FOREX REVALUATION

This document presents the principles of accounting for the revaluation of foreign exchange transactions.

It includes the following elements:

            Preamble

            1. Tables used

            2. Interest/straight line method detail

            3. Revaluation entries

            4. Allocation of results by profit centers

This document is not a training support for the FX module. It therefore does not describe all of the module’s features.

Preamble

Several revaluation methods are available for Forex, each of which can be defined at the contract level.

The revaluation results are produced in the detailed and summary “FOREX REVALUATION REPORT” reports.

The accounts and categories used are described below.

For transactions using the “Interest” or “Straight Line” method, accrued interest is recorded for each of the two currencies in play for IN, and for the net of the two in SL. However, since these transactions impact the foreign exchange position, they are also revalued at the spot rate. The “FX ACCRUAL” report provides details of accrued interest per contract for these methods.

Transactions using the “Rebate” method are subject to a marked to market revaluation using linearly interpolated forward rates on the “FORWARD.RATES” table.

1. Tables used

In-game parameter tables:

CATEGORY:

Definition of P&L categories for latent and realized results on foreign exchange transactions, as well as for adjustment entries.

Examples:

ACCOUNT :

Definition of internal adjustment accounts to balance income and accrued interest entries.

Examples:

CHF142600001 REVAL FOREX FWD

CHF142500001 REVALUATION FOREX

CHF142550001 REVALUATION FWD ASSET & LIAB

CHF142600001 REVAL FOREX FWD

CHF142700001 REGUL FOREX FWD DEBIT

CHF142800001 REGUL FOREX SWAP DEBIT

ACCOUNT.CLASS :

Assignment of income statement and reg categories to Forex-related “system events” such as:

FWD revaluation, reg on accrual entries,…

Extract from the table for FX:

ACCOUNT.CLASS – DEFAULT LIST                         

  ID          DESCRIPTION                          RECORD.TYPE CATEGORFUNCT.

 —————————————————————————

     EXCHADJ  FOREX REVALUATION P & L              ACCOUNT      14260  

   EXCHALFWD  ASSET & LIAB FORWARD REVALUATION     ACCOUNT      14250  

    RESFWDCR  FOREIGN EXCHANGE RESERVE – FWD CR    ACCOUNT      14770  

    RESFWDDR  FOREIGN EXCHANGE RESERVE – FWD DR    ACCOUNT      14270  

   RESSWAPCR  FOREIGN EXCHANGE RESERVE – SWAP CR   ACCOUNT      14780  

   RESSWAPDR  FOREIGN EXCHANGE RESERVE – SWAP DR   ACCOUNT      14280

    SUSPFXCR  SUSPENSE CREDIT FX                   ACCOUNT      14530  

    SUSPFXDR  SUSPENSE DEBIT FX                    ACCOUNT      14030  

The “system events” are as follows:

SUSPFXCR/ SUSPFXDR

 To be used by the Foreign Exchange system when the true account is not yet known for the payment entry.

EXCHADJ

Categories of accounts used by the system when it records unrealized +/- values ​​on the revaluation of foreign exchange transactions.

EXCHALFWD

Account categories used by the system for exchange revaluation and off-balance sheet entries in value date accounting.

RESFWDCR / RESFWDDR

RESSWAPCR / RESSWAPDR

Account categories used by the system for accrual interest postings for foreign exchange contracts in “interest method” or “straight line”.

REVALUATION.PARAMETERS

Assignment of category codes used for re-evaluation according to the different methods RB, IN, SL…

2. Interest/straight line method detail

These methods are generally used for swap contracts. They allow the interest result from the rate differentials in each currency to be recorded progressively (this spread thus implying a difference between the spot rate and the forward rate). This is also referred to as amortization of the carryover/backwardation. This amounts to breaking down the purchase/sale into lending/borrowing transactions.

The difference between the two methods is that in SL, a netting of interests is carried out.

All the necessary information is available on each contract, namely:

                                    Example for an FX  SWAP

                                                            Amounts used as the basis for calculation:

6 Currency Bought                                        7 Amount Bought

9 Currency Sold                                             10 Amount Sold

Interest rates for loans and borrowings:

30. Int.Rate.Buy                     31. Int.Rate.Sell

Total interest amounts for loan/borrowing + equivalents:

113 Total Int Bought 115 Equiv. Int Bought

114 Total Int Sold                  116 Equiv. Int Sold

Calculation dates

26 Spot Date              8 Value Date Buy       / 11 Value date Sell

Calculation bases used :

117 Int Basis Bought 118 Int Basis Sold

Accrued interest calculated daily (F curr. origin, L equivalent.):

78 Buy Daily Acc F                76 Buy Daily Acc L

82 Sell Daily Acc F                 80 Sell Daily Acc L

Accumulation of accrued interest (F curr. origin, L equivalent.):

77 Buy Acc Tdate L               79 Buy Acc Tdate F

81 Sell Acc Tdate L                83 Sell Acc Tdate F

                                    Numerical example:

6 Currency Bought : CHF                  7 Amount Bought : 2 309 600

9 Currency Sold         : JPY                10 Amount Sold : 200 000 000

30. Int.Rate.Buy : 1.546134              31. Int.Rate.Sell : 0.6875

26 Spot Date : 25/03/98                 

8 Value Date Buy       / 11 Value date Sell : 16/09/98

=> nbj total : 175j

117 Int Basis Bought 118 Int Basis Sold : B 366/360

113 Total Int Bought : 17 358.79

115 Equiv. Int Bought : 17 358.79

114 Total Int Sold : 668 403            

116 Equiv. Int Sold : 7 718.715

Details of interests:

113 :    (2309600 * 0.01546134 * 175 ) / 360

114 :  (200000000 * 0.006875 * 175 ) / 360

Countervalue with an assumed initial price of 1.1548

78 Buy Daily Acc F : 99.19    76 Buy Daily Acc L : 99.19

82 Sell Daily Acc F     : 3819 80 Sell Daily Acc L : 44.11

Detail of daily accruals:

78 : (2309600 * 0.01546134 * 1) / 360

82 : (200000000 * 0.006875 * 1 ) / 360

Countervalue with an assumed initial price of 1.1548

The accounting entries will be as follows:

FX9808880001     50000                     -44.34             CHF              

FX9808880001     51000                      99.19             CHF              

FX9808880001     CHF142805200              -99.19             CHF              

FX9808880001     CHF147805200               44.34             CHF

this by referring to the categories defined in “ACCOUNT.CLASS”:           RESSWAPDR  14280

            RESSWAPCR  14780

for regularization entries. When the maturity date arrives, the regularization accounts will be settled.

3. Revaluation entries

The operations in the IN and SL method are therefore revalued in parallel, at the Spot rate.

In the RB method, a recalculated forward rate is used.

Finally, the Spot exchange contracts are revalued up to the value date (generally within 48 hours). The “FX.REVALUATION.REPORT” report will present these results for each contract, using Spot or FWD rates depending on the method used.

Subtotals distribute these results according to the method:

SP (Spot contracts), IN, RB,…

The “Unrealised To Date” column is a cumulative total of the latent results for all contracts in Live status.

The “Unrealised Today” column is the latent for the day.

In the transaction log, these latent results appear in lines grouped by keys (these include the currency) and not by contracts to limit the number of entries.

Reval keys have incorporated the re-evaluation method, which can give this:

FX.RB9816200000  53003                      -1.43             CHF              

FX.RB9816200000  53003                       0.48             CHF              

FX.RB9816200000  53003                      -0.01             CHF              

FX.RB9816200000  53003                    -676.59             CHF              

FX.RB9816200000  53003                     -16.37             CHF              

FX.RB9816200000  53003                      13.91             CHF              

FX.RB9816200000  CHF142605200               -0.48             CHF              

FX.RB9816200000  CHF142605200                0.01             CHF              

FX.RB9816200000  CHF142605200               16.37             CHF              

FX.RB9816200000  CHF142605200              -13.91             CHF              

FX.RB9816200000  CHF142605200                1.43             CHF              

FX.RB9816200000  CHF142605200              676.59             CHF              

FX.SP9816200000  53001                    -178.74             CHF              

FX.SP9816200000  CHF142605200              178.74

With:

From the category table:

53001 REVALUATION FX SPOT

53003 REVALUATION FX FORWARD                

From the account.class table:

EXCHADJ  FOREX REVALUATION P & L : 14260

When the contracts mature, the adjustment accounts are settled and the unrealized results (53001, 53003 and possibly 53007 if the system is in value date) are transferred to the foreign exchange income accounts (53000). These FWD contracts at maturity thus passing into the balance sheet, the transaction journal will present foreign exchange income lines of the type AL98xxx in the RV section, and moving a category 53000.

4. Allocation of exchange rate results by profit centers:

When customer transactions are entered, the margin resulting from the difference between the customer price and the trading room price must generally be paid back to the account managers.

To do this, in the modules allowing the entry of exchange rates (e.g. allowing settlements in currencies different from the transactions processed) that are: FX, SC, FT and TELLER, and after indicating that these are customer transactions, the system will automatically assign these results to a category 53006.

Thus, the dealer.desk considered will be debited, and the customer’s account.officer will be credited for this difference.

Notice:

Once this result is recorded, all exchange revaluations will only impact the trading room, and will therefore be recorded using the dealer desk that initiated the transaction.

Example of a forward exchange contract made for a client:

The trading room will negotiate this contract with:

An FX rate : field # 13

A customer: field # 3 

If the #86 Treasury Customer field is set to “NO” (e.g. non-bank counterparty), the system will request a customer rate: #90 Treasury Rate.

Then, the difference between the #13 and #90 fields will determine a margin in local currency: #80 Marketing Exchange Profit.

This result will then be recorded on category 53006, by default for the benefit of the customer manager (or another specified in the #95 Account Officer field).