time, you have the possibility to Activate the "Can have mirror deal" option and then specify what the mirror instrument type is with this main Instrument. These will appear in the bottom of the list in ‘Instrument Settings’. Keep in mind that you need to have one Loan type and one Inv type to carry on.
All fields explained here:
Name
Give the instrument a name that explains the type of loan really clearly when creating a loan, so that the process runs smoothly. Also, in accounting you can route postings based on the instrument to different accounts, meaning you can split different kinds of loans between instruments.
For example, you can name one Instrument "Fixed internal loan /360", so you know that the loan has a fixed interest, internal and interest calculated with act/360.
Dealtype
DEPO - 3/12M - This dealtype is for commercial paper investments where the entity is a lender. The options 3 or 12 M does not have any effect at this point, meaning that you can choose either one.
INVST or INVLT - This dealtype is for normal type of loan investments where the entity is the lender. The options ST or LT does not have any effect at this point, meaning that you can choose either one.
LOANST or LOANLT - This dealtype is for normal type of loan where the entity is a borrower. The options ST or LT does not have any effect at this point, meaning that you can choose either one.
EMIO - 3/12M - This dealtype is for commercial paper emissions where the entity is the borrower. The options 3 or 12 M does not have any effect at this point, meaning that you can choose either one.
BOND - EMI - This dealtype is for bond loans where the entity is the borrower. A bond type means that it takes into consideration the premium paid/received in the start while also calculating the valuation for the agreement using market quotation.
BOND - INVST - This dealtype is for bond investments and it involves that the entity is the lender. A bond type means that it takes into consideration the premium paid/received in the start while also calculating the valuation for the agreement using market quotation.
Day count convention
With day count convention you can define the way interest is calculated for the loan.
Act/360 - This convention is used in money markets for short-term lending of currencies, including the US dollar and Euro, and is applied in ESCB monetary policy operations. It is the convention used with Repurchase agreements. Each month, the convention is treated normally and the year is assumed to be 360 days. For example, in a period from February 1, 2005 to April 1, 2005, the Factor is 59 days divided by 360 days.
Act/365 - Each month is treated normally and the year is assumed to be 365 days. For example, the period between February 1, 2005 and April 1, 2005, has a considered Factor of 59 days divided by 365.
30/360 - This is normally used with bond instruments. Treating a month as 30 days and a year as 360 days was devised for ease of calculation by hand, compared with manually calculating the actual days between two dates. Also, because 360 is highly factorable, payment frequencies of semi-annual, quarterly, and monthly will be 180, 90, and 30 days of a 360-day year. This means that the payment amount will not change between payment periods.
When you create an interest flow to a loan where there is a 30/360 day count convention, you need to create the interest periods starting from the 1st day of the month (Interest calculation start date) and ending the 1st day of the period end (End date of first interest calculation period).
30/365 - Treating a month as 30 days and a year as 365 days was devised for its ease of calculation by hand compared with manually calculating the actual days between two dates.
When you create an interest flow to a loan where there is a 30/365 day count convention, you need to create the interest periods starting from the 1st day of the month (Interest calculation start date) and ending the 1st day of the period end (End date of first interest calculation period).
Act/Act - This convention accounts for days in the period based on the portion in a leap year and the portion in a non-leap year. The days in the numerators are calculated on a Julian day difference basis. In this convention, the first day of the period is included and the last day is excluded.
Business day convention
With this setup you can define the way you alter payment dates if the payment goes to a day that is not a business day. Currently, we have in the system only weekends Sat-Sun as non-business days. This is where you can specify how to treat the payment if it would naturally go into the weekend.
No adjustment - paid on the actual day, even if it is a non-business day.
Previous - the payment date is rolled on to the previous business day.
Following - the payment date is rolled on to the next business day.
Modified previous - The date will be the first preceding day that is a Business Day, unless the first preceding Business Day is in the previous calendar month; in which case that date will be the first following day that is a Business Day.
Modified following - The date will be the first following day that is a Business Day, unless the first following Business Day is in the next calendar month; in which case that date will be the first preceding day that is a Business Day.
End of Month - No adjustment - the payment date is rolled on to end of the payment month, even if it is a non-business day
End of Month - Previous - the payment date is rolled on to the end of the payment month, if it is a non-business day to a previous day business.
