Banking Back-Office Processing

Transcription

1 Banking Back-Office Processing OTC Options Administration Guide Copyright 2001, Unisys Corporation. All rights reserved Unisys is a trademark of Unisys Corporation Release June 2004 Printed in the UK

2 The names, places, and/or events used in this publication are not intended to correspond to any individual, group, or association existing, living or otherwise. Any similarity or likeness of the names, places and/or events with the names of any individual, living or otherwise, or that of any group or association is purely coincidental and unintentional. NO WARRANTIES OF ANY NATURE ARE EXTENDED BY THIS DOCUMENT. Any product and related material disclosed herein are only furnished pursuant and subject to the terms and conditions of a duly executed Program Product License or Agreement to purchase or lease equipment. The only warranties made by Unisys, if any, with respect to the products described in this document are set forth in such License or Agreement. Unisys cannot accept any financial or other responsibility that may be the result of your use of the information in this document or software material, including direct, indirect, special or consequential damages. You should be very careful to ensure that the use of this information and/or software material complies with the laws, rules, and regulations of the jurisdictions with respect to which it is used. The information contained herein is subject to change without notice. Revisions may be issued to advise of such changes and/or additions. All registered trademarks are acknowledged. Correspondence regarding this publication should be forwarded to Unisys Corporation, Bakers Court, Bakers Road, Uxbridge, Middlesex, UB8 1RG, United Kingdom.

3 About This Guide Purpose This guide describes the Over-The-Counter (OTC) Options functions offered by the Unisys Banking Back-Office Processing product. The information contained in this guide is also available as online help. Scope This guide provides background information associated with OTC Options, and describes the data entry screens associated with the processing of these transactions. An example is provided of each of the screens. Audience This guide is intended for personnel preparing information for, and entering data associated with, OTC Options deals. Prerequisites Any person using this guide should be familiar with the user documentation and understand the banking terminology associated with OTC Options. Users of this guide should have read the Starter s Guide that provides instruction in the use of the screens. How To Use This Guide This guide should be used as a reference tool when preparing information for data entry. Use the guide in conjunction with your Guide to Setting Up and, Core Functions and Inquires Guide. Refer to the Core On-Demand Reports Guide for instructions on how to select and run the reports that provide this information iii

4 About This Guide About Urbis The usage of the product name Urbis is due to be phased out as part of the Unisys re-branding exercise. The replacement will be the generic term "Banking Back-Office Processing" solution or "Banking Back-Office" for short. To provide continuity with existing product documentation, the name Urbis is used within this document, but is synonymous with Banking Back-Office Processing. Organisation This document consists of three sections and one appendix: Section 1: OTC Options Overview This section provides a background to the OTC Options transactions processed by the system. Section 2: OTC Option Contract Screens This sections describes each of the screens used to enter, perform valuation, exercise and inquire on OTC Options deals, together with screens to define the OTC products and instruments. A short description covering data entry, is supplied with each screen. The description is accompanied by an illustration of the screen. Section 3: Definition of Field Names This section provides definitions of the field names on OTC Options screens. The field names are listed alphabetically and in full, regardless of whether or not they are abbreviated on screens. Details of valid entries are given as part of the definition. Appendix A: Calculations This appendix provides the formulae used by the system for calculations associated with the processing of OTC Option transactions. iv

5 About This Guide Related Product Information Product Overview ( ) This document describes the capabilities and benefits of the modules of the Banking Back-Office Processing system. It consists of an overview of the system, and a description of each of the modules and interfaces available. It is intended for use by senior management. Operations Reference Card ( ) This document is a single card that provides a list of screen names and their mnemonics. The list is organised according to the menu structure of the Graphical User Interface. The card also describes how to log on and off the system, enter data, make inquiries and print reports. These instructions are relevant to the Graphical User Interface only. Starter s Guide ( ) This guide describes how to enter data and make online inquiries. It also includes a description and example of commonly used data entry and inquiry screens. This guide is intended for all new and inexperienced personnel who need to enter data and make inquiries. Guide to Setting Up ( ) This guide describes how to set up parameters that govern the operating environment of the system. It describes the procedures for setting up the business and operational tables, and setting up usercodes and access security. The procedures for setting up blueprint parameters are provided with a description of each parameter. It should be used by all persons involved in installation, implementation and maintenance of these system parameters. Core Functions and Inquiries Guide ( ) This guide describes the kernel functions that are used regularly for the maintenance of information utilised by a number of modules. It describes the procedures for setting up and maintaining data, such as market rates and dealers. It also describes inquiries that are common to all contracts. This guide is relevant to all users. Clients and Accounts Administration Guide ( ) This guide describes the data entry and inquiry screens associated with setting up and maintaining client details. This guide also describes the set up and maintenance of client accounts, including automatic payments (standing orders). An appendix covers the calculations used by client accounts. This should be used by personnel preparing information for data entry v

