Transact

LIBOR Transition to Risk Free Rates

Implementation

Guide (R22) (English)

2022 Q4

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Warning: This document is protected by copyright law and international

treaties. Unauthorised reproduction of this document, or any portion of it, may
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Transact LIBOR Transition to Risk Free Rates Implementation

Table of Contents
Table of Contents ............................................................................................................................... 2
History ............................................................................................................................................... 5
Introduction ....................................................................................................................................... 6
Lesson Overview.................................................................................................................................................... 6
Your Course » Objective and Learning Outcomes................................................................................................. 7
Your Course » Timetable ....................................................................................................................................... 8
Retirement of LIBOR Rates » The London Interbank Offered Rate ....................................................................... 9
Retirement of LIBOR Rates » The Demise of LIBOR ............................................................................................10
Retirement of LIBOR Rates ..................................................................................................................................11
Lesson Summary..................................................................................................................................................12
RFR in Temenos Transact .................................................................................................................. 13
Lesson Overview..................................................................................................................................................13
Libor Transition to RFR » The Alternatives ..........................................................................................................14
Libor Transition to RFR » Risk-Free Rates............................................................................................................15
Libor Transition to RFR » Enhancement of Asset Class Using Risk-Free Rates....................................................16
Libor Transition to RFR » Impacted Modules in Temenos Transact....................................................................17
RFR Market Conventions » Lookback (Observation Lag) ....................................................................................18
RFR Market Conventions » Lookback Methods ..................................................................................................19
Changes to Temenos Transact ............................................................................................................................20
Changes to Temenos Transact ............................................................................................................................21
Changes to Temenos Transact ............................................................................................................................22
Changes to Temenos Transact ............................................................................................................................23
Changes to Temenos Transact ............................................................................................................................24
Changes to Temenos Transact » Periodic Interest Table ....................................................................................25
Lesson Summary..................................................................................................................................................26
LD Loans and Deposits ...................................................................................................................... 27
Lesson Overview..................................................................................................................................................27
LD Parameters » [Link] ....................................................................................................................28
LD Parameters » [Link] .........................................................................................................29
LD Parameters » LD Contract Fields ....................................................................................................................30
Periodic Interest ..................................................................................................................................................31
Creating Contracts » Observation Shift with Spread-Inclusive ...........................................................................32

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Transact LIBOR Transition to Risk Free Rates Implementation

Creating Contracts » Schedule ............................................................................................................................33

Creating Contracts » [Link] ...............................................................................................34
Creating Contracts » Post COB » View Accruals ..................................................................................................35
Creating Contracts » Post COB » View Accruals ..................................................................................................36
Creating Contracts » Post COB » View Accruals ..................................................................................................37
Lesson Summary..................................................................................................................................................38
AA Deposits ...................................................................................................................................... 39
Lesson Overview..................................................................................................................................................39
Interest Property Class ........................................................................................................................................40
Interest Product Conditions ................................................................................................................................41
Interest Product Conditions ................................................................................................................................42
Interest Product Conditions ................................................................................................................................43
Interest Product Conditions ................................................................................................................................44
Interest Product Conditions ................................................................................................................................45
Interest Product Conditions ................................................................................................................................46
Interest Product Conditions ................................................................................................................................47
Interest Product Conditions ................................................................................................................................48
Deposit Arrangements » Demo 1 ........................................................................................................................49
Deposit Arrangements » Demo 1 ........................................................................................................................50
Deposit Arrangements » Demo 1 ........................................................................................................................51
Deposit Arrangements » Demo 1 ........................................................................................................................52
Deposit Arrangements » Demo 1 ........................................................................................................................53
Deposit Arrangements » Demo 2 ........................................................................................................................54
Deposit Arrangements » Demo 2 ........................................................................................................................55
Deposit Arrangements » Demo 2 ........................................................................................................................56
Deposit Arrangements » Demo 2 ........................................................................................................................57
Deposit Arrangements » Demo 2 ........................................................................................................................58
Deposit Arrangements » Demo 2 ........................................................................................................................59
Lesson Summary..................................................................................................................................................60
AA Lending ....................................................................................................................................... 61
Lesson Overview..................................................................................................................................................61
Interest Property Class ........................................................................................................................................62
Interest Product Conditions ................................................................................................................................63
Interest Product Conditions ................................................................................................................................64
Interest Product Conditions ................................................................................................................................65
Interest Product Conditions ................................................................................................................................66

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions ................................................................................................................................67

