A swap is a derivative in which two counterparties exchange two cash flow streams. These streams are called the legs of the swap.
See “Understanding Swap Investments” on page 129.
2 Set Up Swap Investments.
To set up a swap contract in Geneva, you first define a Swap Investment, which specifies the notional investments held by each party. You define a Swap Investment by specifying the swap’s notional and default financing investments, accounting options, and reset schedule and options.
See “Setting Up a Swap Investment” on page 131.
See “Understanding Contracts For Difference (CFDs)” on page 160.
See “Understanding Credit Default Swaps (CDSs)” on page 162.
3 Enter swap transactions.
The type and frequency of transactions you enter will depend on the definition of the Swap Investment and its reset schedule.
See “Opening and Closing Simple Swap Contracts” on page 144.
See “Opening and Closing Basket Swaps” on page 148.
See “Resetting a Swap Investment” on page 150.
See “Transferring a Swap Investment” on page 152.
See “Reorganizing a Swap Investment” on page 156.
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Understanding Swap Investments 129
Understanding Swap InvestmentsA swap is a derivative in which two counterparties exchange two cash flow streams. These streams are called the legs of the swap. The cash flows are calculated based on a notional principal amount. Swaps are often used to hedge certain risks, such as interest rate risk. Another use is speculation.
A swap’s underlying investments are notional investments, that is, they are “off balance sheet”—neither party in the swap holds (or is required to hold) these investments for the swap to take place. Instead, each party agrees to act as if it holds the notional investment and receives income from it. The parties then exchange the income cash flows that these investments would generate. The parties can also exchange the difference in the unrealized gains on the notional investments that they hold.
For every contract you enter, you must have a counterparty. The counterparty is the party with whom you exchange income payments. The notional investments (also called swap elements) that each party in the swap holds are called a “leg” of the swap, as follows.
Note: Geneva’s TWR Performance module does not calculate performance returns correctly for Credit Default Swap (CDS) investments or basket swaps. Geneva’s IRR Performance module does not calculate performance returns correctly for any swap.
Swap Terminology
Underlying investment: This is the “notional” investment for which the two counterparties are swapping cash flows. The counterparties may or may not actually own the investments they swap, thus the underlying can also be called a “notional” investment. It is also called a “generic” investment.
Notional value: The spot price of an underlying investment. This is used to calculate payments on the swap.
Financing investment: A notional investment used to finance the purchase of an underlying investment. The financing investment can be a bond or a Geneva-specific Financing investment. Interest payments on a Financing investment are equivalent to payments on a loan.
This party holds the notionalinvestments in the
and receives income from the notional investments in the
For the portfolio, this is the
Counterparty In leg Out leg. Long position.
Portfolio Out leg In leg. Short position.
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Types of Swaps
A swap’s notional investments can be equities, bonds, options, or rights/warrants. A simple swap with an underlying investment in one leg and a financing investment in the other is called a total return swap. A swap with more than one notional investment in one or both legs is called a basket swap. Other types of swaps that you can set up in Geneva include:
Overview of Financing investments
A swap can be used to finance the purchase of the notional investment. Such a swap is called a financing swap. When you set up a financing swap in Geneva, you specify a fixed-income investment to be the swap’s financing investment, which records the terms of the loan that the portfolio or counterparty secured to purchase the notional investment. The financing investment’s interest payments represent the payments on the loan. You can use a bond or a Financing investment to serve as a swap’s financing investment. The main difference between using a bond and a Financing investment is the way payments are made.
Type Description
Interest rate swaps
Swaps that hedge against fluctuations in interest rates.
Credit default swaps
Swaps that hedge against another investment (called the reference investment) going into default. Long represents buying protection; short represents the portfolio selling or underwriting protection. You can open CDSs with no cost, or with an upfront cost. Similar to bonds (which pay interest to the buyer), except that CDSs pay interest at regular intervals to the seller.
Contracts for differences (CFDs)
Similar to financing swaps, except that Geneva recalculates the face value each day as the total of the closing market values of the financed instruments. Then Geneva multiplies the day’s face value by the Financing instruments interest rate to determine the day’s interest finance charges (also called “margin”).
If you use a: Then Geneva does this:
Bond Geneva creates a coupon schedule as it would for any other bond, and then generates GDTP Interest Receipt transactions based on the bond’s nominal coupon dates, regardless of the Swap Investment’s reset schedule.
For swaps not priced explicitly, the bond’s current market value is also used in the market value calculation (and thus unrealized gain/loss at reset).
Financing investment
Geneva uses the Swap Investment’s reset schedule to determine when to record interest payments.
In calculating market value, Geneva always assumes the Financing investment is valued at Par = 100. Thus the Financing investment’s value does not contribute to gain/loss calculations, even if you enter a non-100 value for the current face in the portfolio’s price schedule, and even if the swap’s market value is defined to be based on the price of underlying investments (that is, the swap is not priced explicitly).
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Setting Up a Swap Investment 131
Advent recommends that you use Financing investments rather than bonds, both because the interest payments are automatically coordinated with the swap reset schedule, and also because they are easier to set up and maintain.
When you open a new swap contract, you can select a financing investment that is different than the one in the Swap Investment. This represents the specific financing terms for that contract, if they differ from the default financing investment in the Swap Investment. You can also specify a different financing investment each time that a swap resets, to represent a renegotiation of the swap’s financing terms.
By default, portfolios receive payments from financing investments that they hold short (that is, loans to the counterparty), but you can specify that they do not. You can also specify that they receive payments from financing investments that they hold long, such as for “hard-to-borrow” notional investments.
Note: Bonds that custody coupons on trade date cannot be used as financing investments. Also, in calculating accruals for bonds with 30/360 accrual calendars used as swap financing investments, Geneva incorrectly treats February as having 30 accrual days.
Setting Up a Swap Investment
To set up a swap contract in Geneva, you first define a Swap Investment, which specifies the notional investments held by each party. You define a Swap Investment by specifying the swap’s:
Underlying investment or investments.
Default financing investments.
Accounting options.
Reset schedule and options.
You then use transactions to open specific contracts for those swaps, and to record when the swap resets or closes. Using Swap Investments allows you to enter multiple contracts for the same sets of notional investments; you need only specify the quantities, prices, and FX rates specific to that contract.
Dependent events, such as Split/Stock Dividend transaction, that you enter for investments that you use as swap notional investments also affect the swap’s notional positions. You can also enter Gross Amount Dividend Receipt and Gross Amount Interest Receipt transactions for Swap Investments. For information about reorganizing swaps and swap notional investments, see “Reorganizing a Swap Investment” on page 156.
Note: Index-adjusted bonds cannot be swap notional investments. Also, in reports for swaps with a single notional investment, the quantity of the generic investment appears as the quantity of the Swap Investment. For all other swaps, reports display a quantity of 1 for the Swap Investment.
in HelpDetails
swaps, defining investments
CFDs, defining
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Setting Up a Swap Investment132
The Closer Look that follows describes how to set up Financing investments, and either a simple swap or CFD (a swap with a single notional investment in one or both legs), or the Swap Investment for a basket swap or CFD (a swap with more than one notional investment in one or both legs).
For details on setting up See
Multicurrency swaps “Setting Up a Multicurrency Swap” on page 134.
Bank debt swaps “Setting Up a Bank Debt Swap” on page 135.
Basket swaps “Opening and Closing Basket Swaps” on page 148.
Financing investments are similar to bonds, but display only those settings necessary to define swap’s or CFD’s financing terms. To define a Financing investment, choose Define ➤ Investments ➤ Swap Instruments ➤ Financing. Define the information on the General, Pricing, Groupings, and Misc tabs as for other investments. Then, click the Financing Specific tab to enter details about the Financing investment.
A Enter the investment’s issue, dated, and maturity dates. The investment’s interest day count begins on its dated date.
B Enter the financing rate. This can be a negative rate. If you do not want Geneva to accrue interest for the investment, enter an interest rate of 0, or a dated date far in the future.
