U.S. patent application number 10/673125 was filed with the patent office on 2004-04-15 for data processing system and method for administering financial instruments.
Invention is credited to Fox, John Vincent, Karsenty, Myriam Joelle, Tull, Robert Stanley JR., Weisberger, David M..
Application Number | 20040073506 10/673125 |
Document ID | / |
Family ID | 22838008 |
Filed Date | 2004-04-15 |
United States Patent
Application |
20040073506 |
Kind Code |
A1 |
Tull, Robert Stanley JR. ;
et al. |
April 15, 2004 |
Data processing system and method for administering financial
instruments
Abstract
A data processing system and method is disclosed for
implementing and control of a financial instrument which is issued
for a limited period of time. The instrument is based on an
underlying basket of stocks optimally selected to track an
established capital market and its price also reflects accrued
investment income and maintenance expenses. The data processing
system receives input from the capital market and periodically
evaluates the performance of the financial instrument, reporting
its price to customers. Also disclosed is a data processing system
for administering an investment group of such instruments designed
to track the performance of several domestic and foreign markets,
estimate their return and provide current price information to
customers.
Inventors: |
Tull, Robert Stanley JR.;
(Levittown, PA) ; Weisberger, David M.; (London,
GB) ; Fox, John Vincent; (Esher, GB) ;
Karsenty, Myriam Joelle; (New York, NY) |
Correspondence
Address: |
JONES DAY
222 EAST 41ST STREET
NEW YORK
NY
10017
US
|
Family ID: |
22838008 |
Appl. No.: |
10/673125 |
Filed: |
September 26, 2003 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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10673125 |
Sep 26, 2003 |
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09617646 |
Jul 17, 2000 |
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09617646 |
Jul 17, 2000 |
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09313155 |
May 17, 1999 |
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6092056 |
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09313155 |
May 17, 1999 |
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09071437 |
May 1, 1998 |
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5946667 |
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09071437 |
May 1, 1998 |
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08223797 |
Apr 6, 1994 |
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Current U.S.
Class: |
705/36R |
Current CPC
Class: |
G06Q 40/06 20130101;
G06Q 40/04 20130101; G06Q 40/00 20130101 |
Class at
Publication: |
705/036 |
International
Class: |
G06F 017/60 |
Claims
What is claimed is:
1. A method for selecting entries in a basket of securities
designed to conform to a performance index of a capital market over
a predetermined period of time, comprising the steps of: sorting
securities of the capital market in accordance with a market
valuation at a given initial time; providing a measure of
volatility associated with each of the sorted securities of the
given time; computing an average volatility measure associated with
a select group of securities; comparing the average volatility
measure of the select group of securities to a predetermined
constant, wherein said constant is about 1; based on the
comparison, modifying the composition of the select group of
securities and repeating the steps of computing and comparing until
a basket of securities is selected for which the average volatility
measure substantially matches the predetermined constant; computing
a price measure associated with the basket of securities;
monitoring the price measure associated with the basket of
securities over the predetermined period of time from the given
initial time; and periodically adjusting the composition of the
basket of securities based on a comparison of the monitored price
measure associated with the basket of securities and the
performance index of the capital market.
2. The method of claim 1, wherein the step of computing a price
measure comprises: for each security in the basket of securities
computing the current ask price, bid price and trade price based
upon market information and stored data associated with financial
characteristics of the security; and determining the current
aggregate ask prices, bid prices and trade prices for the basket of
securities.
3. The method of claim 2 further comprising the step of adjusting
the current aggregate ask prices, bid prices and trade prices for
the basket of securities to include income accrued from the basket
of securities and management and trade settlement expenses
associated with the basket of securities.
4. The system of claim 1 wherein the predetermined period of time
is longer than one year.
5. The method of claim 1, wherein the average volatility measure is
a beta factor.
6. The method of claim 1, wherein prior to the step of computing an
average volatility measure the method further comprises the steps
of: designating a set of constraints on the current financial
reports on securities in the capital market; designating a level of
certainty regarding future events; designating predicted future
values of economic variables; and executing a mathematical
programming optimization function using the designated set of
constraints on the current financial reports on the securities,
level of certainty regarding future events and predicted future
values of economic variables.
7. A computer-based system for selecting entries in a basket of
securities designed to conform to a performance index of a capital
market over a predetermined period of time, comprising: a computer
software program executable to sort securities of the capital
market in accordance with a market valuation at a given initial
time; a computer software program executable to compute an average
volatility measure associated with a select group of securities
based on input data indicative of a measure of volatility
associated with each of the sorted securities; a comparator
comparing the average volatility measure of the select group of
securities to a predetermined constant, wherein said constant is
about 1; a computer software program executable to modify the
composition of the select group of securities until a basket of
securities is selected for which the average volatility measure
substantially matches the predetermined constant; a computer
software program computing a price measure associated with the
basket of securities; and a computer software program executable to
adjust the composition of the basket of securities based on a
comparison of the price measure associated with the basket of
securities and the performance index of the capital market.
8. The system of claim 7 further comprising a computer software
program executable to evaluate an expected investment return for
the selected basket of securities in the basket of shares over the
predetermined period of time.
9. The system of claim 7 further comprising a computer software
program executable to record the investment performance of the
basket of securities over time.
10. The system of claim 7, wherein input is received from a global
communication network for reporting the trade transactions of each
of said one or more selected securities.
11. The system of claim 7, wherein further comprises memory for
storing a record of the last N transactions of each of said one or
more selected securities in the basket of securities.
12. The system of claim 7 further comprising a computer software
program generating a report containing information about the price
measure associated with the basket of securities and the
performance index of the capital market.
13. A method for selecting entries in a basket of equity securities
designed to conform to a performance index of a capital market over
a predetermined period of time, comprising the steps of: sorting
equity securities of the capital market in accordance with a market
valuation at a given initial time; providing a measure of
volatility associated with each of the sorted equity securities of
the given time; computing an average volatility measure associated
with a select group of equity securities; comparing the average
volatility measure of the select group of equity securities to a
predetermined constant, wherein said constant is about 1; based on
the comparison, modifying the composition of the select group of
equity securities and repeating the steps of computing and
comparing until a basket of equity securities is selected for which
the average volatility measure substantially matches the
predetermined constant; computing a price measure associated with
the basket of equity securities over the predetermined period of
time from the given initial time; and periodically adjusting the
composition of the basket of equity securities based on a
comparison of the monitored price measure associated with the
basket of equity securities and the performance index of the
capital market.