6 About This Guide Settlements Guide ( ) This guide describes the processes associated with settlements and customer transfers. It details how to administer the settlement queues. This guide also describes how to use the Straight Through Processing and Netting functions. It should be used by personnel managing the settlements department. General Ledger Administration Guide ( ) This guide describes the data entry screens associated with General Ledger transactions. This should be used by personnel preparing information for data entry. Risk Management Administration Guide ( ) This guide describes the data entry screens associated with setting up limits and exposures. The guide also describes the screens associated with portfolios. The amounts that represent book and market values are listed by module in an appendix. This guide is intended for personnel preparing information for data entry and those concerned with controlling risk. Commercial Loans Administration Guide ( ) This guide describes the data entry screens associated with Commercial Loan transactions. This includes entry of commitments, various types of drawdown and contract schedules. An appendix gives the calculations used in the processing of Commercial Loan transactions. This guide is intended for personnel preparing information for data entry. Foreign Exchange and Money Market Administration Guide ( ) This guide describes the data entry screens associated with Foreign Exchange and Money Market transactions. An appendix gives the calculations used in the processing of Foreign Exchange and Money Market transactions. This guide is intended for personnel preparing information for data entry. Forward Rate Agreements and Interest Rate Swaps Administration Guide ( ) This guide describes the data entry screens and some related inquiries associated with Forward Rate Agreement and Interest Rate Swaps transactions. An appendix gives the calculations used in the processing of Forward Rate Agreement and Interest Rate Swap transactions. This guide is intended for personnel preparing information for data entry. Futures Administration Guide ( ) This guide describes the data entry screens associated with Futures transactions and some related inquiries. An appendix gives the calculations used in the processing of Futures transactions. This guide is intended for personnel preparing information for data entry. vi

7 About This Guide Traded Options Administration Guide ( ) This guide describes the data entry screens associated with Exchange-Traded Options transactions. An appendix gives the calculations used in the processing of Exchange-Traded Options transactions. This guide is intended for personnel preparing information for data entry. Securities Administration Guide ( ) This guide describes the data entry screens associated with Interest Bearing Securities, Discounted Securities and Repurchase Agreements transactions and some related inquiries. An appendix gives the calculations used in the processing of Securities transactions. This guide is intended for personnel preparing information for data entry. Trade Finance Administration Guide ( ) This guide describes the data entry screens used by the Trade Finance department. This guide is intended for personnel preparing information for data entry. Generalised Fees Administration Guide ( ) This guide describes the data entry screens associated with Fee transactions and supporting business table. This guide is intended for personnel preparing information for data entry. Core On-Demand Reports ( ) This guide describes how to run online reports that are provided in the core of the system and which will be relevant to most implementations of the system. Any options available when producing a report are detailed as well as any specific calculations. On-Demand Reports Guide ( ) This guide describes on-demand reports in alphabetical order. Any options available when producing a report are detailed as well as any specific calculations. Note: core reports are described in the Core On-Demand Reports Guide; retail reports are described in the Retail On- Demand Reports Guide. Overnight Reports ( ) This guide describes how to run offline reports. This includes an overview of overnight processing. Instructions on how to initiate reports are given. This guide should be used by all personnel who need to understand the reports and the overnight process. Data Dictionary ( ) This document provides details of data fields within every dataset on your banking systems database. This document should be used by staff preparing the accounting models and writing SQL reports to inquire on the database vii

8 About This Guide Guide to Interfaces with External Systems ( ) This guide describes the running of all the interfaces between your Banking Back-Office system and external systems. This guide is intended for personnel involved in setting up and running external interfaces. Order Transport Management System ( ) This guide describes how to enter stock exchange securities contracts using the Order Transport and Management System. The screens in this guide allow users to add, maintain and inquire on deals, convert deals into stock exchange securities contracts, and liaise with brokers to complete settlement of a deal. This guide is intended for personnel preparing information for data entry. Portfolio Management ( ) This guide describes how to create portfolios for the clients and agents who will be trading stock exchange securities with your institution. A large array of inquiry screens for managing these portfolios is also described. This guide is intended for personnel preparing information for data entry. Stock Exchange and Securities Management ( ) This guide describes how to set up and maintain the securities master file, allowing you to record details of stock exchange securities. This guide also describes how to create, maintain and inquire on contracts based on stock exchange securities, including the necessary static data. Loan Administration System Guide ( ) This guide describes the data entry screens associated with Syndicated Loans. It includes entry of facilities, and contracts such as drawdowns, guarantees and acceptances and their schedules. The screens in this guide allow users to enter data using workflows. This guide is intended for personnel preparing information for data entry. Static Database Transaction Input Guide ( ) This guide, in conjunction with the static database, enables users to evaluate the functions and features of many of the modules. It should be used by persons who are familiarising themselves with the systems functionality. viii