C Use these fields to define the investment’s accrual calendar. You can use ACT/ACT, ACT/360, or ACT/365 accrual calendars.
D Use these fields for a variable rate financing investment.
B
C
A
D
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Setting Up a Swap Investment 133
A Closer Look at Setting Up Swap Investments
To define a Swap Investment, choose Define ➤ Investments ➤ Swap Instruments ➤ Swap Investment. Define the information on the General, Pricing, Groupings, and Misc tabs as for other investments. Then, click the Swap Specific tab to enter details about the Swap Investment.
A How market value is calculated. For details, see “Opening and Closing Simple Swap Contracts” on page 144.
B If you want Geneva to price the swap’s notional investments using a specific price list, rather than the portfolio’s price schedule, enter that price list here.
C Specify what takes place when a swap resets. For details, see “Resetting a Swap Investment” on page 150.
D For a bank debt swap, define the unfunded entitlement percentage. This is the percentage you receive of any fee the lender charges for unused credit. For example, if you receive 75 percent of the unfunded commitment fee, put 75 in this field.
E Define the swap’s reset schedule. For details, see “Resetting a Swap Investment” on page 150.
F Select this to define a basket swap. For details, see “Opening and Closing Basket Swaps” on page 148.
G How Geneva treats an interest payment’s nominal date if it occurs on a non-business day.
H For a CFD, identify the date when CFD accruals begin. This is typically the settlement date of the Swap Investment's opening transaction. For details, see “About CFD Accrual Accounting” on page 161.
I For a CFD, enter Daily.
J For a simple swap, enter the notional investment in each leg.
K For a financing swap or CFD, enter the swap’s default financing investments, and specify whether the portfolio receives financing payments from the short financing investment. A CFD’s financing investments must be Financing investments. Both a long and a short financing investment are required for basket swaps.
L If either party receives only part of the underlying investment’s dividends, enter the percentage they receive.
B
CF
AC
D
G
E
J
K
H
L
I
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Setting Up a Swap Investment134
Setting Up a Multicurrency Swap
To set up a multicurrency swap, in addition to the normal settings, you must define the Price Denom and Local Basis Currency settings on the Pricing tabs of the financing investment, underlying investment, and Swap Investment as follows. The currency settings for the financing investment apply whether you use a Financing investment or a bond as the swap’s financing investment.
If the Swap Investment has multiple underlying investments, but no financing investment, at least one of the underlying investments be in the local basis currency of the Swap Investment.
A Closer Look at Setting Up a Swap Template
In addition to defining a Swap Investment, you can also create a swap template to streamline your swaps workflow. Fill out the Swap Investment definition screen as usual, but then, on the Swap Specific tab, define it as a swap template instead of a Swap Investment.
A Select this check box to designate that this is a swap template, to be used as a model for creating other swaps. For details, see “A Closer Look at the Swaps Workflow Screen” on page 143.
B Specify whether the template is assigned to a custodian, a custodian account, or neither.
C If you link the template to a custodian, then the Custodian field becomes available. Identify the custodian (counterparty) with which you will use this template. If you link the template to a custodian account, then the Custodian Account field becomes available. Identify the custodian account with which you will use this template.
Investment Price Denom Local Basis Currency
Financing investment Must be the same as the portfolio’s book currency.
Must be the same as the Swap Investment’s local basis currency.
Underlying investment Leave blank. Can be any currency.
Swap investment Leave blank. Must be the same as the Financing investment’s local basis currency.
B
AC
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Setting Up a Swap Investment 135
Setting Up a Bank Debt Swap
To set up a bank debt swap, define the credit facility and related credit contracts the same as you would for any bank debt investment. Then
After you have set up the swap elements, define a Swap Investment that uses the credit facility as the underlying investment. The principle difference between a bank debt swap and any other swap is that:
You can define date-specific financing, where a different financing investment is applied to the entire facility on a succession of different dates.
You can define contract-specific financing, where a different financing investment is applied to individual contracts. Like the date-specific financing at the facility level (above), you can break this down, so that it changes over a succession of different dates.
You can specify the contract’s unfunded entitlement percentage. This is the percentage you receive of any fee the lender charges for unused credit. For example, if you receive 75 percent of the unfunded commitment fee, enter 75 in this field.
Example: You have a credit facility with a global amount of $1 million and two open contracts for $250,000 each. The unfunded amount is therefore $500,000. If you buy ten percent of the facility, you thus receive two contracts worth $25,000 and an unfunded entitlement fee based on $50,000 unfunded (your ten percent of the $500,000 amount).
For details on See
Setting up a credit facility and its contracts “Setting Up Credit Facilities” on page 183.
Entering credit facility transactions “Understanding the Transactions You Can Enter for Credit Facilities” on page 183.
Setting up a swap “A Closer Look at Setting Up Financing Investments” on page 132 and “A Closer Look at Setting Up Swap Investments” on page 133.
Entering the opening transaction for a bank debt swap
“An Example of an Opening Transaction for a Swap” on page 145 and “A Closer Look at a Bank Debt Swap” on page 136.
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Setting Up a Swap Investment136
Setting Up a Bullet Swap
A bullet swap is like a total return swap except that it defers payment until the swap matures or your position is closed. This means that no cash exchanges hands on reset. Instead, the transactions that would comprise its cash flow, accrued interest, dividends, and financing, is posted to a receivable account and held there until close.
A Closer Look at a Bank Debt Swap
When you define a swap with an underlying credit facility, Geneva displays the Overrides tab. Use this to make investment-specific changes to the swap’s bank debt settings. You can:
Define date-specific financing, that is applied to the entire facilityEnter a start date, and then choose the appropriate financing investment.
Define contract-specific financing, where a different financing investment is applied to individual contracts.Enter a start date, and then choose a contract investment and its corresponding financing investment(s).
Define a new unfunded percentage for the credit facility.Enter a start date, and then enter the appropriate new unfunded percentage.
Note: When you enter a Buy or Reset transaction, Geneva gives you the chance to make similar overrides at the transaction level. Do this if your swap contract specifies different terms for different lots.
A The date that your entries on this line overrides the same setting on the Swap Specific tab. You can have multiple lines for multiple contracts, as well as multiple lines for the same contract with different dates in accounting time.
B Enter a credit contract associated with the credit facility you entered as the Swap In Element. Leave this field blank if want to define a new Unfunded % or to have Geneva apply the financing in this row to all contracts.
To define a new Unfunded %, leave this field blank but enter a start date and define a new unfunded percent.
To define a new Financing investment that applies to all contracts, leave this field blank but enter a new Financing investment.
C Define the long and short financing investment for the Swap Investment.
D Enter a new percentage to override the original value of the swap contract’s unfunded percentage entitlement. This overrides the default percentage you specified on the Swap Specific tab. For a revolving facility, a portfolio may receive a percentage of the amount that is unfunded. This is the entitlement percentage, that is, how much of the unfunded accrual that this portfolio receives. This is usually a negotiated amount. For example, if you negotiated to receive 75% of the unfunded commitment fee, you would enter 75 in this field. If the investment then pays a $100 unfunded commitment fee, you wouldreceive $75.
B
A
C
D
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Setting Up a Swap Investment 137
Set up a bullet swap the same way you would a total return swap, but on the Swap Specific tab, select the Bullet Swap check box. When you do, Geneva lets you override financing on the deferred cash flows for dividends, interest, and trade proceeds (realized gains/losses).
A Closer Look at Financing Overrides for a Bullet Swap
When you select the Bullet Swap check box on the swap Specific tab, Geneva displays the Overrides - Cash Flows tab. Use this to make investment-specific changes to the swap’s finance settings.
Note: When you enter a Buy or Reset transaction, Geneva gives you the chance to make similar overrides at the transaction level. Do this if your swap contract specifies different terms for different lots.
A Use this to define the effective date when the settings for this row of deferred cash flows (dividends, interest and/or trade proceeds) should be applied, and then select the Financing investment (short and long) that Geneva should use to calculate accrual. You can have different financing lines for different dates in accounting time. The actual accrual begins on the event’s contractual settle date or payment date.