Interest Product Conditions ................................................................................................................................68
Interest Product Conditions ................................................................................................................................69
Interest Product Conditions ................................................................................................................................70
Lending Arrangements » Demo 1........................................................................................................................71
Lending Arrangements » Demo 1........................................................................................................................72
Lending Arrangements » Demo 1........................................................................................................................73
Lending Arrangements » Demo 1........................................................................................................................74
Lending Arrangements » Demo 1........................................................................................................................75
Lending Arrangements » Demo 2........................................................................................................................76
Lending Arrangements » Demo 2........................................................................................................................77
Lending Arrangements » Demo 2........................................................................................................................78
Lending Arrangements » Demo 2........................................................................................................................79
Lending Arrangements » Demo 2........................................................................................................................80
Lesson Summary..................................................................................................................................................81

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Transact LIBOR Transition to Risk Free Rates Implementation

History
Author Version Release Date Comments

TLC CaTS 1.0 1-Jan-21 Initial document.

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Transact LIBOR Transition to Risk Free Rates Implementation

Introduction
Lesson Overview
In this lesson I am going to describe what your course is all about, and the Retirement of LIBOR Rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

Your Course » Objective and Learning Outcomes

This course will allow you to: Setup and use Risk Free Rates in Temenos Transact. In particular you will be able to:
Discuss LIBOR rates and why they are being retired; Discuss Risk Free Rates and Market Conventions; Setup Risk
Free Rates in LD Module; Setup Risk Free Rates in AA Lending; Setup Risk Free Rates in AA Deposits.

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Transact LIBOR Transition to Risk Free Rates Implementation

Your Course » Timetable

Here’s the timetable. We’ve just started on the Introduction lesson. Following this we’ll cover RFR in Temenos
Transact and LD Loans and Deposits. On Day 2, we’ll look at AA Deposits and AA Lending.

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Transact LIBOR Transition to Risk Free Rates Implementation

Retirement of LIBOR Rates » The London Interbank Offered Rate

The purpose of this course is to provide an overview of the Libor transition to Risk free rates, what it is and why it
is happening and how we will address the challenge within our products, mainly Temenos Transact applications.
The details of the transition and how we are going to handle the new rates, which will substitute LIBOR and what
we need to do in each Transact module in order to implement Risk Free Rates. LIBOR is the primary benchmark rate
for floating rate contracts. It is published daily for five currencies USD, EUR, GBP, JPY and CHF and seven time
intervals ON/SP, 1W, 1M, 2M, 3M, 6M and 12M. It is forward-looking and indicates the willingness of a panel of
banks or banks submitting the rates to lend to one another in the Interbank wholesale market for each respective
time period. LIBOR will be retired at the end of 2021. As a consequence the industry is moving to alternative, Risk
Free Rates or near risk free overnight rates or RFRs which are fundamentally different from the Interbank Offered
Rates (IBORs) used now.

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Transact LIBOR Transition to Risk Free Rates Implementation

Retirement of LIBOR Rates » The Demise of LIBOR

The following has caused the demise of LIBOR and why LIBOR is being retired. Lack of Liquidity; Subjectivity; Lack
of control; Manipulation. These became the main elements that determined the demise of LIBOR and why we have
this transition to alternative rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

Retirement of LIBOR Rates

A decision has been made by the Bank of England (BoE), that LIBOR will be retired at the end of 2021. This has
brought a significant challenge to Banks, simply due to the number of contracts that are currently linked to LIBOR.
All such contracts would need to move to LIBOR alternatives. The Regulators are very strict about meeting this
deadline. All the loans using LIBOR need to transition to Risk Free Rates before the end of Q1 2021. The initial
deadline or plan was Q3 2020 but it was postponed because of the Covid-19 pandemic. From the 2nd of March
2020, the Bank of England and the Financial Conduct Authority’s (FCA’s) require market-makers to stop using LIBOR
as a primary benchmark rate for Interest Rate Swaps. Use Cases of Benchmark Rates: Compounded in Arrears,
Term Rate and Further Alternatives (The Working Group on Sterling Risk-Free Reference Rate)
[Link]
compounded-in-arrears-term-rate-and-further-
[Link]?la=en&hash=22BA20A8728D9844E5A036C837874CA3E70FEAE1
[Link] [Link]
rate-benchmark-reform-transition-world-without-libor [Link]
libor [Link]
interest-rate-swaps-spring-2020 [Link]
from-libor USD LIBOR – more than $200 trillion of notional outstanding

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Transact LIBOR Transition to Risk Free Rates Implementation

Lesson Summary
In this lesson I described what your course is all about, and the Retirement of LIBOR Rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

RFR in Temenos Transact

Lesson Overview
In this lesson I am going to describe Libor Transition to RFR, RFR Market Conventions, and Changes to Temenos
Transact.

