U.S. patent application number 12/916154 was filed with the patent office on 2011-02-24 for apparatus and method for component analysis of pooled securities.
Invention is credited to Michael David Erlanger.
Application Number | 20110047098 12/916154 |
Document ID | / |
Family ID | 43606120 |
Filed Date | 2011-02-24 |
United States Patent
Application |
20110047098 |
Kind Code |
A1 |
Erlanger; Michael David |
February 24, 2011 |
Apparatus and Method for Component Analysis of Pooled
Securities
Abstract
A system for valuation of pooled financial products contracts
comprises receiving or extracting or generating data elements
regarding financial products contracts, determining valuations of
the financial products contracts data elements by calculation or
comparison methods, creating a data report in a standard data
format, storing the data report in the one or more data storage
devices, receiving new data items relating to nonfinancial risk or
financial risk affecting quality or risk of one or more of the
financial products contracts, performing calculations with respect
to the new data items to determine an updated valuation of the
financial products contracts; and adding to or modifying the data
report to create a risk updated data report incorporating updated
financial products contracts valuation, and storing the updated
data report in the one or more data storage devices.
Inventors: |
Erlanger; Michael David;
(Westport, CT) |
Correspondence
Address: |
ST. ONGE STEWARD JOHNSTON & REENS, LLC
986 BEDFORD STREET
STAMFORD
CT
06905-5619
US
|
Family ID: |
43606120 |
Appl. No.: |
12/916154 |
Filed: |
October 29, 2010 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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12870354 |
Aug 27, 2010 |
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12916154 |
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12536197 |
Aug 5, 2009 |
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12870354 |
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12419163 |
Apr 6, 2009 |
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12536197 |
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61072966 |
Apr 4, 2008 |
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61256736 |
Oct 30, 2009 |
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Current U.S.
Class: |
705/36R |
Current CPC
Class: |
G06Q 40/06 20130101;
G06Q 40/08 20130101; G06Q 40/02 20130101 |
Class at
Publication: |
705/36.R |
International
Class: |
G06Q 40/00 20060101
G06Q040/00 |
Claims
1. Apparatus for valuation of pooled securities, comprising: a data
processing system having one or more program executing computers,
and one or more data storage devices; one or more computer programs
executing on said data processing system for: receiving or
extracting or generating data elements regarding financial products
contracts included in a pooled security, determining valuations of
the financial products contracts data elements by calculation or
comparison methods; creating a data report in a standard data
format containing the financial products contracts data elements,
storing the data report in the one or more data storage devices,
receiving new data items regarding one or more of the financial
products contracts, determining updated valuations of the financial
products contracts data items by calculation or comparison methods;
adding to or modifying the data report to create an updated data
report incorporating the new data items, storing the updated data
report in the one or more data storage devices.
2. The apparatus of claim 1 wherein said standard data format
contains data tags to identify each data element.
3. The apparatus of claim 2, wherein said standard data format is
an XBRL (eXtensible Business Reporting Language) data format.
4. The apparatus of claim 1 wherein said one or more computer
programs perform calculations with respect to said new data items
to determine valuation.
5. The apparatus of claim 1 wherein said valuation is determined
relative to predetermined standards.
6. The apparatus of claim 4 wherein said one or more computer
programs add to or modify the data report to create a valuation
updated data report incorporating determined valuation identified
with valuation data tags.
7. The apparatus of claim 1, wherein said financial products
contracts comprise insurance contracts, reinsurance contracts,
loans, or lines of credit, or subsequent and derivative
transactions relating thereto.
8. The apparatus of claim 7, wherein said data regarding financial
products contracts comprise one or more of insurance underwriting
standards, insurance financial terms, insurance applicant data,
loan application standards, loan financial terms, loan applicant
data, or comparable transaction details.
9. The apparatus of claim 8 wherein said new data items regarding
one or more of the financial products contracts include one or more
of payment history, appraised value, loan to value ratio,
comparable transaction details, comparable property defaults or
value changes or risks, related financial instrument changes, or
derivative contract data.
