TRMCreditSpreads - EN - Yield Curve Framework PDF

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HELPX.TRM_RM
Yield Curve Framework
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Document Version: 7104 – <Date>
Yield Curve Framework 7104 1

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Yield Curve Framework ......................................................................................................... 5

1 Key Terms in the Yield Curve Framework ....................................................................... 5
2 Reference Interest Rates ................................................................................................ 8
3 Yield Curves ................................................................................................................... 9
3.1 Yield Curve Type...................................................................................................... 9
3.2 Creation of Yield Curves......................................................................................... 10
3.2.1 Interpolation (Yield Curve Framework).............................................................. 15
3.2.2 Extrapolation.................................................................................................... 16
3.2.3 Calculate Interest Rates from the Yield Curve Generated ................................. 18
4 Basis Spreads and Basis Spread Curves ...................................................................... 19
4.1 Manual Entry of Basis Spread Values ..................................................................... 21
5 Customizing for Credit Spreads..................................................................................... 23
6 Credit Spreads and Credit Spread Curve Structures...................................................... 40
6.1 Create Reference Entities for Business Partners..................................................... 41
6.2 Maintain Reference Entities .................................................................................... 42
6.3 Assign Reference Entities to Business Partners...................................................... 44
6.4 Enter Credit Spread Values .................................................................................... 45
7 Composite Curves ........................................................................................................ 46

SAP Library
Yield Curve Framework
You use the Yield Curve Framework to define reference interest rates and enter their values.
On the basis of the reference interest rates, you can create yield curves to help you determine
mark-to-market net present values with the price calculator. They also enable you to create
basis spreads and credit spreads for inclusion in calculations for the creation of basis spread
curves and credit spread curves, which you can add to the yield curves and then make
calculations on the basis of the combined curves (called "composite curves").
Integration
The functions of the Yield Curve Framework are available with the following business
functions:
TRM, Yield Curve Framework (Reversible) [External]
TRM, Credit Spreads (Reversible) [External]
Features
Key Terms in the Yield Curve Framework [Page 5]
Reference Interest Rates [Page 8]
Yield Curves [Page 9]
o Yield Curve Type [Page 9]
o Creation of Yield Curves [Page 10]
Interpolation [Page 15]
Extrapolation [Page 16]
Calculate Interest Rates from the Yield Curve Generated [Page 18]
Basis Spreads and Basis Spread Curves [Page 19]
o Manual Entry of Basis Spread Values [Page 21]
Customizing for Credit Spreads [Page 22]
Credit Spreads and Credit Spread Curve Structures [Page 39]
o Create Reference Entities for Business Partners [Page 41]
o Maintain Reference Entities [Page 42]
o Assign Reference Entities to Business Partners [Page 44]
o Enter Credit Spread Values [Page 45]
Composite Curves [Page 46]
1 Key Terms in the Yield Curve Framework

SAP Library
Reference See also: Reference Interest Rate [External]

Interest Rate
Compounding The compounding frequency determines how often interest is calculated.

Frequency
Payment The time interval between interest payments.

Frequency
Interest This method is a procedure for counting days in interest calculation. It is

Calculation defined by the quotients taken from the daily method and the basic daily
Method method.
The daily method determines how the days for interest calculation are
counted between two dates on the Gregorian calendar.
The basic daily method determines how many days there is in a year for
the purposes of interest calculation.
Yield Curve A yield curve type contains one yield curve structure for each different
Type currency. On the validity date, the yield curve structure generates a yield
curve that serves as the basis for NPV calculation.
A yield curve type covers a market segment such as the swap

market or the bond market.
A yield curve is used to determine the opportunity interest rate

(such as for a product group like loans).
You can assign any number of currencies to every yield curve type. The
yield curve structures are based on the reference interest rates assigned.
These reference rates are used to form the grid points for the currencies
of the yield curve type.
Yield Curve A curve that is built from a record of reference interest rates for different
terms. A yield curve is uniquely defined by its combination of the validity
date, the yield curve date, and the currency.
Basis Spread Basis spreads are premiums and discounts on one side of a basis swap
that make the swap into a fair transaction. They can be used in the price
calculator for the calculation of discount factors and forward interest rates.
The spread relates to the first two reference interest rates assigned.
Cross-Currency Spread:
Three-Month EURIBOR Versus Three-Month USD Libor, Five-

Year Term
The spread is the premium or discount on the EUR side.
Tenor Spread:
Three-Month EURIBOR Versus Six-Month EURIBOR, Three-Year

Term

SAP Library
The spread is the premium or discount on the three-month side.
Basis Spread ID Key with which a basis spread is defined. This could relate to either a
cross-currency spread or a tenor spread.
Basis Spread A basis spread curve type contains a basis spread curve structure for
Curve Type each combination of currency and tenor:
A pair of tenors (like 3 months versus 6 months) for a given

currency defines a tenor basis spread curve.
A pair of currencies for a given tenor defines a cross-currency

basis spread curve.
On the validity date, the basis spread curve structure generates a basis
spread curve, which is combined with a yield curve during the NPV
calculation.
You can assign any number of currency/tenor pairs to every basis spread
curve type The currency/tenor pair is defined on an abstract level. The
concrete relationship to the quoted market data is defined by assigning the
basis spread IDs to the grid points. The basis spread curve structures are
based on the assigned basis spread IDs. The underlying reference rates
assigned to these basis spread IDs need to fulfill the following
requirements:
Their currency needs to match the currency of the basis spread

curve.
Their time to maturity must be equal to the tenor of the basis

spread curve.
Basis Spread A basis spread curve is the result, valid on a specific date, for a basis
Curve spread curve type for a concrete currency-tenor transition, which is
combined with a yield curve during the NPV calculation.
A basis spread curve does not exist on its own; it is only used in the
context of the generation of a composite curve.
Credit Spread A credit spread value always relates to a reference entity, a credit spread
ID, a quotation type, and a rate date.
Credit Spread Key with which a credit spread is defined.

ID
To be able to save market data for credit spreads, you additionally need to
define reference units.
Reference Entity The reference entity is the reference factor for a credit spread.
Examples of reference entities:
Business partners ("reference debtor")
Company codes (for the storage of credit spreads belonging to

your company)
Security ID numbers

SAP Library
Ratings
Credit Spread A credit spread curve structure defines the term structure of a credit
Value Structure spread curve.
On the validity date, the credit spread curve structure, together with a
reference entity, generates a credit spread curve, which is combined with
a yield curve during the NPV calculation.
Credit Spread A credit spread curve is the result, valid on a specific date, for a credit
Curve spread curve type together with a reference entity that is combined with a
yield curve during the NPV calculation.
A credit spread curve does not exist on its own; it is only used in the
context of the generation of a composite curve.
Composite A composite curve consists of exactly one yield curve and any number of
Curve spread curves. The properties of the yield curve determine the properties
of the resulting composite curve.
The Yield Curve Framework allows you to define a set of basis spread
curves that are added to the yield curve, both for forward yield curves and
for yield curves that are assigned in the evaluation type/valuation rule.
Further, it is possible to derive a credit spread curve for discounting.
2 Reference Interest Rates
In Customizing, you define interest conditions for reference interest rates. Interest conditions
are used for the interest rate instrument on which the reference interest rate is based to
describe when and how much money is paid. In this way, you influence the calculations for
building yield curves. The interest conditions that can be set for the reference interest have
the following meaning:
Currency: Currency in which the underlying interest rate instrument is expressed.
Interest Calculation Method: Specifies the day count method and the method for
calculating the number of days in a year.
Term/Time Unit: Specifies the term of the underlying interest rate instrument in the
specified time unit.
Payment Frequency: Specifies the frequency with which interest payments are made.
The payment frequency can be used to distinguish between par coupon and zero
interest rates.
Compounding Frequency: Specifies the duration of the period during which interest is
calculated. The following equation is used to calculate the interest on paid-in capital
within a year:
R m
K1 K 0 (1 100 m
)