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Transact LIBOR Transition to Risk Free Rates Implementation

Libor Transition to RFR » The Alternatives

Each currency has its own alternative rate or Alternative Reference Rates. These alternative rates have the following
characteristics. They are based on market data which is taken from highly liquid markets such as overnight Repo
market or wholesale deposits; They are overnight rates; They are backwards-looking; Are without term structure
nor credit risk element. Most of the alternative rates are T+1 it means that a rate published this business day is
applicable for the previous business day. These rates are backwards-looking and they do not have a forward-looking
nature so they do not have a term structure and they do not have any credit risk elements. When quoting the Libor
rate earlier with Libor Banks would consider the risks that they take in the Interbank market. Since the alternative
rates are based purely on Market data there is no risk element in them so they are considered to be near risk free
rates – that’s why we call them RFR or Risk Free rates. Therefore the prospects of manipulations and subjectivity
are quite limited.

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Transact LIBOR Transition to Risk Free Rates Implementation

Libor Transition to RFR » Risk-Free Rates

Risk Free Rates are different from LIBOR in that they tend to be lower than LIBOR rates because they do not have
these two elements in them mainly the credit risk premium and that they are backwards-looking rates published
only for a tenor of overnight. How can we use these Risk Free Rates for an Interest period of say 3 months? To
achieve this all the overnight rates for the 3 months period would need to be compounded daily. For Risk Free Rates
we use the term Daily compounding in arrears. Each business day a new Risk Free Rate will be available which is
applicable for the previous business day. We need to take all these Risk free rates published in the 3 month period
and compound them using the formula below and only at the end of the 3 months we will have an average rate
which we can use retrospectively for the 3 months’ period. A bank will know what they need to pay or receive at
the end of the Interest period. Temenos solution to LIBOR transition will enable Banks to transact in RFRs and will
meet instrument-specific functional requirements. The below formula will be used to calculate the RFR rate in
Compounding Method, Where, d – Number of Business days in the Interest Period. r – RFR rate plus Spread is
Spread<2> is I. a – Number of Days for the RFR rate to be applied. b – Total number of days in a year. n – Total
number of days in the period. i – Series of ordinal numbers representing each business day in the period. On the
final value, add Spread if Spread<2> is E.

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Libor Transition to RFR » Enhancement of Asset Class Using Risk-Free Rates

A number of applications or modules have been enhanced in Temenos transact and the following are the main
building blocks for the Temenos Transact solution. Daily Rate or Amount Compounding. We provide the daily
compounding possibility as either the daily compounding rate or compounding the amount or the balance.
Appropriate Market Convention. We support appropriate Market conventions and each asset class can use risk free
rates in a slightly different way. For example, derivatives have one market convention while the loans market has
adopted a different way of using risk free rates and they apply a different way of compounding. Options for Margin
Treatment. There are a number of margin treatment options in Temenos Transact and we can set floating rates
using the Periodic Interest table and also apply spreads on top of the rates. Risk-Free Rate Flooring. We also provide
the ability to floor these rates. Some risk free rates such as the Euro Short-Term Rate (ESTR), the risk free rate in
the European Union is a negative rate of -0.5%. Banks don't really want to handle negative rates, that's why they
would require abilities to floor these negative risk free rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

Libor Transition to RFR » Impacted Modules in Temenos Transact

The Impacted modules to date in Temenos transact are Swaps, Securities, Money Market Loans and Deposits,
Arrangement Lending (AL), Arrangement Deposits (AD), Syndicated Lending, and IFRS 9. Additional Impacted Areas:
Triple A Plus, Multifonds, Country Model Bank Interfaces. The risk free rates will be stored in the Periodic Interest
(PI) table and an API within the Banking framework infrastructure will have the intelligence to use different
calculation methods to arrive at average rates so that the contract has an average rate at the end of a period.

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Transact LIBOR Transition to Risk Free Rates Implementation

RFR Market Conventions » Lookback (Observation Lag)

RFR Rate for day 1 will be taken from day minus 1 since lookback is 2 days in this example, similarly for day 2 the
RFR rate will be taken from day Zero and so on. Holidays will take the rate from the previous working day.