B Enter a transaction type associated with the financing in this row. To apply the financing to a specific transaction type, enter Trade Proceeds, Interest, or Dividend. Use this to have Geneva apply a different financing investment to different income transaction types (dividend, accrued interest, or trade proceeds). Enter a start date, and then choose the transaction type and associated financing investment.
C (Optional) Enter a specific transaction ID with pending cash flows for which Geneva should accrue financing. This applies only to deferred cash flows on dividends and interest, not trade proceeds. (A realized gain/loss amount does not have a transaction ID).
D Define the long and short financing investment to be used with the date or transaction type you entered in the first part of this line. The Financing investment you enter here may be defined as either a compounding or noncompounding investment. If you want to use compounding interest, then you must use the Financing investment, not a bond, as the financing instrument.
E (Optional) The percentage of the notional dividends, which the party or counterparty are entitled to receive. These are expressed as a percent, for example, 90 for 90%. Enter a start date and the appropriate percentage. If you leave this blank, Geneva will use the long/short dividend percent defined on the Swap Investment’s Swap Specific tab. (Note: You can enter values here only if the Pending Cash Flow field is set to None. Otherwise, these fields are disabled.)
B
A
C
D E
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Setting Up a Swap Investment138
Compounded Interest for a Bullet Swap
Beginning with release 8.0, Geneva can compound the interest for a Financing investment used with a Swap Investment. When you set up the Financing investment, define a compounding frequency of Monthly, Quarterly, Semi Annual, or Annual. Geneva adds the accrued interest for a given period to the principal used in calculating that period’s accrued interest. When calculating compounded interest, interest is paid on both the principal and on any previously accrued interest.
How a Bullet Swap Processes the Financing Overrides: An Example
In addition to accruing financing on a dividend or interest receipt transaction, you can also accrue financing on realized gain/loss. In the Overrides - Cash Flows tab, you can specify a financing investment to be used when calculating accrued interest for the pending cash flows from trade proceeds. You can either identify a specific transaction ID (Tran ID) or leave that field blank. If you do not specify a transaction ID, then Geneva will apply the financing you define here to all trade proceeds.
Start Date Pending Cash Flows
Tran ID Income Currency
Fin Long Fin Short Long Div %
Short Div %
1/1/2010 Trade Proceeds
1002057 USD Fin2.5% Fin3.5%
1/1/2010 Trade Proceeds
1002058 USD Fin1.5% Fin2.5%
1/1/2010 Trade Proceeds
USD Fin3% Fin4%
Geneva processes the settings you defined above according to whether you supplied a transaction ID. If there are multiple rows with the same Pending Cash Flow type designated, then Geneva locates any row with a specified Tran ID and processes that transaction first. Then it moves on to process the rest of the pending transactions. So in the example above, Geneva would apply the specified financing to trade proceeds of transactions 1002057 and 1002058, and then apply 3% long and 4% short financing to the trade proceeds of all other transactions.
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Setting Up a Swap Investment 139
Understanding How Geneva Processes a Bullet Swap
Geneva lets you to define a bullet swap so that it resets in ways that are fundamentally different from other swap types:
No cash changes hands. In a typical swap, any accrued interest or gain/loss is posted to Cash OnHand inventory state. For a bullet swap, it remains in a Receivable state until the swap matures or the position is closed.
The Financing investment’s accrued interest is compounded. (This applies only to a swap Financing investment. A bond used as the financing instrument does not compound.)
A Closer Look at Compound Interest for a Financing Investment
Asset backed securities, bonds, credit contracts, and credit facilities all accrue simple interest. A Financing investment used for a Swap Investment can accrue simple interest or compounded interest.
The shorter the compounding period (Monthly, Quarterly, Semi Annual, or Annual), the faster the compounded amount grows.
A Simple (straight-line) interest: If you are paying 10 percent financing on $100,000, compounded as simple interest, then the accrued interest at the end of the first year would be $10,000 (10% of $100,000). Simple interest calculation is based only on the original principal amount. Thus every subsequent year would also yield $10,000 (10% of the original $100,000).
B Compound interest: If you are paying 10 percent financing on $100,000, compounded annually, then the accrued interest at the end of the first year would be $10,000 (10% of $100,000). This accrued amount is then added to the principal in order to calculate subsequent accrued interest. Thus the financing for the second year would be 10 percent of $110,000, or $11,000. By the third year, you would be paying 10 percent financing on $121,000.
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Setting Up a Swap Investment140
The compounding frequency can be daily, weekly, monthly, quarterly, semiannually, or yearly.
The compounding period does not need to coincide with the reset period.
The Reset transactions (called “fixings” for a bullet swap) do not initiate cash flows until the swap matures or the position is closed.
The financing does not move to the Cash OnHand inventory state until you close your position. The swap financing continues to accrue compounded interest based on the compounding type and frequency that you defined on the Financing investment.
You can override the financing for a bullet swap much as you can for a bank debt swap. Use the Overrides - Cash Flows tab to define override financing at the swap level or transaction level that are specific to the type of income recorded: dividend transactions, interest transactions, or transaction proceeds.
During a given reset period, the compounding financing is aggregated based on multiple overriding financing rates you may defined for the swap or for transaction-level overrides for dividend or interest transactions or for transaction proceeds.
How Geneva closes a bullet swap
When a bullet swap matures, or when you close a partial or complete position, Geneva closes the financing accrual in a way that is proportionally weighted, based on its origin (whether from the position itself or subsequent interest or dividend transactions or transaction proceeds).:
Geneva closes the correct amount of compounded interest associated with the lot, whether the interest was earned as part of the position itself or subsequent interest or dividend transactions or transaction proceeds.
Geneva closes the financing accrual in a way that is proportionally weighted, based on its origin (whether from the position itself or subsequent interest or dividend transactions or transaction proceeds).
Geneva classifies gain/loss into capital accounts as of the date of the close or maturity.
If the position was held for 12 months or longer, all realized gain/loss is classified as long term (regardless of whether position was opened as a long or short position).
If the position was held for less than 12 months, all realized gain/loss is classified as short term (regardless of whether position was opened as a long or short position).
For details about using the Lot Closing tab, look up “lots, closing” in the Geneva Help index.
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Streamlining Your Swaps Workflow 141
Streamlining Your Swaps WorkflowUse swap templates and the Swaps Workflow screen to simplify the process of defining Swap investments. Together they make it easier for you to define new swaps, enter swap transactions, and edit existing swap transactions and records.
Create templates for your counterparties and contract types
The overall process for entering swaps data begins with creating templates. Define a model swap template for each type of Swap Investment your firm trades and for each major counterparty or contract type you work with.
1 Define the underlying investment.
2 Define the Financing investment.
3 Create a Variable Rate Schedule (if applicable).
4 On the Swap Investment definition screen, use these elements to define a swap template for each counterparty or contract type.
5 Use the Swaps Workflow screen to enter new records; the templates can automate much of your work.
The more templates you have, and the more closely they represent your various counterparties and contract types, the more you can streamline your data entry work. Typically you would do this whenever you begin working with a new counterparty (custodian).
Enter new records in the Swaps Workflow screen
On the Swaps Workflow screen, use your swap templates to enter new swap records and to edit existing swap transactions. Using your previously defined templates, Geneva can do much of the work for you and streamline your data entry and overrides.
To create new records based on an existing swap template:
1 Select a swap template to use.
2 Define the underlying investment.
3 Create any necessary overrides for the financing or other contract terms.
4 Create a variable rate schedule, if necessary.
Then, enter transactions to open or close swap positions (Buy, Sell, Sell Short, Cover Short).
You can also view and edit existing swap transactions that you access from the Swaps History screen.
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Streamlining Your Swaps Workflow142
To define Swap Investments and Financing investments
In the Basic Information section, enter the custodian account (sometimes referred to as the counterparty) with which you will use the new Swap Investment.