9 Contents Section 1. OTC Options Overview Introduction OTC Currency Options System Functionality Schedule Events Contract Statuses Premium Accrual Mark to Market Valuation OTC Options Exposure Confirmations and Payment Advices Nostro and Agent Combinations Section 2. OTC Options Contract Screens Introduction to OTC Options Screen Flow Prerequisites OTC Options Product Default Maintenance (OTDFM) OTC Options Instrument Maintenance (OTINM) OTC Options Outline Deal Add (OTDEA) OTC Options Contract - Add (OTCOA) OTC Options Underlying Maintenance (OTCUA) OTC Options Contract - Change (OTCOC) OTC Options Contract Inquire/Delete (OTCOI) OTC Options Underlying Inquiry (OTCUI) OTC Options Settlement Maintenance (OTSTL) OTC Options Valuation Maintenance (OTVSM) OTC Options Instrument Browse (OTINI) OTC Options Contract Browse (OTCBR) OTC Options Valuation/Settlement Inquiry (OTVSI) OTC Options Positions Inquiry (OTPSI) Section 3. Definition of Field Names Introduction ix

10 Contents Appendix A. Calculations Introduction... A 1 Premium Amount... A 1 Intrinsic Status... A 2 Intrinsic Value... A 2 Total Settlement Value (at Exercise/Assignment)... A 4 Index... Index 1 x

11 Figures 1 1 Valuations changing over time OTC Options Data Entry and Management Screens OTC Options Product Default Maintenance screen OTC Options Instrument Maintenance screen OTC Options Outline Deal Add screen OTC Options Contract - Add screen OTC Options Underlying Maintenance screen OTC Options Contract - Change screen OTC Options Contract Inquire/Delete screen OTC Options Underlying Inquiry screen OTC Options Settlement Maintenance screen OTC Options Valuation Maintenance screen OTC Options Instrument Browse screen OTC Options Contract Browse screen OTC Options Valuation/Settlement Inquiry screen OTC Options Positions Inquiry screen xi

12 Figures xii

13 Tables 1 1 Entries in Nostro and Agent Fields Definition of Field Names xiii

14 Tables xiv

15 Section 1 OTC Options Overview Introduction Options provide the purchaser with the right but not the obligation to purchase (Call) or sell (Put) a specified amount of a financial instrument or commodity at a price agreed today (the exercise price), for delivery on some future date. The product actually traded is known as the Underlying Instrument. Urbis supports both Exchange-Traded and Over-The-Counter (OTC) Options. Exchange-Traded Options (see the Traded Options User Guide) are standardised products traded on exchanges, whereas OTC Options are individual contracts between two parties, who can set characteristics, such as the option's size and expiry date, as they wish. OTC Options can thus be tailored precisely for use in specific situations, but are much less liquid than Exchange-Traded Options. Options contracts are entered into for two principal reasons, either to reduce the risk of loss through adverse movements in the market, or to profit from changes in the underlying instrument prices. The grantor, or seller, of the Option, receives from the purchaser or taker, a premium. The premium reflects the value of the Option, and compensates the seller for the granting of the Option and the consequent risk of adverse price movements. If an option is "European", the buyer may exercise the option only at expiry, but if it is "American" the option may be exercised at any time up to the expiry date. When an option is exercised the result is that an underlying transaction is executed between the parties at the exercise price, or, less commonly, that a cash sum (the "total settlement value" of the option at the time of exercise) is paid by the seller to the buyer

16 OTC Options Overview OTC Currency Options Urbis supports the purchase and sale of OTC Currency Options that have the following characteristics: An underlying instrument that is an FX outright contract (either spot or forward) American-style or European-style Traded (speculative) or Hedged (risk offsetting) Premium paid on an agreed date or upon exercise/expiry Exercise leading either to a contract in the underlying instrument, or to a cash settlement. System Functionality The system provides security and multi-level access control throughout; this also applies to the OTC Options module. This includes a record of log-on, log-off and attempted violations, and an audit, in the form of before and after images for OTC Options deal entry and processing screens. Each contract is linked to an OTC Options General Ledger Master Number, an Accounting Centre, a Dealer Identifier and a Bank Portfolio. All but the General Ledger Master can be defaulted from the Users Maintenance (USERS) screen onto the contract screens. A default General Ledger Master can be set up for each contract type and client type combination. The defaults may be overridden on the contract entry screens. The General Ledger Master determines the ledger category for the contract, see the General Ledger Administration Guide for further information on General Ledger Masters. The user can define any number of OTC Option Instruments using the OTC Option Instruments Maintenance (OTINM) screen. Here the user references a Product Type for the underlying instrument, which must already be defined as an FX Product Type. Back-valued contracts can be entered. These contracts can be back-valued to the earliest history retention date as set up at installation. For each contract you can enter narratives against scheduled events. These narratives can then be used for reporting purposes. Each contract can have any number of narratives associated with events, provided that each event has a different value date. An FX contract may be created manually when the exercise of an OTC Currency Option results in the right to buy/sell such an FX contract (instead of settling in cash). The user can cross-refer the FX contract to the associated OTC Currency Option contract, via the Related Contract field. The user should also mark the FX contract to indicate that it is the result of option exercise ; this fact is then recorded on the MT300 confirmation generated. There are two methods of entry for OTC Options Contracts: Using the Contract Input (LEAD1) screen, the system allows you to input the key fields for any contract, for example the Client Shortname and City, and the Instrument Identifier. The system then takes you automatically to the OTC Options Contract Add (OTCOA) screen. This allows you to initiate direct contract entry

