Background documentationHA Rule 200: Amortization / Hedge Adjustment P&L / Credit Spread OCI

 

The Amortization / Hedge Adjustment P&L / Credit Spread rule is used in the following scenarios:

  • 150 FVH: Bond Hedged with Interest Rate Swap - Final Maturities Similar

  • 151FVH: Bond Hedged with Interest Rate Swap - Final Maturities Not Similar

Prerequisites

In Customizing for the Transaction Manager under Start of the navigation path General Settings Next navigation step Accounting End of the navigation path, you need to make the required settings for the valuation in the following Customizing activities:

  • In the Customizing activity Define Position Management Procedure, you need to include the following valuation steps in the position management procedure for these positions:

    1. Amortization

    2. One-step valuation or security valuation

  • In the Customizing activity Assign Update Types for Valuation, assign the update types to be used for the flows of the valuation (such as for the write-ups and write-downs).

  • In Customizing activity Assign Alternative Update Types for Position Outflows, enter the alternative update types for posting the hedge adjustment (condition: P-HA: Hedge Adjustment). In this way, the hedge adjustment is posted to a separate (P&L) account.

Features

Valuation Before the Start of a Hedging Relationship

Amortizations are assigned to the position components 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". Write-ups and write-downs in the security are written to the position component 1002 (= Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation".

Valuation at the Start of the Hedging Relationship (Designation)

During a designation, transfer postings are made from the free-standing subpositions to the hedged subpositions or to the subpositions to be hedged. Before these transfer postings are made, the free-standing subpositions are valuated as part of a derived business transaction. Amortizations are assigned to the position components 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". Write-ups and write-downs in the security are written to the position component 1002 (= Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". In addition, the write-up or write-down is written to the component 1029 (= Hedge Amortization), whereby the derived component 9004 (= Amortized Acquisition Costs) is adjusted to the fair value at the time of designation. This produces a new effective interest rate for subsequent amortizations. The system determines the update type using the settings in the Customizing activity "Assign Update Types for Derived Business Transactions" in the "P-Hedge Accounting: Transfer Postings Between Subpositions" area in the "Hedge Amortization" field.

Valuations During the Hedging Relationship

Valuations during hedging relationships are performed as key date valuations (transaction TPM1) or as part of derived business transactions.

With a key date valuation, a check is run as to whether the hedging relationship is effective both retrospectively and prospectively. The result of the valuation can only be posted if effectiveness is given. In the case of ineffectiveness, the hedging relationship has to be dedesignated manually.

Valuations as part of derived business transactions also affect business transactions in the future (for example, with a designation, valuation is performed at the time of the dedesignation). For this reason, the existence of a valid effectiveness test is not a prerequisite for creating the derived business transaction. Consequently, valuation as part of a derived business transaction can also be performed in the case of an ineffective hedging relationship. However, at the time when you fix the derived business transaction, the hedging relationship must be effective. In the case of ineffectiveness, the hedging relationship has to be dedesignated manually.

  • Hedged Item Valuation

    • In the case of effectiveness

      Amortizations are assigned to the position component 1007 (Amortization). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation. Write-ups and write-downs in the security are divided into two parts:

      • Hedge Adjustment

        The hedge adjustment results from the difference between the hedge fair value and the hedge amortized costs. The hedge fair value is calculated during valuation by discounting the future cash flows.

      • Credit Spread

        The credit spread results from the difference between the market value of the bond (transaction FW17) and the hedge fair value.

      A detailed log for the valuation log shows how the hedge adjustment and the credit spread are calculated.

      The hedge adjustment is written to position component 1301 (Hedge Adjustment) as well as to position component 1300 (For internal calculation: To be classified). The update date is calculated using the Customizing activity Alternative Update Types for Position Outflows.

      The credit spread is written to the position component 1002 (Security Valuation). The update type is calculated using the settings made in the Customizing activity Assign Update Types for Valuation (update type for Security Write-Up or Security Write-Down).

    • In the case of ineffectiveness

      Amortizations are assigned to the position component 1007 (= Amortization). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation". Write-ups and write-downs in the security are divided into two parts:

      • Hedge Adjustment

        The hedge adjustment results from the difference between the hedge fair value and the hedge amortized costs. The hedge fair value is calculated during valuation by discounting the future cash flows.

      • Credit Spread

        The credit spread results from the difference between the market value of the bond (transaction FW17) and the hedge fair value.

      A detailed log for the valuation log shows how the hedge adjustment and the credit spread are calculated. The hedge adjustment is written to the position component 1002 (Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

      The credit spread is written to the position component 1002 (Security Valuation). The update type is calculated using the settings made in the Customizing activity Assign Update Types for Valuation (update type for Security Write-Up or Security Write-Down).

  • Hedging Instrument Valuation

    • In the case of effectiveness

      Write-ups and write-downs in the security are written to position component 1002 (Security Valuation) as well as to position component 1300 (For internal calculation: To be classified). The update type is determined on the basis of the settings made in the Customizing activity Assign Update Types for Valuation.

    • In the case of ineffectiveness

      Write-ups and write-downs in the security are written to the position component 1002 (Security Valuation). The update type is determined on the basis of the settings made in the Customizing activity "Assign Update Types for Valuation".

    A classification (transaction TPM101) can be used to split the valuation results determined into effective and ineffective portions. For this, the position component 1300 (For internal calculation: To be classified) of the hedged item and of the hedging instrument is transferred to the position components 1302 (Effective) and 1303 (Ineffective). Once the classification has been performed, the position component 1300 (For internal calculation: To be classified) acquires the value zero.

Valuation at the End of the Hedging Relationship

With a dedesignation, the system transfers the hedged subpositions or the subpositions to be hedged to the free-standing subpositions. Before these transfer postings are made, the hedged subpositions or the subpositions to be hedged are valuated as part of derived business transactions. Valuation at the end of the hedging relationship uses the same procedure as valuation during the hedging relationship. In addition, the component 1024 (Hedge Amortized Costs) or the derived component 9004 (Amortized Acquisition Costs) is adjusted, producing a new effective interest rate on the free-standing subposition. The system determines the update type using the settings in the Customizing activity Assign Update Types for Derived Business Transactions in the P-Hedge Accounting: Transfer Postings Between Subpositions area in the Hedge Amortization field. A classification is also performed as part of a derived business transaction.

Manual Dedesignation of an Ineffective Hedging Relationship

With a manual dedesignation, an additional retrospective effectiveness test is included in the test plan. This test needs to be executed manually. If the test is effective, the valuation performed as part of the dedesignation is performed in the "Effective" mode. If the test is ineffective, the valuation performed as part of the dedesignation is performed in the Ineffective mode.

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