SAP Library
m specifies the compounding frequency. For example, m=4 stands for quarterly
compounding.
Calendar: The calendar that is selected here is used as the basis for the settings
made in the fields "Number of Working Days" (in terms of interest determination) and
"Shift Value Date to Working Day". If you have selected interest calculation method
actW/252, the system uses this calendar to determine the public holidays on the
basis of 252 working days per year.
Fixing Period: Specifies the duration in working days between the date of interest
fixing and the start of the first interest period. Only positive values are considered;
negative values are set to zero.
Shift Value Date to Working Day: Specifies the direction in which the payment date is
shifted if it falls on a public holiday. After the shift, the payment date can fall either
before or after the original date coinciding with a public holiday.
Maturity Dates at Month End: Dictates whether maturity dates are moved to the end
of the month when the start of the interest term falls at the end of the month.
Forward Yield Curve Type: Yield curve type used to calculate the forward interest
rates for the selected reference interest rate.
3 Yield Curves
Yield curves are used to calculate net present values.
Before you can create yield curves, you first need to define yield curve types. From within the
application, the required yield curve is calculated based on the settings made for the yield
curve type, for the yield curve, and for the reference interest rates as well as on the basis of
the current market data.
More Information
Yield Curve Type [Page 9]
Creation of Yield Curves [Page 10]
o Interpolation [Page 15]
o Extrapolation [Page 16]
o Calculate Interest Rates from the Yield Curve Generated [Page 18]
3.1 Yield Curve Type
A yield curve type is the abstract description of a group of concrete curves. A yield curve type
contains one yield curve structure for different currencies.
You define yield curve types using attributes that influence market data selection and
properties such as payment frequency and compounding frequency plus any number of
currencies. As grid points on the curve, you assign reference interest rates to the currencies
of the yield curve type. For this, you can only assign reference interest rates with a currency
matching the selected currency.

SAP Library
On the validity date, the yield curve structure generates a yield curve that serves as the basis
for NPV calculation.
Structure
Properties of the yield curve type that define how interest rates are calculated (see also:
Calculate Interest Rates from the Yield Curve Generated [Page 18]):
Payment Frequency
Compounding Frequency
Quotation Type (for information purposes only)
Maximum Age
Property that defines the market data that can be used to create a concrete curve.
Extrapolation Method
Basis Spread Curve Type
This setting is relevant if a curve is used for forward calculations.
You achieve a concrete yield curve from the yield curve type by means of combining it with a
currency.
At this level, you assign a calendar and an interest calculation method. You then assign the
reference interest rates that provide the market data as well as specify the time fence.
The yield curve attributes Underlying Term and Underlying Time Unit are used to find, for a
specific basis spread curve type, suitable basis spread curves that can be combined with the
yield curve for forward calculation.
Example
If you create a yield curve from swap records versus three-month EURIBOR, the
underlying term of the yield curve is 3 and the period is Month.
Example
A yield curve type covers a market segment such as the swap market or the bond market.
3.2 Creation of Yield Curves
You use this function to create yield curves. A yield curve is defined by the reference interest
rates assigned to it. The system creates the yield curve using the market data that exist for
the individual reference interest rates. In other words, the system calculates discount factors
on the grid points defined by the reference interest rates and zero rates that are constantly
subject to interest calculation.

SAP Library
Features
Reference Interest
Rates Assigned to the
Yield Curve, Market
Data Corresponding to
the Yield Curve Setting
"Maximum Age"
Step 1: Bootstrapping Method Applying the Settings

of the Reference Interest Rates
Continuously Equivalent
Interest- Portrayals
Discount
Bearing Zero
Factors
Rates
Step 2: Calculate Interest Rates Based on Yield Curve Settings
Interest Rates Corresponding to the

Curve Properties or to the Settings of
the Reference Interest Rate for
Forward Calculations (such as
Payment Frequency, Compounding
Frequency, and Interest Calculation
Method)
Overview: Creating Yield Curves
The system calculates discount factors using the bootstrapping method. The method ensures
that the discount factors can be calculated from the given market data free of arbitrage. For
this, the system performs the following steps:
1. Find market data
Search for interest rates for a specified date for all reference interest rates assigned
to the yield curve. For this, the Direct Read-Back method is used, with specification of
a maximum age:
o Determination of the read date using the condition Date Smaller than or
Equal to Specified Date for the reference interest rates assigned to the yield
curve. Starting with the specified date, the system searches for the latest
date in the past for which market data exists. This means that the system
takes the specified date and then continues to set the read date to the
proceeding date until it finds an interest rate for at least one of the reference
interest rates assigned.
o If the read date established in this way exceed the maximum age (the read
date is earlier than the date achieved by subtracting the maximum age from
the specified date), the system behaves as if no market data were found. In
such instances, the system does not create a yield curve.
o If the read date established is not too far in the past, the system reads from
the market data table the existing interest rates for this date and for all
reference interest rates assigned to the yield curve and uses the interest
rates found on the read date to build the yield curve for the specified date.
This yield curve is then valid for the specified date.

SAP Library
You specify the permitted maximum age (in days) in the

Customizing settings for the Market Data under Master Data
Settings for Ref. Interest Rates and Yield Curves Define Yield
Curve Types .
If the system does not find an interest rate for a reference

interest rate that is marked as required, no yield curve is created.
2. Determining Payment Amounts and Payment Dates for the Assigned Reference
Interest Rates
Using the interest conditions of the reference interest rates, the system calculates the
payment amounts and payment dates of the individual reference interest rates for
which market data was found:
o Calculating the Start of the First Interest Period:
This date is achieved by adding the fixing period to the validity date. To
determine the working days and public holidays, the system uses the
calendar specified for the reference interest. If you have not specified a
calendar, the system ignores the number of working days for the purpose of
interest calculation; the start of the first interest period is in this case the
same as the validity date. The start of the first interest period corresponds to
the date on which capital was paid for the underlying interest rate instrument
for the reference interest rate.
o Calculating Payment Dates:
On the basis of the entries made for the Term/Time Unit and Payment
Frequency fields for the reference interest, the system calculates the
payment dates, from the start of the first interest period.
Term: 3 Years, Payment Frequency: Yearly, Start of First Interest

Period: 17.5.2011
The system creates the payment dates 05/17/2012, 05/17/2013,

05/17/2014.
o Depending on which setting you have made in Customizing for the Shift
Value Date to Working Day indicator for the reference interest rate, the
system moves the payment dates that were determined in the previous step
to working days, based on the rule specified. The system applies the shifted
payment dates in the following step.
o Calculation of the quotients - resulting from the number of days divided by the
name of days in the year - for each individual interest period of the reference
interest rate, on the basis of the interest calculation method specified in
Customizing for the reference interest rate. The payment date of the previous
interest period is applied as the start date of each interest period (or, if the
current interest period is the first interest period, the start date of that interest
period is applied), and the payment date of the current interest period is
applied as the end date of the interest period.
o Calculation of the individual interest payments:
Multiplication of the interest rate found with the quotients calculated in the
previous step by dividing the number of days by the number of days in the

SAP Library
year. In the case of a zero interest rate with a term that is longer than a year,
the interest share "C" of the repayment is achieved using the following
equation:
C 1 0 0 ((1 R /100)q 1)
Where R: zero interest rate, q: quotient resulting from the number of days
divided by the number of days in the year.
o The system then sets as the date for the capital repayment the payment date
of the last interest period.
3. Sorting the Market Data
The system sorts the found interest rates ascending by term and calculates the
discount factors recursively in exactly the same sequence.
4. Calculation of Discount Factors
Together with the quoted interest rate, each reference interest rate implicitly provides
a well-defined cash flow of n interest payments Ci (calculated in the step Determining
Payment Amounts and Payment Dates for the Assigned Reference Interest Rates)
including repayment of 100. The quoted interest rates are noted at par level, that is,
the NPV of the cash flow of all future payments is the same as the outstanding debt
of 100. To calculate the NPV, the system multiplies each individual payment (interest
and capital repayment) with a discount factor di. You obtain the NPV equation (where
d0 is usually equal to 1, d0 is not equal to 1 when the start date of the first interest
period is not the same as the validity date):
n
100d 0 d iC i 100d n
i 1
The system now benefits from the fact that the yield curve has already been created
up until event Tn-1 and that, consequently, the discount factors d0 through dn-1 of the
payment date T0 through Tn-1 are already known. The discount factors are deemed to
be known if they have previously been calculated or can be obtained using
interpolation (yield curve framework) [Page 15]. To calculate dn, the above equation is
activated towards dn, as the following equation shows:
n 1
100 d 0 d iC i
d n 100
i 1
C n
In this way, you obtain discount factors for all terms determined by the reference
interest rates. This approach is known as bootstrapping.
5. Calculating Discount Factors for Zero Interest Rates with a Term Exceeding a Year

