I was wondering how to manage the following scenario (corner case):
Say we have a FixedRate Bond v0 and the holidayCalendar associated to it says that today and tomorrow are working days.
Then, the lifecycler evolves the bond today, resulting in a new bond v1 and Effects. Suddenly something unexpected and extraordinary happens and today and tomorrow are declared as public holidays, so the calendarDataProvider updates the holidayCalendar. I understand that the Effects generated are no longer valid.
Any ideas about how to deal with this scenario?
Or maybe the scenario does not make any sense?
What I’d expect to happen in this case:
- Assumption is that no settlement of claimed effects has happened yet (it shouldn’t be possible, as the “disruption” event is preventing it)
- The issuer archives the effect
- The issuer archives any settlement batches and instructions from anyone that has already claimed the effect
- The issuer archives v1 of the bond
- The issuer lifecycles the v0 bond again the day after tomorrow, which - as the new holiday calendar is taken into account - would be the new coupon payment date (with a potentially different coupon amount due to day count fraction being different). A new effect is generated which then allows claiming as usual
So essentially, we remove the previous, invalid v0 → v1 upgrade route, and replace it with a new one.
If you’re in the situation where some investors have already gone through settlement of the “wrong” effect somehow, the situation is a bit tricker, as you’d likely have to book correction payments. For all other investors the flow above could still apply. Both paths have brought investors from v0 → v1, but with different payments, so some will need “manual” corrections.
Thanks @georg for the detailed explanation.
I’m not sure if I understand the assumption. Why the “disruption” event prevent the settlement?
Maybe because, for example, the issuer won’t allocate/approve the instructions due to the event?
Yes, we assume here that some party critical for settlement is unavailable (eg. node of the settler is offline) and therefore settlement cannot happen. Therefore, the market authority declares a disruption event (such that missed payments are not considered a credit event).