14. A computer based system for selecting entries in a basket of
equity securities designed to conform to a performance index of a
capital market over a predetermined period of time, comprising: a
computer software program executable to sort equity securities of
the capital market in accordance with a market valuation at a given
initial time; a computer software program executable to compute an
average volatility measure associated with a select group of equity
securities based on input data indicative of a measure of
volatility associated with each of the sorted equity securities; a
comparator comparing the average volatility measure of the select
group of equity securities to a predetermined constant, wherein
said constant is about 1; a computer software program executable to
modify the composition of the select group of equity securities
until a basket of equity securities is selected for which the
average volatility measure substantially matches the predetermined
constant; a computer software program computing a price measure
associated with the basket of equity securities; and a computer
software program executable to adjust the composition of the basket
of equity securities based on a comparison of the price measure
associated with the basket of equity securities and the performance
index of the capital market.
Description
[0001] This is a continuation of application Ser. No. 09/313,155
filed on May 17, 1999, which is a continuation of application Ser.
No. 09/071,437, filed on May 1, 1998, now U.S. Pat. No. 5,946,667,
which is a continuation of application Ser. No. 08/223,797, filed
Apr. 6, 1994, abandoned.
FIELD OF THE INVENTION
[0002] The present invention relates to a data processing system
and method for managing financial debt instruments designed for
investors whose objective is to track the performance of certain
security markets within a limited period of time. More
particularly, the invention relates to an integrated financial
management system for implementing investor participation in
domestic and foreign capital markets through positions in indexed
vehicles which are packaged as debt instruments.
BACKGROUND OF THE INVENTION
[0003] The capital markets of the world have undergone
unprecedented transformations during the last decade in response to
changing economic, political and financial conditions which have
led to closer contacts between the economies of different countries
and thus to a largely internationalized capital marketplace. As a
result of this global investment environment, traditional
investment devices such as stocks and bonds have been supplemented
with more versatile investment vehicles. The advent of computerized
trading and other forms of advanced information processing has
created a new family of investment products, such as commodity
options; international capital, real estate, and currency funds;
"unmanaged" index funds; financial futures contracts, and other
so-called derivative instruments.
[0004] In spite of these alternatives, certain investment
strategies remain prohibitively expensive to pursue for a number of
investors. In particular, many investors employ a technique known
as market timing, which involves investing in the equity markets at
the perceived time of market growth and divesting at a later time
of perceived market contraction. This strategy is usually based on
timing the business cycles for the economy as a whole which tends
to avoid the risk associated with owning individual stocks. Due to
the fact that economic cycles of different countries frequently run
in opposite directions, it would be especially beneficial for
market timers to participate in a particular capital market for a
limited time and to be able to redistribute investments to other
markets at appropriate times in the perceived cycles. Despite the
globalization of the economic and political ties between different
countries, however, there are numerous problems associated with a
foreign market trade, so that only a few investment vehicles exist
which would allow the investors to participate in the global
financial markets at a reasonable cost.
[0005] Another investment approach is to seek undervalued stocks.
The goal is to counteract the business cycles so that the selected
individual stocks, perceived to be undervalued, have an opportunity
to appreciate. Such investment approach involves hedging one
investment in a perceivably undervalued stock with a countering
investment to limit the impact of the business cycle on this stock.
Clearly, the investment hedging strategy is best applied on a
global scale, which allows the investors to limit their risks. As
discussed above, however, such approach is presently not available
to most inventors due to the difficulties associated with trading
on foreign markets.
[0006] Among the various investment options, significant popularity
in last years have achieved the mutual funds which offer a variety
of investment options tailored to specific customer needs.
Different funds are designed to invest in particular types of
stocks, in specific industry sectors, or track the performance of
broader market indicators. Some funds offer income which is free of
federal, state or local taxes, dependent on the residence of the
investors. Mutual funds are particularly attractive because they
provide the investors with the opportunity to participate in the
capital markets for a relatively low fee compared to a direct
investment in stocks. These investors' fees are in part used to
finance research directed to selecting a specific investment
portfolio for each fund.
[0007] Recently, professionally managed mutual funds have come
under criticism due to the fact that a large number of such funds
were outperformed by general equity market indicators, such as the
S&P 500 index. The S&P (Standard & Poor's) 500 index is
a relative valuation of the stocks of 500 large companies,
indicative of the performance of the U.S. equity markets. To some
degree, the performance of such funds is determined by the total
investments in the fund. Some small funds are capable of focusing
on a particular investment strategy which may lead to superior
performance over a limited period of time.
[0008] As the investment return of such finds rises, however, more
investors are attracted to the fund, leading to a less flexible
investment structure and frequently to a worsened performance. For
this reason, many funds are being closed to new investors after
they reach certain level of assets.
[0009] The unsatisfactory performance of many managed funds has
created substantial interest in unmanaged investment products that
track the overall performance of the equity markets. Such products
include indexed stock funds that invest in the stocks of the
S&P 500 companies and, therefore, directly track the
performance of the S&P 500 index, unencumbered by asset
research fees and transaction costs. Other investment vehicles have
been offered to track the performance of select foreign
markets.
[0010] Several investment products have been proposed in the past
in this respect. One approach is represented by the Toronto Index
Participation Units ("TIPS"). TIPS is an open end unit trust
structure which was designed to follow the Toronto 35 Index.
[0011] Another relatively recent approach is offered by the
Standard & Poor's Depositary Receipts.TM. ("SPDRs"). The SPDRs
are financial instruments devised to package equity into a single
listed security. They represent ownership in a SPDR Trust, a unit
investment trust which holds a portfolio of common stocks that
tracks the price performance and dividend yield of the S&P 500
Index. SPDRs are like open end unit trust that is rebalanced daily
to the S&P 500 Index and may trade at a premium or discount to
the S&P 500 futures. SPDRs may be held like a stock for a long
time and entitle the holder to quarterly cash distributions
corresponding to the dividends that accrue to the S&P stocks in
the underlying portfolio, less expenses. While the SPDRs provides
desirable diversification and convenience, they are only offered in
one capital market.