2 Click Select Swap Template. Geneva opens the SwapSelector window. It displays only the templates associated with the custodian you selected in the preceding step, as well as templates that do not have a custodian assigned. If you do not see a template that you just created in another Geneva workspace, click Refresh. If you want to create a new template, click New.
3 In the SwapSelector window, select the existing swap template you want to use.
4 Click Select. Geneva populates the Swaps Workflow screen with information from the template you selected.
5 In the Swaps Details section, use the Contract Terms tab, the Financing tab, or the Miscellaneous tab to define a new Swap Investment, specify new financing terms, or create a variable rate schedule.
Note: The new Swap Investment, financing, variable rate, and other changes will not be recorded until you add transactions that use the swap and then click Commit. For details, see “A Closer Look at the Swaps Workflow Screen” on page 143.
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Streamlining Your Swaps Workflow 143
A Closer Look at the Swaps Workflow Screen
Use the Swaps Workflow screen to create new swaps based on a template, enter multiple transactions quickly, or edit existing transactions from the Swap History screen. You can customize the template’s definition at the swap or transaction level. Your changes do not affect the template itself.
A Enter the custodian account (or counterparty), and then click Select Swap Template. Geneva opens the SwapSelector window. Select the template you want to use, and then click Select. Geneva populates the Swaps Workflow screen with information from the template. (To create a new template, click New.)
B Use the Contract Terms tab to customize the swap’s reset options.
C Use Financing tabs to customize the swap’s financing terms or define a variable rate schedule.
D For a swap that has a credit facility as the underlying investment, use the Financing by Contract tab to customize the financing rates or to define a new unfunded percentage for swap contract.
E Use the Miscellaneous tab to change general swap settings, including pricing and grouping information.
F After you have customized the swap settings, choose a transaction type (Buy, Sell, Sell Short, Cover Short), and then click Add. (Optional: You can also change the underlying investment.) When you click Add, Geneva adds a new Swap Investment that includes the investment-level overrides you just made. The new swap’s name is displayed on the left, comprised of the underlying investment, the word “swap,” the name of the template you used, and then a number that is incremented to distinguish it from similar swaps. (Note: If you specified a name on the Miscellaneous tab, Geneva uses the name you entered.)
G Choose a portfolio and then specify the trade date, quantity, price, and other transaction information.
H (Optional) Use the Transaction Details section to make further overrides to the swap that will apply only to the current transaction. When you are finished, click Commit. Continue entering new swap’s and transactions based on this template, or click Clear to start over with a new template.
B
C
A
D
E
F
G
H
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Opening and Closing Simple Swap Contracts144
Opening and Closing Simple Swap ContractsYou can use Buy, Sell Short, Sell, and Cover Short transactions and distributions, and Receive Long/Short and Deliver Long/Short transactions, to open and close swap contracts for simple Swap Investments that contain only a single notional investment, in either the “in” or the “out” leg. These are typically financing swaps or CFDs. (Note: Bank debt swaps can be opened only with a Buy and closed only with a Sell transaction.)
You use specific opening and closing transactions depending on who holds the notional investment, the portfolio or the counterparty.
For information about See
Opening and closing simple swaps with a notional investment in each leg
The following pages in this section.
Setting up basket swaps “Opening and Closing Basket Swaps” on page 148.
If the notional investment is the Swap Investment’s
Use this transaction to
Open thecontract
Close thecontract
Receive thecontract
Deliver thecontract
In element Buy Sell Receive Long Deliver Long
Out element Sell Short Cover Short Receive Short Deliver Short
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Opening and Closing Simple Swap Contracts 145
An Example of an Opening Transaction for a Swap
In most cases you open a swap position by entering a Buy, Sell Short, Receive Long, or Receive Short transaction, or by entering a Sell transaction in portfolios that cross zero for the underlying investment. Enter transaction information based on the swap’s underlying investment.Note: Bank debt swaps can be opened only with a Buy and closed only with a Sell transaction.
A Enter the Swap Investment.
B Enter the quantity and price of the notional investment.
C For an opening transaction for a Swap Investment whose financing investment is a variable rate bond, if you want to use a different interest rate than the one specified in the variable rate schedule, enter the opening interest rate of the financing leg investment. This rate remains in effect until either the bond’s first coupon payment, or its next reset.
D For opening transactions (Buy, Sell Short, and Receive Long/Short; and Sell in a portfolio that crosses zero for the underlying investment), you can override the swap’s default financing with a different financing investment. If you enter an overriding financing investment in a Buy, Sell Short, Receive Short, or Sell transaction, use the Receive Financing check box to specify whether the portfolio receives financing payments from the swap.
E If the swap’s underlying investment is a bond, you can specify whether the portfolio pays/receives the full amount of the next coupon, and whether Geneva should treat the transaction’s price as including accrued interest (“dirty”) or not (“clean”). For details, see “Swap Dirty Pricing and Pay/Receive Full Coupon” on page 146.
F For a bank debt swap, if you clear the Par/Near Par check box (the default), Geneva treats the investment as distressed, and displays the Delayed Compensation field and the Trades Flat check box.
G For a bank debt swap, if you clear the Par/Near Par check box, use the Delayed Compensation field to select the method that Geneva uses to calculate delayed compensation for the transaction. For credit facilities that trade distressed, select the Trades Flat check box if the investment trades flat. If you select it, no interest will accrue between contractual settlement date and actual settlement date. Instead, interest starts accruing for the buyer on actual settlement date, and the amount of interest paid on the first interest payment date reflects accrual between the actual settlement date and the coupon date.
Note: Geneva calculates the notional cost of the swap’s leg as Quantity × Price. Geneva displays 0.00 in the Net Trade Amount and Net Settlement Amount fields, however, because contracts for Swap Investments do not have any cost associated with them.
BD
A
E
C F
G
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Opening and Closing Simple Swap Contracts146
Swap Dirty Pricing and Pay/Receive Full Coupon
When you open or close a swap with an underlying bond using the Buy, Sell, Sell Short, or Cover Short transactions, you can specify whether the:
Portfolio should pay or receive the full coupon amount. This tells Geneva how to process the next upcoming coupon after the opening or closing transaction. Geneva also includes the bond’s accrued interest in the notional value of the financing investment.
Price that you entered for the transaction is a clean or “dirty” price, that is, that the purchase and sale price includes the bond’s accrued interest.
The Buy, Sell, Sell Short, and Cover Short transactions display the following check boxes when the investment is either a single-leg Swap Investment with a bond as its underlying element, or a basket Swap Investment when you enter a bond in the Generic Leg field.
Geneva always calculates the underlying bond’s notional value as Quantity × Clean price, regardless of whether these check boxes are selected or cleared, and uses this value to calculate the bond’s gain/loss.
Note: Geneva treats the prices entered in all other swap transactions, such as Receive Long/Short, Deliver Long/Short, and Swap Transfer, as clean. Geneva treats the prices that you enter for bonds in a price list as clean, regardless of whether the lot opened with a clean or dirty price.
Select this check box To have Geneva
Pay/Receive Full Coupon
Record the payment of the complete coupon on the next coupon date after the transaction, even if the bond was purchased or sold in the middle of a coupon period with accrued interest. Geneva does not calculate accrued interest for the opening or closing transaction. Instead, reports display a “change in accrued interest notational” mark equal to the bond’s accrued interest on the day of the trade, plus one day’s accrued interest.
Selecting this check box also instructs Geneva to use the bond’s dirty price to calculate the notional value of the swap’s Financing investment; that is, the notional value of the Financing investment includes the bond’s accrued interest:
(Quantity × Clean price) + Accrued interest since prior coupon
Note: If a Swap Reset transaction resets the swap’s notionals, Geneva sets the Financing investment’s notional value equal to the underlying bond’s notional value on the reset date, regardless of how you set the Pay/Receive Full Coupon check box in the opening transaction. In other words, the two notionals will be equal and use clean pricing after the reset.
