Purpose

An OTC forward securities transaction is a non-standard purchase or sale agreement between two contracting parties who purchase or sell a specific quantity of a specific security at a specific amount at a future date.

Insurance companies use forward securities transactions to hedge open items, for example.

You can create forward securities transactions for the following product categories:

Stocks (010)

Investment certificates (020)

Bonds (040)

Shareholdings (160)

You can map the life cycle of forward securities transactions from rollover, advance maturity, delivery at maturity, and dividend adjustment through cash settlement and physical delivery.

Prerequisites

Customizing

Define product types

The system provides the product category Forward Securities Transaction (740). You need to create the required product types for this product category in Customizing for the Transaction Manager by choosing OTC Derivatives / Listed Derivatives → Transaction Management → Product Types → Define Product Types.

Define Transaction Types

You need to define the transaction types Purchase and Sale for the product types. The processing category 0001 Contract - Settlement – Maturity is specified for the product category Forward Securities Transaction .

A forward securities transaction can run through the following activity categories:

- Contract

- Contract Settlement

- Rollover

- Rollover Settlement

- Advance Maturity

- Advance Settlement

- Dividend Adjustment

- Corporate Actions

- Delivery

Special settings for forward securities transactions:

Define the Underlying Transaction Type .

For the sale of forward securities, you need to specify the Position Lock settings that you require ( Type of Position Lock and Reason for Lock ).

If it is possible to sell short, you need to make the settings No Lock or Lock Generates Warning .

Define Flow Types

1050 Forward Purchase (position decrease)

1051 Forward Sale (position decrease)

1052 Base Flow, Forward Securities Transaction (position increase)

1057 Corporate Action: Increase Base UL (increase base UL, corporate action)

1058 Corporate Action: Decrease Base UL (decrease base UL, corporate action)

1310 Cash Settlement (cash settlement)

Account Determination

You need to define account determination for the update types relevant for posting.

Define Position Management Procedure

To integrate forward securities transactions in position management, you need to define position management procedures.To do this, choose Transaction Manager → General Settings → Accounting → Settings for Position Management → Define Position Management Procedure.

For forward securities transactions that are settled in cash, use the position management categoryOTC Derivatives

For forward securities transactions that are exercised physically, use the position management categoryOTC Derivatives (Transfer to Underlying).

Up until the due date of the forward securities transaction, you can decide whether to settle in cash or via physical exercise.To do this, you should assign your positions to a position management procedure using the position management category OTC Derivatives (Transfer to Underlying).

Specify the step(s) for the key date valuation; the followingCategory Steps are provided:

001 One-step price valuation

004 Security valuation

005 Foreign currency valuation

Select the procedure you require.

Set the indicatorExecute on Key Date Valuation

Define theEvaluation Type forHedge Management for FAM

In the areaTransfer to Underlying , you can set the following indicators:

Transfer Option Value to Underlying (OTC Derivatives)

- Transfer premium, reverse valuations, or

- Transfer premium and valuations (to underlying purchase value)

Execute Valuation of OTC Derivatives: This indicator activates the valuation of OTC derivatives or forward securities transactions at the time of physical exercise.

Assign Position Management Procedure

You then define the rules used to assign a position management procedure to a position under Transaction Manager → General Settings → Accounting → Settings for Position Management → Assign Position Management Procedure.

Master Data

You need to define Class data for the security.

You also need to define a Business Partner .

Integration

Process Flow of a Forward Securities Transaction

Features

The following functions are provided to process a forward securities transactions: