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FTP Forward Starting Instruments Cash Flow RATE_LOOKUP_TERM Uses ORIGINATION_DATE Instead of TP_EFFECTIVE_DATE (Doc ID 2747024.1)

Last updated on JANUARY 28, 2021

Applies to:

Oracle Financial Services Funds Transfer Pricing - Version 8.0.5 and later
Information in this document applies to any platform.
Oracle Financial Services Analytical Applications (OFSAA)
Oracle Financial Services Funds Transfer Pricing (FTP)
Oracle Financial Services Enterprise Performance Management (EPM)
Interest Rate Code / Yield Curve (IRC)


On FTP 8.0.5, there seems to be an FTP functionality gap which impacts modeling of forward starting instruments. The cash flow RATE_LOOKUP_TERM uses ORIGINATION_DATE instead of TP_EFFECTIVE_DATE.

Through testing, there appears to be an issue when pricing from the TP Effective Date. While the transfer pricing engine correctly selects the yield curve from the pricing date, the tenor selection is based upon the Origination Date, instead of the TP Effective Date. Effectively, each cash flow is assigned a rate from the incorrect yield curve tenor.
As observed in the FTP calculated cash flow detail, the rate lookup term (in days) is the difference between the cash flow date and the funding date (10-FEB-21). Subsequently, the cash flow receives an incorrect funding rate.
For example, the 120-day (4-month) funding rate of 0.189% is assigned to the 10-JUN-21 cash flow, when it is expected to be assigned to the 10-MAR-21 cash flow.

With the TP_EFFECTIVE_DATE set to today, the correct IRC rate observations are used. However, the tenors are based upon the ORIGINATION_DATE instead of the TP_EFFECTIVE_DATE, as desired.


As described by Treasury, funding for a loan with a forward rate lock should work as follows:
1. Payments and interest accruals should mirror those of the loan
2. Pricing rates should come from the Match Cost yield curve on the Rate Lock Date
3. Yield curve tenors should reflect the period from the Rate Lock Date to the payment date


Should the loan be modeled as if it were to fund on the Pricing Date (and not the Funding Date), then the desired yield curve tenors would be assigned to each cash flow. In the example, the Origination Date (Funding Date) is set to 10-NOV-20 (instead of 10-FEB-21).
This results in the 120-day funding rate of 0.189% being assigned correctly to the 10-MAR-21 cash flow.  However, as one would expect, this manipulation of the funding date impacts the timing of the interest cash flows. Under these conditions, OFSAA inappropriately starts accruing interest from the Funding Date (instead of the Pricing Date), resulting in a deviation from desired principal cash flows and period beginning balances.

This deviation from the desired beginning balance may be overcome by loading a custom payment schedule with fictitious payments equal to the projected interest accrual.  This will result in the correct calculated beginning balance on the actual loan funding date, and the subsequent calculation of the correct weighted cash flow transfer rate.


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