Note: Geneva automatically selects this check box if the bond has the Suppress Accrued Interest check box selected, and makes the Pay/Receive Full Coupon check box is unavailable.
Dirty Price Treat the price of the bond that you enter in the transaction as a dirty price, that is, you should enter a price in the transaction that includes the bond’s accrued interest since its last interest payment.
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Opening and Closing Simple Swap Contracts 147
The following table summarizes how Geneva treats the prices and notional values of the underlying bond and financing investment.
Dirty Pricing and Pay/Receive Full Coupon: Examples
The following table shows the financial accounts included in the JE Lines By Date report for the same swap, opened using different combinations of the Dirty Price and Pay/Receive Full Coupon Settings. Both the swap and its underlying bond are denominated in U.S. dollars. The swap pays income on reset date, rather than payment date. The bond has an issue and dated date of 02/01/2000, an issue and maturity price of 100, an Actual/Actual accrual calendar, and pays 12 coupons per year with an interest rate of 10%.
In the preceding table, the following financial accounts are represented:
AI: AccruedInterest
OHN: OnHandNotational
PAIEN: PurchasedAccruedInterestExpenseNotational
DirtyPrice
Pay/ReceiveFull Coupon
Underlying bond’s Financing investment’s Next coupon paymentPrice Notional value Price Notional value
You can use a Sell transaction to close part or all of a long (in) notional lot in a swap contract opened by a Cover Short transaction or to close part or all of a short (out) notional lot. Enter the notional investment in the Investment field, and then select the Swap Element check box to indicate that you are closing a swap notional investment. For a financing swap, the transaction automatically closes an equivalent portion of the financing investment for that leg of the swap.
Geneva uses the period from the opening transaction or the last Swap Reset transaction to the Sell or Cover Short transaction as the holding period of the capital gains from the partial close, and the price for the notional investment, to determine the gain/loss realized on the closed portion of the contract.
If the portfolio holds more than one lot of the notional investment to close, you can use the portfolio’s lot closing rules to determine which lot or lots Geneva closes, or select different lot closing rules or specific notional lots to close on the Lot Closing tab.
If the Quantity that you enter in the transaction closes a single-leg swap contract’s entire notional position, Geneva closes that swap contract, realizing any gain/loss and recognizing any pending cash flows from the swap.
Note: You cannot use a Buy transaction to partially close a swap notional position if the portfolio crosses zero on that investment type.
Opening and Closing Basket SwapsBasket swaps can contain any number of notional investments, including equities, bonds, options, and rights/warrants. You can change your notional investments, and override long and short financing investments throughout the life of the contract. Define the basket Swap Investment as for a simple swap, but select the Basket Swap check box. This removes the Swap In Element and Swap Out Elements from the screen. Instead, you use Buy, Sell, Sell Short, and Cover Short transactions and distributions to add notional investments to and remove them from the swap contract.
After you define the notional and financing investments, as well as the basket Swap Investment, you can begin establishing positions in your Basket Swaps. When you establish these positions, enter Buy transactions or distributions for long positions, and Sell Short transactions or distributions for short positions.
When you want to close positions in a Basket Swap investment, enter Sell transactions or distributions for long positions, and Cover Short transactions or distributions for short positions.
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Working with Swaps 7
Opening and Closing Basket Swaps 149
The following Closer Look shows how to enter a trade to open or close a notional investment in a basket swap.
Closing Notional Investments in a Basket Swap
When you close part or all of a notional position in a basket swap, you use Sell and Cover Short transactions, instead of Swap Activity transactions. These transactions include the same Generic Leg field as opening transactions.
A Closer Look at Establishing Positions in Basket Swaps
A Enter the basket swap investment into which you want to establish the position.
B Enter the notional investment for which you want to establish the position.
C Enter the quantity and price of the notional investment.
D For an opening transaction for a Swap Investment whose financing investment is a variable rate bond, if you want to use a different interest rate than the one specified in the variable rate schedule, enter the opening interest rate of the financing leg investment. This rate remains in effect until either the bond’s first coupon payment, or its next reset.
E For opening transactions (Buy and Sell Short, and Sell in portfolios that cross zero for the notional investment), you can override the Swap Investment’s default financing investment with a different financing investment. If you enter an overriding financing investment, use the Receive Financing check box to specify whether the portfolio receives financing payments from the swap.
F If the generic investment is a bond, you can specify whether the portfolio pays/receives the full amount of the next coupon, and whether Geneva should treat the transaction’s price as including accrued interest (“dirty”) or not (“clean”). For details, see “Swap Dirty Pricing and Pay/Receive Full Coupon” on page 146.
Note: Geneva calculates the notional cost of the swap’s leg as Quantity × Price. Geneva displays 0.00 in the Net Trade Amount and Net Settlement Amount fields, however, because contracts for Swap Investments do not have any cost associated with them.
A
D
C
B
E
F
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Resetting a Swap Investment150
If the portfolio holds more than one lot of the notional investment to close, you can use the portfolio’s lot closing rules to determine which lot or lots Geneva closes, or select different lot closing rules or specific notional lots to close on the Lot Closing tab.
Resetting a Swap Investment
Periodically, the parties to a swap can reset the swap, typically to exchange the income cash flows that their notional investments have generated since the last reset. However, depending on the terms of the swap, you can also use a swap reset to:
Settle the proceeds from trades for the swap contract.
Settle the difference between the two parties’ unrealized gain/loss on their notional investments.
Pay the pending financing charges on the swap.
Renegotiate the swap’s financing terms by selecting different financing investments.
A swap reset transaction resets the cost basis for the swap. When you subsequently report on unit cost or cost book, Geneva will report the reset price instead of the opening transaction’s price.
When you define a Swap Investment with a value other than No AutoSchedule in the Swap Reset Frequency field, Geneva automatically generates GDTP Swap Reset transactions for it, from the swap’s first reset date through its expiration date, based on the reset frequency that you specify. By default, the GDTP Swap Reset transaction resets all of the contracts for a Swap Investment. You can, however, enter Swap Reset transactions in specific portfolios, and use the Lot Closing tab to select specific lots of the swap you want to reset.
You use settings in the Swap Investment to specify what activity occurs during a reset, as follows.
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Swap Reset transaction
Setting Selected (4) Cleared
Settle Proceeds on Reset
Geneva delays settling pending proceeds on opening and closing transactions for the Swap Investment until the next Swap Reset. (Default)
Geneva settles opening and closing transactions for the Swap Investment normally on their settlement dates.
Corporate Actions Pay on Pay Date
Geneva settles interest and dividends from the swap’s notional investments normally on their payment dates.
Geneva delays settling the pending interest and dividends from the swap’s notional investments, until the next Swap Reset. The Swap Reset also settles any pending FX gain/loss on the income between the payment date and the reset date. (Default)
Reset Notionals
Geneva marks the swap’s notional investments to market on the reset date, and the parties exchange the net unrealized gain/loss.
The parties do not exchange unrealized gains/losses on the notional investments. (Default)
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Resetting a Swap Investment 151
To view or modify a GDTP Swap Reset transaction, or enter your own, choose Transactions ➤ Swap Activity ➤ Swap Reset. The following Closer Look shows this transaction in detail.
A Closer Look at Swap Resets
A For Swap Investments that price explicitly, enter the investment’s price on the reset date.
B Specify whether you want this reset to settle the swap’s financing charges. This check box is automatically selected and inactive if you select the Reset Notionals check box.
C You can use these settings to override the default settings from the Swap Investment for this reset. Pending income payments continue to accrue until the next reset.
D For user-entered resets that reset notionals and are for swaps that price implicitly, enter the prices for the swap’s notional investments that Geneva uses to calculate their unrealized gain/loss or the swap’s market value. You can specify the currency in which the price is denominated (Settlement Currency), and the FX rate on the reset date between that currency and the book currency (Trade Date FX Rate). If you do not enter a price or FX rate (and for transactions that Geneva generates), Geneva looks it up in the portfolio’s price schedule.
E The reset date plus the Swap Investment’s Swap Reset Settlement Period setting.