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Transact LIBOR Transition to Risk Free Rates Implementation

RFR Market Conventions » Lookback Methods

We will now discuss Lookback Methods. In the case of Narrow Definition, the day count of the original interest
period is considered while the rates used are historical rates from N working days prior to the current business day.
In the Observation Shift scenario, the day count of the ‘looked-back’ rate (the historical RFR) is used instead of
keeping the original interest period day count.

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Transact LIBOR Transition to Risk Free Rates Implementation

Changes to Temenos Transact

On the Transact framework side, we are enhancing the Periodic Interest table to hold Risk free rates. Within
Transact we have a compounding routine that can cater for different Market Conventions, spread treatments and
flooring and can calculate average Risk Free rates. There is an enhancement in the Banking framework, which allows
each application to send information for calculation as part of the end of day processing when it calls the Term Rate
Routine. This Term Rate Routine provides the Average Risk free rates risk applicable for the given contract. The
SWAP Module is using the Plain arrears and the Reset Cut-Off convention. The Reset cut-off is a lockout but with
simple interest calculations. With Plain Arrears the rate is only known on the very last date of the interest period.
We have also implemented Payment Delay which is like a standard Market Practice for Plain Arrears. This is to have
a payment delayed by two business days. We are providing this option, as well as online maturity if a Bank does not
want to delay payments. Money Market deals and all the cash instruments for example LD Loans and Deposits,
Syndicated Lending and Arrangement Architecture products use the Lookback market convention. Based on all this,
each module would be able to provide this information to the compounding routine. The Term Rate Routine would
return a different average rate which the contract can use on each business day.

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Transact LIBOR Transition to Risk Free Rates Implementation

Changes to Temenos Transact

There is now a different way of doing interest accruals with RFRs. For example on Day 10, if there are 10 RFRs
published in 1 interest period, it would mean that the average risk free rate is applicable for the 10 days that have
passed in that interest period. In order to make sure that the daily interest accrual recorded is in the system, the
last average RFR returned by the Term Rate Routine is used to calculate interest for those ten days and subtract
the accruals for these 10 days from the past nine days which have already been recorded. The latest published RFR
for a given contract each business day is used to do cash flow projections which are sent to the Position
Management module. Certain SWIFT messages require the population of some Tags differently. For example, in the
SWAP module, there is a message MT362 which is the Rate Reset request message, the timing of this message
needs to be changed because the rate is no longer available in advance but only at the end of an interest period.
The Migration tool is Currently being built and will be available at a later date, most banks have exposure to LIBOR
rates hence there is a need to migrate the contracts to alternatives since there will be no rate to fix such contracts
beyond 2021.

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Transact LIBOR Transition to Risk Free Rates Implementation

Changes to Temenos Transact

We will now differentiate Rate compounding from Amount or Balance Compounding and Simple Interest. We will
first look at Rate compounding. When a new rate is published each day then the system considers the new rate for
calculation purposes. With this method, the system takes the daily compounded average rate and multiplies it with
outstanding principal and that will give the interest accrual for the days for which the average compounded risk
free rate is applicable. Under Amount Compounding or Balance Compounding the system takes the Daily risk free
rates and multiplies them with the principal and adds the outstanding or unpaid accrued interest. This is considered
a more accurate option for a scenario where principal changes within the interest period. Simple interest is a Daily
risk free rate multiplied by the outstanding principal and all this is summed up at the end.

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Transact LIBOR Transition to Risk Free Rates Implementation

Changes to Temenos Transact

The RFR rate calculator considers the following as part of the rate calculation, an application needs to send the
following details: The risk free rate would be part of the Periodic Interest key. The start and end dates of the
period. The rounding. The spread treatment methods. The day count from the contract. Any floors if applicable.
The Market Convention.
Once all this is specified on the contract level the API call happens and the Term Rate API provides a rate based on
all these selections.

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Transact LIBOR Transition to Risk Free Rates Implementation

Changes to Temenos Transact

The migration tool is still being developed however the Tool will enable easy and fast migration of multiple contracts
from (L)IBOR to RFRs. The flow would be as follows: Select Contracts for migration; Identify which variables to
change – Interest Rate Key or Spread; Choose new variables like New rate Key, New adjustment spread, new
calculation method, New Market convention and Date from which changes will be applicable.