[0012] The above-described investment products do not provide the
desired diversity and level of service. Notably missing are
investment products which track the performance of one or more
foreign markets. At least in part, the reason for this lack of
financial products is that no financial management system has been
able to combine resources such as computer data processing systems,
economic forecasts, market models and a global communication
network to enable the creation of such products and provide real
time analysis and reports on the performance of the financial
product. Furthermore, no financial product on the market has been
packaged as a debt instrument which in many jurisdictions provides
appreciable tax and other advantages to the investors.
[0013] It is therefore felt that there is a need to provide an
integrated financial management system for implementing investor
participation in domestic and foreign capital markets through
positions in indexed vehicles which are packaged as debt
instruments. The financial management system is to offer a full
range of services including administering, monitoring and reporting
on the return of the financial instrument, providing investors with
cost effective and versatile options to participate in different
capital markets.
SUMMARY OF THE PRESENT INVENTION
[0014] It is an object of the present invention to provide a
financial management system to develop and administer a financial
debt instrument traded as a listed security to investors desiring
to track the performance of a domestic or foreign capital
market.
[0015] Another object of the present invention is to provide a
system and method for optimized selection of shares the performance
of which is designed to track the performance of the related equity
index over a limited period of time.
[0016] It is another object of the present invention to provide a
data processing system for administering information on each share
of a selected basket of shares which is representative of a capital
market.
[0017] It is a further object of the present invention to provide
data processing means for determining a price for a basket of
shares which is packaged as a debt instrument so as to reflect the
current aggregate value of the shares and accrued income and
expenses associated with all shares in the basket.
[0018] Yet another object of the present invention is to provide a
data processing system and method to rebalance a basket of shares
which is representative of a capital market and is designed to
track its performance if the tracking error associated with an
index value of the capital market exceeds certain threshold.
[0019] It is yet another object of the present invention to provide
a computer system for maintaining financial debt instruments that
represent positions in one or more capital markets and which
generates reports on the return of each financial debt instrument
to the investors.
[0020] These and other objects of the present invention are
realized in a specific embodiment of a financial management system
incorporating means for implementing, coordinating, supervising,
analyzing and reporting upon financial debt instruments designed to
track the performance of established capital markets. The financial
debt instrument of the present invention comprises a basket of
stock shares the return performance of which is representative of a
capital market over a predetermined limited period of time. The
debt instrument is sold as an Optimal Portfolio Listed Security
("OPALS") which may provide in many jurisdictions tax and other
advantages to the investors. The data processing system of the
management system of the present invention provides continuous
monitoring of the price of the OPALS and reports this price to
customers over a communication network.
[0021] The basket of shares underlying the debt instrument of the
present invention is selected through a mathematical programming
function which uses input to forecast of economic and financial
variables, risk allocation factors and data about individual stocks
in the market. The programming function then suggests a basket of
stock shares which are optimally selected to track the investment
return of the capital market over a predetermined period of time.
Thus, the present invention provides investors with a convenient,
cost-effective and mathematically rigorous means of reducing the
level of uncertainty about their investment return.
[0022] In the preferred embodiment, the financial management system
of the present invention packages the optimally selected baskets of
shares as debt instruments which are traded as OPALS. The debt
instruments are issued in different series which track the
performance of domestic or foreign capital markets over different
predetermined periods of time. Each OPALS is secured by the shares,
or an Equity Linked Obligation ("ELO"), secured by the underlying
basket of stock shares which are purchased and held by the
financial management system. Upon maturity, the OPALS is redeemable
to the investors, or may be rolled over into a new debt instrument,
designed to track the same or a different capital market. The
period of time for which such OPALS are issued is between about one
and ten years, preferably between one and five years, and may vary
with the selected capital market or the prevailing economic
conditions.
[0023] During the life period of an OPALS the data processing
system of the present invention provides continuous monitoring of
the trade transactions of the stocks represented in the underlying
basket of shares. The system combines current trade information
with historical data representing financial characteristics of each
stock in the basket to generate the current price of each stock at
any time. The data processing system uses the financial
characteristics, such as the value of the historical, default or
minimum spread between ask and bid prices of the stock and its last
N trade transaction, to estimate information about trade
transactions which have not closed and thus provide an accurate
estimate of the price of the stock.
[0024] Based on the information on each stock, the data processing
system computes the current aggregate value of the basket of
shares. This aggregate value is further modified to reflect
clearing, custody and other management costs and income accrued
from the basket of shares to generate a composite price for the
debt instrument which is the listed price at which the OPALS are
traded. Because the OPALS are traded as single securities,
investors gain exposure to an entire market by making one payment
only. Furthermore, the OPALS securities receive book-entry
settlement so that an investor willing to sell the security can
send one set of instructions to an operator of the financial
management system. The OPALS will settle in about five business
days after the trade date, regardless of the local market
settlement cycle. This is made possible by the pricing model used
in administering the OPALS which model is implemented by the data
processing system of the present invention.
[0025] During the life of the security, the pricing of each OPALS
is monitored and analyzed. Based on the analysis, if necessary, an
OPALS is then rebalanced to account for differences between the
performance of the constituent shares and that of the associated
capital market index. The cost of rebalancing is automatically
included in the price of the security by the data processing
system.
[0026] Another aspect of the present invention is that the data
processing system, which monitors the performance of the basket of
shares underlying an OPALS also provides the capability to generate
reports to the investors on the price of the security, on the
present and expected return of the investment and other
information. Such reports, which may have different levels of
details are expressed in both U.S. dollars and the local market
currency and are valuable to investors who follow the market cycle
and wish to optimize their investment strategy.
[0027] From the standpoint of the investors, the OPALS financial
debt instrument provided by the financial management system of the
present invention is superior to other investment vehicles in that:
(1) It provides the capability to implement several global
portfolio decisions using a single investment; (2) it provides
access to international equity markets on a country by country
basis, avoiding problems associated with investor asset
restrictions or the inconvenience of trading individual stocks; (3)
it is a cost-effective investment with low administration costs for
trading and processing shares underlying the debt instrument.
[0028] The structure and complexity of the system of the present
invention suggests that it would be best implemented on a real time
computer system. As described in its preferred embodiment below,
the management system and its data processing part provides a real
time update of all the components which comprise the OPALS, and
supervises, analyses and periodically reports on the investment
activities associated with the financial debt instrument.
