TRM - Interest Swap with floor as hedge instrument

[former_member762339]

Dear colleagues,

We are working on the implementation of E-Hedge for our HA designated swaps.

Some of our swaps with hedge accounting comprise a combination of an interest rate swap & the purchase of an interest rate floor (0%) as one derivative. Currently, those floors are only recognised within the condition details for interests (within the swap), as the minimum in the interest formula (minimum == 0).

When calculating the fair value of those swaps (incl. floor as the minimum condition for the interest rate) via TPM60, I'm afraid it would not calculate the correct fair value with regards to the floor. Do you have any experiences regarding the correct recognition/representation of those derivatives in TRM? Do we have to "split" the floor from the interest rate swap and create a second transaction only containing the floor? Are there any possibilities to calculate the fair value of the swap and the floor jointly, to receive one fair value? Do we have to create a reference (TBR6)? Sorry for the various questions and suggestions!

I would really appreciate any further help regarding a potential solution to achieve the proper representation of those derivatives in TRM (also with regard to the hedge accounting, inluding the effectiveness testing).

Thank you very much in advance and if any questions arise, feel free to ask.

Anna

[lrichter_eprox]

Dear Anna

the system should consider the floor, when calculating the NPV for an IRS with an included floor (via interest formulas) with TPM60CVA. I would expect that the floor is part of the discounted cashflow calculation, which results in the NPV.

However, splitting the IRS and the floor into different product and maybe link them will probably not help. Firstly, under IFRS9 there should be no split of derivatives in case used as a hedge instrument. Secondly, I would not know how to designate that in SAP. Guess this is even not possible.

Best, Lars