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Transact LIBOR Transition to Risk Free Rates Implementation

Changes to Temenos Transact » Periodic Interest Table

The risk free rates will be stored in the Periodic Interest (PI) table. So far we have been using the PI table to store
Libor type Rates or forward looking rates. In the PI table we had different time buckets like 1 month and 3 months
with Bid and Offer rates. With Risk free rates we can use a single field called Rfr Rate to store the Risk Free Rate.
Two new fields are added in the Periodic Interest table to accommodate the Risk Free Rates. The RFR Rate field to
capture the RFR rate and the RFR Date Recd field to capture the RFR rate date received. This date should be different
from the PI ID. The Periodic Interest ID stores the effective date, whereas the Rfr Date Recd stores the previous
business day. The Date in the ID of the Periodic Interest will be the effective date. The traditional bid and offer rates
will be disabled when you create the Risk Free rate. A Bank can input any ID for the PI table when it’s committed
and authorised it becomes reserved for the Periodic Interest calculation for Risk Free Rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

Lesson Summary
In this lesson I described Libor Transition to RFR, RFR Market Conventions, and Changes to Temenos Transact.

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Transact LIBOR Transition to Risk Free Rates Implementation

LD Loans and Deposits

Lesson Overview
In this lesson I am going to describe LD Parameters, Periodic Interest, and Creating Contracts.

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Transact LIBOR Transition to Risk Free Rates Implementation

LD Parameters » [Link]
We will now take a look at the Parameter Tables required to setup Risk Free Rates for the LD Module. A new
Parameter called [Link] has been introduced. The following Risk Free Rate related fields can be set on
this application. The [Link] field defines the market convention to be used for rate compounding or
averaging. The LD application follows the Lookback market convention. The [Link] field defines
Lookback type. The possibilities are Narrow and Observation Shift. The [Link] field identifies whether
the Risk Free Rates have to be calculated using Compound Averaging, Simple Averaging or Amount Averaging. The
default value is Compound for Risk Free Rates. This field has three options Amount, Compound or Simple. The
[Link] field holds the options of Spread-Inclusive and Spread-Exclusive for the spread the
treatment method. We have two options Inclusive or Exclusive. The [Link] field defines the
treatment of the last available Risk Free Rate. The allowed values are Full and Today. Full means that the last Risk
Free Rate is considered with the applicable day for the full interest period. Today means that the last Risk Free Rate
is considered with its applicable original day weightage up to the current business day. The [Link] field
defines the rounding to be applied for Risk Free Rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

LD Parameters » [Link]
The [Link] has local fields which can be enabled for Risk Free Rates processing. The
[Link] field defines the market convention to be used for rate compounding or averaging. The LD
application follows the Lookback market convention. The [Link] field defines the Lookback type
used for Risk Free Rates. The available options are Narrow Definition and Observation Shift. The
[Link] field defines the number of lookback days. The [Link] field identifies
whether the RFRs have to be calculated using Compound Averaging or Simple Averaging. The
[Link] field holds options Spread-Inclusive and Spread-Exclusive for the spread treatment
method.

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Transact LIBOR Transition to Risk Free Rates Implementation

LD Parameters » LD Contract Fields

While opening an LD contract, the RFR related fields [Link], [Link],
[Link], [Link] and [Link] are defaulted. If required the users can
amend the field values. The actual Risk Free Rate will be supplied by the applicable Periodic Interest Index.

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Transact LIBOR Transition to Risk Free Rates Implementation

Periodic Interest
Above is a record from the Periodic Interest table for Risk Free Rates. The applicable Risk Free Rate is stored on the
LRF RFR Rate field.

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Creating Contracts » Observation Shift with Spread-Inclusive

Displayed here is an LD Loan using Risk Free Rates. Notice that the interest key is defined as 50 and Interest Spread
is defined as 2. The RFR fields are defined as follows: The RFR Convention is set as Lookback and the RFR Lookback
type is set as Observation Shift. The RFR Lookback Days are set to 5 with the RFR Calculation Method set as
Compound. The RFR Spread treatment is set as Inclusive.

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Transact LIBOR Transition to Risk Free Rates Implementation

Creating Contracts » Schedule

The payment schedule of the loan is set. In this example, it is a bullet payment where the whole Principal of one
hundred million is paid back with interest on the maturity date.

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Creating Contracts » [Link]

After authorisation, the Interest rate field on the Loan is updated with the calculated Risk Free Rate. The Interest
details can be viewed in the [Link] table.