F If you have renegotiated the swap’s financing terms, you can enter the financing investments for the new terms here. If you enter a new financing investment, you can use the Receive Financing Long or Short check box to specify whether the swap now receives financing payments from that investment.
B
C
F
E
D
A
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Transferring a Swap Investment152
Note: If the portfolio uses Manual Income Settlement, you must enter a Bulk Settlement or Investment Income Settlement transaction before Geneva recognizes the pending income, after either the Income transaction’s payment date (if the swap pays income on payment date), or the Swap Reset transaction that recognizes the income (if the swap delays income payments).
How Geneva calculates a swap’s market value
The method Geneva uses to calculate a swap’s market value depends on whether you select or clear the Swap Investment’s Price Explicitly check box.
Transferring a Swap Investment
There are two transactions that you can use to transfer a swap between custodian accounts or strategies: Transfer and Swap Transfer. You transfer a swap contract by specifying how much of its notional position or positions to transfer. When you transfer part or all of a swap notional position, Geneva opens a position of the Swap Investment in the new custodian account or strategy.
Using the Transfer Transaction
Use a Swap Transfer transaction to transfer a notional investment that you opened with a Buy, Sell Short, Sell, or Receive Long/Short transaction.
To use the Transfer transaction to transfer a notional investment, enter the notional investment in the Investment field, and select the Swap Element check box to indicate that you are transferring a swap notional investment. Complete the remaining fields as you would for a regular Transfer transaction. If you transfer a notional investment in a swap that prices explicitly, you must enter At Price (the default) in the Transfer Type field. Geneva marks the swap contract to market so that it can correctly attribute price and FX gain/loss, and accrued interest, to the appropriate custodian accounts and strategies.
For a financing swap, transferring part of a notional lot also transfers a proportional amount of the swap’s financing investment. You can also select the Pending Income check box to have the
Price Explicitly
Geneva calculates the swap’s market value as the
Selected (4)
Price of the Swap Investment in the portfolio’s price schedule.
That is, the price of the Swap Investment from the portfolio’s price schedule.
Cleared Unrealized gain calculated using the price of the underlying investment.
That is, the price of the underlying investment from the portfolio’s price schedule – the price from the swap’s opening transaction or from the previous Swap Reset’s price if you chose Reset Notionals on the Swap Investment screen. (Note: You cannot select Reset Notionals for a swap where you also select Price Explicitly.)
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Working with Swaps 7
Transferring a Swap Investment 153
transaction transfer cash from dividends that are pending as of the transfer date, from the swap’s notional equities that have settled as of the transfer date.
If the portfolio holds more than one lot in the closed notional investment, Geneva uses the portfolio’s lot closing rules to determine which lot or lots to transfer.
Using the Swap Transfer Transaction
If you want to transfer a Swap Investment, or a notional investment in a simple swap that you opened with a Buy, Sell Short, Sell, or Receive Long/Short transaction, you must use the Swap Transfer transaction. You can also use this transaction to transfer part or all of lots of several notional investments in a simple swap with two legs or a basket swap at the same time.
For a financing swap, when you use a Swap Transfer to transfer a notional investment, you must also transfer a proportional quantity of the swap’s financing investment.
Enter the Swap Investment in the Investment field, and the price of the Swap Investment in the Transfer Price field.
2 (Optional) If you select the Disable Swap Elements check box, Geneva automatically calculates the accrued interest for a Swap Transfer transaction.
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Transferring a Swap Investment154
3 Click the Swap Lot Closing Tab, then click Find Open Lots.
The lower table displays the swap’s notional lots that are open on the transfer date. Select one or more lots to transfer, and then click Transfer Selected Lot to move it to the upper table.
In the Relief Qty field, enter the amount of the lot to transfer. You can also use the Order field to specify the order in which Geneva uses the lots of that investment to transfer the quantity that you specify on the Swap Prices tab.
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Transferring a Swap Investment 155
4 Click the Swap Prices tab.
Enter the total quantity of each notional investment that you want to transfer, as well as its transfer price. For fixed-income investments, Geneva displays the interest accrued as of the transfer date.
You can also specify the currency in which the price is denominated (Settlement Currency), and the FX rate on the reset date between that currency and the book currency (Trade Date FX Rate).
Note: The quantity that you enter on the General tab must be the same as the total of the quantities of the “in” notional investments that you enter on the Prices tab.
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Reorganizing a Swap Investment156
Reorganizing a Swap InvestmentUse the following table to understand how to record a reorganization transaction.
A Closer Look at Swap Elements
When you enter a Swap Investment in a Swap Transfer transaction, Geneva automatically enters its underlying investment and financing in the Swap In and Out Elements tables. Use these tables to enter information about this specific contract.
A Enter the amount of the notional investment to transfer.
B For CFDs and swaps that price implicitly, enter the cost or price of the notional investment, denominated in the Settlement Currency (E). (Default: (Notional Amount × the notional investment’s pricing factor)/Quantity; for an interest rate swap, enter 100.) If you do not enter this value, Geneva uses the investment’s price from the portfolio’s price schedule.
C Geneva uses the quantity and contractual settlement date to calculate the accrued interest. (For equities, options, and rights/warrants, enter 0.)
D If the swap is priced implicitly, enter the notional lot’s “cost” or “closing price” (Default: (Quantity × Price)/the underlying investment’s pricing factor).
E The currency in which the Price is denominated (Default: The notional investment’s local basis currency). (For a Swap Reset or Swap Close transaction, this is labeled Settlement Currency.)
F The trade date FX rate between the Settlement Currency and the book currency. If the Settlement Currency is the same as the Swap Investment’s local basis currency, this defaults to the Swap Investment’s trade date FX rate. If the in and out elements have the same Settlement Currency, they must also have the same FX rate.
B C D E FA
! Important: When you activate the revised swaps code as described in PR #5059031 and in “Geneva 8: Geneva Initialization File (geneva.ini) Settings for Bullet Swaps” on Advent Connection (KB 32344), then by default Geneva always accounts for a Swap Transfer transaction as if you have selected the Disable Swap Element check box, whether or not you actually select it. Also, the check box on the transaction screen is automatically selected, and it is disabled so you cannot modify it.
When the Disable Swap Elements check box is selected, Geneva automatically looks up the price, settlement currency, and trade date FX rate for the swap's underlying investment and financing investment, and calculates the quantity of the financing investment to match the underlying investment's cost on the transfer date. This also causes the Swap Prices tab not to display the Quantity, Price, Settlement Currency, Trade Date FX Rate, or Financing Leg fields. Geneva also calculates investments' accrued interest, but you can edit still this on the Swap Prices tabs.
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Reorganizing a Swap Investment 157
To reorganize a non-basket swap
1 (If necessary) To record an organizational change to the swap’s underlying investment, choose Transactions ➤ Asset Servicing ➤ Reorganization ➤ Dependent Event Reorganization.
2 Define one or more new Swap Investments to reflect changes to the contractual terms and underlying investments of the new (post-reorganization) Swap Investment.
3 To convert the old Swap Investment to the new Swap Investment(s), use either the Dependent Event Reorganization or Partial Reorganization transaction depending on which lots are affected by this reorganization:
To Do this
Make standard organizational changes to the underlying investment of a non-basket swap, including:
A name change, stock split, spin-off, merger or stock-for-stock acquisition.
A change in underlying investment type (for example, a convertible bond that converts to an equity, or a bond that converts to a different bond type).
A change in underlying investment (for example, an equity that converts into a different equity).
A redenomination/renominalization.
Enter a Dependent Event Reorganization for the change to the underlying investment, and then enter a Dependent Event Reorganization for all Swap Investments using that underlying investment. For details, see “To reorganize a non-basket swap” on page 157.
Record a change to the contractual terms of a non-basket swap, including:
A change in the financing investment for some or all lots.
A change in the underlying investment for some or all lots.
Converting a position from a single Swap Investment to multiple Swap Investments.