10. The apparatus of claim 1, wherein said financial products
contracts comprise credit default swap contracts which are against
either covered or uncovered positions.
11. The apparatus of claim 1, further comprising: one or more
computer programs executing on said data processing system for
determining if a person has provided data elements regarding
financial products contracts to said data processing system and
calculating a system credit related to a quantity of data elements
provided by said person.
12. The apparatus of claim 11 wherein said system credit may be
applied by the person to a cost of obtaining data reports from said
data processing system or to reduce other costs charged for uses of
said data processing system.
13. The apparatus of claim 12 wherein said system credit is
operably connected to a data element, data report, new data item,
or updated data report.
14. A computer program product for use in valuation of pooled
securities financial contracts, said computer program product
embodied on computer-readable medium and comprising code that, when
executed on a computer, causes the computer to perform the
following steps: create a data report file in a standard data
format using data tags to identify financial products contracts
data elements for one or more financial products contained in a
pooled security, store said data report file as one of a plurality
of electronic data files; receive new data items affecting
valuation of one or more of the financial products contracts,
perform calculations with respect to said new data items to
determine an updated valuation of one or more of the financial
products contracts; add to or modify said data report file to
create an updated data report file incorporating updated valuation
of one or more of the financial products contracts identified with
updated valuation data tags, and storing the updated data report
file in said one or more data storage devices.
15. The computer program product of claim 14, wherein said
financial products contracts comprise insurance contracts,
reinsurance contracts, loans, or lines of credit, or subsequent and
derivative transactions relating thereto.
16. The computer program product of claim 15, wherein said data
regarding financial products contracts comprise one or more of
insurance underwriting standards, insurance financial terms,
insurance applicant data, loan application standards, loan
financial terms, or loan applicant data.
17. The computer program product of claim 16 wherein said new data
items regarding one or more of the financial products contracts
include one or more of payment history, appraised value, loan to
value ratio, comparable transaction details, comparable property
defaults or value changes or risks, related financial instrument
changes, or derivative contract data.
18. The computer program product of claim 14 wherein said risk
conditions are determined relative to predetermined standards.
19. A method, comprising the steps of: receiving or extracting or
generating data elements regarding financial products contracts in
a pooled security from one or more persons at a data processing
system having a program executing computer and a data storage
device; determining valuations of the financial products contracts
by calculation or comparison methods; a computer program executing
on said program executing computer formatting the data elements
including the valuations of the financial products contracts into a
data report having a standard data report format and storing the
data report in said data storage device, receiving new data items
relating to nonfinancial risk or financial risk affecting valuation
of one or more of the financial products contracts at the data
processing system, said computer program executing on said program
executing computer adding to or modifying said data report to
create an updated data report incorporating the new data items, and
determining updated valuations of the financial products contracts
by calculation or comparison methods, and storing the updated data
report including the updated valuations of the financial products
contracts in said one or more data storage devices.
20. The method of claim 19 wherein said computer program performs
calculations with respect to said new data items to determine
valuation.
21. The method of claim 19, wherein said risk conditions are
determined relative to predetermined standards.
22. The method of claim 19 wherein said computer program adds to or
modifies the data report to create a risk updated data report
incorporating determined valuation.
23. The method of claim 19, wherein said financial products
contracts comprise insurance contracts, reinsurance contracts,
loans, or lines of credit, or subsequent and derivative
transactions relating thereto.
24. The method of claim 19, wherein said data regarding financial
products contracts comprise one or more of insurance underwriting
standards, insurance financial terms, insurance applicant data,
loan application standards, loan financial terms, loan applicant
data, payment history, appraised value, loan to value ratio,
derivative contract data, changes in related financial products, or
defaults in related financial products.
25. The method of claim 19, wherein said standard data format
contains data tags to identify each data element and are contained,
tracked and audited across the life of the instrument by the
transaction credit.