17 OTC Options Overview Using the Outline Deal (DEAL) screen, the basic details are entered and the system then takes you automatically to the OTC Options Deal Add (OTDEA) screen. The outline deal is selected on the Outline Deal Queue (DEALQ) for confirmation by the Back Office. For more information on Contract Entry, see the Starter s Guide and Section 2 for a Screen Flow of OTC Options Contracts. Schedule Events When a contract is entered, diary events for input, start, premium and maturity are generated. The following events are relevant to OTC Options contracts: Input (IP): The date of contract entry. Premium (PR): The date on which the option premium is paid or received. The Premium Value Date may be different from any other date, or it may be the same as the Start Date, or the Exercise Date, or the Maturity (Expiry) date. Start (ST): The diary associated with the deal date - not the Start Date - of the contract. (The Start Date is only used to identify the first date on which an American-style option can be exercised. It is left blank on European-style option contracts). Exercise (EC): Records the fact that an American-style option has been exercised prior to its expiry date. Note that the buyer of the option is said to "exercise" it, while the seller is said to be assigned. Both exercise and assignment are recorded as an Exercise (EC) event. Maturity (MA): The expiry date of the option. For options exercised on this date, the Maturity diary can also be used to record the fact that it has been exercised, so that a separate Exercise (EC) diary is not needed. Note: For a given Options Instrument, a lag period can be defined after the expiry date. During this period, the option can still be exercised, but this is treated as having taken place on the expiry date. This allows for the case where a notification of assignment is received late. Contract Statuses A contract goes through a number of statuses during its life. These statuses are triggered as follows: Unstarted: The contract has been entered. The contract remains Unstarted until: - It reaches its Deal Date for European-style options - It reaches its Start Date for American-style options - It is closed manually - It reaches its Expiry Date (this occurs if the Expiry Date is changed to end the contract) Active: The contract becomes Active when: - It reaches its Deal Date for European-style options - It reaches its Start Date for American-style options The contract remains Active until: - It is exercised - It reaches its Expiry Date - It is closed manually - It is expired manually - It is deleted

18 OTC Options Overview Exercised: The contract becomes Exercised when it is manually updated to this status. Only Active contracts can be exercised. Closed: A contract can only be set to this status manually. A contract is normally set as Closed when it has been offset by an equal and opposite contract with the same counterparty. It is the users responsibility to set both contracts to Closed manually. For any such contract, no further actions will take place. Expired: The contract becomes Expired at the beginning of the day after the Expiry Date. In addition, a contract can only be expired manually on its expiry date (i.e. to represent the expiry time during that date). The contract status can move from Expired to Exercised if it is exercised during the lag period. Premium Accrual Both traded and hedged OTC Options can be set up. However, only hedged contracts accrue. For hedged OTC Options, premium is accrued on a daily basis. The accrual is performed on a simple straight-line basis during the period that the contract is Active. This means that accrual is performed from the Deal Date to the Expiry Date for a European-style option, or from the Start Date to the Expiry Date for an American-style option. Exercise of an American option does not affect this accrual. If a contract has been closed and the Premium Date has been reached, all nonaccrued premium will be posted on closure. Mark to Market Valuation For an OTC Options contract, three valuations are made daily. These are the Intrinsic Value, the Market Value and the Theoretical Value. These values are made available for posting for both traded and hedged OTC Options. The Intrinsic Value is based on the difference between the exercise price and the current price of the underlying instrument. In the case of an OTC Currency Option, the current price is the current spot FX rate in the relevant currency pair. The Intrinsic Value shows the gross profit (if any) that would be made by the buyer if the option were to be exercised today. If the current price of the underlying is lower than the exercise price, the Intrinsic Value is zero and the option is said to be Out of the Money (this is the Intrinsic Status within the system). If the current price is the same as the exercise price, the Intrinsic Value is also zero, but the Intrinsic Status is At the Money. If the current price is better than the exercise price, then the Intrinsic Value is greater than zero, and the Intrinsic Status is In the Money. The Market Value shows what the market considers that the option is worth. This does not necessarily mean that the OTC Option can be sold for this price. The Market Value is manually entered on the OTC Options Valuation Maintenance (OTVSM) screen. The Theoretical Value shows what the option is worth using a theoretical model that uses such parameters as current price of underlying and the volatility of that price. The calculation is complex and will be performed by specialist software outside of the system. The Theoretical Value is manually entered on the OTC Options Valuation Maintenance (OTVSM) screen