SAP Library
In the case of zero interest years with a term exceeding a year, the system calculates
the discount factors differently to the above method. Instead, it uses the equation
depicted below:
q
dn d 0 (1 R / 100 )
For zero interest rates with a term exceeding a year, this approach assumes a
compounding frequency of one year.
6. Calculation of the Discount Factor d0
If the payment date T0 for discount factor d0 already falls after all payment dates (grid
points) that were previously created in the yield curve, the system assumes that the
continuous compounding zero interest rates are the same between the last available
grid point and T0 and between T0 and the first interest payment date. As a grid point,
the validity date on which the discount factor is always equal to 1 implicitly also
applies to the yield curve.
If, however, a grid point with a longer term exists, the system interpolates d0.
The reference interest rate with the shortest term in the yield curve has a
term of one month, the payment frequency is monthly, and the start date of
the interest period is two working days after interest fixing (after the validity
date of the interest rate).
In this case, the system assumes that the continuous compounding zero
interest rates between the validity date of the yield curve and the validity date
of the interest rate, on the one hand, and the start date of the interest period
and the end date of the interest period on the other hand are the same. Using
this assumption, the system can calculate d0.
7. Filling Swap Gaps
Filling Swap Gaps by Interpolating Par Interest Rates
It is not always the case that all discount factors d0 through dn-1 are already known to
the system. If, for example, reference interest rates for one-, two-, three-, four-, five-,
seven-, and ten-year terms are assigned to a yield curve, there are missing grid
points (the swap gaps) for six, eight, and nine years so that the system can use the
above-cited equation. For example, for determining d7, discount factor d6 is missing.
The system cannot yet perform an extrapolation [Page 16] to determine d6 because
this is only possible for a yield curve that has been created completely. For this
reason, the system must use a different method to fill these gaps. The system uses
linear interpolation. To calculate the interest rate for six years, the system interpolates
the par rates of the reference interest rates with the terms of five and seven years,
using linear interpolation and to the exact day, as shown in the following equation:
(T7 T6 ) R5 (T6 T5 ) R7
R6
T7 T5

SAP Library
In this example, it is assumed that there is an interest payment once a year for all
interest rates.
For the terms Ti of the relevant reference interest rates, the quotient of the actual
number of days divided by 365 is used. This interpolation of par interest rates occurs
exclusively during the creation of the yield curve for the purpose of filling the swap
gaps. When the yield curve has been created completely, however, the system
interpolates using the method described in the section "Interpolation". If the interest
conditions are different in the case of two reference interest rates that follow on from
each other, whereby the interest calculation methods for R5 and R7, for example,
differ, the system calculates, at point in time T5, an interest rate noted at par level in
the interest calculation method for R7, and deploys this interest rate in the above
formula. For more information about calculating interest rates, see Calculate Interest
Rates from the Yield Curve Generated [Page 18]. For the system to be able to apply
the above formula, the interest conditions of the relevant interest rates must be
identical (but the terms may differ).
After filling the gaps, the system calculates the missing discount factors (see
Calculation of Discount Factors). Once all discount factors have been calculated up
until the grid point with the longest term, the yield curve is complete.
3.2.1 Interpolation (Yield Curve Framework)
The system uses this function to interpolate interest rates for terms that have not been
created in the system.
Features
Using the discount factors d calculated along the grid points during the creation of the yield
curve, the system calculates zero interest rates ZCC with continuous interest calculation
(continuous compounding zero) by activating the following equation towards Z:
ZccT
d e
The term T is always portrayed in the ACT/365 format and measured between the validity
date of the yield curve and payment date.
For the interest rates in this portrayal, the system performs linear interpolation to the exact
day, that is, the interpolated continuous compounding zero rate ZX is achieved using the
following equation:
T2 TX Z1 TX T1 Z 2
ZX
T2 T1

SAP Library
The system calculates the discount factor dX using the following equation:
ZxTx
dX e
Interest
Rates Before
Interpolation
Grid Point 1 Grid Point 2 Grid Point 3 Grid Point 4 Grid Point 5
Interpolation Range
Interest
Rates After
Interpolation
Grid Point 1 Grid Point 2 Grid Point 3 Grid Point 4 Grid Point 5
3.2.2 Extrapolation
The system performs an extrapolation on the completed yield curve if an interest rate or
discount factor is requested for a term that is greater than the longest term of all grid points of
the yield curve.
Features
In the Customizing settings for the yield curve, you can choose between the following
methods:
1. Keep Continuously Interest-Bearing Zero Rate Constant
It is assumed that the continuously interest-bearing zero rate for all terms in the
extrapolation area is the same as the last available continuously interest-bearing zero
rate in the yield curve.
For this, the following equation is applied:
ZCC(T Tn) ZCC(Tn)

SAP Library
2. Keep Par Interest Rate Constant
It is assumed that the last available par interest rate in the yield curve, once
converted into the continuous interest-bearing portrayal, is the same as the
continuously interest-bearing forward interest rate in the entire extrapolation area.
This achieves almost constant par interest rates for terms in the extrapolation area.
However, using this option does not mean that the par interest rates in the
extrapolation area are exactly the same as the par interest rate on the last grid point.
The system performs the following calculations:
o Calculation of the par interest rate for the last yield curve grid point based on
the conditions set for the yield curve (for more information, see Calculate
Interest Rates from the Yield Curve Generated [Page 18]).
If you have selected the payment frequency Zero Interest Rate: One
Interest Payment at End of Term in the Customizing settings for the
yield curve, the system nevertheless assumes a payment frequency
of one year for the par interest rate to remain constant.
o Conversion of the par interest rate P into a continuously interest-bearing

portrayal (m = number of interest payments per year) and calculation of the
factor F, as portrayed in the following graphic:
P
F exp(m log(1 100m
))
o Calculation of the discount factor d(T), as portrayed in the following graphic:
T Tn
dT Tn d Tn F
o Calculation of the continuously interest-bearing zero interest rate, as

portrayed in the following graphic:
log( d (T Tn ))
Z CC (T Tn ) T
3. Keep Continuously Interest-Bearing Forward Rate Constant
The system assumes that the continuously interest-bearing forward rate on the last
grid point of the yield curve is the same as the continuously interest-bearing forward
interest rate in the entire extrapolation area. The system performs the following
calculations:

SAP Library
o Determination of the increase of the interpolation lines between the

penultimate and last grid points of the yield curve, as portrayed in the
following graphic:
Z CC ( Tn ) Z CC ( Tn 1 )
s T n Tn 1
o Calculation of the continuously interest-bearing forward interest rate on the

last grid point of the yield curve, as portrayed in the following graphic:
f (Tn ) sTn ZCC(Tn )
o Calculation of the continuously interest-bearing zero rate, as portrayed in the

following graphic:
Z CC (T Tn ) f (T n ) ( Z CC (T n ) f (T n )) TTn
3.2.3 Calculate Interest Rates from the Yield Curve

Generated
Once the yield curve has been created, it is used to calculate the interest rates on the basis of
the interest conditions that are set in the yield curve. The interest rate R is noted at par level if
the condition represented by the following graphic applies for R:
n
100 d 0 d i Rq i 100 d n
i 1
The quotients qi from the difference in days and days in the year as well as the payment
dates i are achieved from the conditions of the interest rate. To calculate R, the system
activates the equation towards R, as portrayed in the following graphic:
R 100 dn0 dn
di qi
i 1

SAP Library
Either the system has already calculated the discount factors di during the creation of the
yield curve, or they are achieved by means of interpolation with the continuous compounding
zero rates.
The prerequisite for this is that the last and not the first interest period is shortened if the term
is not a whole-number multiple of the payment frequency.
Calculation of Zero Interest Rates with a Term Exceeding a Year
If a zero interest rate with a term exceeding a year needs to be calculated, the system uses a
different equation to the method portrayed above. Instead, it uses the equation depicted
below:
R 100 (( d 0 / d n )1 / q 1)
This means that, for zero interest rates with a term exceeding a year, the system assumes a
compounding frequency of one year.
4 Basis Spreads and Basis Spread Curves
Basis spreads are premiums and discounts on one side of a basis swap that make the swap
into a fair transaction. The spread relates to the first two reference interest rates assigned.
You can define tenor spreads and currency spreads. Basis spreads need to be defined before
you can perform the following activities:
Upload Basis Spread Market Data to the System
Build Basis Spread Curves from Basis Spreads with Different Terms
Structure
To portray basis spreads, you need to create basis spread IDs in Customizing for Treasury
and Risk Management under Basic Functions Market Data Management Master Data
Basis Spreads Define Basis Spreads .
You assign to a basis spread ID two reference interest rates, the term, and the time unit.
If you want to portray a tenor spread, assign two reference interest rates with the
same currency and different terms. The first reference interest rate is the one to
which the spread is added. In this way, the properties of the first reference
interest rate determine the quotation of the basis spread.
If you want to portray a currency spread, assign two reference interest rates with
the same term and different currencies. The first reference interest rate is the one
to which the spread is added. In this way, the properties of the first reference
interest rate determine the quotation of the basis spread.

