payment/reset interest rule

[suneshkumar]

Hello All, I am tired of googling and need some help from FpML experts! We are using FpML4.6 where in there is a need to carry the Interest calculcation rule for payments and for resets (I mean for fixed and floating legs) The interest calulation rule can be either 1. Interest can be calculated after payment dates adjustment 2. Interest can be calculated before payment dates adjustment 3. Interest can be calculated on an Adjusted basis, except the last period, which stops accruing on Maturity I was wondering if any one know where this infirmation can fit in FpML4.6, if not in 4.6 is there any higher version which supports it. For the products SWAPs and FRAs Your help is much appreciated!! Thanks! Sunesh

[h_mcallister]

Hi Sunesh, I’ll discuss your questions in the context of the (more complex) case of swaps, but the principles can be generalised to FRAs also. Please bear with me where I state the obvious … The scenarios you describe can be re-phrased in slightly different terms: 1. Interest calculation period dates are adjusted in the same way as payment dates 2. Payment dates are adjusted, but interest calculation period dates are not 3. Interest calculation period (and payment) dates are adjusted, but the termination date is not The FpML InterestRateStream contains three mandatory components: [i]calculationPeriodDates, paymentDates[/i] and [i]calculationPeriodAmount[/i]. The first of these, [i]calculationPeriodDates[/i], is concerned with how the interest calculation period dates are defined; the second, [i]paymentDates[/i], is concerned with payment date definitions. Each of these contains a section devoted to definition of the relevant date adjustment rules ([i]calculationPeriodDatesAdjustments[/i] and [i]paymentDatesAdjustments[/i], respectively). So calculation-period- and payment- date adjustments are defined independently of each other, and can be configured to yield the required behaviour. Moreover, specific adjustment rules are defined for the [i]effective-[/i] and [i]termination-Dates[/i], allowing these to be adjusted independently of the calculation period roll dates, which allows scenarios like (3) to be modelled. Then the three scenarios are implemented in FpML as follows: 1. [i]calculationPeriodDatesAdjustments[/i] and [i]paymentDatesAdjustments[/i] share the same business day convention (e.g. MODFOLLOWING) and holiday calendars ([i]businessCenters[/i]) 2. [i]paymentDatesAdjustments/businessDayConvention[/i] = MODFOLLOWING (for example); [i]calculationPeriodDatesAdjustments/businessDayConvention[/i] = NONE (no adjustment applies) 3. Interest & payment date adjustments per scenario 1, but with [i]calculationPeriodDates/terminationDate/dateAdjustments/businessDayConvention[/i] = NONE (no adjustment applies to the termination date) Please let me know if this answers your question. Best regards, Harry McAllister Chair, IRD-WG

[gagansab]

Hi Harry, Appreciate you for a comprehensive reply. I have a followup question. Do we see a case where in the business centres applied on calculationPeriodDates and paymentDates have different business centers ? Regards Gagan

[h_mcallister]

Hi Gagan, Yes, this is entirely possible e.g. calculation period dates based on USNY business days, with payment based on USNY + GBLO. This is why the InterestRateStream model allows (although does not require) the business centres to be specified independently in each case. Best regards, Harry

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