26. The method of claim 19, further comprising: one or more
computer programs executing on said data processing system for
determining if a person has provided data elements regarding
financial products contracts to said data processing system and
calculating a system credit related to a quantity of data elements
provided by said person.
27. The method of claim 26 wherein said system credit may be
applied by the person to a cost of obtaining data reports from said
data processing system or to reduce other costs charged for uses of
said data processing system.
28. The method of claim 26 wherein said system credit is related to
a data element, data report, new data item, or updated data
report.
29. A system for evaluating pooled securities for users,
comprising: a database; pooled security creating software executing
on a computer readable medium for creating a pooled security data
record for a pooled security and storing it in the database; risk
creating software executing on a computer readable medium for
creating a risk data record for a risk, storing it in the database,
and associating it with pooled security data record; and evaluation
software executing on a computer readable medium for evaluating the
value of a pooled security based at least in part on any associated
risk data records; wherein each pooled security record has one or
more risk data record associated therewith; each risk data record
contains data used for calculating the monetary value of the risk;
and users on the system are provided access to the value of pooled
security and associated risks.
30. The system of claim 29 further comprising reporting software
executing on a computer readable medium for reporting data related
to pooled security data records and/or risk data records.
31. The system of claim 29 wherein the pooled security creating
software creates pooled security data records for pooled securities
which are combinations of one or more of loans, insurance contracts
and lines of credit.
32. The system of claim 29 wherein the pooled security creating
software creates pooled security data records for financial
instruments such as subsequent or derivative instruments.
33. The system of claim 32 wherein a subsequent or derivative
instrument is associated with at least one risk similar or the same
as a risk associated with the preceding or original financial
instrument.
34. The system of claim 29 wherein the risk creating software
creates risk data records for risks such as underwriting standards,
financial terms, borrower information, appraised value, loan to
value, comparable transaction information, diversification,
economic indicators, environmental issues, liquidity, litigation,
global conflicts, and market volatility.
35. The system of claim 29 wherein users disclose risk data to the
system which is used by the risk creating software in exchange for
transaction credits.
36. The system of claim 35 wherein the transaction credits can be
used to access system reporting features, obtain data from the
system, and/or reduce other costs charged for use of the
system.
37. The system of claim 35 wherein a transaction credit is
associated with a risk data record, a pooled security data record,
and/or a disclosing party.
38. The system of claim 35 wherein a transaction credit value is
correlated to or defined by the timeliness of a disclosure of risk
data.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation-in-part of U.S. patent
application Ser. No. 12/870,354, filed Aug. 27, 2010 and entitled
"Method and Apparatus for Continuous Revaluation of Contracts",
which is a continuation-in-part of U.S. patent application Ser. No.
12/536,197 filed Aug. 5, 2009, entitled "Apparatus and Method for
Risk Disclosure and Analysis," which is a continuation of U.S.
patent application Ser. No. 12/419,163 filed Apr. 6, 2009, entitled
"Apparatus And Method For Risk Disclosure And Analysis," which
claims the benefit under 35 U.S.C. .sctn.119(e) of U.S. Provisional
Patent Application Ser. No. 61/072,966 filed on Apr. 4, 2008, the
disclosures of which are hereby incorporated by reference in their
entirety.
[0002] This application claims the benefit under 35 U.S.C.
.sctn.119(e) of U.S. Provisional Patent Application Ser. No.
61/256,736 filed on Oct. 30, 2009 and entitled "Component Analysis
of Pooled Securities."