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In the Extended Properties area, you can override some of the settings of the assigned
reference interest rate by setting the Extended Properties indicator. When you set this
indicator, the following fields are made visible:
Payment Frequency
Fixing Period
Working Day Shift
Calendar
Interest Calculation Method
Maturity at Month End
You can override these settings.
Example
You want to portray a tenor spread that creates the surcharge on the three-month side of a
term basis swap 3-Month EURIBOR versus 6-Month EURIBOR, with a term of five years.
You make the following settings:
Basis Spread ID Ref1 Ref2 Term Time Unit
EUR3M6M EURIBOR3M EURIBOR6M 5 Year
You can use the auxiliary program FTBBYC_BSPRD_CUST_HELP to create multiple

similar basis spreads in parallel. For more information, see the documentation on this
program in the system.
You manually enter the concrete values of the basis spreads for a specific date in the area
menu of Treasury and Risk Management under Basic Functions Market Data
Management Manual Market Data Entry Basis Spreads Enter Basis Spreads .
Instead of entering the basis spread values manually, you can also upload basis spread
values in the same way as other market data, such as with Datafeed [External], the file
interface, or by using Market Data Transfer from Spreadsheet [External].
See also:
Manual Entry of Basis Spread Values [Page 21]
Market Data Management [External]
Basis Spread Curves
You can include basis spreads in the price calculator for the calculation of discount factors
and forward interest rates. For this, you define basis spread curve types in Customizing for
Treasury and Risk Management under Basic Functions Market Data Management
Master Data Basis Spreads Define Basis Spread Curve Types and use them as the
basis for creating the basis spread curves that, together with the yield curve, form the
composite curve used as the basis for the calculations.

SAP Library
In the definition of the basis spread curve types, no settings are made regarding the interest
rates derived from the curve because basis spread curves are not created as independent
curves; instead, they are only used in conjunction with the creation of a composite curve. For
a concrete curve to be achieved from the curve type, a concrete pair of currency/tenor
combinations (for example, currency 1/tenor 1 <-> currency 2/tenor 2) is required.
The quotation type stored at the level of the basis spread curve type is for information
purposes only.
The maximum age stored is relevant for the market data uploaded for a concrete curve. The
quotation stored at the level of the concrete curve influences what market data is selected.
See also: Composite Curves [Page 46]
4.1 Manual Entry of Basis Spread Values
You use this function to enter basis spread values manually in the market data tables. A basis
spread value always relates to a basis spread ID, a quotation type, and a rate date. You can
enter positive as well as negative basis spread values.
Prerequisites
You need to have created the basis spreads in Customizing for Treasury and Risk
Management under Basic Functions Market Data Management Master Data Basis
Spreads Define Basis Spreads .
Activities
1. Call the function in the SAP Easy Access menu for Treasury and Risk Management
under Basic Functions Market Data Management Manual Market Data Entry
Basis Spreads Enter Basis Spreads (transaction RMBSM) or in Customizing under
Basic Functions Market Data Management Manual Market Data Entry Basis
Spreads Enter Basis Spreads .
2. Choose Display or Choose to call up the display/change mode for the market data
table for the basis spread values.
To restrict the number of basis spread values in the display, you can use the
Basis Spread ID, Quotation Type, and Rate Date fields.
By choosing (Display <-> Change), you can switch between the display and
change modes.
3. In the change mode, you can enter new basis spread values or change existing ones.
Entering Basis Spread Values
1. Choose New Entries.
2. Enter a basis spread ID in the Basis Spread ID field and a quotation type in
the Quotation Type field.
3. Enter the quotation date in the Quotation Date field.

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4. Enter the basis spread values in basis points, where one basis point
corresponds to a hundredth of a percentage point.
5. To enter an additional basis spread value, choose (New Input Line).
6. If you have entered a line incorrectly, select the line and choose (Delete).
Changing Basis Spread Values
You can change or delete existing basis spread values.
To delete a value, select the line and choose (Delete).
4. Save your entries.

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5 Customizing for Credit Spreads

Features
Market Data
For you to be able to enter market data in the system for credit spreads, you first need to make the following settings:
Customizing/Function Path Comments
Define Credit Spread Customizing: Treasury and Risk Management In this Customizing activity, you create credit
IDs (view Basic Functions Market Data Management Master spread IDs by specifying their characteristics.
V_FTBBYCCSPRD) Data
In the Market Data Quotation area, you can
define how the yield curve framework interprets
the market data. For this, you make entries in the
following fields:
Payment Frequency
Fixing Period
Working Day Shift
Calendar
Interest Calculation Method
Maturity at Month End
In the Expert Settings area, you need to select

the default entry for the Usage field, unless you
want to implement your own logic for converting

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the market data into spreads for use in the yield

curve framework.
Maintain Reference Area menu: Treasury and Risk Management Basic You also need to create the reference entities
Entities (transaction Functions Market Data Management Manual Market that are referred to by your credit spreads. You
RMRE) Data Entry Credit Spread Curves can assign business partners, company codes,
and security ID numbers to reference entities.
Create Reference However, you can also define more general
Entities for Business reference entities for ratings or industries.
Partners (transaction
RMREBP) To create reference entities for your business
partners, you can use the program Create
Reference Entities for Business Partners
(transaction RMREBP).
See also:
Maintain Reference Entities [Page 42]
Create Reference Entities for Business

Partners [Page 41]
Settings for the Datafeed
Convert Credit Spread Customizing: Treasury and Risk Management In this activity, you define the conversion codes
Quotation Types (view Basic Functions Market Data Management Master for credit spread quotation types.
V_MDUDFCS) Data Datafeed Translation Table Define Datafeed
Conversion Codes Define the external names for the required
quotation types. Consult your datafeed provider
to establish which names (instrument properties)
are recognized by your external partner program.
Define Credit Spreads Customizing: Treasury and Risk Management In this activity, you define how to import credit
(view V_DFCU10) Basic Functions Market Data Management Master spreads using the external partner program of
Data Datafeed Translation Table your datafeed provider.

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Notation:
Reference entity: BP_DEUBA
Credit spread ID: 5_YEAR
Quotation type: 2 (bid)
Relevant datafeed notation:
Instrument name: DB5YEUAM=R
Data origin: DDS
Instrument property: BID
Prerequisites
You need to define the credit spread ID
You need to define the reference entities
The real-time price/rate provision

function requires that your external
partner program operates in real time.
Ask your datafeed provider regarding
whether your external partner program
meets this requirement and whether one
query from the system suffices for market
data to be provided regularly.
Activities

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1. Specify how you want to import your

interest rates using the external partner
program and consequently using
datafeed.
2. If you want to record an exchange rate

history in the system, you need to set the
"Store Market Data Permanently in R/3"
indicator.
3. Moreover, you can define whether the

prices are only supplied from the system
upon explicit request, or whether they are
supplied in real time using the external
partner program of your datafeed
provider.
To reduce effort considerably, first perform the

following activities:
1. Define Credit Spread IDs
2. Convert Codes for Credit Spread

Notation Types
3. Define Reference Entities
4. Import R/3 Master Data
In this way, most settings in this activity are filled

automatically and do not need to be filled

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manually.
Settings for the File Interface
Convert Codes for Customizing: Treasury and Risk Management In this activity, assign the quotation types used by
Quotation Types (view Basic Functions Market Data Management Master your data provider to the quotation types used in
V_MDUCS) Data File Interface Credit Spreads the sytem.
To each quotation type used in the SAP system,

assign the relevant external quotation type (=
name used by the data provider). Ensure that a
1:1 assignment is guaranteed for the quotation
types. The codes are not converted until you
enter an external quotation type for the quotation
type used in the system.
System notation:
1 (Middle)
2 (Bid)
3 (Ask)
Data provider notation:
MID
BID
ASK

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Applying Credit Spreads in the Calculation of Net Present Values

For credit spreads to be applied in the calculation of net present values, the system must create a suitable credit spread curve during the calculation of net
present values. To enable this, you first need to make the following settings:
Customizing/Function Path Comments
Define Credit Spread Curve Customizing: Treasury and In this Customizing activity, you define credit spread curve
Structures (transaction Risk Management Basic structures and use attributes that influence the selection of market
RMCSC) Functions Market Data data. Further, you assign credit spread IDs to define the term
Management Master Data structure of the curve.
In combination with a reference entity, a credit spread curve

structure describes a specific credit spread curve. For this reason,
credit spread curve structures can be assigned to reference
entities.
Create new credit spread curve structures.
1. Enter a four-digit ID for the credit spread curve structure.
2. Choose "Create".
When you create a new credit spread curve structure, you

can use the Copy function. Enter the ID of an existing
credit spread curve structure and choose Copy.
In the next screen that appears, enter the ID for the new
structure. The system creates the new structure with the
same settings. Enter the new structure ID and choose
"Change" to make the necessary changes to the new
structure.