19 OTC Options Overview The following figure shows an example of the Intrinsic Value, Market Value and Theoretical Value of an OTC Option changing over time. At each end-of-day, the revaluation is based on the closing price for the day. (The example shows the Theoretical Value above the Market Value but of course this is not always the case.) Theoretical Close (a) Close (b) Close (c) Exercise (online) Market Intrinsic Figure 1 1. Valuations changing over time When the option is exercised all three values are set to the Intrinsic Value at the time of exercise. This value will be the final valuation and will be used for postings in the end-of-day processing for the option. Note: If the Intrinsic Value is zero ( Out-of-Money ) at the time of exercise, the Market Value and Theoretical Value will also be set to zero. OTC Options Exposure For Start (ST), Premium (PR) and Maturity (MA) events the following values are available for exposure: Premium (in original and settlement currencies) Underlying currency amount Counter currency amount For Premium (PR) and Maturity (MA) events the following values are also available for exposure: Intrinsic value Market value Theoretical Value The method for setting up and maintaining exposures is described in the Risk Management Administration Guide

20 OTC Options Overview Confirmations and Payment Advices Input confirmations are printed (or S.W.I.F.T. messages are generated) when a contract is entered. Confirmations and payment advices for subsequent events are produced a number of days in advance of the event (for each country). These subsequent confirmations are produced during the overnight processing. For each contract entered, you can specify the priority of the S.W.I.F.T. messages generated for that contract by making an entry in the Message Priority field. If you leave this field blank, the default value selected at installation is used (see the Guide to Setting Up for details). Nostro and Agent Combinations The system automatically identifies the accounts between which payments are made, on the basis of the nostros and agents that have been set up for each particular contract giving rise to the notice or payment. Default nostros and agents may be allocated according to rules set up on the Nostro Settlement Defaults (NSDFM) and the Agent Settlement Defaults (AGDFM) tables. A nostro account is defined as our account with another bank (the correspondent). In order to correctly reflect any money held with another bank, the system maintains a copy of the nostro account in its own books. Nostro accounts are set up using the Nostro Details (NSTRO) table. They are identified by a nostro number and currency or a nostro name and currency. An agent is defined as a third party responsible for paying or receiving funds on a contract. Agents are set up using the Agent Details (AGNTM) table. They are identified by an agent nickname. For details of how to set up nostros and agents see the Settlements Guide. Nostros and Agents are specified when entering OTC Options contracts. In order that instructions for the transfer of funds are correctly generated (using either the S.W.I.F.T. network, if applicable, or printed messages), the system ensures that only valid combinations of nostros and agents can be specified for each contract. Table 1-1 lists and describes valid combinations of entries in the nostro and agent fields. The following rules apply: A nostro can be identified by either its name or number. The use of an Agent does not necessarily indicate that an account relationship exists between the bank and the agent. For example settlement messages may be sent by the bank to its pay nostro, with information for onward transmission to the client's agent. Similarly, settlement messages may be received from the client's agent by the bank's receive nostro, with information for onward transmission to the bank. The SSI codeword cannot be used for OTC Options. Note: The default settings for both the agent and the nostro can be entered using other methods. Entering the number or name for the default agent or nostro will display the entered detail for the agent or nostro. Leaving the agent or nostro blank will result in the system applying the default, if available, or T (To be advised)

21 OTC Options Overview Table 1 1. Entries in Nostro and Agent Fields Nostro Agent Description Number/Name Name Your correspondent and the client s agent are different. The agent s nickname is entered in the Agent field. Number/Name Number/Name The client s agent is one of your correspondents: 1. The nostro number/name in the Nostro field can be different from the nostro number/name in the Agent field. 2. If your correspondent and the client s agent are the same, the nostro number/name entered in the Nostro field can refer to the same nostro as that entered in the Agent field. Number/Name S Your correspondent and the client s agent are the same. (This is equivalent to 2. above). Number/Name U There is no agent. Number/Name T Your correspondent is known; the client s agent is to be advised. If a S.W.I.F.T. message would normally have been sent, this combination will result in it not being sent - printed messages will be generated instead. V Vostro A/C No. Posting is to be made using a vostro. The Agent field identifies the account to be used. D Name Posting is to be made directly from/to your bank to/from the client s agent. You can enter either an agent s nickname or a nostro number/name in the agent field. D U There is no agent. Posting is to be made directly from your bank to the error suspense account. When the receive account is known, use the batch postings facility to effect the transfer. D T Posting is to be made directly from your bank to a client s agent who is to be advised. If a S.W.I.F.T. message would normally have been sent, this combination will result in it not being sent - printed messages will be generated instead. T Name Your correspondent is to be advised; the client s agent is known. You can enter a nostro number/name in the Agent field. This combination will result in S.W.I.F.T. messages not being sent - printed messages will be generated instead

22 OTC Options Overview Nostro Agent Description T U Your correspondent is to be advised and the client doesn t have an agent. This combination will result in S.W.I.F.T. messages not being sent - printed messages will be generated instead. T T Both your correspondent and the client s agent are to be advised. The settlement message will be sent directly to the nostro, when entered. This nostro/agent combination should be used with care when payment takes place at the start event. This combination will result in S.W.I.F.T. messages not being sent - printed messages will be generated instead. Number/Name NSTD Settlement instructions specific to the contract are to be used for the agent. Enter NSTD in the Their Receive Agent field and clicking Settlement Instructions will link to the Non Standard Settlement Instructions (NSTDM) screen. Any of the Agent identifiers shown in Table 1-1 can be replaced by the exact S.W.I.F.T. address of the agent. Only do so if you are certain of the address, which must be entered using symbol followed by the appropriate 8 or 11 character S.W.I.F.T. address. Only the following formats should Where: BBBB = Four alphabetic characters representing the S.W.I.F.T. bank identifier CC = Two alphabetic characters representing the S.W.I.F.T. country code LL = S.W.I.F.T. location code XXX = Three alphabetic/numeric characters representing the S.W.I.F.T. branch code (if applicable)

23 Section 2 OTC Options Contract Screens Introduction to OTC Options Before attempting to enter an OTC Option, you must be familiar with: Entering and Inquiring on Contracts as described in the Starter's Guide and Core Functions and Inquiries Guide. General information on OTC Options contracts, see Options Overview in Section 1 General information on settlements, see Overview of Settlements in the Settlements Administration Guide

24 OTC Options Contract Screens Screen Flow Set up details of underlying FX product FX Default Maintenance (FXDFM) OTC Options Product Default Maintenance (OTVSM) Set up defaults for OTC Options product OTC Options Instrument Maintenance (OTINM) Enter details of OTC Options instrument Outline Deal Add (DEAL) Begin outline deal entry OTC Options Outline Deal Add (OTDEA) Enter outline deal details Begin contract entry Contract Input (LEAD1) Outline Deal Queue (DEALQ) Select outline deal for verification Enter contract details OTC Options Contract - Add (OTCOA) Enter details of contract s underlying OTC Options Underlying Maintenance (OTCUA) Change status of contract (for example, exercise contract) OTC Options Settlement Maintenance (OTSTL) OTC Options Valuation Maintenance (OTVSM) Manually enter underlying and market prices and view valuation Figure 2 1. OTC Options Data Entry and Management Screens

25 OTC Options Contract Screens The data entry screens used to enter and manage OTC Options products, instruments and contracts are illustrated in the preceding Figure. A full description of the fields on the screens, and valid entries, is given in Section 3, Definition of Field Names. Please refer to the Starter s Guide for a description of how to access and use screens. Prerequisites Before you can enter any type of OTC Options contract, certain items referenced by the contract must be set up. The following list shows the mandatory items and the business tables on which they are set up: Accounting Centre - Accounting Centres Maintenance (ACNTM), see the Guide to Setting Up Portfolio - Portfolio Definition (PFDFM), see the Risk Management Administration Guide Product Type - Product Types Maintenance (PRTPM), see the Core Functions and Inquiries Guide Principal Currency - Currencies (CCYS), see the Guide to Setting Up Foreign Exchange Product for Underlying Instrument - Foreign Exchange Default Maintenance (FXDFM), see the Foreign Exchange and Money Market Administration Guide General Ledger Master - General Ledger Master (GLMAM), see the General Ledger Administration Guide You can set default General Ledger Masters for OTC Options Buy and OTC Options Sell contracts using the Default General Ledger Masters (GLDFM) screen, see the General Ledger Administration Guide

26 OTC Options Contract Screens OTC Options Product Default Maintenance (OTDFM) Before you can enter an OTC Options instrument, you must define the product that is traded on the Product Types Maintenance (PRTPM) screen. When an OTC Options product has been defined, you can set up defaults for it on the OTC Options Product Default Maintenance (OTDFM) screen. These defaults are designed to save you time when entering instrument details. The values that are displayed do not constitute a complete instrument record. You may overwrite the defaulted details. However, if the Option Type of a product is set to Call or Put, then any instruments based upon it must have the same Option Type. Product defaults can be deleted if there are not any instruments that use the product. The following figure shows an example of the OTC Options Product Default Maintenance screen. Figure 2 2. OTC Options Product Default Maintenance screen

27 OTC Options Contract Screens OTC Options Instrument Maintenance (OTINM) This screen is used to enter details of an OTC Options instrument. Before an instrument can be defined, the product on which it is based must have been set up on the Product Types Maintenance (PRTPM) and OTC Options Product Default Maintenance (OTDFM) screens. Instruments defined on this screen provide the basic characteristics for OTC Options. If an instrument is identified as the basis of a contract, then the instrument s details will be displayed as defaults on the OTC Options Contract Add (OTCOA) screen. The defaulted values do not constitute a complete contract record and you may overwrite them. Note: If the Option Type of the product was set to Call or Put on the OTC Options Product Default Maintenance (OTDFM) screen, then any instrument based upon it must have the same Option Type. Similarly if the Option Type is set to Call or Put on the OTC Options Instrument Maintenance (OTINM) screen, then any contract based upon it must have the same Option Type. Similarly, if the Trade Type of the instrument is set to Traded or Hedged, then any contract based upon it must have the same Trade Type. An instrument can be deleted if there are not any contracts that use it. The following figure shows an example of the OTC Options Instrument Maintenance screen. Figure 2 3. OTC Options Instrument Maintenance screen

