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Function documentationTotal Return Swap Locate this document in the navigation structure

 

A total return swap in the system allows you to swap the total return of a single asset in exchange for periodic cash flows, or you can swap periodic cash flows for the total return of a single asset. The periodic cash flow is typically a floating rate, such as LIBOR +/- a basis point spread, and a guarantee against any capital losses. With a total return swap, the total return (cash flows plus capital appreciation or depreciation) is exchanged, and not just the cash flows.

You use the Transaction Manager of the Treasury and Risk Management application component to manage total return swaps.

Prerequisites

To enter Total Return Swaps, you first need to make the required settings in Customizing for the Transaction Manager:

  1. Define product types. The creation of financial transactions and management of positions in the Transaction Manager is based on Product Types.

    The system provides the product category Total Return Swap . You need to create the required product types for this product category in Customizing by choosing   Financial Supply Chain Management   Treasury and Risk Management   Transaction Manager   OTC Derivatives   Transaction Management   Product Types   Define Product Types  .

    Select the OTC Swaps tab page and the New Entries.

    • Assign the product type a key (for example, 64A)

    • Assign the product type a long text up to 30 characters and a short text no longer than 10 characters.

    • Product Category = 640 Total Return Swap

    • Save your entries.

  2. Define settings for transaction management.

    Choose   OTC Derivatives   Transaction Management   Transaction Types   Define Transaction Types   to create at least one transaction type for transaction category 300 Payer (fixed interest) and one for transaction category 301 Payer (variable interest).

  3. Define flow types by choosing   OTC Derivatives   Transaction Management   Flow Type   Define Flow Type  .

    The following flow types are required for Total Return Swaps:

    • 1105 Nom. Amt Incr.(Not Rel.f.Postg) for flow category 10 Principal Increase

    • 1107 Nominal Unit Increase/Base flow increase for flow category 10 Principal Increase

    • 1117 Nominal Unit Decrease/Base flow decrease for flow category 11 Principal Decrease

    • 1125 Contract (Not Rel. for Posting) for flow category 12 Final Repayment

    • 1200 Interest for flow category 20 Nominal Interest

    • 1370 Revenue Compensation for flow category 37 Revenue Compensation

    • 1380 Price Compensation for flow category 38 Price Compensation

  4. Assign the required flow types to each transaction type:   OTC Derivatives   Transaction Management   Flow Type   Assign Flow Type to Transaction Type  . You must include all the flow types needed to process a transaction (as defined above)

  5. Define the relevant update types and assign them to the corresponding transaction types in the Update Types section. For example:

    • Flow type 1380 Price Compensation assigned to update type DE1020+

    • Flow type 1380 Price Compensation assigned to update type DE1020–

    • Flow type 1105 Nom. Amt Incr.(Not Rel.f.Postg) assigned to update type DE1105–

    • Flow type 1107 Nominal Unit Increase/Base flow increase assigned to update type DE1107+

    • Flow type 1117 Nominal Unit Decrease/Base flow decrease assigned to update type DE1117–

    • Flow type 1125 Contract (Not Rel. for Posting) assigned to update type DE1125+

    • Flow type 1200 Interest assigned to update type DE1200+

    • Flow type 1370 Revenue Compensation assigned to update type DE2300

  6. Define and assign the relevant condition types to the transaction types, for example, interest condition, final repayment condition, (for variable interests) interest adjustment condition.

You must also define settings in Customizing for managing positions for Total Return Swaps:

  1. Check that the Effects of the Update Types on the Position Components are already in place:   Transaction Manager   General Settings   Accounting   Settings for Position Management   Set the Effects of the Update Types on the Position Components  

  2. To integrate total return swaps 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  .

    • You can use the following Position Management procedures or define your own procedures with reference to these:

      • 7000 – OTC Derivatives: Mark-to-Market

      • 7100 – OTC Options: Mark-to-Market (2-Step/OCI)

  3. Assign the position management procedure to a position using   Transaction Manager   General Settings   Accounting   Settings for Position Management   Assign Position Management Procedure  .

  4. Assign the update types required for valuation based on the position management procedure:   Transaction Manager   General Settings   Accounting   Valuation Class Transfer   Update Types   Assign Update Types for Valuation Class Transfer  

Activities

Entering a Total Return Swap

  1. In the SAP area menu, open   Accounting   Financial Supply Chain Management   Treasury and Risk Management   Transaction Manager   Derivatives   Trading   Create Financial Transaction   (FTR_CREATE).

  2. Choose the Company Code.

  3. Choose the Product Type, for example, 64A Total Return Swap.

  4. Choose the Transaction Type, for example 300 or 301.

  5. Choose the business Partner.

  6. Choose the ID Number.

  7. Click Enter and the Create Total Return Swap: Structure screen is displayed.

  8. Complete the relevant fields:

    • Term

    • Business Calendar

    • Contract Conclusion

  9. Complete the Return Leg/Outgoing data:

    • Number of Units

    • Base Rate

    • Stock Exchange

    • Rate Type

    • Flow Type Increase

    • Flow Type Decrease

      Note Note

      The Flow Type fields can be displayed by clicking on the Flow Types button after the initial Return Leg and Funding Leg details have been saved.

      End of the note.

  10. Complete the Funding Leg/Incoming data:

    • Nominal Amount and Currency

    • Effective From date

    • First Due Date and Frequency Month

    • Fixed Interest

    • Internal Calculation Method

  11. Click on the Dividend tab and add a dividend flow if required.

  12. Complete the remaining tab pages as required.

Additional Functions

Function

Entries

Remarks

Change

  1. Choose   Derivatives   Trading   Edit Financial Transaction  

  2. Enter the Company Code and Transaction number.

  3. Choose Change.

  4. Make your changes and save your entries.

  • You can change all transaction data before you settle the contract.

  • After settling the transaction, you should only use this function to correct errors in the following data.

    • End of term

    • Forward price

  • Use the appropriate function from the list below.

Settle

  1. Choose   Derivatives   Trading   Edit Financial Transaction  

  2. Enter the Company Code and Transaction number.

  3. Choose Settle.

  4. Check the transaction data. Save the transaction if all the data is correct.

Adjust Dividends

See also: Adjustment of Dividends

Advance Maturity

See also: Advance Maturity

Reverse

  1. Choose   Derivatives   Trading   Edit Financial Transaction  

  2. Enter the Company Code and Transaction number.

  3. Choose Reversal.

See also: Reversal

Key Date Valuation

See also: Valuation

Corporate Actions

After you have executed a corporate action, the system automatically creates a new activity (Corporate Actions) for the total return swap whose underlyings are affected by the corporate action.

See also:

More Information

For more information, see also: