Interest Swap renewal

Risk-Free Rates
Rudolf Bryša, SAP Globalization Services
6th October 2020

PUBLIC
Agenda

▪ Activation and Implementation

▪ General Changes
▪ Risk-Free rates

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Activation and Implementation
New Business Function FIN_TRM_IR and activation per Product Type

Activation per Product Type in on Premise releases

Preview: This setting will be

obsolete in future S4HANA
releases
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Implementation

▪ See SAP Note 2971185 - Risk-Free Rates for Interest Rate Swaps: Collective Note

Additional Features:
▪ Net Payments
– available from release S/4 1809,
– see SAP Note 2970552 - Net Payments
▪ Settlement Currency
– enabling Net Payments for Cross-Currency Interest Rate Swaps
– available from release S/4 2020,
– see SAP Note 2976242 - Settlement Currency for Cross-Currency Interest Rate Swaps: Collective Note

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Handling of new and existing swaps

▪ The activation of the Business Function and the “Parallel Conditions” in Customizing enables creation of the
new swaps supporting risk-free rates.
▪ The existing swaps are still processed in the old framework
▪ There isn’t any migration of the existing swaps transactions to the new swaps

Handling of the existing old swap transaction:

▪ Not relevant for RFR (IBOR Replacement)
– Keep the transaction and process it as usual until the Term End
▪ Relevant for RFR (IBOR Replacement)
1. Close the old swap
▫ via Shifting Term End or Termination
▫ based on the agreement with your counterparty about the key date for the switch to risk-free rates
2. Create new swap

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General Changes
Swaps Renewal
General Changes

▪ UI stayed almost the same, the program underneath was rewritten from scratch
– Now same condition detail as for interest rate instruments, securities, loans
▪ Payer/receiver/basis via customizing in Transaction type – not in cloud
▪ Default conditions
– Regular instead of Unadjusted -1 Day included
– Due Date Shift to Term End
▪ Parallel conditions
– Interest
– Various types of repayments – installment, annuity
– Condition based fees
▪ Termination with final repayment including interest till termination
▪ New DEAL* BAPIs to come
▪ Flows:
– All the flow types should be posting relevant, the update type should decide about accounting relevancy
▫ It is still possible to create an interest rate condition with start before the Term Start
– Position amount is used in the deal flows (FTR_CREATE, FTR_EDIT)

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Swaps Renewal
Condition Detail

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Swaps Renewal
Payer/receiver/basis Swaps setup in customizing

▪ Payer/receiver/basis set for Transaction type

▪ Easier to setup field selection

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Swaps Renewal
Default conditions

▪ Regular instead of Unadjusted -1 Day included

▪ Due Date Shift to Term End

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Swaps Renewal
Parallel conditions

▪ Interest
▪ Various types of repayments
▪ installment, annuity
▪ Condition based fees

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Swaps Renewal
Termination

▪ Termination with final repayment including interest till termination

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Swaps Renewal
Flows – posting relevancy

▪ All the flow types should be posting relevant, the update type should decide about accounting relevancy

▪ Message in posting log

▪ It is still possible to create an interest rate condition with start before the Term Start
– Calculation Date at the Calculation from of the interest, Due Date at Term Start

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Swaps Renewal
Flows – usage of Position amount in the transaction itself (FTR_CREATE, FTR_EDIT)

▪ The flows belonging to one of the legs (outgoing or incoming) have filled position amount
– Nominal Changes, condition-based flows like interests, repayments.
– Payment amount is derived from the position amount – see Foreign Exchange Rate Settlement
▪ Derived flows and other flows
– These flows don’t belong to a leg.
– Only payment amount is filled.

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Risk-Free Rates
Risk free rates- Replacement of LIBOR rates

Requirement: Parallel Interest Conditions in Instruments and support of new risk free rates

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Field Selection of Condition Types

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Interest Rate Condition

New Interest Rate Calculation Types

4 – Exponential Interest Calculation with Factor

5 - Compound Interest Calculation

6 - Average Compound Interest Calculation

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Interest Rate Adjustment Condition

Interest Rate Fixings every business day according

to calendar(s) 1-5

“Previous working day” takes a Friday rate as

relevant for the coming weekend and not a Monday
rate retroactively.

Lookback in Working Days

Lockout Periods in Working Days

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Compound Interest Calculation
Calculation of an Interest Flow

𝑍𝑛 Interest Amount
𝐵𝑛 Calculation Base Amount
𝑑𝑛
𝑍𝑛 = 𝐵𝑛 × 𝑅𝑛 × 𝐵0 Calculation Base Amount
𝐵𝐷
𝑛−𝑖
at begin of period
𝑅𝑛 Interest Rate
𝐵𝑛 = 𝐵0 + ෍ 𝑍𝑚
𝑑𝑛 Number of Days (according to Calendar)
𝑚=1
𝐵𝐷 Number of Base Days of Interest Year
(according to Base Days Method)
𝑛 Number of Interest Flow

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Compound Interest Calculation
Example: Contract and Condition Overview

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Compound Interest Calculation
Example: Interest and Interest Adjustment Condition

Interest Calculation Type

5 Compound Interest Calculation

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Compound Interest Calculation
Example: Resulting Cash Flow

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Average Compound Interest Calculation

𝑇
𝑑𝑡 𝐵𝐷
𝑟𝑇 = 𝑟𝑜𝑢𝑛𝑑 ෑ 1 + 𝑅𝑡 × − 1 × 𝑇 ;4
𝐵𝐷 σ 1 𝑑𝑡
𝑡=1

Naming Convention
Flow Factor

in Cash Flow
Base Factor

Average Interest Rate (annualized and rounded)

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Average Compound Interest Calculation
Example: Interest Condition

Average Compound Interest Calculation as

Interest Calculation Type

Rounding Rule of the average annualized interest

rate

Rounding Rule of the Flow Factor

(empty field = max accuracy)

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Average Compound Interest Calculation
Example: Resulting Cash Flow

𝑇
𝑑𝑡 𝐵𝐷
𝑟𝑇 = 𝑟𝑜𝑢𝑛𝑑 ෑ 1 + 𝑅𝑡 × − 1 × 𝑇 ;5
𝐵𝐷 σ1 𝑑𝑡
𝑡=1

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Rounding Rules effect 28
Average Compound Interest Calculation 𝑟𝑛−1 Σ1𝑛−1 𝑑𝑡
Cash Flow Flow Generation Logic
𝑍𝑛 𝐵𝑛 𝑟𝑛 Σ1𝑛 𝑑𝑡

𝑟𝑛 Σ1𝑛 𝑑𝑡 𝑟𝑛−1 Σ1𝑛−1 𝑑𝑡

𝑍𝑛 = 𝐵𝑛 × × − ×
100 𝐵𝐷 100 𝐵𝐷

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 Average Compound Interest: Lookback and Weighting
Definition

In case of Lookback in Average Compound Interest Calculation there are two kinds of Weighting
possible.

Lag Method
▪ Weighting category „L – Based on Interest Rate Adjustment Date“
▪ Weight equals to the number of calendar days corresponding to the number of
calendar days from Interest rate Adjustment Date until next working day

Shift Method
▪ Weighting category „S – Based on Interest Rate Fixing Date“
▪ Weight equals to the number of calendar days corresponding to the number of
calendar days from Interest rate Fixing Date until next working day

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Average Compound Interest: Lookback and Weighting
Interest Rate Adjustment Condition

▪ Interest Rate Adjustment every working day

▪ Lookback in working days

▪ The dates of Interest Rates Adjustment** and Interest Rate

Fixing are identical for both Lag and Shift Method

▪ The Interest Rate Adjustment Condition is identical for both

Lag and Shift Method

** Interest rate adjustment dates are semantically the

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Average Compound Interest: Lookback and Weighting
Interest Condition

Only for Interest Calculation Type

„Average Compound Interest“

Weighting Category
▪ L – Based on Interest Rate Adjustment Date
– Lag method

▪ S – Based on Interest Rate Fixing Date

– Shift method

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 Lookback and Weighting: Fields and Formula
Cash Flow for Lookback = 0

Weight of Interest Rate 𝑤𝑡

cumulated weight of interest rate σ𝑛1 𝑤𝑡
No. Days in Interest Calculation Period 𝑑𝑡

No. Days to calculate Interest Amount Σ1𝑛 𝑑𝑡

Average Interest Rate:

𝑛
𝑤𝑡 360
𝑟𝑛 = 𝑟𝑜𝑢𝑛𝑑 ෑ 1 + 𝑅𝑡 × −1 × 𝑛 ;4
360 σ1 𝑤𝑡
𝑡=1

Interest Amount:
𝑟𝑛 Σ1𝑛 𝑑𝑡 𝑟𝑛−1 Σ1𝑛−1 𝑑𝑡
𝑍𝑛 = 𝐵𝑛 × × − ×
100 360 100 360

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 Lookback and Weighting: Lag Method
Cash Flow for Lookback = 2 days

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 Lookback and Weighting: Shift Method
Cash Flow for Lookback = 2 days

Weight of Interest Rate SHIFTed

compared to the number of days in
interest calculation period.

𝑤𝑡 ≠ 𝑑𝑡 ; σ𝑛1 𝑤𝑡 ≠ σ𝑛1 𝑑𝑡

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Additional Information

New Interest Rate Calculation Types

5 - Compound Interest Calculation

6 - Average Compound Interest Calculation

are only supported for Interest Calculation Methods of type act / * (like act/360, act/365, …)

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Risk free Rates: Spread Handling
Spread Logic 1 - Spread is compounded with daily RFR
Effect in Cash Flow Calculation

5 - Compound Interest Calculation

𝑛−𝑖
𝑑𝑛
𝑍𝑛 = 𝐵𝑛 × (𝑅𝐹𝑅𝑛 +𝑆𝑝𝑟𝑒𝑎𝑑) × 𝐵𝑛 = 𝐵0 + ෍ 𝑍𝑚
𝐵𝐷
𝑚=1

6 - Average Compound Interest Calculation

𝑇
𝑑𝑡 𝐵𝐷
𝑟𝑇 = 𝑟𝑜𝑢𝑛𝑑 ෑ 1 + (𝑅𝐹𝑅𝑡 +𝑆𝑝𝑟𝑒𝑎𝑑) × − 1 × 𝑇 ;4
𝐵𝐷 σ1 𝑑𝑡
𝑡=1

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Spread Logic 1 - Spread on top of daily market interest rate
Example for Average Compound Interest Calculation

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Spread Logic 1 - Spread on top of daily market interest rate
Example for Average Compound Interest Calculation

RFR + Spread

Spread is compounded
and included in the
average rate calculation

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Spread Logic 2 - Spread as Parallel Interest Condition
Example for Average Compound Interest Calculation

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Spread Logic 2 - Spread as Parallel Interest Condition
Example for Average Compound Interest Calculation

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Spread Logic 3 - Spread on top of average interest rate
Contract and Condition Overview (Average Compound Interest)

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Spread Logic 3 - Spread on top of average interest rate
Interest Condition

Spread
• Entered as part of average rate
• is not compounded
• is added to the annualized rounded average interest
rate
• Cap/Floor is applied on this result
→ result is shown in field “average interest rate”

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Spread Logic 3 - Spread on top of average interest rate
Cash Flow

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