End of Month - Following - the payment date is rolled on to the end of the payment month, and if it is a non-business day it rolls to a next day business.
Fixed loan interpolation method for discount cashflow valuation
This is where you can define that if you are calculating a valuation for a fixed interest rate loan using a discount method, you might want to pay attention to the yield curve. The valuation will be calculated on the Loan valuation report yielding an unrealised result in accounting.
Multiple rates based on each payments - By choosing this option you need to have the full yield curve for the date of the valuation calculation. The system will then interpolate the used interest rate for each payment to be discounted. You need one interest rate for a reference rate that has a tenor of 1D or 1W, and another one that goes beyond the final payment of the loan.
Single rate based on maturity date - Using this method the system will only look for the maturity date of the loan, and then interpolate an interest from the yield curve using that date while also appointing that rate for all payments of the loan flow.
For example, if the loan matures in 3,5 years, you’ll find valuation date rates in the system for 3Y 3% and 4Y 4%. Following this step, the system will discount with 3,5 % interest all payments into the present value.
Discount method for floating loan
This is where you can define that if you are calculating a valuation into a floating interest rate loan using a discount method, you might want to pay attention to the yield curve. The valuation will be calculated on the Loan valuation report, pinpointing an unrealised result in accounting.
Discounting a full payment schedule - By choosing this option, you need to have the full yield curve for the date of the valuation calculation. Afterwards,the system will interpolate for each payment the used interest rate to be discounted. You need one interest rate for a reference rate that has a tenor of 1D or 1W, and another one that goes beyond the final payment of the loan.
Discounting only the first interest flow - With this method the system will only look for the closest interest payment of the loan from the valuation date, and then interpolate an interest from the yield curve using that date. Following this step, it will then use that rate for that interest payment only + the unpaid debt amount of that valuation date.
For example, if the next interest payment is within the next month, you’ll find the valuation date rates for 1W 2% and 1M 2,1% in the system. Then, the system will discount with 2,05 (not exact interpolation) % interest the first interest payment + the current unpaid debt into the present value.
Price type
Clean - meaning whether or not interest has been accrued at the time of the loan valuation for that loan; then, it will be excluded from the valuation.
Dirty - Means that accrued interest will not be excluded from the valuation, if there is a valuation.
Display cash flow table
Should be always active - Meaning whether we are displaying the payment flow or not.
Display floating interest rate table
Should be always active. The floating interest rate table will only appear if you choose the loan to be floating. It is recommended to put this on active mode.
Rate can be negative
By activating this option you make it possible for interests to go below zero when you have a floating rate loan, and you enable the system to update the interests from the interest rate table. You should just know from the agreements that you are making interests can be negative or not. If this is left unactivated and the reference rate is negative, then the system will update the interest for the floating rate loan, but with zero interest for the floating base rate.
Include extra day in interest calculations
By leaving this option on inactive mode you include the first day of the first interest calculation period, and you always do not include the last day of that interest period. This means that the last interest day of the first interest period is added to the second interest period as first day.
By activating this option we will begin calculating the interest period from the first day and end it to the last of the interest period. To calculate the interest days correctly, we then need to add one day to the end into the calculation, thus explaining the reason for the tab header.
In simple terms, if your interest period is 1.1.2020-31.3.2020, you want there to be 91 days in the interest calculation. By leaving the tab inactive - and selecting the last day for the first interest calculation period as the last day of the quarter - the system calculates the dates from 31.12.2019-31.3.2020. The system will leave the last day of a calendar month (e.g.31.3.2020) out. You can also create the interest flow so that you select the last day as the first day of next quarter. This means that the remaining days are 1.1.2020-1.4.2020, so it leaves 1.4.2020 and you will have 1.1.2020-31.3.2020.
By activating this option as the last day of the quarter, the system calculates the period between 1.1.2020-31.3.2020 + one day to the end.
If you have a floating rate agreement, you should just notice that if this is not active and your interest calculation period ends at 31.12, you would want to apply a new interest starting from 1.1 onwards. Following this step, you should update the new interest for the last day of the new interest period. If you want the new interest to be applied to 1.1.2020, put the new interest to 31.12.2019, and update the interest to the date of 1.1.2020 if the option is active.