BRIEF DESCRIPTION OF THE DRAWINGS
[0029] The foregoing features of the present invention may be more
fully understood from the following detailed disclosure of a
specific preferred embodiment in conjunction with the accompanying
drawings, in which:
[0030] FIG. 1 illustrates in a block diagram form the financial
management structure of the present invention and its connections
to the capital markets and investors.
[0031] FIG. 2 illustrates in a block diagram form the connections
between the data processing system and other components of the
financial management structure.
[0032] FIG. 3 shows in more detail the structure of the data
processing system.
[0033] FIG. 4 is a flow chart of the computation of the current ask
price for each stock in the basket.
[0034] FIG. 5 is a flow chart of the computation of the current bid
price for each stock in the basket.
[0035] FIG. 6 is a flow chart of the computation of the current
trade price for each stock in the basket.
[0036] FIG. 7 illustrates the information for a basket of shares
which is reported to the system operators.
DETAILED DESCRIPTION OF THE PREFERRED EMBODIMENTS
[0037] Discussing briefly in overview the financial management
structure of the present invention, its fundamental objective is to
facilitate the access of investors to world capital markets by
providing and administering a new financial debt instrument that
increases the ease and diminishes the cost of investing.
[0038] The financial management structure of the present invention
is operated according to the data processing methods and systems
disclosed next. FIG. 1 illustrates in a block diagram form the
financial management structure 8 of the present invention which
links capital markets 1 and the investors 5, who wish to
participate in one or more of these markets. Capital markets 1 may
represent the stock market of different countries or an index
associated with the performance of such markets. In a preferred
embodiment of the present invention financial management structure
8 comprises a modeling system 3, financial debt instruments 10
traded to investors as single securities and a data processing
system 20 designed to administer the transactions associated with
debt instruments 10.
[0039] Modeling system 3 selects an optimized basket of shares
which is representative of a particular capital market. This
selection is done using a programming function which receives and
stores data about each stock in the capital market, correlates the
available data with economic forecast models to suggest an optimal
basket of stock shares which can model the performance of the
overall market, and predicts the future correlation of the selected
stocks in the basket with the index of the market to ensure that
they will track the market index closely.
[0040] Based on the information from the modeling system 3,
financial management structure 8 creates one or more financial debt
instruments 10 which are designed to be traded as Optimized
Portfolio Listed Securities ("OPALS"). Each OPALS 10 is packaged as
a financial debt instrument which is characterized in that it can
be traded as a single security and, for a limited period of time
which is typically between one and five years, tracks a market
index associated with the capital market. During their existence
term, OPALS 10 generate income to their holders based on the
performance of the underlying shares in accordance with a
prespecified payment schedule. Such income is comprised of
dividends on the shares in the basket of shares underlying each
OPALS 10, proceeds from the sale of rights accruing to such shares,
and income received from lending such shares. Upon maturity of the
OPALS 10, its holder (a participating investor 5) is entitled to
receive the entire basket of shares underlying the OPALS.
[0041] The OPALS financial instrument 10 operates with respect to
investors 5 as an open market fund which can be traded by brokers
either at the value of the underlying shares or above or below this
value dependent on the current market situation or other factors.
OPALS 10 are issued in series which track the performance of one or
more capital markets over different predetermined periods of time.
An important features of OPALS 10 of the present invention is that
each of them is packaged as a debt instrument so that income
received on the shares that support the OPALS may be passed to the
investors in a tax neutral manner in most jurisdictions. Notably,
OPALS 10 are structured so that where permitted they may be traded
in a local currency which feature may create additional benefits to
the investors.
[0042] During the existence term of an OPALS 10, financial
management structure 8 fully administers the debt instrument using
data processing system 20. Data processing system continuously
monitors the price of the underlying basket of shares using input
from a global communications network 9 connected to the capital
market place. Based on this information, data processing system 20
computes the aggregate value of the entire underlying basket of
shares and the current price of the OPALS 10 by further including
the accrued income and the appropriate maintenance expenses.
[0043] Data processing system 20 additionally reports over
communications network 7 to the investors 5 the prices of all
issued OPALS which can be traded on request. Furthermore, system 20
provides the capability of trading and settling of the OPALS 10
independent of the local settlement cycles because it uses in the
pricing structure of the OPALS a market impact factor which
incorporates the characteristics of local trading patterns.
[0044] The individual components of the management system 8, their
interactions and the advantages offered to the investors are
considered in detail next.
[0045] The Modeling System
[0046] Still in reference to FIG. 1, the optimized basket of shares
underlying an OPALS 10 is selected in a preferred embodiment of the
present invention by modeling system 3. In order to adequately
follow a market index, for small capital markets it may be
necessary to purchase shares of all stocks. In larger markets,
however, it would be more cost efficient to purchase only a subset
of all stocks which subset is representative of the market as a
whole. An advantage of this approach is that it avoids the costs
associated with the transactions and monitoring on a daily basis of
large numbers of stocks. Factors such as capitalization, the
industries representation, the liquidity the local shares and
others are used in the stock selection process.
[0047] This selection is done in accordance with one embodiment of
the present invention using a mathematical programming function
which employs data means 2 for receiving and storing data about
each stock in the capital market; portfolio modeling means 4 which
correlate the available data with economic forecast models to
suggest an optimal basket of stock shares; and risk evaluation
means 6 predicting the future correlation of the selected stocks in
the basket with the market valuation. Risk evaluation means 6
employs a multi-factor risk model and relies on optimization
techniques to ensure that the subset of stocks underlying an OPALS
will track the market index as closely as possible. The cooperation
between data means 2, modeling means 4 and risk evaluation means 6
results in a basket of stock shares whose weighing further reflects
liquidity considerations, industry exposure and market
capitalization.
[0048] In a specific embodiment, modeling system 3 determines the
optimal basket of stocks by sorting the stocks of the capital
market in a descending order of market values and storing the
sequence in a computer memory. For each stock of the portfolio,
modeling means 4 then computes the associated volatility or beta
factor using well known techniques. Modeling means 4 then stores in
a memory (not shown) the beta factor of each individual stock. The
list of beta values is then added and divided by the number of all
beta values to obtain the average beta value for the stocks in the
model basket of shares. If the average beta for the basket of
shares is greater than unity, the programming function operated by
modeling means 4 will review the portfolio and add or substitute
stocks with lower beta factors to bring the average to or less than
about 1. This selection of substitute stocks can be made by an
operator using the optimization software to select the shares to be
deleted from or added to the composite of basket of shares to
adjust the tracking tolerance.