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Creating Contracts » Post COB » View Accruals

After running Close of Business, we can see the accounting entries for the interest accruals of the loan. The system
has accrued the Interest for the 24th of April 2018 using a Risk Free Rate of 2.710499997. The total accrued interest
amount is 7,426.03 Dollars. The accrual amount and interest rate are also updated in the [Link]
table.

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Transact LIBOR Transition to Risk Free Rates Implementation

Creating Contracts » Post COB » View Accruals

After running a second Close of Business, the Risk Free Rate has been recalculated to 2.711100676 and the system
has accrued the interest for the 25th of April 2018 with that new rate.

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Transact LIBOR Transition to Risk Free Rates Implementation

Creating Contracts » Post COB » View Accruals

After running a third Close of Business, the Risk Free Rate is recalculated again and accounting entries get generated
for the interest accrual. The updated Risk Free Rate is now 2.711134682%.

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Transact LIBOR Transition to Risk Free Rates Implementation

Lesson Summary
In this lesson I described LD Parameters, Periodic Interest, and Creating Contracts.

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Transact LIBOR Transition to Risk Free Rates Implementation

AA Deposits
Lesson Overview
In this lesson I am going to describe Interest Property Class, Interest Product Conditions, and Deposit Arrangements.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Property Class

The Interest Property class has been enhanced to include the following attributes related to Risk Free Rates. RFR
Convention, RFR Lookback Type, RFR Calculation Method, RFR Lookback Days, RFR Spread Treatment, RFR Period
Day Count and RFR Rounding Rule.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

In the Interest Product Condition, we can use the Periodic Index for Risk Free Rates. The Periodic Interest table
stores the Risk Free Rates.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

In the Interest product condition under RFR tab, the user can define Risk Free Rates setup for products using the
following attributes: RFR Convention, RFR Lookback Type, RFR Calculation Method, RFR Lookback Days, RFR Spread
Treatment, RFR Period Day Count and RFR Rounding Rule.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

We will now take a look at each of the Attributes in turn. We will begin by looking at the RFR Convention field. AA
only uses the Lookback Market Conventions. This convention looks back to N days earlier to get the published Risk
Free Rate every day in the current interest period and calculate the compounded Risk Free Rate. Only the
observation period shifts while the interest period remains the same. The Lookback types will be used to identify
the DAYCOUNT (Weight of Published RFR rate). This DAYCOUNT will be used in RFR formula to derive the compound
average interest rate. There are two types of Lookback definitions available. Those are Lookback – Narrow
Definition and Lookback – Observation Shift. These types will be used to identify the DAYCOUNT (Weight of
Published RFR). This DAYCOUNT will be used in the RFR formula to derive the compounded average interest rate.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

Under Lookback – Narrow Definition type the system will apply the original interest period’s day count to the
‘lookback’ rate used for this day. For example, if the Wednesday rate is used for Friday, then apply Friday’s weight,
three days, to Wednesday’s rate. Under the Lookback – Observation Shift type, the system will apply the original
day count of the ‘lookback’ rate. For example, if the Wednesday rate is used for Friday, then apply Wednesday’s
own weight, one day, and do not use Friday’s day count for it. The RFR Look Back Days field will be used to define
the number of lookback days. The allowed days can be set between 1 to 10.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

The RFR Calculation method field accepts two values: Simple or Compound Amount (under development for AA).

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

Risk Free Rates have to be compounded on a daily basis in order to arrive at a final rate and the applications will
refer to this Rate to be used in the arrangement.

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Transact LIBOR Transition to Risk Free Rates Implementation

Interest Product Conditions

The Period Day Count field indicates that the calculation of the Rate will vary based on the Period Day Count value.
It accepts two values, Today or Full. When set to Today, then the formula will use only RFR rate till TODAY from the
Period Start date and calculate the Compounding rate. If set to full, then the formula will use the RFR rates for the
FULL period from the Period Start date to the Period End date when calculating the compounding rate.

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Interest Product Conditions

The Spread Treatment field indicates that the Risk Free Rate calculation will vary based on the Selected Spread
option. Two types of Spread Options are available: Inclusive means that the specified spread in definition will be
used in the Risk Free Rate formula itself to calculate the Compounding Risk Free Rate. Exclusive means that the
specified spread in the definition will be added on top of the formula calculated Compounding Risk Free Rate.
Please note that AA will accumulate all kinds of margins existing in the interest conditions and take them as a Spread
to pass to the Banking Framework API. The margins include Relationship Pricing, Package Pricing, Regional Pricing
and Manual Pricing.