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3. Enter a descriptive text for the credit spread curve

structure.
4. In the Market Data Properties area, specify the quotation

type and the maximum age. These attributes influence
which market data (credit spreads) is selected.
5. In the Credit Spread Curve Structure area, select the credit

spread IDs using the New Credit Spread IDs pushbutton,
which provides a list of available credit spread IDs.
Further, you can use the following functions for credit spread curve
structures:
Change or Display Credit Spread Curve Structures
1. Enter the ID for the credit spread curve structure.
2. Choose Edit or Display.
3. Make your changes and save your entries.
Check Credit Spread Curve Structures
1. Enter an ID for the credit spread curve structure.
2. Choose Goto.
3. The system checks the consistency of the credit spread

curve structures and the credit spread IDs assigned.
The system displays any inconsistencies found and

suggests how to resolve them. Before you use the credit
spread curve structures, you need to resolve any

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inconsistencies.
Delete Credit Spread Curve Structures
1. Enter the ID of the credit spread curve structure and

choose Delete.
2. The system deletes all table entries that depend on the

credit spread curve structure.
Transport Credit Spread Curve Structures
1. Enter the ID of the credit spread curve structure and

choose Transport.
2. The system transports the credit spread curve structure.

For reasons of consistency, the master data of the
assigned credit spread IDs is included in the transport.
Where-used list
1. Enter the ID for the credit spread curve structure.
2. Choose Where-Used List.
3. You obtain a list of all reference entities to which the

selected credit spread curve structure is assigned.
Determining Reference Entities
Assign Reference Entities to Area menu: Treasury and Risk For many business partners, there is no credit spread
Business Partners Management Market Risk market data available, which means that these business
(transaction Analyzer/Portfolio Analyzer/Accounting partners cannot be created directly as reference entities
RMBPRE_ASSIGN) Analyzer/Analyzer for Commodities in the system. It may nevertheless be necessary for
Evaluation Control Valuation Settings valuation purposes to apply the most suitable credit
spread curve as a substitute credit spread curve for
these business partners. Depending on the semantics

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involved, there are many different approaches for

finding a substitute curve (search by ratings, industries,
countries, similar companies, indexes, and so on).
The system cannot automatically assign these

alternative reference entities to the business partners,
which means that you have to use this function to
assign the relevant reference entity to the affected
business partners.
Define Reference Entity Customizing: In this Customizing activity, you define for all clients the
Derivation IDs (view cluster derivation IDs for reference entities. A reference entity
VC_FTBB_YC_REF_ENTITY_ Treasury and Risk Management Basic derivation ID controls how the system derives reference
DERI) Analyzer Settings Valuation entities representing the business partner or your own
company code that is involved in the financial
transactions/positions. Based on the credit spread curve
structures of these reference entities, the system
creates credit spread curves that are added to yield
curves at runtime to form composite curves. The ID is
relevant for yield curve types that are entered in the
evaluation type/valuation rule and are used, for
example, for discounting.
Notes:
Your reference entity derivation IDs must start

with the prefix 'X', 'Y', or 'Z' (customer
namespace).
For each reference entity derivation ID for

business partners and your own companies,
you have to create a BAdI implementation with
the reference entity derivation ID as the BAdI
filter value.
When the above preconditions have been met, the

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concrete credit spread curves added to yield curves for

evaluation purposes (such as discounting) are taken
from the reference entity according to the BAdI
implementation, using the reference entity derivation ID
as the filter value.
Activities
1. Choose "Derivation for Business Partners" or

"Derivation for Your Own Companies".
2. Choose New Entries.
3. Enter the four-digit reference entity derivation ID

and a short and a long text for the ID.
4. Enter all needed derivation IDs and save your

entries.
BAdI: Derive Reference Entity Customizing: This Business Add-In (BAdI) is used in Treasury and
for Your Own Companies Risk Management (FIN-FSCM-TRM) to derive reference
(BADI_FTBBYC_REF_ENTIT Treasury and Risk Management Basic entities for your own companies - and consequently
Y_OWN) Analyzer Settings Valuation Spread credit spread curves for your own companies - for
Curve Derivation evaluation purposes such as discounting. The BAdI filter
"Reference Entity Derivation ID for Your Own
Companies" is the only procedure for deriving credit
spread curves for your own companies (see also the
Customizing activity Define Reference Entity Derivation
IDs).
Either you use the BAdI implementation delivered by

SAP (see the standard implementation), or you can
create your own coding corresponding to the reference
entity derivation ID that you have created for your own
companies.

SAP Library
Prerequisites
You have defined reference entities (using the function

Maintain Reference Entities - transaction RMRE)
representing your own companies with the Use in Credit
Spread Curve indicator set and the credit spread curve
structures specified for bid/ask/middle.
Activities
For information about implementing BAdIs as part of the

enhancement concept, see SAP Library for SAP
NetWeaver under BAdIs Embedded in the
Enhancement Framework [External].
This BAdI uses the interface

IF_EX_FTBBYC_REF_ENT_DER_OWN. For more
information, display the interface in the class builder.
SAP delivers the standard BAdI implementation

BADII_REF_ENTITY_DERI_BP_001 corresponding to
the reference entity derivation ID for your own
companies, STD.
1. Security ID
2. Transaction/Position CoCode
3. Selection Type CoCode
BAdI: Derive Reference Customizing: This Business Add-In (BAdI) is used in Treasury and
Entities for Business Partners Risk Management ((FIN-FSCM-TRM) to derive

SAP Library
(BADI_FTBBYC_REF_ENTIT reference entities for business partners - and

Treasury and Risk Management Basic
Y_BP) consequently credit spread curves for business partners
Analyzer Settings Valuation Spread
- for evaluation purposes such as discounting. The BAdI
Curve Derivation
filter "Reference Entity Derivation ID for Business
Partners" is the only procedure for deriving credit
spread curves for business partners (see also the
Customizing activity Create Reference Entity Derivation
IDs).
Either you use the BAdI implementation delivered by

SAP (see the standard implementation), or you can
create your own coding corresponding to the reference
entity derivation ID that you have created for business
partners.
Prerequisites
You have defined reference entities (using the function

Maintain Reference Entities - transaction RMRE)
representing business partners with the Use in Credit
Spread Curve indicator set and the credit spread curve
structures specified for bid/ask/middle.
Activities
For information about implementing BAdIs as part of the

enhancement concept, see SAP Library for SAP
NetWeaver under BAdIs Embedded in the
Enhancement Framework [External].
This BAdI uses the interface

IF_EX_FTBBYC_REF_ENT_DER_BP. For more
information, display the interface in the class builder.

SAP Library
SAP delivers the standard BAdI implementation

BADII_REF_ENTITY_DERI_BP_001 corresponding to
the reference entity derivation ID for business partners,
STD.
1. Security ID
2. BP Hierarchy
3. Assignment Table
Define and Set Up Evaluation Customizing: In this Customizing activity, the settings for credit
Types (transaction CFMEVAL) spreads have been added to the Evaluation Control tab
Treasury and Risk Management Basic has been added in the evaluation type as well as in the
Analyzer Settings Valuation valuation rule.
In the Credit Spread Curve Derivation area, you make

the following settings to control how the reference
entities are determined:
Derivation ID for Business Partners
This derivation ID controls how the system

derives reference entities that represent the
business partners involved in the transaction or
in the position. Based on the credit spread
curve structures of these reference entities, the
system creates credit spread curves that are
added to yield curves at runtime to form
composite curves.
In the Customizing activity Create Derivation

IDs for Reference Entities, you can define your
own derivation IDs.