28 OTC Options Contract Screens OTC Options Outline Deal Add (OTDEA) You will be routed to this screen if you enter an OTC Options instrument and an action of purchase or sale on the Outline Deal Add (DEAL) screen, see the Starter's Guide for details. Use the OTC Options Outline Deal Add (OTDEA) screen to submit an outline deal to the Outline Deal Queue (DEALQ) from which it can be verified and the contract added to the system. See 'Entering an Outline Deal' in the Starter's Guide for full details of outline deals

29 OTC Options Contract Screens The following figure shows an example of the OTC Options Outline Deal Add screen. Figure 2 4. OTC Options Outline Deal Add screen

30 OTC Options Contract Screens OTC Options Contract - Add (OTCOA) This screen is used to enter both OTC Options Purchase and Sale contracts. You begin data entry by specifying the instrument on which the contract is to be based in the Instrument Code field. You then click the OK button and the details of the instrument will be displayed on the OTC Options Contract Add (OTCOA) screen. These details can be overwritten as necessary. Note: If the Option Type of the instrument is set to Call or Put on the OTC Options Instrument Maintenance (OTINM) screen, then any contract based upon it must have the same Option Type. Similarly, if the Trade Type of the instrument is set to Traded or Hedged, then any contract based upon it must have the same Trade Type. If the instrument is not set to allow for both Bought and Sold OTC Options contract types, then the Agreement Type entered must correspond to contract type of the product that underlies the instrument. The Premium Amount field need not be entered The premium will be calculated when the Underlying Currency Amount has been entered on the OTC Options Underlying Maintenance (OTCUA) screen. If the Exercise Outcome is set to Deal, then the right to buy or sell an FX Market contract exists when the option is exercised. The OTC Options Underlying Maintenance (OTCUA) screen is used to record details of the underlying and counter currency amounts and the exercise price. To transfer to the OTC Options Underlying Maintenance (OTCUA) screen, complete the OTC Options Contract Add (OTCOA) screen, but before confirming the details, switch on the Add Underlying Details field and click on the OK button. Non standard settlement instructions for the payment agent may be created by linking through to the Non Standard Settlement Instructions (NSTDM) screen (see the Settlements Guide). To do this, enter NSTD in the Their Receive Agent field and click Settlement Instructions. When you have completed all the details on both the OTC Options Contract Add (OTCOA) screen and the OTC Options Underlying Maintenance (OTCUA) screen, then to add the contract switch on the Confirm field and click on the OK button. The following figure shows an example of the OTC Options Contract - Add screen

31 OTC Options Contract Screens Figure 2 5. OTC Options Contract - Add screen

32 OTC Options Contract Screens OTC Options Underlying Maintenance (OTCUA) When you are adding an OTC Options contract, you must complete both the OTC Options Contract Add (OTCOA) screen and the OTC Options Underlying Maintenance (OTCUA) screen. You use the OTC Options Underlying Maintenance (OTCUA) screen to record details of the underlying and counter currency amounts and the exercise price. The screen can only be accessed via the OTC Options Contract Add (OTCOA) screen. The Underlying Currency Amount and Exercise Price must be entered. The Exercise Price is used as the exchange rate between the Underlying Currency Amount and the Counter Currency Amount. Note: The Underlying Currency and Counter Currency cannot be altered - they must be the same as those specified in the defaults of the Underlying FX Product. When you have completed the Underlying Currency Amount and Exercise Price fields, then click on the OK button. The Counter Currency Amount will be calculated and displayed. When you have finished adding the underlying option on the OTC Options Underlying Maintenance (OTCUA) screen, switch on the Confirm field and click on the OK button. You will be returned to the OTC Options Contract Add (OTCOA) screen. The following figure shows an example of the OTC Options Underlying Maintenance screen. Figure 2 6. OTC Options Underlying Maintenance screen

33 OTC Options Contract Screens OTC Options Contract - Change (OTCOC) The OTC Options Contract - Change (OTCOC) screen can be used to change the deal date, start date, premium value date or expiry date in the following circumstances: If the date has not passed If the date is not changed to a date earlier than today Changes to the contract s dates will have the following effects: Start date: This will reduce the length of an American-style contract. Deal date: This will move the start (ST) diary event and reduce the length of the contract. The premium accruals are adjusted for hedged contracts. Expiry date: This will move the maturity (MA) diary and change the length of the contract. The premium accruals are adjusted for hedged contracts. Premium Value Date: This will move the premium (PR) diary. For a description of diaries relevant to OTC Options, see Schedule Events in Section 1. Note: If changing a date, such as the expiry date, means that an action should be performed, then this will be carried out during the following Overnight processing. Non standard settlement instructions for the payment agent may be created by linking through to the Non Standard Settlement Instructions (NSTDM) screen (see the Settlements Guide). To do this, enter NSTD in the Their Receive Agent field and click Settlement Instructions