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Deposit Arrangements » Demo 1

In this Demo, we will look at a USD Deposit Arrangement is created with a value date of 15 April 2021. This Deposit
Arrangement is using the Narrow Type Lookback Convention with Compound Calculation Type. The Lookback Days
have been set to 3 and the Spread Treatment is set to Inclusive. The Period Day Count is set to Today.

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Deposit Arrangements » Demo 1

The Deposit Arrangement is created with a Committed Amount of 30,000.00 Dollars and a Term of 1 year. The RFR
Convention is set to Look Back and the Lookback Type is set to Narrow. The Calculation Method is set to Compound
with Lookback Days set to 3. The Spread Treatment is Inclusive and the Period Day count is set to Today.

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Deposit Arrangements » Demo 1

We have selected the Periodic Index 96 for Risk Free Rates and set the Margin Type to RFR Spread with Operand
set to Add and Margin Rate as 0.15%.

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Deposit Arrangements » Demo 1

We have indicated Monthly Payments for Interest in the Payment Schedule.

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Deposit Arrangements » Demo 1

The Arrangement Overview screen updated with Risk Free Rates is displayed here.

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Deposit Arrangements » Demo 2

In this Demo we will look at a USD Deposit Arrangement is created with a value date of 15 April 2021. This Deposit
Arrangement is using the Narrow Type Lookback Convention with Compound Calculation Type. The Lookback Days
have been set to 3 and the Spread Treatment is set to Exclusive. The Period Day Count is set to Full.

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Deposit Arrangements » Demo 2

The Deposit Arrangement is created for 1 year for 10,000 Dollars.

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Deposit Arrangements » Demo 2

This Deposit is using the Periodic Index 14 for Risk Free Rates. The RFR Convention is set to Look Back and the
Lookback Type is set to Narrow. The Calculation Method is set to Compound with Lookback Days set to 3. The
Spread Treatment is Exclusive, and the Period Day count is set to Full. We have set the Margin Type to RFR Spread
with a Margin of 0.5% for balances up to 5000.00 Dollars and a margin of 1% for balances above 5,000.00 Dollars.

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Deposit Arrangements » Demo 2

We have indicated Monthly Payments for Interest in the Payment Schedule.

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Deposit Arrangements » Demo 2

After authorisation, we can see that the Risk Free Rate is 3.45% for amounts up to 5000 Dollars and 3.95% for
amounts above 5000 Dollars.

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Deposit Arrangements » Demo 2

Since the arrangement was created on 20 April 2020, and look back being 3 days, the system has taken the Rate
from 15 April 2020 which is 2.95 and added a margin of 0.5% for tier 1 and a margin is 1% for the rest. The Tier 1
rate is calculated as 2.95 which is the Periodic Index Rate + 0.50% margin giving us a total of 3.45%. The Tier 2 rate
for the remainder is 2.95 which is the Periodic Index Rate + 1.00% margin giving us a total of 3.95%.

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Lesson Summary
In this lesson I described Interest Property Class, Interest Product Conditions, and Deposit Arrangements.

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AA Lending
Lesson Overview
In this lesson I am going to describe Interest Property Class, Interest Product Conditions, and Lending Arrangements.

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Interest Property Class

The Interest Property class has been enhanced to include the following attributes related to Risk Free Rates. RFR
Convention, RFR Lookback Type, RFR Calculation Method, RFR Lookback Days, RFR Spread Treatment, RFR Period
Day Count and RFR Rounding Rule.

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Interest Product Conditions

In the Interest Product Condition, we can use the Periodic Index for Risk Free Rates. The Periodic Interest table
stores the Risk Free Rates.

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Interest Product Conditions

In the Interest product condition under the RFR tab, the user can define the Risk Free Rates setup for products using
the following attributes: RFR Convention, RFR Lookback Type, RFR Calculation Method, RFR Lookback Days, RFR
Spread Treatment, RFR Period Day Count and RFR Rounding Rule.

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Interest Product Conditions

We will now take a look at each of the Attributes in turn. We will begin by looking at the RFR Convention field. AA
only uses the Lookback Market Conventions. This convention looks back to N days earlier to get the published Risk
Free Rate every day in the current interest period and calculate the compounded Risk Free Rate. Only the
observation period shifts while the interest period remains the same. The Lookback types will be used to identify
the DAYCOUNT (Weight of Published RFR rate). This DAYCOUNT will be used in the RFR formula to derive the
compound average interest rate. There are two types of Lookback definitions available. Those are Lookback –
Narrow Definition and Lookback – Observation Shift. These types will be used to identify the DAYCOUNT (Weight
of Published RFR). This DAYCOUNT will be used in the RFR formula to derive the compounded average interest rate.