[0003] This application is related in subject matter to:
[0004] U.S. patent application Ser. No. 09/178,400, filed Oct. 24,
1998, entitled "A Data Processing System for Providing an Efficient
Market for Loans and Lines of Credit" (now abandoned) which is
incorporated by reference;
[0005] U.S. patent application Ser. No. 09/296,573, filed Apr. 22,
1999, (now issued as U.S. Pat. No. 6,594,635) entitled "A Data
Processing System for Providing an Efficient Market for Insurance
and Reinsurance," which is also incorporated by reference;
[0006] U.S. patent application Ser. No. 09/370,619, filed Aug. 7,
1999, (now issued as U.S. Pat. No. 7,742,966) entitled "Efficient
Market for Financial Products," which is also incorporated by
reference;
[0007] U.S. patent application Ser. No. 10/427,519, filed May 1,
2003, entitled "Data Processing System For Providing An Efficient
Market For Insurance And Reinsurance," which is also incorporated
by reference;
[0008] U.S. Provisional Patent Application No. 61/072,966 filed
Apr. 4, 2008, the disclosure of which is hereby incorporated by
reference; and
[0009] U.S. patent application Ser. No. 12/536,197 filed Aug. 5,
2009, the disclosure of which is hereby incorporated by
reference.
FIELD OF THE INVENTION
[0010] The invention relates to financial markets and, more
particularly, to a system and method for determining, tracking,
analyzing, calculating and disclosing risks associated with pooled
securities to determine an accurate value of the pooled
securities.
BACKGROUND OF THE INVENTION
[0011] The financial marketplace consists of numerous products that
have evolved out of the most basic designations of equity and debt.
Product specialization has resulted in linguistic and semantic
differences, similar to those that can be found in different
national languages in the world's countries. The transactional
conventions and methodologies for scoring and rating the products
that are associated with these differences can result in real price
and term discontinuities, just as they appear in society as
different approaches with different meanings. As is well known to
those in the trade, it is possible through one kind of financial
engineering or another to change high risk assets into low risk
ones through various kinds of aggregation, diversification, hedging
and division of risk. As a result, a single C risk can be
re-configured into a product that appears to have AAA-risk
characteristics. Of course, the individual asset retains the same
characteristic that it always had; it is the pooled, re-configured
and financially re-engineered aggregation of products that is
considered to have a different characteristic than a specific
component of the pooled product. The difference is most easily seen
as the analysis becomes increasingly granular. The disease that
might infect one class or sub-class of assets may not necessarily
spread to the whole--and then again it might. The financial world
has now seen how this result can play out to disrupt the entire
marketplace in the subprime mortgage crisis of 2007-2008. This is a
clear example of a financial "perfect storm".
[0012] Therefore, it would be beneficial to have a superior method
and apparatus for component analysis of pooled securities.
SUMMARY OF THE INVENTION
[0013] The needs set forth herein as well as further and other
needs and advantages are addressed by the present embodiments,
which illustrate solutions and advantages described below.
[0014] The system of the present embodiment includes, but is not
limited to, a data processing system having one or more program
executing computers, and one or more data storage devices; one or
more computer programs executing on the data processing system for:
receiving or extracting or generating data elements regarding
financial products contracts included in a pooled security,
determining valuations of the financial products contracts data
elements by calculation or comparison methods; creating a data
report in a standard data format containing the financial products
contracts data elements, storing the data report in the one or more
data storage devices, receiving new data items regarding one or
more of the financial products contracts, determining updated
valuations of the financial products contracts data items by
calculation or comparison methods; adding to or modifying the data
report to create an updated data report incorporating the new data
items, storing the updated data report in the one or more data
storage devices.
[0015] The method of the present embodiment includes, but is not
limited to, the following steps: receiving or extracting or
generating data elements regarding financial products contracts in
a pooled security from one or more persons at a data processing
system having a program executing computer and a data storage
device; determining valuations of the financial products contracts
by calculation or comparison methods; a computer program executing
on the program executing computer formatting the data elements
including the valuations of the financial products contracts into a
data report having a standard data report format and storing the
data report in the data storage device, receiving new data items
relating to nonfinancial risk or financial risk affecting valuation
of one or more of the financial products contracts at the data
processing system, the computer program executing on the program
executing computer adding to or modifying the data report to create
an updated data report incorporating the new data items, and
determining updated valuations of the financial products contracts
by calculation or comparison methods, and storing the updated data
report including the updated valuations of the financial products
contracts in the one or more data storage devices;
[0016] Other embodiments of the system and method are described in
detail below and are also part of the present teachings.