SAP Library
If you want to define rules for the derivation of

reference entities, you need to create an
implementation for BAdI: Referenzeinheiten für
Geschäftspartner ableiten using the derivation
ID as a filter value.
SAP delivers the standard derivation rule STD,

which the system deploys as follows:
In general, the system only considers reference

entities for which the Use in Curve indicator is
set. The following search steps are performed:
1. In the case of bond positions, the

system uses the securities ID number
to search for a reference entity. If the
search finds a reference entity, the
system applies it; otherwise, the system
continues the search using the
business partner.
2. The system searches for a reference

entity using business partners (OTC
counterparty or bond issuer) as follows:
3. If a business partner hierarchy type is

specified, the system determines the
company at the top of the hierarchy;
otherwise, the system uses the
business partner itself.
4. The system uses the business partner

determined in this way to search for a
reference entity. If the search returns a
reference entity, the system applies it.

SAP Library
5. If the system does not find a reference

entity that represents the business
partner, it searches for a replacement
reference entity (such as a reference
entity for a rating) that is assigned to
the partner in transaction
RMBPRE_ASSIGN.
BP Relationship Category
If you enter a relationship category here, the

system determines the reference entity for the
business partner with which the business
partner of the transaction is connected by
means of this relationship category.
You can use the relationship category, for

example, to valuate all companies in a group
using the credit spreads of the parent group. In
the business partner master data of the
subsidiary, you assign the parent group using
the relationship category Is Subsidiary Of and
you enter this relationship category in the
evaluation type. Consequently, the system
applies the reference entity of the parent group
for all subsidiaries.
Derivation ID for Your Own Companies
Enter the derivation ID to determine the

reference entity for your own companies.
Default Company Code
By entering a default company code, you can

influence how the system derives the reference

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entity for your own companies.
Dependencies
How this setting works depends on the

derivation ID selected for deriving the reference
entity for your own companies.
The implementation of the selected standard

derivation ID STD for deriving the reference
entity for your own companies considers the
default company code as follows:
1. The system searches for a reference

entity for the company code of the
transaction/position.
2. If it does not find a reference entity, it

looks for a reference entity for the
default company code.
If only one credit spread curve exists for your

company, irrespective of the company code,
you can define a reference entity for a specific
company code that you then specify as the
default company code in your evaluation
type/valuation rule.
Alternative Maximum Age Indicator
The maximum age of the market data is entered

in the definition of the credit spread curve

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structures.
If you set this indicator, you can define a new

age as the maximum age for evaluation
purposes.
Maximum Age

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6 Credit Spreads and Credit Spread Curve

Structures
You can either enter credit spreads manually or transfer them automatically from a market
data provider (using datafeed, the file interface, or an Excel upload).
Credit spread IDs need to be defined before you can perform the following activities:
Upload credit spread market data to the system (or enter it manually)
Define credit spread curve structures from credit spreads with different terms
In combination with the reference entity, a credit spread curve structure defines a
concrete credit spread curve that can be combined with yield curves in the Yield
Curve Framework. See also: Composite Curves [Page 46]
Prerequisites
To portray credit spreads, you need to create credit spread IDs in Customizing for
Treasury and Risk Management under Basic Functions Market Data
Management Master Data Credit Spread Curves Define Credit Spread IDs .
In a credit spread ID, you describe the credit spread. Choose "New Entries" and then,
in the Credit Spread Definition area on the screen that appears, enter the term using
the time units Day, Month, and Year, and enter a name.
In the Market Data Quotation area, fill the following fields:
o Payment Frequency
o Compounding Frequency
o Fixing Period
o Working Day Shift
o Calendar
o Interest Calculation Method
o Maturity at Month End
Credit Spread Value Structures
You can include credit spreads in the price calculator for the calculation of discount
factors. For this, you define credit spread curve structures in Customizing for
Treasury and Risk Management under Basic Functions Market Data
Management Master Data Credit Spread Curves Define Credit Spread Curve
Structures . On the basis of these credit spread curve structures, credit spread
curves are then created using a reference entity. Together with the yield curve and
any additionally created basis spread curves, the credit spread curves generate a
composite curve that is then applied in the calculations.
In the definition of the credit spread curve structures, no settings are made regarding
the interest rates derived from the curve because credit spread curves are not
created as independent curves; instead, they are only used in conjunction with the
creation of a composite curve.

SAP Library
By means of the assignment of a credit spread curve structure to reference entities, a

concrete curve is created for each of these reference entities (the reference entity is
also a key field in the market data table).
The maximum age and quotation type specified influence which market data is
selected.
You can assign the same credit spread curve structure to reference entities
for which there are credit spreads with the same terms and quotation
properties (such as payment frequency and days calculation method). This
reduces considerably the number of credit spread curve structures that need
to be created in the system. Furthermore, it reduces the effort required in
Customizing in cases when credit spread curves need to be used for an
additional business partner: Provided that a suitable credit spread curve
structure exists (regarding the terms and quotation properties of the credit
spreads), new settings do not need to be made in Customizing. You simply
need to create a new reference entity and assign the existing credit spread
curve structure to it.
Reference Entities
You create the required reference entities either in the area menu of Treasury and
Risk Management under Basic Functions Market Data Management Manual
Market Data Entry Credit Spread Curves Maintain Reference Entities
(transaction RMRE) or using the program Create Reference Entities for Business
Partners [Page 41] (transaction RMREBP), which is also found at the same location in
the area menu.
See also: Maintain Reference Entities [Page 42]
You manually enter the concrete values of the credit spreads for a specific date in the
area menu of Treasury and Risk Management under Basic Functions Market
Data Management Manual Market Data Entry Credit Spread Curves Enter
Credit Spreads . See also: Enter Credit Spread Values [Page 45]
Instead of entering the credit spread values manually, you can also upload credit
spread values in the same way as other market data, such as with datafeed
[External], the file interfaces [External], or by using a market data transfer from a
spreadsheet [External].
6.1 Create Reference Entities for Business

Partners
You use this program to create reference entities simultaneously for multiple business
partners.
Activities
Selection
1. Call the function by choosing Treasury and Risk Management Basic Functions
Market Data Management Manual Market Data Entry Credit Spread Curves
Create Reference Entities for Business Partners (transaction RMREBP).

SAP Library
2. Enter the business partners for which you want to create reference entities.
3. Choose the business partner roles for which you want to create reference entities.
The role Counterparty, Issuer, and House Bank are set by default.
If you do not enter a business partner and you do not change the business
partner role default settings, the system selects all existing business partners
that have these roles assigned to them.
4. Enter the prefix (maximum of 5 digits) for the reference entity ID of the new reference
entities. The default setting is BP_.
5. Overwrite Existing Entries indicator: Specify whether reference entities with the same
ID are overwritten. If you set this indicator, the system overwrites existing reference
entities.
6. Avoid Duplicates indicator: Specify whether duplicate reference entities for a business
partner are allowed. When you set this indicator and, in addition, you have not made
the setting allowing existing reference entities to be overwritten, the system does not
create a second reference entity with the same ID for a business partner, and existing
reference entities remain unchanged.
7. If you want to use the reference entities in the Yield Curve Framework, set the Use in
Credit Spread Curve indicator. Assign the credit spread curve structures to the credit
spread curves "Bid", "Ask", and "Middle".
8. Execute the function.
Result
The system creates a reference entity for each business partner selected.
The ID of the reference entities consists of the prefix and the business partner name.
If you have set the Use in Credit Spread Curve indicator, the credit spread curves for the new
reference entity are also defined.
You can use the function Maintain Reference Entities [Page 42] (transaction RMRE) to rework
the reference entities.
Example
If you execute the report with the default values for the selection parameters, the system
creates new reference entities for all business partners with the roles "Counterparty", "Issuer",
and "House Bank" in your system.
The reference entities are named BP_PARTNER, where PARTNER stands for the name of
the business partner. Existing entries are not overwritten, and duplicates are not allowed.
6.2 Maintain Reference Entities
The reference entity is the reference factor for a credit spread.