34 OTC Options Contract Screens The following figure shows an example of the OTC Options Contract - Change screen. Figure 2 7. OTC Options Contract - Change screen

35 OTC Options Contract Screens OTC Options Contract Inquire/Delete (OTCOI) Details of OTC Options contracts are available from the OTC Options Contract - Inquire/Delete (OTCOI) screen. After performing an inquiry on a contract you can: Copy it Delete it. If the contract has matured, then it cannot be deleted unless the blueprint parameter BP-CNT-MATDEL-DYS (see the Guide to Setting Up) has been used to specify that matured contracts can be deleted. Using the blueprint parameter you specify the period after maturity during which a contract may be deleted. When a contract is deleted: All associated account postings are reversed S.W.I.F.T. confirmation of input is reversed S.W.I.F.T. payments of premiums are reversed Premium accruals are reversed Any position and exposure updates are deleted When you have the details of an OTC Options contract displayed, you can switch to the OTC Options Underlying Inquiry (OTCUI) screen to view details of the underlying transaction. To transfer to the OTC Options Underlying Inquiry (OTCUI) screen, switch on the Inquiry Underlying Details field and click on the Inquire button. If there are non standard settlement instructions for the payment agent these can be viewed by linking through to the Non Standard Settlement Instructions (NSTDM) screen (see the Settlements Guide). To do this click Settlement Instructions. To view the details of the diary for the contract, click Diary and the Diary by Contract (DICNI) screen will be displayed

36 OTC Options Contract Screens The following figure shows an example of the OTC Options Contract Inquire/Delete screen. Figure 2 8. OTC Options Contract Inquire/Delete screen

37 OTC Options Contract Screens OTC Options Underlying Inquiry (OTCUI) The OTC Options Underlying Inquiry (OTCUI) screen is used to display details of the underlying and counter currency amounts and exercise price. These details are entered using the OTC Options Underlying Maintenance (OTCUA) screen. This screen can only be reached via the OTC Options Inquire/Delete (OTCOI) screen. To return to that screen click on the OK button. The following figure shows an example of the OTC Options Underlying Inquiry screen. Figure 2 9. OTC Options Underlying Inquiry screen

38 OTC Options Contract Screens OTC Options Settlement Maintenance (OTSTL) The OTC Options Settlement Maintenance (OTSTL) screen is used to exercise, close, or expire an option. You first perform an inquiry by entering the Contract Number and clicking OK. The Underlying Price When Exercised field initially displays the current price of the underlying. This field can be updated to record the underlying price to be used when the option is exercised. The Exercise Outcome and settlement instructions fields can also be changed if necessary. If there are non standard settlement instructions for the payment agent these can be viewed by linking through to the Non Standard Settlement Instructions (NSTDM) screen (see the Settlements Guide). To do this click Settlement Instructions. If the Exercise Outcome is set to Deal, then the right to buy or sell an FX Market contract exists when the option is exercised. If required details of the FX Market contract can be set up using the Foreign Exchange Market Add (FXMKA) screen, see the Foreign Exchange and Money Market Administration Guide for details. When the FX Market contract is created, an indicator can be set showing that it was produced due to an OTC Option being exercised. If an option has been manually exercised, closed or expired it can be Re-Activated. This can only be performed on the day of the manual status change. Select Re-Activate (R) in the Action field and the status will be changed back to Active. If the settlement details, the exercise outcome and/or the underlying price were changed, then they will not revert back to their original values, but they can be changed again. The rules for performing actions (see Schedule Events and Contract Statuses in Section 1 for further details) are: Exercise (E) For American-style options that are Active, exercising can be performed on any date from the Start Date up to (and including) the Expiry Date. For European style options that are Active, exercising can only be performed on the Expiry Date. For both American-style and European-style sold options, exercising can be performed after the Expiry Date up to (and including) the Lag Date. Lag periods do not apply if an option is expired manually before its Expiry Date. Expire (X) For Active options, expiry can be performed on the Expiry Date only. Performing manual expiry allows you to record an Expiry Time (this time is for documentary purposes only, expiry is actually performed during the Overnight processing). Close (C) For Unstarted or Active options, closing can be performed at any time between the Input Date and the Expiry Date. Note: If an option is expired or closed manually on its Expiry Date it can be Re-Activated and then exercised on that day. When you have completed changes to the option s details and have set the action to be performed click OK. The Action/option changes entered will not be activated until the OTC Options End-of Day (OTCEOD) report is run during the overnight process