[0017] For a better understanding of the present embodiments,
together with other and further aspects thereof, reference is made
to the accompanying drawings and detailed description, and its
scope will be pointed out in the appended claims.
BRIEF DESCRIPTION OF THE DRAWINGS
[0018] FIG. 1 is a schematic diagram of a data processing system in
accordance with the invention;
[0019] FIG. 2 is a block diagram of the data processing system in
accordance with the invention;
[0020] FIG. 3 is a schematic block diagram depicting one embodiment
of the system according to the present teachings;
[0021] FIG. 4 is a schematic block diagram depicting one embodiment
of data association according to the present teachings; and
[0022] FIG. 5 is a flowchart depicting one embodiment of the method
according to the present teachings.
DETAILED DESCRIPTION OF THE INVENTION
[0023] The present invention is a better way to gather information
about the valuation of company assets.
[0024] The current business model for regulation of financial
entities such as insurance companies relies on financial statements
made by such companies that provide a snapshot of the company's
financial position as of an historical date. Invested assets (while
they may reference marks to market) are judged as if they will be
held to a maturity at par. If the company's management does not
completely understand the risks they have assumed or the value of
the assets they have secured, the financial statements they make
will be deficient. Furthermore, regulators can only discover the
information was flawed at a later date or during a financial audit.
However, market reasons may cause a company to sell assets at a
significant discount to par value which varies significantly from
the par value, and the variance can have a significant impact on
the company's financial status.
[0025] The present invention is directed at removing the disconnect
in value perception between valuation "on the books" or even annual
or semiannual valuations by updating all of the definitions of
financial products in real time, thereby providing market
transparency, by enabling full and continuous disclosure of asset
valuations.
[0026] In accordance with the invention, financial products markets
where there are a first sector for origination of the financial
products (such as sale of insurance, or making of loans to
borrowers) and a second sector for resale (or chains of resales) of
a fractional interest or entire interest of the insurer or lender
in the financial product, data is captured in the course of each
transaction involving the financial product. The data is recorded
in a data storage system so that each financial product and related
subsequent transaction involving that financial product are
described in a data report that discloses that original terms of
the financial product and its value, and changed terms of the of
the financial product and its value arising from external events or
from the subsequent transactions. The data report is provided in a
predefined standard format and can be continuously updated with
new, relevant information.
[0027] The data report is offered for sale to parties that conduct
transactions in the two sectors, and can be made available to
government regulators. The pricing of data is offered under a
pricing schedule providing reductions in the price of the
information which is related to the amount of information delivered
to the system by the user, and/or to fees paid for services such as
intermediation services provided to the user.
[0028] During application processes for financial products,
including specifically, consumer-directed financial products,
including but not limited to life insurance, annuities, medical
insurance, homeowner's insurance, renter's insurance, automobile
insurance, secured loans, mortgages, home equity loans, automobile
loans, personal loans or lines of credit and unsecured loans, and
credit card revolving loans, as well as business directed financial
products of the same type including mortgages for investment
properties and loans and lines of credit provided for use as
operating capital, offered by a plurality of offerors, information
is obtained in the application processes.
[0029] The present invention is a data processing system having one
or more program executing computers, and one or more data storage
devices, which processes data captured in the application processes
and in subsequent transactions. In particular, the invention
incorporates one or more computer program products executing on the
data processing system 101, which incorporate the following
steps:
[0030] receiving or extracting or generating data elements
regarding financial products contracts,
[0031] creating a data report in a standard data format containing
the financial products contracts data elements,
[0032] storing the data report in the one or more data storage
devices,
[0033] receiving new data items regarding one or more of the
financial products contracts,
[0034] adding to or modifying the data report to create an updated
data report incorporating the new data items, and
[0035] storing the updated data report in the one or more data
storage devices.
