Overview
This section discusses the process of setting up a Market Linked Debenture (MLD) within Finvisage. It further covers various fields that go towards setting up an overall issue as well as multiple series within that ISIN.
Navigation
In the side panel, click on Liability, and then - under Liability - select Market Linked Debenture to navigate to the blotter for the same.
Steps for Creating a new MLD
Select the + button from the menu icon on the bottom right of the screen to add a new MLD
1. External ID - Input the desired reference identification details for the overall issue
2. Entity - Pull down and select the issuing entity’s name (normally defaulted to your entity name)
3. Counterparty - Pull down and select the name of the bank or financial institution or other entity that is the holder / investor of the MLD (this will normally be the Registrar & Transfer Agent (RTA) or Trustee that is engaged by your entity, and will be available based on the record being created in the appropriate Counterparty Master.
4. Currency - is defaulted to INR; any other currency may be selected from the dropdown as applicable.
5. Security Trustee - This is a free-format text field. The name of the Trustee may be entered here.
Click on ‘Create’ to add the new MLD.
Recording an MLD variation / type
Click on the action button as shown above to add a new variation (type / tranche) of the MLD.
Status - shall default to ‘Issued’.
Type / Series - Record the individual ‘Type#’ or Series here, as relevant.
ISIN - the specific ISIN for the Type being created, should be recorded here.
Reference Asset - Pull down and select whether NIFTY 50 or BSE Sensex (additional Reference Assets can be added through the Loan Settings / Reference Asset page).
Allotment date - to be entered as appropriate.
Maturity date - to be entered as appropriate.
Tenure - will be auto-calculated by the system and displayed in ‘days’.
Issue Price Per Debenture - to be entered as appropriate.
Investment Amount - to be entered as appropriate.
Face Value Per Debenture - is defaulted to INR 1,00,000/- (this can be changed from the Loan Settings page).
Face Value of Investment - will be auto-calculated by the system.
Premium - will be auto-calculated by the system.
Commission Type - may be selected as Absolute or Percentage from the pulldown.
Commission - may be entered as an absolute number or as a percentage, depending on the choice in the ‘Commission Type’ field.
Cost of Funds (%) - to be entered as appropriate in percentage terms.
Principal Protected - may be selected as Yes / No using the pulldown.
Principal Protected (%) - is to be used to specify the level of Principal Protection, where this is applicable (as per selection in previous field).
Initial Level Rounding - may be selected as Yes / No using the pulldown.
Initial Level Rounding Precision - Select the level of rounding for initial level
Final Level Rounding - may be selected as Yes / No using the pulldown.
Final Level Rounding Precision - Select the level of rounding for final level
Additional information - any other information or details requiring to be recorded may be captured in this field, as free-format text.
Creating the Payoff Structure
Payoff - The description of the payoff structure may be captured in this field, as free-format text. This is for user reference only.
Payoff Type - may be selected as Conditional or Non-Conditional depending on the agreed terms of the MLD, and the basis of calculation of the final payoff.
Selecting ‘Payoff Type’ as Conditional will result in the above screen being prompted for entry. This represents a condition. There are two sets of payoff the user has to set in that case. One for when the condition is TRUE and when it is FALSE.
A combination of fields 3, 4, 5, 6 and 7 can be used to define the necessary parameters / conditionality for computation of the payoff levels / ladder. These fields are as under:
Initial / Final Level: This shall be defaulted to ‘Final Level’.
Percentage: This is defaulted to 100% but can be edited. Where the actual Final Level needs to be compared with the final level, keep this as 100%.
Operator: select between “<”, “<=”, “>”, “>=”
Initial / Final Level: This shall be defaulted to ‘Initial Level’.
Percentage: This is defaulted to 100% but should be changed to reflect the threshold level that the Final Level should cross or reach in order for the condition to be satisfied.
For example, if the payoff depends on the FInal Level being 40% or higher than the initial level, then the following will be how the payoff is built:
3. [ Final Level ]
4. [ 100% ]
5. [ >= ]
6. [ Initial Level ]
7. [ 140% ]
i.e. if Final Level is greater than or equal to 140% of Initial Level, or has exceeded the Initial Level by 40% or more.
If the 'Payoff Type' is selected as Non Conditional then there is no condition element to set. The system directly expects a payoff structure.
The payoff structure can be set up as per the following formats:
Fixed coupon
The fixed coupon is captured as fixed percentage value. This would be directly applied on the face value to calculate the payoff at maturity.
Participation Rate
In this case, there is no fixed coupon. The investor only receives a percentage of benchmark gains.
Participation Rate - refers to % participation in benchmark gains.
Capped Coupon - Max gain possible
The gains can be restricted to a specific range of values for Final / Initial level as percentage.
Use Initial Level Start (checkbox) - Select this if the gains should be initiated from a specific gain Final / Initial level value.
Initial Level Start % - Enter the desired start level
Use Initial Level End (checkbox) - If there is cutoff value for Final / Initial Level after which no participation in gains occurs.
Initial Level End - The aforementioned cutoff level in percentage
Fixed Coupon and Participation Rate
In this case, the payoff is a combination of both fixed coupon and participation rate.
Most fields are the same as the previous section on Participation rate. The only difference is that a fixed coupon can be assigned that will accrue to the user irrespective of the participation rate and cutoff range.
Lets say, the fixed coupon is 30% and the participation rate is 10%. When the Final / Initial level is 110%, then assuming no cutoff range is present, the user shall receive:
Fixed (30%) + Participation (10% of 10% = 1%) = 31% of the face value as payoff.
Max Asset Return
If selected, this is equivalent to 100% participation rate in benchmark gains.
Formulae
The system allows the user the ability to design complex payoff structures with the formulae functionality. For instance, if the payoff involves a certain decay rate, then the formulae approach is most suitable.
Example of a typical payoff formula with decay rate: MAX(0, 0.62 + 2.48 * ((FINAL LEVEL / INITIAL LEVEL - 1) - 5%)).
This may be entered using the drop down feature on the left or by directly typing the same. The system automatically multiplies the Principal to the result of this formula to calculate payoff.
Operators such as+, -, *, /, %, (, )may be used as per BODMAS principle to construct the same.
Keywords such as FINAL LEVEL, INITIAL LEVEL, MAX ASSET RETURN may be picked from the dropdown to refer to specific aspects of the MLD structure.
Functions such as MAX, MIN are also available.
Use Validate to assess the validity of the formula once entered.
Review the Payoff Ladder
The system allows the user to generate a payoff ladder to ascertain how the payoff behaves at various probable Final / Initial level values. This is recorded along with the MLD details when the same is submitted / created within the system. Hence, the same is available for future reference for auditing or internal review purposes.
Click on “Add Payoff Ladder inputs” and apply lower and upper limits to view the payoff graph for the desired range. An interval may also be set to define granularity of the depicted graph.
Click on Generate Ladder to generate the desired graph.
Once satisfied with the graph, click on Submit button to set up the MLD variation in the system.