Redenominating the Swap Investment.
Enter a Partial Reorganization transaction or a Dependent Event Reorganization for the Swap Investment, depending on the new terms. For details, see “To reorganize a non-basket swap” on page 157.
Record a change to the notional investment or contractual terms of a basket swap.
Close the swap’s notional position in the reorganized investment (using a Sell, Cover Short, or Deliver Long/Short transaction), and open positions in the new investments with the new quantities (using a Buy, Sell Short, or Receive Long/Short transaction).
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swaps, reorganizations of notional investments
If the reorganization affects Use a
All lots held by the portfolio Dependent Event Reorganization transaction.
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Reorganizing a Swap Investment158
Only some of the lots held by the portfolio Partial Reorganization transaction
All of the lots held by the portfolio, but some of the lots you are reorganizing will use different Financing investments after the reorganization
Partial Reorganization transaction, with the Full Swap Reorg check box selected.
A Closer Look at a Partial Reorganization of a Swap: the General tab
A The Quantity field is unavailable. Geneva determines the quantity based on whether you select the Full Swap Reorg check box. If you select it, Geneva reorganizes all open lots. If you clear it (the default), then Geneva reorganizes the lots you specify on the Lot Closing tab.
B If you select this check box, then this screen is similar to the Dependent Event Reorganization screen—Geneva reorganizes all open lots in the transaction, but you can specify overriding financing for specific lots on the Lot Closing tab. If you clear this check box (default), then Geneva reorganizes only the lots that you specify on the Lot Closing tab.
C Identify the new Swap Investment(s).
D For each new investment, assign a Financing investment. (If you do not assign overriding financing, Geneva assigns the same Financing investment that was used in the old Swap Investment, whether from the swap definition or an override.) If you want to assign:
A single overriding Financing investment to all lots of the new investment, then, on the General tab, scroll to the right and use the Override Financing field. Specify one Financing investment for each new Swap Investment.
Different Financing investments to specific lots of a new investment, then use the Lot Closing tab. If you do, note the order in which you entered the new investments on this tab. You will need to refer to this list order on the Lot Closing tab. You can assign lot-specific financing for up to five new investments. For details, see “A Closer Look at a Partial Reorganization for a Swap: the Lot Closing tab” on page 159..
If the reorganization affects Use a
A
C
B
D
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Reorganizing a Swap Investment 159
A Closer Look at a Partial Reorganization for a Swap: the Lot Closing tab
Use the Lot Closing tab to specify which lots to reorganize and to assign financing to specific lots.
A Click Find Lots to see available lots. Geneva displays open lots for the portfolio and Swap Investment you specified on the General tab.
B Assign overriding financing for each new investment lot created out of each lot of the old investment. For each lot, the columns OF1, OF2, OF3, and so on, correspond to the first, second, and third (and so on) new investments you entered on the General tab:
Use OF1 to assign financing to the first new investment on the General tab.
Use OF2 to assign financing to the second new investment on the General tab.
Use OF3 to assign financing to the third new investment on the General tab.
Use OF4 to assign financing to the fourth new investment on the General tab.
Use OF5 to assign financing to the fifth new investment on the General tab.
In this example, you have made these assignments:
For the new investment lots made from lot 1000080, you assigned USD05% to bond.swap, USD07% to BP.Swap.USD, and USD10% to DELL.Swap.USD.
For the new investment lots made from lot 1000082, you assigned USD07% to bond.swap, USD10% to BP.Swap.USD, and VRDO to DELL.Swap.USD.
For the new investment lots made from lot 1000586, you assigned USTN-2015-08-15 to bond.swap, GE_Step_5.25% to BP.Swap.USD, and Merck-4.75 to DELL.Swap.USD.
Geneva lets you assign lot-specific financing to only five new investments. If you have entered more than five new investments on the General tab, use that tab to assign a single overriding Financing investment to all lots of the new investment, or leave the financing column blank and Geneva will automatically assign the financing from the original investment.
A
B
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Understanding Contracts For Difference (CFDs)160
Understanding Contracts For Difference (CFDs)Contracts for difference (CFDs) are derivative investments that commonly trade in Europe. They are similar to financing swaps, except that Geneva recalculates the face value of the Financing investment each day as the total of the closing market values of the financed investments. Geneva then multiplies that day’s face value by the Financing investment’s interest rate to determine that day’s interest finance charge (also called “margin”). If the Financing investment uses a variable rate schedule, Geneva uses the interest rate in effect on that day. Geneva calculates one day’s worth of finance charges as:
(Day’s closing market value × Daily interest rate)/Number of days in year
To determine the total finance charge for the payment period, Geneva sums each day’s worth of finance charges for that period.
Note: CFDs require that you enter daily closing prices for the financed investments.
Working with CFDs
You open and close CFDs the same way that you open and close regular swaps. You also use the following transactions to record CFD activity.
1 If on the Swap Specific tab you define CFD Accrual Frequency as Daily, on each day that your portfolios hold a CFD, Geneva enters a GDTP CFD Accrual transaction for the CFD. This causes Geneva to calculate the CFD’s accrued finance charge for that day.
Note: For information on how the Amort/Accrual Appraisal setting from the portfolio’s accounting parameters affects CFD accruals, as well as how Geneva handles days for which you do not enter a CFD accrual transaction, see “About CFD Accrual Accounting” on page 161
2 The GDTP Swap Reset transactions for the CFD Swap Investment roll up and settle the finance charges accrued since the last reset.
Calculating Accrued Interest for a CFD: An Example
A portfolio holds a CFD with 10,000 shares of underlying notional equity investment ABC. The last interest payment date for the Financing investment occurred on 6/30/2003; therefore, the next accrual period begins on 7/1/2003. On 7/1/2003, the closing price of investment ABC is $3.72, and the Financing investment’s interest rate is 5%. On 7/2/2003, the closing price is $3.75, and the Financing investment’s interest rate is 5.1%.
Geneva calculates interest finance charges for the first two days of July. Geneva calculates the interest for:
07/01/2003 as 3.72 x 10,000 × 5% / 365 = $5.10.
07/02/2003 as 3.75 x 10,000 × 5.1% / 365 = $5.24.
The total finance charge that has accrued as of 7/2/2003 is $10.34.
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Understanding Contracts For Difference (CFDs) 161
If you use a trade (Buy, Sell, Sell Short, or Cover Short) transaction to partially close a CFD, the transaction closes a proportional amount of the CFD’s accrual. The accrual moves to on-hand on the CFD’s next reset.
To enter a CFD Accrual transaction
About CFD Accrual Accounting
Geneva uses the Amort/Accrual Appraisal setting from the portfolio’s accounting parameters to determine how it calculates CFD financing charges.
This setting gives you flexibility decide which period end accruals should be accounted for. At a report’s period end, this setting instructs the report to include accruals up to, but not including, the setting you enter: CurrentDay, ModifiedNextBusinessDay, NextBusinessDay, or NextCalendarDay.
In all cases, Geneva books the financing charges on the accrual date of the current CFD Accrual transaction, based on the closing market value and closing financing rate on the “from” date.
For the period from the last CFD transaction in a reporting period to the end of the reporting period, Geneva calculates CFD financing charges as follows, based on the closing market value and closing financing rate on the “from” date, and books them on the report’s period end date.
2 Specify the date for which Geneva calculates interest accrual.
If you specified a default price list for the CFD investment, Geneva displays the notional investment’s prices from that list.
You can also select a different price list, or manually enter prices for the notional investments in the Price fields. If you do not select a price list, or enter a price for a notional investment, Geneva enters zero as the investment’s default price.
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Understanding Credit Default Swaps (CDSs)162
Example: The following table compares these three methods side by side. Each cell shows the financing charge that Geneva books on that day, as (market value @ rate) × the number of days.
Understanding Credit Default Swaps (CDSs)A credit default swap (CDS) hedges against another investment (called the reference investment) going into default. A long position represents the portfolio buying protection; a short position represents the portfolio underwriting or selling protection. You can open CDSs with no cost or with an up-front cost.