[0036] The financial products contracts will typically comprise
insurance contracts, reinsurance contracts, loans, or lines of
credit, or subsequent and derivative transactions relating thereto,
including reinsurance, and derivative securities such as
collateralized debt obligations.
[0037] The data elements regarding financial products contracts can
include one or more of insurance underwriting standards, insurance
financial terms, insurance applicant data, loan application
standards, loan financial terms, loan applicant data, or comparable
transaction details.
[0038] Thus, for example, in the case of a mortgage, the data
elements can include one or more of loan underwriting standards of
the loan originator; loan terms such as the size or amount of
mortgage, the type of loan (primary mortgage or home equity), the
loan to value (LTV) and/or combined loan to value (CLTV) ratios,
the mortgage rate (Fixed or Adjustable rate (including reset
date)), appraisal value, appraiser name, the primary/secondary
residence; the Origination Date, the holder of original
note/location of assignment documents, prepayment history; and
title search; and loan applicant data such as age, income,
employment history/type, credit history, debt to income (DTI), and
documentation provided.
[0039] The data report created from these data elements is in a
standard format so that the data contained in the report is
consistently searchable, combinable, and updatable. Thus, the data
in the data report can be used to instantiate an OLAP cube for
analysis of the data contained in the reports. The data elements
can be stored in a relational database or other database.
Alternatively, in a preferred embodiment, the data elements do not
require a relational database and are stored with associated data
tags to identify each data element. In the most preferred
embodiment, the data tags are XML tags. In one version of the
preferred embodiment, the standard data format is an XBRL
(eXtensible Business Reporting Language) data format.
[0040] New data items regarding one or more of the financial
products contracts might include one or more of payment history,
appraised value, loan to value ratio, comparable transaction
details, comparable property defaults or value changes or risks,
related financial instrument changes, or derivative contract data.
The new data items regarding one or more of the financial products
contracts can relate to one or more of the following types of
risks: asset valuation, bankruptcy, credit, currency, changes in
sentiment, counterparty, country, definitional (absence of
standardization), diversification, economic (Inflation, recession
and interest rates--yield curve), environmental, liquidity,
litigation, market crash, moral hazard, performance or operating
risk, spread, terrorism or war, transaction, transfer,
transparency, volatility, or volumes.
[0041] In one embodiment, the financial products contracts comprise
credit derivative swap contracts; and the new data items may
disclose changes in related financial products, or defaults in
related financial products.
[0042] The one or more computer programs perform calculations with
respect to the new data items to determine risk conditions; and add
to or modify the data report to create a risk updated data report
incorporating determined risk conditions, which are preferably
identified in the apparatus with risk condition data tags.
Preferably, the risk conditions are determined relative to
predetermined standards.
[0043] The apparatus further includes one or more computer programs
executing on the data processing system 101 for determining if a
person has provided data elements regarding financial products
contracts to the data processing system and calculating a system
credit related to a quantity of data elements provided by the
person. If so, the system credit may be applied by the person to a
cost of obtaining data reports from the data processing system or
to other economic benefits.
[0044] Preferably, the system credit is operably connected to a
data element, data report, new data item, or updated data report.
The operable connection may be obtained through a XLink defined
hyperlink. The hyperlink will typically be an out-of-band hyperlink
known as an extended link. The linkage allows identification of a
data contributor and a determination of the possibility of
adjustment of schedules of the award of the system credit amounts
based on experience gained in the effect of the system credit in
enhancing or occluding greater system transparency.
[0045] Usages of the system credits are determined and used as an
analytic tool to determine an optimum pricing for other financial
products contracts. The frequency, amount, and distribution of
system credits can be used as an analytic tool to determine a
degree of market transparency. A transparency index can be
calculated. Derivative financial instruments are created based on
the transparency index. Derivative financial instruments may also
be created based on system credits. Such derivative financial
instrument can include a credit wallet for the aggregation and
exchange of system credits.