[0049] Another step used in the selection of the model portfolio
involves analysis of the capitalization of the stocks in the
selected portfolio. Capitalization may be defined as the value
obtained by multiplying the total number of outstanding shares of a
stock by the current price of the stock. Risk evaluation means 6
computes the capitalization of each stock in the model basket, adds
them up and divides the result by the number of stocks in the
portfolio to obtain the average model capitalization. Risk
evaluation means 6 next determines or obtains from an outside
source the average capitalization value for the particular market
which is being followed and compares the result to the computed
capitalization of the model basket. Should there be a discrepancy
between the two values which is above a predetermined threshold,
the program implemented by means 6 may be directed to substitute
either new stocks from the capital market or change the weighing of
the stocks represented in the basket.
[0050] Data means 2, modeling means 4 and risk evaluation means 6
may be implemented in a specific embodiment of the present
invention as computer processes which are capable of creating and
exchanging messages. A separate computer can be provided for each
of these processes or they can run on a single multiprocessing
system. Modeling system 3 operates in accordance with a
mathematical programming optimization function which uses a set of
user defined constraints on the current financial reports of the
stocks received from the capital markets over communications
network 9 and stored in data means 2. Other constraints include the
level of certainty regarding future events and the predicted future
values of economic variables. Such constraints are typically
defined by human experts and are used by the risk evaluation means
6.
[0051] The operation of modeling system 3 above is merely
illustrative of the considerations used to define an optimal basket
of stock shares which represent a capital market over a limited
period of time.
[0052] Alternatively, modeling system 3 may be implemented using
commercially available sources for optimized portfolio selection
and risk and investment analysis. Such sources include packages
which are available from the Harvard Business School in Cambridge,
Mass., or vendors such as Barra International in San Francisco,
Real Decisions Corporation in Darien, Conn. and others.
[0053] The Data Processing System
[0054] FIG. 2 illustrates in a block diagram form the connections
between the data processing system 20 and other components of the
financial management structure as well as the communications
network proving a link to the capital markets. As shown, data
processing system 20 receives input over communications network 9
from the capital markets 1 and has a two-way connection with
brokers 13 which handle trade transactions of the OPALS.
[0055] Data processing system 20 is also connected over a
communications network to investors 5. In a preferred embodiment of
the present invention this communication may be established over an
international news report service 15 such as Reuters. Additionally,
all trade transactions and other information concerning the basket
of stock shares underlying the OPALS are communicated on-line to
desktop terminals 17 of the operators of the financial management
structure 8. Terminals 17 further receive information about the
current price of all OPALS which are administered by the management
structure 8.
[0056] FIG. 3 shows in more detail the structure of the data
processing system 20 which is designed in accordance with the
present invention to administer an OPALS debt instrument. In a
preferred embodiment illustrated in FIG. 3, data processing system
20 comprises a processor unit 60, database 70 which stores data
about the basket of shares underlying the OPALS and three computer
applications: 30 called bids, 40--called status, and 50--termed
dcalc. The applications 30, 40 and 50 interact with processor 60 to
compute the current price of the OPALS. As shown in FIG. 3, data
processing system 20 also receives input from the capital markets
which input comprises raw transactions data for each stock.
[0057] Based on the information from the capital market,
application 30 first computes the aggregate ask, bid and trade
prices for the stocks underlying the OPALS. Next, application 40
receiving input from application 30 computes the overall value of
the basket of shares which includes the sum total of all ask prices
and the sum total of the bid and trade prices. Finally application
50, receiving input from both applications 30 and 40, adds to the
aggregate value of all shares the accrued income and maintenance
costs to determine the overall price of the OPALS as traded to the
investors.
[0058] In addition to the dynamic values which are reported on-line
to the data processing system from the capital market there are
static variables which are used to determine the final prices for
the OPALS. Such static values include finance charges and
commission rates as well as the historical and default spread
values between the ask and bid prices for the stocks of the
underlying basket. These static values are computed and
periodically updated using an OPALS maintenance facility (not
shown) which is part of processor 60 and stores data in data base
70.
[0059] In a preferred embodiment of the invention, applications 30,
40 and 50 of data processing system 20 are processes running on
workstations which are interconnected by a local area network to a
computer file server 60. A specific advantage of this configuration
is the relatively low cost of implementation.
[0060] In another preferred embodiment of the present invention,
data processing system 20 can be implemented on any computer
capable of multiprocessing, or multitasking where the individual
processes can be synchronized and can exchange messages while
running. Examples include general purpose "time-slice"
minicomputers and mainframes, symmetrical multiprocessor computers,
and multiprocessor and single-processor transaction processing
computers.
[0061] The data processing system 20 of the present invention may
also be implemented using several architectures which differ in the
interconnections between the process components and the exchange of
information between them. Specifically, processor 60 may be
connected, either directly or through a data communications
gateway, to a host computer, which in turn may connect directly to
operator terminals. In this embodiment the terminals 17 of the
operators may be connected to both the host and to processor 60, so
that an operator may have access to all running processes.
[0062] Computation of the Price of an OPALS
[0063] The operation of data processing system 20 is best
understood by considering the interaction of applications 30, 40
and 50, processor 60 and database 70. Due to the fact that
information about a large numbers of stocks from different capital
markets must be processed simultaneously, each stock of each OPALS
being administered by the data processing system must be uniquely
identified to enable such interaction. The identification of each
security has a specific system description which is stored in
database memory 70 and may appear as follows:
[0064] INDEX=MSCI ID=AMBGN E=FRA CNTRY=GFR CURR=DEM RIC=GDAX
REX=IDN QUAN=50.0 DQUAN=50.0
[0065] where:
1 TABLE OF INPUT INDICES INDEX which market index this basket is
following ID The stock identifier. E The exchange code identifier.
CNTRY The country code. This code maps to the spread file where the
specific spreads are assigned to specific countries. CURR The local
trade currency. RIC The symbol identifier for the select index. REX
The exchange identifier for the select index. QUAN The quantity of
the particular stock in the basket. DQUAN The default quantity of
the particular stock in the basket.
[0066] Additionally, data processing system 20 comprises a set of
configuration files which are stored in database 70 and comprise
various static variables used by the applications. Examples include
the default spread and the historical spread files, in which for
each country an exchange identifier is associated with the default
and historical spread factors for the ask and bid prices of each
stock.