SAP Library
Examples of reference entities:
Business partners ("reference debtor")
Company codes (for the storage of credit spreads belonging to your

company)
Security ID numbers
Ratings
You need to define reference entities to enable you to do the following:
Enter credit spread values in the system
Use credit spread curves in the Yield Curve Framework
You can use this function to create and change reference entities. To create reference entities
automatically for your business partners, you can use the program Create Reference Entities
for Business Partners [Page 41].
For many business partners, there is no credit spread market data available, which
means that these business partners cannot be created directly as reference entities.
It may nevertheless be necessary for valuation purposes to apply the most suitable
credit spread curve as a substitute credit spread curve for these business partners.
For this, you can use the function Assign Reference Entities to Business Partners
[Page 44] (transaction RMREBP_ASSIGN).
Activities
1. Call the function in the area menu for Treasury and Risk Management by choosing
Basic Functions Market Data Management Manual Market Data Entry Credit
Spread Curves Edit Reference Entities (transaction RMRE) .
An overview of all previously defined reference entities appears. You can display or
change existing reference entities or create new reference entities.
2. Choose (Display -> Change) to switch from the display mode to the change mode.
In the change mode, you can make changes to existing reference entities or create a
new reference entity.
3. To create a new reference entity, choose New Entries.
1. In the Reference Entity field, enter an ID with a maximum of nine digits or a

short description for the reference entity as well as an additional description
in the "Name" field.
2. In the Definition area, under Standard Attributes for Spread Curve Definition,
specify the business partner, company code, or ID number to which the
reference entity relates.
For these standard attributes, the Yield Curve Framework can automatically
derive the appropriate reference entity.
If you want to portray other types of reference entity, you can select
combinations of the attributes in the Additional Attributes area. The following
attributes are available:

SAP Library
Rating Procedure
Rating
Industry System
Industry
Country
Currency
In this way, you can create more general credit spread market data, for
example, in cases when no specific credit spread market data is available for
one of your business partners. You then need to manually assign these
reference entities to a business partner. This is because an automatic
assignment by the system is not possible. See also: Assign Reference
Entities to Business Partners [Page 44]
3. In the Settings for Usage in Yield Curve Framework area, set the Use in
Curve indicator when you want the related credit spread curves to be used in
the composite curves of the Yield Curve Framework.
Further, you need to assign which credit spread curve structures are used for
the credit spread curves "Bid", "Ask", and "Middle".
Example
Reference Entity Business Partner Company Code Security ID Number
BP_AA AA
CC_1000 1000
SID_123456 DE123456
6.3 Assign Reference Entities to Business

Partners
For many business partners, there is no credit spread market data available, which means
that these business partners cannot be created directly as reference entities in the system. It
may nevertheless be necessary for valuation purposes to apply the most suitable credit
spread curve as a substitute credit spread curve for these business partners. Depending on
the semantics involved, there are many different approaches for finding a substitute curve
(search by ratings, industries, countries, similar companies, indexes, and so on).
The system cannot automatically assign these alternative reference entities to the business
partners, which means that you have to use this function to assign the relevant reference
entity to the affected business partners.
See also: Composite Curves [Page 46]

SAP Library
Activities
1. Call the function by choosing Treasury and Risk Management Market Risk
Analyzer / Portfolio Analyzer / Accounting Analyzer Evaluation Control Valuation
Settings Assign Reference Entities to Business Partners (transaction
RMBPRE_ASSIGN).
2. Choose (Display -> Change) to switch from the display mode to the change mode.
In the change mode, you can make changes to existing assignments or create new
assignments.
3. To create a new assignment, select the business partner and assign the relevant
reference entity to it.
Example
Business Partner Reference Entity
CC Rating_CC
DD_AG ITRX_EUR_NONFIN
6.4 Enter Credit Spread Values
You use this function to enter credit spread values manually in the market data tables.
A credit spread value always relates to a reference entity, a credit spread ID, a quotation type,
and a rate date.
Prerequisites
You need to have created credit spread IDs in Customizing for Treasury and Risk
Management under Basic Functions Market Data Management Master Data
Credit Spread Curves Define Credit Spread IDs .
You need to have created reference entities. You use the following functions to create
reference entities:
o Create Reference Entities for Business Partners [Page 41] (transaction

RMREBP)
o Maintain Reference Entities [Page 42] (transaction RMRE)
Activities
1. In the application menu, call the function by choosing Treasury and Risk
Management Basic Functions Market Data Management Manual Market Data
Entry Credit Spread Curves Enter Credit Spreads (transaction RMCSM).
2. Choose Display or Choose to call up the display/change mode for the market data
table for the credit spread values.

SAP Library
To restrict the number of credit spread values in the display, you can use the
Reference Entity, Credit Spread ID, Quotation Type, and Rate Date fields.
By choosing (Display <-> Change), you can switch between the display and
change modes. In the change mode, you can enter new credit spread values or
change existing ones.
3. Entering Credit Spread Values
Choose New Entries. Alternatively, select entries and copy the selected lines by
choosing (Copy).
4. Choose the reference entity, the credit spread ID, and the quotation type.
5. Enter the quotation date.
6. Enter the credit spread values in basis points, where one basis point corresponds to a
hundredth of a percentage point.
7. To enter an additional credit spread value, choose "New Input Line".
8. If you have entered a line incorrectly, select the line and choose "Delete". In the
change mode, you can change or delete existing credit spread values. To delete a
value, select the line and choose "Delete".
7 Composite Curves
Each composite curve consists of exactly one yield curve and any number of basis spread
curves. The properties of the yield curve determine the properties of the resulting composite
curve.
The Yield Curve Framework allows you to define a set of basis spread curves that are added
to the yield curve, both for forward yield curves and for yield curves that are assigned in the
evaluation type/valuation rule. Further, it is possible to derive a credit spread curve.

SAP Library
Step 1 (Bootstrapping) for All Curves Involved
Yield Curve: Spread Curve 1: Spread Curve N:

Continuously Continuously Continuously
Interest- Interest-Bearing
… Interest-Bearing
Bearing Zero Zero Rates Zero Rates
Rates
Intermediate Step: Add Up Continuously Interest-Bearing Zero Rates, Grid Points Inherited from Yield Curve
Composite
Curve:
Continuously Discount Factors of
Interest-Bearing the Composite Curve
Zero Rates
Step 2: Calculate Interest Rates Based on Properties of the Yield Curve (If Required)
Interest Rates of the Composite Curve

Corresponding to the Yield Curve Properties
or to the Settings of the Reference Interest
Rate for Forward Calculations (such as
Payment Frequency and Compounding
Frequency)
Creation of a Composite Curve
1. Deriving Basis Spread Curves
o Determining the Basis Spread Curve Type
First, the basis spread curve type is determined. This is either the basis
spread curve type (bid/ask) that was assigned in the relevant evaluation
type/valuation rule or, in the case of forward calculations, the basis spread
curve type that was assigned to the yield curve type of the relevant yield
curve for forward calculations.
o Determination of the Basis Spread Curve for Concrete Use
SAP delivers different BAdIs for the purposes of forward calculations

and evaluation processes. The BAdIs are used to select the basis
spread curve to be used concretely for the relevant basis spread
curve type.
The BAdIs belong to the enhancement spot

ES_FTBBYC_SPREAD_CURVES_DER. You find these BAdIs in
Customizing for Treasury and Risk Management under Basic
Analyzer Settings Valuation Spread Curve Derivation .
BAdI BADI_FTBBYC_SPREAD_CURVES_EVAL BAdI: Derive

Basis Spread Curves for Evaluation Purposes
BAdI BADI_FTBBYC_SPREAD_CURVES_FORW BAdI: Derive

Basis Spread Curves for Forward Calculations
SAP delivers standard implementations (such as

BADII_BSPRD_DER_FWD_001 for determining basis spread curve(s)
for forward calculations for BAdI
BADI_FTBBYC_SPREAD_CURVES_FORW) and implementation
example classes that they can use.