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Interest Product Conditions

Under Lookback – Narrow Definition type the system will apply the original interest period’s day count to the
‘lookback’ rate used for this day. For example, if the Wednesday rate is used for Friday, then apply Friday’s weight,
three days, to Wednesday’s rate. Under the Lookback – Observation Shift type, the system will apply the original
day count of the ‘lookback’ rate. For example, if the Wednesday rate is used for Friday, then apply Wednesday’s
own weight, one day, and do not use Friday’s day count for it. The RFR Look Back Days field will be used to define
the number of lookback days. The allowed days can be set between 1 to 10.

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Interest Product Conditions

The RFR Calculation method field accepts two values: Simple or Compound Amount (under development for AA).

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Interest Product Conditions

The RFR Calculation method field accepts two values: Simple or Compound, Amount (under development for AA)
Risk Free Rates have to be compounded on a daily basis in order to arrive at a final rate and the applications will
refer to this Rate to be used in the arrangement.

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Interest Product Conditions

The Period Day Count field indicates that the calculation of the Rate will vary based on the Period Day Count value.
It accepts two values, Today or Full. When set to Today, then the formula will use only the RFR rate till TODAY from
the Period Start date, and calculate the Compounding rate. If set to full, then the formula will use the RFR rates for
the FULL period from the Period Start date to the Period End date when calculating the compounding rate.

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Interest Product Conditions

The Spread Treatment field indicates that the Risk Free Rate calculation will be vary based on the Selected Spread
option. Two types of Spread Options are available: Inclusive means that the specified spread in definition will be
used in the Risk Free Rate formula itself to calculate the Compounding Risk Free Rate. Exclusive means that the
specified spread in the definition will be added on top of the formula calculated Compounding Risk Free Rate.
Please note that AA will accumulate all kinds of margins existing in the interest conditions and take them as a Spread
to pass to the Banking Framework API. The margins include Relationship Pricing, Package Pricing, Regional Pricing
and Manual Pricing.

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Lending Arrangements » Demo 1

In this Demo we will look at a USD Lending Arrangement is created with a value date of 15 April 2021. This Lending
Arrangement is using the Narrow Type Lookback Convention with Compound Calculation Type. The Lookback Days
have been set to 3 and the Spread Treatment is set to Inclusive. The Period Day Count is set to Full.

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Lending Arrangements » Demo 1

In this Lending Arrangement, we have used Periodic Index 14 with a margin of 1% added to the rate. The RFR
Convention is set to Look Back and the Lookback Type is set to Narrow. The Calculation Method is set to Compound
with Lookback Days set to 3. The Spread Treatment is Inclusive and the Period Day count is set to Full.

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Lending Arrangements » Demo 1

We have indicated Monthly Repayments for Interest in the Payment Schedule.

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Lending Arrangements » Demo 1

After authorisation, we can see that the Risk Free Rate is 4.14% from the Arrangement Overview screen.

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Lending Arrangements » Demo 1

The system has calculated the interest accruals at the rate of 4.14%.

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Lending Arrangements » Demo 2

In this Demo we will look at a USD Lending Arrangement is created with a value date of 15 April 2021. This Lending
Arrangement is using the Narrow Type Lookback Convention with Compound Calculation Type. The Lookback Days
have been set to 3 and the Spread Treatment is set to Inclusive. The Period Day Count is set to Today.

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Lending Arrangements » Demo 2

The Lending Arrangement is created with a Committed Amount of 200,000.00 Dollars and a Term of 1 year. The
RFR Convention is set to Look Back and the Lookback Type is set to Narrow. The Calculation Method is set to
Compound with Lookback Days set to 3. The Spread Treatment is Inclusive and the Period Day count is set to Today.
The Rounding Rule is set to Natural.

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Lending Arrangements » Demo 2

We have selected the Periodic Index 96 for Risk Free Rates and set the Margin Type to RFR Spread with the Operand
set to Add and Margin Rate as 0.15%.

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Lending Arrangements » Demo 2

The Due frequency for the Principal Interest is set as monthly in the payment schedule.

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Lending Arrangements » Demo 2

Once the loan arrangement is authorised and disbursed, the RFR rate for the Interest Accruals is updated as 3.38%.

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Lesson Summary
In this lesson I described Interest Property Class, Interest Product Conditions, and Lending Arrangements.

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