[0067] FIGS. 4-6 are flowcharts which illustrate the program steps
executed by application 30 (bids) to calculate the ask, bid and
trade prices for each stock in a basket of shares underlying an
OPALS. These individual stock prices are made available to
processor 60 and database 70 for subsequent use.
[0068] Specifically, FIG. 4 illustrates the instruction sequence
executed by application 30 to compute the ask parameter for a
particular stock. (To avoid confusion with the ask prices in the
capital market which are posted on the communications network, the
value computed by the processing system 20 is termed an ask
parameter in the sequel). In step 100 the program checks whether
there is an ask price posted on the communications network and if
there is such price the program proceeds to step 110 to check
whether there is an ask size specified. If such ask size is
specified, application 30 proceeds to step 130 in which it computes
whether the ask size is greater than the basket quantity of the
stock. If the ask size is greater than the basket quantity, the
next step is 135 where the value of the ask parameter for the stock
is set equal to the market ask price. If the ask size is less than
the basket quantity, the algorithm proceeds to step 150 where it
checks whether there is a bid posted on the communications network.
If there is such bid posted, in step 155 the value of the ask
parameter is set equal to the posted ask price multiplied by a
constant C which is close to but greater than 1.
[0069] If in step 110 there is no ask size posted, the algorithm
proceeds to step 120 where it is checked whether the stock default
quantity is greater than the basket quantity. The default quantity
is a static parameter which is entered by the operators of the data
processing system for each capital market, and is stored in
database 70. If the check result is positive, the program assigns
in step 125 the ask parameter equal to the posted ask price. If the
check result is negative, the algorithm proceeds to step 140 to
check whether a bid price has been posted on the communications
network. If there is a bid price posted, in step 145 the ask
parameter is set equal to the market ask price. If there is no bid
posted, in step 160 the ask parameter is set equal to ask price
plus a multiple of this price which is determined by the default
spread value for the stock which is stored in the default spread
file discussed above.
[0070] If in step 100 there is no ask price for the stock, the
algorithm proceeds to step 103 where it is checked whether the
system contains in its database data on the last trade transactions
of the stock. If the system does have such record, it checks the
trade direction (the sign of the trade difference) during the last
transactions at step 106. If the trade direction during the last
transaction is positive, the ask parameter is set in step 109 to
equal the last transaction price plus the difference between the
largest transaction minus the smallest transaction, multiplied by a
coefficient beta1. If the last trade direction is negative, the ask
parameter is set in step 112 equal to the last transaction price
plus the difference between the largest and smallest ask prices in
these last transactions, multiplied by a coefficient beta2. The
values of the beta coefficients in steps 109 and 112 of the method
are preferably in the range of about 0.05 to 0.07 for beta1 and
about 0.03 to 0.05 for beta2.
[0071] If there is no record of the last N trade transactions,
application 30 proceeds to step 115 which determines whether the
last trade price is available. If this price is available, at step
130 it is determined whether the trade was closed, which condition
is indicated by a closed flag posted on the network. If the
transaction is closed, in step 133 the ask parameter is set equal
to the price in the last transaction plus the last transaction
price multiplied by the historical spread value, which is stored in
the historical spread file, also discussed above.
[0072] If the last transaction was not closed in step 136 the ask
parameter is set equal to the last transaction price plus the same
price multiplied by the default spread value which contained in the
default spread file. If there is no record of the last transaction
price, in step 118 application 30 checks whether there is an open
price available. (An open price refers to a price for a transaction
which is not closed). If such price is posted, in step 121 the ask
parameter is set equal to the open price times the open price
multiplied by the default spread value.
[0073] If there is no open price available at the time, in step 124
is received the percent change for the associated index. In this
case the ask parameter for the stock is calculated to be equal to
the last close price plus the same price multiplied by the default
spread value, multiplied by a coefficient equal to unity plus the
percent change of the market index at step 127.
[0074] Finally, if there is no ask, size, bid, trade price or close
information for a particular stock, application 30 does not
calculate an ask parameter.
[0075] The instruction sequence above is an example of the type of
situations in which, according to the method and data processing
system of the present invention different static parameters may be
used.
[0076] FIG. 5 shows an analogous flowchart which illustrates the
computation of the bid parameter for each stock in the basket. The
bid parameter is computed first by checking in step 200 whether
there is a bid price posted on the communications network. If there
is such price, in step 210 application 30 checks whether there is a
bid size posted. If a bid size is posted, in step 230 this size is
compared to the basket quantity for the particular stock and if it
is determined to be greater than the basket quantity, in step 235
the bid parameter for the stock is set equal to the posted bid
price.
[0077] If in step 230 the bid size is less than the basket
quantity, in step 250 application 30 checks whether there is an ask
price posted and if there is such price, in step 255 the value of
the bid parameter is set equal to the bid price multiplied by a
coefficient C which is close to but less than 1. If there is no ask
price posted, the value of the bid parameter is set in step 270
equal to the posted bid price plus the same price multiplied by the
default spread which is determined for the stock from the
corresponding value in the default spread file.
[0078] If next in step 210 it is determined that there is no bid
size posted, in step 220 it is checked whether the default quantity
of the stock is greater than the quantity which is in the basket.
If the result of the test is positive, the value of the bid
parameter is set in step 225 equal to the posted bid price. If the
default quantity is less than the basket quantity, in step 240
application 30 checks whether there is a posted ask price.
[0079] If such price is posted, in step 225 the value of the bid
parameter is set equal to the bid price. If there is no ask price
posted, then the bid parameter is set in step 260 to be equal to
the bid price plus the same price multiplied by the default spread
value for the stock.
[0080] Returning back to step 200, if it is determined that there
is no bid price posted, then in step 203 the system checks whether
it has a record of the last N transactions of the stock. If such
record is available, in step 206 it is determined whether the trade
direction during the last transaction is negative, in which case
the value of the bid parameter is set in step 209 to the last trade
price minus the difference between the biggest and smallest trade
prices, multiplied by a coefficient beta1. If the trade direction
is positive, then in step 212 the value of the bid parameter is set
equal to the last transaction minus the difference between the
biggest and smallest transaction prices, multiplied by a
coefficient beta2. Coefficients beta1 and beta2 are stored in data
base 70 and preferably have values between about 0.05 to 0.07 for
coefficient beta1, and about 0.03 to 0.05 for coefficient
beta2.
