Evergreen Termination event

[chrisisla]

Background An evergreen contract is a type of agreement that automatically renews itself indefinitely or until either party decides to terminate it. There are two main events associated to evergreen contracts:

• Rolling – this is where the contract is automatically renewed for another period
• Termination – the contract is no longer renewed and will be closed when it reaches its termination date

The CDM supports evergreen contracts but currently does not support the events described above. In the proposal below I outline how we could process and qualify the Termination of an evergreen contract, and also raise some questions for feedback from the community.

Please refer to Issue #2334 for a proposal on how we could support the Rolling of an evergreen.

Proposal To add new event and qualification functions to the model to support the termination of an evergreen.

Terminating an evergreen The existing TermsChange processing is not able to manage this event. This is because we need to remove the evergreenProvision from the after trade. It is thus suggested that a new event function is created named Create_EvergreenTerminationInstruction.

To terminate an evergreen we need the following details:

• In the instruction:
  • A terminationDate – as we need to know when the trade will terminate now it is no longer an evergreen
• In the before trade:
  • Must have an evergreenProvision – this allows us to confirm that the trade is an evergreen.

There are further data items in the evergreen provisions that can affect the successful execution of the termination event. These are considered here, but I do not propose supporting them for the first contribution; they will be added in a following set of changes:

• finalPeriodFeeAdjustment
  • If this is set then it will contain an adjustment that must be applied to the interest rate on the trade for its remaining term
  • The interest rate to update can be found under instruction -> before -> trade -> tradableProduct -> tradeLot -> priceQuantity
  • The adjusted rate should replace the rate in after -> trade -> tradableProduct -> tradeLot -> priceQuantity
  • We do not need to qualify this, but some validation could be applied i.e. confirm that we have a PriceQuantity with a rate in it.
• noticeDeadlineDateTime
  • Specifies a date/time before which a notice to call/stop the evergreen can be served
  • To add support I think we’d need to add a parameter to the function where the current date/time can be entered, which will need to be checked against the date/time held in this data item.
• noticeDeadlinePeriod
  • Specifies a period within which notice to call/stop the evergreen can be served
  • To add support I think we’d need to do the same as the noticeDeadlineDateTime i.e. add a parameter to the function.
• singlePartyOption
  • If only one party can serve notice on the evergreen then they are referenced here by their role on the trade
  • To add support I think we’d need to add a parameter to the function so the calling application can tell it which party is attempting to stop the evergreen.

In the result of the Create_EvergreenTerminationInstruction we should expect:

• BusinessEvent -> after -> economicTerms -> terminationDate should be set to the date passed in the instruction
• BusinessEvent -> after -> economicTerms -> terminationProvision should not be present
• Everything else should be the same in both the before and after trades

Qualifying the termination of an evergreen To qualify that we are stopping the automatic rolling of an evergreen we need to confirm:

• BusinessEvent -> instruction -> before has an economicTerms -> terminationProvision -> evergreenProvision item present – this confirms the trade was an evergreen
• BusinessEvent -> after has no economicTerms -> terminationProvision -> evergreenProvision item in it – this confirms the trade is no longer an evergreen
• BusinessEvent -> after has an economicTerms -> terminationDate data attribute present and it is a date that is today or in the future – this confirms the trade is now due to close on the proposed termination date

[chrisisla]

@finos/cdm-maintainers @tomhealey-icma @iansloyan Any feedback on the proposal will be gratefully received.