If you select Geneva accrues financing charges If a variable rate reset occurs on the report’s period end date, GenevaFrom 00:00:01 on the To 00:00:01 on the
CurrentDay Accrual date of the last CFD Accrual transaction
Report’s period end date
Does not use it to calculate the financing charges on the report’s period end date.
NextBusinessDay Next business day after the accrual date of the last CFD Accrual transaction
Next business day after the report’s period end date
Uses it to calculate the financing charges on the report’s period end date.
NextCalendarDay (Default)
Next calendar day after the accrual date of the last CFD Accrual transaction
Next calendar day after the report’s period end date
Uses it to calculate the financing charges on the report’s period end date.
Thurs. Fri. Sat. Sun. Mon. Tues. Wed.
Closing market value
60 70 80 90 100
Closing rate 2% 3% 4% 5% 6%
CurrentDay 50 @ 1%(Wednesday’svalue and rate)
60 @ 2% (70 @ 3%)× 3 days
80 @ 4%
90 @ 5%
NextBusinessDay 60 @ 2% (70 @ 3%)× 3days
80 @ 4% 90 @ 5%
100 @ 6%
NextCalendarDay 60 @ 2% 70 @ 3% (70 @ 3%) × 2 days +(80 @ 4%) × 1 day
90 @ 5%
100 @ 6%
This counterparty: Makes this payment:
Bond investor (insurance buyer)
Regular payments according the credit default swap’s coupon schedule. These payments are equivalent to an insurance premium.
In Geneva, a CDS behaves similarly to a bond, except that, rather than receiving interest, the CDS buyer pays interest at regular intervals to the seller. Geneva generates Interest Receipt transactions for a CDS investment automatically, based on settings similar to those that you use for bonds. In trades for a CDS that accrue interest, the buyer receives the accrued interest that has accrued up to the settlement date from the seller.
Understanding How a Credit Default Swap Is Priced
Geneva lets you price a credit default swap based on a par of either 100 (sometimes referred to as “par adjusted” pricing) or zero (sometimes referred to as “factor-based” pricing). If your firm prices a CDS based on a par of 100, you can enter the price the same as you would for the underlying bond. On the Pricing tab, select the Par = 100 check box.
If your firm prices a CDS based on a par of zero, then, on the Pricing tab, leave the Par = 100 check box cleared (default). In this case, you would enter the price in Geneva as:
Par-adjusted price minus 100
In this way you account for the difference between the bond-like par-adjusted price and the zero-based par value. Typically this results in a value around 0.
Example: If the CDS price is quoted as the par-adjusted $99, as it would be for a bond, but your firm uses the zero-based par for a CDS, you would enter –1.
Example: If the CDS price is quoted as the par-adjusted $101.275, but your firm uses the zero-based par, you would enter 1.275.
The maturity price and any related gain/loss calculations use the par basis you define.
Geneva can treat a CDS’s gain/loss either normally or reversed. If a CDS records gain/loss:
Hedge fund (insurance seller)
Physical settlement: If the bond defaults, then the insurer makes a payment to the bond investor equal to the bond’s par value and takes delivery of the defaulted bond.
Cash settlement: If the bond defaults, then the insurer pays the bond investor an amount equal to the bond’s par value minus its recovery value.
This way and the portfolio holds it the portfolio records a gain if the price
Normally Long Increases
Short Decreases
Reversed Long Decreases
Short Increases
This counterparty: Makes this payment:
Working with Swaps7
Understanding Credit Default Swaps (CDSs)164
Opening and Closing Positions for Credit Default Swaps
After you define CDS investments, you can begin establishing positions in them. You use Buy, Sell, Sell Short, and Cover Short transactions to open and close long and short positions for CDSs, just as with a Bond investment.
If you want a portfolio to be able to cross zero for CDS investments, select the check box Cross Zero on Debts/CDS in its accounting parameters. For details, look up “crossing zero, accounting parameters” in the Geneva Help index.
A Closer Look at Defining a Credit Default Swap
To define a Credit Default Swap, choose Define ➤ Investments ➤ Swap Instruments ➤ Credit Default Swap. Click the CDS Specific tab to enter details about the CDS investment.
A Use these fields to define the CDS’s coupon schedule and interest accrual, as you would for a bond.
B Enter the investment against whose default the CDS investment protects.
C Select this check box if the CDS’s holder benefits from a price decrease. Otherwise, if you leave this check box clear (the default), a price increase benefits the CDS’s holder.
B
C
A
Working with Swaps 7
Understanding the Geneva Credit Default Swap Index (CDX) 165
Understanding the Geneva Credit Default Swap Index (CDX)In addition to the credit default swap, you can also track a Credit Default Swap Index (CDX). A CDX tracks a basket of underlying investments. Note that the basket is represented by a single reference investment, as in a Credit Default Swap (CDS). Geneva lets you track a CDX with an up-front cost or with no cost. Geneva can record gains for CDX investments either normally, or reversed (where a price increase on a long position is a loss for the portfolio).
A Closer Look at Opening a Credit Default Swap
In this example, the portfolio is buying protection with a CDS investment priced short.
A Enter the CDS for which you want to establish a position.
B Enter the CDS contract’s notional amount in the Quantity field, and then enter a price. If the CDS has no up-front cost, enter 0. In this example of a CDS with an up-front cost, the CDS’s price is .65, meaning that its quoted price is 100.65.
C Buying a CDS priced short with a price greater than 0 reflects a decrease in the risk of default. Geneva calculates the amount that the portfolio receives from the seller based on the price.
D Geneva calculates the amount of accrued interest that the portfolio receives from the seller, beginning from the previous coupon date.
A
B
C
D
Working with Swaps7
Understanding the Geneva Credit Default Swap Index (CDX)166
Another key difference between a CDS and a CDX is that when you enter a CDX Credit Event transaction, Geneva automatically reduces the CDX notional value of the basket. Unlike a CDS investment, which trades over the counter, the CDX is a standard securitized investment.
A Closer Look at Entering a CDX Credit Event Transaction
To enter a CDX Credit Event transaction, choose Transactions ➤ Swap Activity ➤ CDX Credit Event, and then define the fields on the General tab as follows. In this example, the portfolio has been buying protection using a CDX investment with an up-front cost of 10,000. The quoted price in the opening transaction was 100.
A Revenue Account Enter the revenue financial account that offsets the income received. This cannot be a notational account. By default, if you leave this field blank then Geneva will use the MiscRevenue financial account for a long position. For a short position, Geneva uses the MiscExpense financial account.
B Expense Account Enter the expense financial account that offsets the income paid. If you select the Paid Outside Portfolio check box, this must be a notational expense account. Otherwise, this cannot be a notational account. By default, if you leave this field blank then Geneva will use the MiscExpense financial account for a long position. For a short position, Geneva uses the MiscRevenue financial account.Note: If you make a manual entry for either of the preceding two fields, then you must use an expense financial account for a long position and a revenue financial account for a short position. If you do not, Geneva will ignore your selection and use the default financial accounts.
C The date on which the default took place. This must be less than or equal to the investment's Maturity Date. This date determines the financing accrual payable or receivable, as calculated from the CDX Credit Event. The accrual is calculated from most recent coupon date up to, but not including, this event date.
D The date on which the transaction should settle. This date determines the cash movements for both the financing accrual payable or receivable from the CDX Credit Event and also for recovery value posted on the Auction Date.
E The auction date is similar to an ex-date. This date determines the effective-date journal entry postings for the notional paydown amount, along with the Auction (Redemption) Value calculation prior to the settlement date. It also allows for accounting recognition of the Current Face notional quantity and the recovery value of the defaulted notional amount prior to the actual cash movements on settlement date.
F Enter the CDX Credit Default factor. This represents the factor of the CDX Reference Index Investment (also called the “basket”), that should be reduced based on the credit default event. The input here is the cumulative impact of known credit events. Geneva uses this formula:Original Face × Default Factor = Current Face