[0081] If in step 203 it is determined that there is no record of
the last N transactions for the particular stock, in step 215
application 30 checks whether there is a record of the last trade
price. If such record exists, in step 230 it is determined whether
the transaction was closed, as indicated by a close flag posted on
the network. If the transaction is closed, in step 233 the value of
the bid parameter is set equal to the last transaction price minus
the last transaction price multiplied by the historical spread
value for the stock. If the transaction is not closed, in step 236
the value of the bid parameter is set equal to the last transaction
price minus the same price multiplied by the default spread value.
Both the default and the historical spread values for each
particular market index and individual stock are contained in the
configuration files in data base 70.
[0082] Going back to step 218, if it is determined that there is no
open price available, in step 224 application 30 checks whether
there is a close price posted, and in step 227 if there is such
price the application 30 requests the percent change for the
associated index. The value of the bid parameter is set equal to
the close price minus the close price multiplied by the default
spread value, multiplied by a coefficient equal to 1 minus the
percent change value in step 229. As in the case of the computation
of the ask parameter, if there are no bid, size, ask, trade or
close prices, no value for the bid parameter is computed or sent to
processor 60.
[0083] Finally, the computation of the trade prices is illustrated
in FIG. 6. In step 300 it is determined whether a bid and ask
prices for a particular stock are available and if the result of
the test is positive, the value of the trade price is set in step
310 equal to the average of the bid and ask prices. If there are no
bid and ask prices simultaneously posted, in step 320 it is
determined whether there is a trade price. If there is a trade
price posted, application 30 checks in step 325 whether the trade
was closed. In step 330 the trade price is determined to be equal
to the trade price minus the trade price multiplied by the
historical spread value. Otherwise, in step 335 the trade parameter
is set equal to the trade price. If there is no trade price posted
for the particular stock, in step 340 application 30 checks whether
there is an open price posted. If there is such price posted, in
step 345 the value of the trade parameter is set equal to the open
price.
[0084] If there is no open price posted in step 360 application 30
checks whether there is a close price posted and if the result of
the test is positive, in step 370 application 30 computes the
percent change for the associated index. In step 375 the value of
the trade parameter is then set equal to the close price minus the
close price multiplied by the default spread value and multiplied
by the value of the percent change. If in step 360 there is no
close price posted, in step 380 it is checked whether the system
has calculated bid and ask prices as computed in FIGS. 4 and 5. If
such values are computed in step 385 the value of the trade
parameter is set equal to the calculated bid price plus the
calculated ask price divided by two.
[0085] Once the bid and ask prices are calculated, application 30
checks whether the spread between the two values is above the
minimum spread value for the stock which value is contained in the
default spread file. In case the calculated difference is less than
the minimum spread value, application 30 widens the difference by
changing both the bid and ask parameter values so that the minimum
spread for a particular stock is covered.
[0086] Application 30 communicates the computed values of the ask,
bid and trade parameters to application 40 (status). As explained
above, application status maintains a running total of all bid, ask
trade prices, along with the number of stocks which are opened
within each basket at a particular time. For each basket of shares,
application 40 creates four status configuration files. The first
created file is associated with the sum total of all ask prices;
the second file contains the sum total of all bid prices; the third
file contains a sum total of all trade prices divided by a
normalization constant which depends on the round lot size at which
the OPALS are normally traded (typically about 10,000); and the
last configuration file contains the number of open stocks in the
basket. The values computed by application 40 are referred to as
the aggregate ask, bid and trade values for the basket of shares
underlying an OPALS. These aggregate values do not include any
income from the shares of the basket or maintenance or custody
charges incurred.
[0087] Application 50 (Dcalc) receives the aggregate values which
are communicated to processor 60 by the status application 40 and
completes the computation of the OPALS price by applying various
commissions and custody charges to the overall value of the
financial instrument. The values which are calculated and
communicated by application 50 are the final prices that are
communicated to the investors and the communications networks.
[0088] An example of the calculated values on output of application
50 for a specific capital market is illustrated as follows:
2 32 ap 4266881.50 16 bp 4246657.00 18 tp 425.64 26 pc 0.00 22 cb
0.07 41 bf 424.9 24 af 428.3 8 bdf 261.35 9 afd 263.52 1 tfd
261.8.
[0089] where the first column indicates the number of real time
records available for the calculation and the remaining entries are
defines as follows:
3 ap Aggregate ask normalized to one record bp Aggregate bid
normalized to one record tp Aggregate trade normalized to one
record pc Percent change between the cumulative clearance price and
current tp. cp Clearance basis = (clearance/aggregate bid) * 10000
bf Bid Final = aggregate bid - clearance - (aggregate bid * broker)
+ dividend + bid finance + (aggregate bid * commission) +
(aggregate bid * bid spread) af Ask Final = aggregate ask +
clearance + (aggregate ask * broker) + dividend + ask finance +
(aggregate ask * commission) + (aggregate ask * custody) +
(aggregate ask * ask spread). bfd Bid Final Dollar = Bid
Final/exchange rate. afd Ask Final Dollar + Ask Final/exchange
rate. tfd Trade Final Dollar = Ask Final/exchange rate
[0090] The "clearance" entry above refers to the transaction costs
to process the settlement of the shares in the specific market by
the agent.
[0091] As illustrated above, application 50 adds to the aggregate
value of the basket of shares underlying the OPALS various
correction factors which reflect income and expenses associated
with the debt instrument. Such correction factors include the local
market settlement costs, the accrued income on the OPALS, fail
financing costs and others, as modified by a market impact
factor.
[0092] Specifically, application 50 will reflect one or more of the
following income components into the price of the OPALS.
[0093] A. cash dividends received on the shares in the underlying
basket.
[0094] B. cash dividends that are past the payable date on the
underlying shares, but have not yet been received.
[0095] C. the net present value of cash dividends that are past the
record date on the underlying shares, but have not yet reached the
payable date.
[0096] D. in certain markets the net present value of dividends
that are passed or at ex date on the underlying shares, but have
not reached the record date. This number may be adjusted to reflect
ex date dividends that are doubtful of receipt.
[0097] E. net interest earned on the cash income received on the
shares.
[0098] F. stock loan income earned on the underlying shares.