SAP Library
For example, for the determination of the basis spread curve(s) for
evaluation purposes, SAP delivers two implementation example
classes for the BAdI BADI_FTBBYC_SPREAD_CURVES_EVAL BAdI:
Derive Basis Spread Curves for Evaluation Purposes. Now you need
to create your own implementations, which you can base on the
implementation example classes:
CL_FTBBYC_EX_BSPRD_DER_EVAL001 Example:
Derivation of Currency Spreads for Discounting
CL_FTBBYC_EX_BSPRD_DER_EVAL002 Example: Currency

Combination of Risk-Free Discounting Currencies
In Customizing for Treasury and Risk Management under Basic

Analyzer Settings Valuation Define Evaluation Type , you assign
for each evaluation type/valuation rule on the Evaluation Control tab
in the Basis Spread Curve Derivation area a four-character ID for
each of the cases Forward Calculation (Spread Derivation ID
(Forward) field) and Evaluation Purposes (Spread Derivation ID
(Eval) field). You use this four-character ID as a filter value in the
BAdI implementations.
Example
The delivered implementation BADII_BSPRD_DER_FWD_001 uses

the filter value TENO. To use this implementation, you need to enter
the value TENO in the relevant evaluation type/valuation rule in the
Spread Derivation ID (Forward) field on the Evaluation Control tab in
the Basis Spread Curve Derivation area.
If the tenor of a yield curve differs from the term of the reference
interest rate, the implementation TENO looks for a matching tenor
spread curve. In this way, you can, for example, assign a swap curve
versus 6–Month EURIBOR as a forward curve for all EUR reference
interest rates like the 3–Month EURIBOR. Spread curve derivation
then looks for a matching spread curve to build the three-month
forward curve from the six-month yield curve and from the three-
month/six-month tenor spread curve.
2. Deriving Credit Spread Curves
For outgoing payments, the credit spread curve for your own company is used,
whereas, for incoming payments, the credit spread curve of your business partner is
used. Credit spread curves are derived using the reference entities. The system only
considers reference entities for which the Use in Curves indicator has been set.
Determining Reference Entities
The system determines the reference entity for your own companies separately from
that for business partners. In both cases, there is a standard derivation logic that you
can replace using your own implementations of the BAdIs BAdI: Derive Reference
Entity for Your Own Companies sowie BAdI: Derive Reference Entity for Business
Partners. For this, the system first determines the derivation IDs that are assigned in
the relevant evaluation type/valuation rule for derivation of the reference entities.
o Standard Derivation for OTC Transactions
Reference Entities for Your Own Company
The standard implementation first searches for a reference entity for

the company code of the transaction. If a reference entity is found for

SAP Library
that company code, the system searches for a reference entity for
the company code entered in the evaluation type/valuation rule.
Reference Entity for Your Business Partner (in the Counterparty role)
The standard implementation first checks the settings that you have
made in the evaluation type/valuation rule on the Evaluation Control
tab in the Credit Spread Curve Derivation area.
If you have not made an entry in the Business Partner

Relationship Category field, the system searches for a
reference entity for the business partner of the transaction.
If you have specified a relationship category in the Business

Partner Relationship Category field, the system first
determines which business partner is connected to business
parter by means of this relationship category, and it then
searches for the reference entity for that connected business
partner. You can use the relationship category, for example,
to valuate a business partner using the credit spread of the
parent group. In this case, you would choose, in the
evaluation type/valuation rule, the relationship category that
is assigned to a subsidiary.
If the business partner stored in the business partner master

data is not connected to another business partner by means
of this relationship category, the system determines the
reference entity for the business partner of the transaction.
If the system does not find any reference entities for the business
partners determined in this way, it searches in the assignment table
Geschäftspartner zu Referenzeinheiten zuordnen (transaction
RMBPRE_ASSIGN) for reference entity that is assigned to the
business partner.
Reference Entity Derivation (OTC Fin. Transaction)
Determine Check Fin.

Eval.Type Transaction
Determine Company
Determine BP Relation- Code
ship Cat. in Eval. Type Determine Bus. Partner
(Counterparty Role)
Determine Reference Entity
No Relationship Category Found

Reference Entity Found
Relationship Category Found
No Reference Entity
Determine Related Found
BP
Determine Comp. Code of
Evaluation Type
Determine Reference Determine Reference Entity

Entity

No Reference Entity Found
Read Reference Entity from

Assignment Table

o

SAP Library
o Standard Derivation for Securities Positions
The system first searches for a reference entity for the securities ID number.
If there is no reference entity for the ID number, the system searches for the
reference entity of the issuer. The business partner is used for asset
positions, and the company code is used for liabilities positions. The
remaining steps of the procedure are the same as those for OTC
transactions.
Derivation of the Reference Entity (Class Position)
Read Class Position in

Securities Account
Determine Securites ID Number

No Reference Entity
Found
Liability Position Determine Company
Determine Issuer
Code
Asset Position
Determine BP Relationship
Determine BP (Issuer Role) Cat. in Eval. Type
Reference Entity
No Relationship Category Found
Found
Relationship Category Found
Determine Company Code of
Determine Related BP Evaluation Type


Read Reference Entity from Reference Entity Found

Assignment Table
Determining the Credit Spread Curve
The credit spread curve results from the credit spread curve structure assigned to the
reference entity determined and from the designation "Bid" versus "Ask".
3. Creation of a Composite Curve
First, the yield curve, the basis spread curves, and the credit spread curves are built.
As a result, the relevant zero rates are available. See also: Creation of Yield Curves
[Page 10], Basis Spreads and Basis Spread Curves [Page 19], and Credit Spreads
and Credit Spread Curve Structures [Page 39]
Now the composite curve is constructed by adding the zero rates to the grid points of
the ‘leading’ yield curve. The grid points of the yield curve are copied to the
composite curve. If necessary, interpolation or extrapolation is used to calculate the
zero rates of the basis spread curves and the credit spread curves.
o Interpolation
Based on the composite curve, interpolation is performed in the same way as

the procedure for yield curves. See also: Interpolation [Page 15]
o Extrapolation
Based on the composite curve, extrapolation is performed in the same way

as the procedure for yield curves. See also: Extrapolation [Page 16]

SAP Library
o Calculation of Interest Rates from the Composite Curve
Based on the composite curve, interest rates are calculated in the same way
as the procedure for yield curves. See also: Calculate Interest Rates from the
Yield Curve Generated [Page 18]

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Yield Curve Framework ......................................................................................................... 5

Yield Curve Framework 7104 4

Yield Curve Framework

TRM, Yield Curve Framework (Reversible) [External]

TRM, Credit Spreads (Reversible) [External]

Reference Interest Rates [Page 8]

Yield Curves [Page 9]

o Yield Curve Type [Page 9]

o Creation of Yield Curves [Page 10]

Interpolation [Page 15]

Extrapolation [Page 16]

Basis Spreads and Basis Spread Curves [Page 19]

o Manual Entry of Basis Spread Values [Page 21]

Customizing for Credit Spreads [Page 22]

Credit Spreads and Credit Spread Curve Structures [Page 39]

o Create Reference Entities for Business Partners [Page 41]

o Maintain Reference Entities [Page 42]

o Assign Reference Entities to Business Partners [Page 44]

o Enter Credit Spread Values [Page 45]

Composite Curves [Page 46]

1 Key Terms in the Yield Curve Framework

Yield Curve Framework 7104 5

Reference See also: Reference Interest Rate [External]

Compounding The compounding frequency determines how often interest is calculated.

Payment The time interval between interest payments.

Interest This method is a procedure for counting days in interest calculation. It is

A yield curve type covers a market segment such as the swap

A yield curve is used to determine the opportunity interest rate

Three-Month EURIBOR Versus Three-Month USD Libor, Five-

The spread is the premium or discount on the EUR side.

Three-Month EURIBOR Versus Six-Month EURIBOR, Three-Year

Yield Curve Framework 7104 6

The spread is the premium or discount on the three-month side.

A pair of tenors (like 3 months versus 6 months) for a given

A pair of currencies for a given tenor defines a cross-currency

Their currency needs to match the currency of the basis spread

Their time to maturity must be equal to the tenor of the basis

Credit Spread Key with which a credit spread is defined.

Examples of reference entities:

Business partners ("reference debtor")

Company codes (for the storage of credit spreads belonging to

Yield Curve Framework 7104 7

2 Reference Interest Rates

Currency: Currency in which the underlying interest rate instrument is expressed.

Yield Curve Framework 7104 8

Yield curves are used to calculate net present values.

Creation of Yield Curves [Page 10]

o Interpolation [Page 15]

o Extrapolation [Page 16]

3.1 Yield Curve Type

Yield Curve Framework 7104 9

Quotation Type (for information purposes only)

Basis Spread Curve Type

This setting is relevant if a curve is used for forward calculations.

3.2 Creation of Yield Curves