[0099] G. stock dividends sold for cash.
[0100] H. cash proceeds from the sale of rights.
[0101] I. cash proceeds from the sale of japanese odd-lots.
[0102] J. cash proceeds from optional dividends.
[0103] K. withholding tax reclaims received by the corporate
issue.
[0104] L. the net present value of tax reclaims due by the tax
issue but not yet received.
[0105] Expenses which are deducted from the income stream earned on
the OPALS include for example:
[0106] A. the wholesale income safe-keeping charters accruing to
the underlying basket of shares.
[0107] B. third party charters billed to the financial management
structure for processing the collection of income derived from the
underlying basket of shares.
[0108] In another aspect of the present invention data processing
system 20 maintains various static variables which are used in
computing the price of the baskets of shares underlying the OPALS
debt instruments. The maintenance facility (not shown) is
implemented by the data processing system 20 and comprises storage
means for storing in accordance with a predetermined protocol one
or more of the following parameters: a basket identifier; dividends
applied; finance charges on the ask side; the clearance costs in
the market; the broker fees on the ask side; the spread value on
the ask side; the commission to be applied; the finance charges on
the bide side; the custody charges to be applied; the broker fees
on the bid side; the spread value on the bid side; and the series
number and outstanding shares.
[0109] During operation, these values are accessed by application
50 and are used to compute the price of the OPALS. The stored
values may be periodically modified by an operator of the financial
management structure to more closely reflect the current and
expected trading patterns in the capital market.
[0110] The price of the OPALS can be rebalanced if necessary to
more closely track the performance of the relevant capital market
index. Rebalancing is effected by the data processing system 20
which compares the investment performance of the OPALS to the index
associated with the capital market to evaluate a tracking error for
the debt instrument. If the evaluated error is larger than a
predetermined threshold, data processing system 20 can suggest a
rebalanced portfolio to improve tracking to the related index. On
the basis of the evaluated error and the suggested portfolio, in a
preferred embodiment of the present invention, management structure
8 initiates rebalancing of the debt instrument by modifying the
composition of the underlying basket of shares.
[0111] In one embodiment of the present invention rebalancing will
occurs when the tolerance to the annual tracking error, as defined
in the OPALS pricing definition, is exceeded. No additional
contributions are required from the investors because the
rebalancing costs are reflected as change in the price of the
OPALS.
[0112] The data processing system 20 of the present invention
further provides the capability to generate and distribute
information about the OPALS to potential and participating
investors. Due to the fact that each stock of each OPALS has an
unique identifier, it is possible to obtain complete information
about all OPALS issued and administered by the management structure
8. To this end, a system user enters the desired basket identifier
into one of the terminals 17 connected to the data processing
system 20 of the present invention. All information which is
associated with the particular basket identifier can then be
retrieved and communicated to the corresponding terminal. Such
information comprises the current trading activities of the
selected basket of shares underlying the OPALS, as well as other
relevant information.
[0113] Relevant information for a basket of shares appears on the
terminals 17 in a format illustrated in FIG. 7. The user may
actually overwrite these values by typing over them and, using an
update command typed from the terminal, may send the newly
corrected values to the processor 60 for recalculation.
[0114] Referring back to FIG. 3, the real time prices of the OPALS
are broadcast to customers in the form of investors reports. Such
reports may completely characterize the OPALS or represent only
select information of interest. Investors may call the OPALS
trading operator for dealing prices on the OPALS. The prices will
be distributed in both U.S. dollars and the local currency of the
capital market.
[0115] As discussed above, the OPALS financial instruments of the
present invention are traded as debt securities so that an
investment in an OPALS may result in a different tax treatment from
that of a direct investment in equities for some investors. The tax
treatment may depend upon the inventors' country and/or their
specific tax profile. Dependent on the jurisdiction, the OPALS are
preferably structured to be tax neutral.
[0116] The redemption of each OPALS occurs in accordance with a
periodic payment schedule during three business days after the
record date. Holders of round lot OPALS may at this time instruct
the financial managing structure to redeem their OPALS and will
receive the underlying shares. The shares will be delivered to the
holder as soon as local equity market cycles and conditions
permit.
[0117] The finance management structure can periodically issue new
series of OPALS for each equity index, if investors of a minimum
predetermined amount of maturing OPALS are interested in purchasing
the new series, or sufficient interest among new investors is
present. The new series will be available for trading five business
days prior to the maturity date of the old OPALS. The investor may
elect to invest in new OPALS series which track either the same or
a different capital market index. At maturity, the OPALS can also
be sold for cash in a secondary OPALS market.
[0118] The financial management structure 8 operating in accordance
with the present inventions provides the infrastructure necessary
to issue and administer the OPALS debt instruments 10. This
infrastructure creates a buffer between the volatility of the
capital markets 1 and the participating investors 5 which feature
provides a number of advantages. Such advantages include the fact
that the management structure 8 is principle to the settlement
risks associated with each local equity market; the fact that
various corporate business structures are involved in the design
and cost structure of the financial instrument, so that the
administrative costs associated with the OPALS are minimized. Still
further advantages include the delivery of on-going administrative
services from the data processing system. Other advantages include
the consolidation of the income flow into scheduled income
distributions which permit investment managers to formulate
investment decisions to match such predictable cash flows.
[0119] An important advantage from the investors point of view is
that all costs associated with participation in foreign markets are
bundled up into a single security which may be traded in an open
market or may be exchanged for cash in the secondary market. As
discussed above, investors are periodically provided with reports
of the status of their OPALS and, during redemption dates or at the
maturity of the product, are entitled to receive the entire basket
of shares which underlies their OPALS.
[0120] The OPALS financial instrument may thus be useful to
investors 5 for various reasons such as the fact that many
investors do not have the back office capabilities to process
foreign trades themselves; they may not wish to establish global
custody relationships or to develop market-specific analytical
expertise. Additionally, some investors may be subject to legal
restrictions that prevent them from purchasing futures outside
their home markets; others may wish to enter markets where no
futures or index linked products exist. The OPALS financial debt
instrument is the answer for these investors.
[0121] The above described preferred embodiment of the system of
the present invention is merely illustrative of the principles of
this invention. Numerous modifications and adaptations thereof will
be readily apparent to those skilled in the art without departing
from the spirit and scope of the present invention which is defined
in the following claims.
* * * * *