[0046] The data reports are continuously updated to reflect changes
arising from external events or from the subsequent transactions.
The data reports can be made available to parties in either a
primary or secondary market for the financial products. In one
preferred embodiment, one or more computer programs executing on
the data processing system determine if a person has provided data
elements regarding financial products contracts to the data
processing system and calculate a system credit related to a
quantity of data elements provided by the person. The system credit
may be applied by the person to a cost of obtaining data reports
from the data processing system.
[0047] The data processing systems 101 may incorporate one or more
mechanisms that prime an efficient market and that reinforce the
efficiency of the market. Three illustrative mechanisms are:
[0048] First, where the data processing system 101 constitutes an
offering/closing system or exchange for the sale of financial
products, the pro rata fees incurred with respect to transactions
associated with a patron for patronizing the system might decrease
as the total fees incurred by transactions associated with that
patron increase. For example, although the owner/operator of data
processing system 101 might receive a fee from a lender/insurer
when the lender/insurer closes a loan or writes an insurance policy
through the system, a portion of the fee might be remitted back to
the lender/insurer for having closed a large volume of business
through the system in a given interval. Advantageously, the fees
from all types of loans, lines of credit and/or insurance policies
are aggregated for determining the amount of the remittance.
[0049] Therefore, this mechanism encourages lenders/insurers to
patronize the system with larger, rather than smaller, volumes,
which is accomplished by endeavoring to offer the most varieties of
loans, lines of credit, or insurance at the lowest interest rates
or insurance premiums and at the best possible terms.
[0050] Second, some or all of the parties who patronize the system
might receive statistics compiled by the system on the condition of
the market in loans, lines of credit, and/or insurance products.
Although these statistics cost the owner/operator of data
processing system 101 little to compile, their value is so great
that lenders, insurers, reinsurers, reinsureds and buyers and/or
sellers of loans who do not have access to the statistics will have
difficulty, in the long run, in competing with those who do. An
analogy makes the situation clear; a trader of stocks without
access to the stock ticker and current bid and offer quotations can
be arbitraged by a trader who does.
[0051] Furthermore, although some or all of the statistics might be
sold for cash, the statistics are advantageously given for free, or
sold at a subsidized price, to those patrons of the system who
actually disclose necessary data in the system. Advantageously, the
price for the statistics decreases as the measure of fees incurred
by transactions associated with a patron increases. For the
purposes of this specification, the provision of statistics for
free, or at a subsidized price, to those patrons of the system who
close loans, buy and/or sell loans, write insurance policies,
and/or reinsure risks or both through the system is called
"netbacking."
[0052] Netbacking also encourages lenders/insurers to patronize the
system with larger, rather than smaller, volumes, which is
accomplished by endeavoring to offer the most varieties of loans,
lines of credit, or insurance at the lowest interest rates or
insurance premiums and at the best possible terms.
[0053] Third, a portion of the fees incurred with respect to
transactions associated with a lender for lending through data
processing system 101, or with an insurer for writing policies to
insurance applicants, might be credited against the fees incurred
with respect to transactions associated with the lender for buying
and/or selling loans through the system, or with respect to
reinsurance transactions (as either buyer, seller, reinsurer and/or
reinsured). For example, many lenders desire to sell a loan
immediately after they have made it, and many insurers who write
policies immediately seek reinsurance (i.e., to transfer all, or a
portion of, the risk associated with the policy to a reinsurer). It
is, therefore, possible that a lender/insurer will lend to an
applicant or write a policy through the system, and incur a fee for
doing so, and then sell that loan or reinsure that policy through
the system and incur a second fee. Data processing system 101
credits, according to some credit schedule, a portion of the fees
associated with a patron for lending or writing insurance through
the system against the fees incurred for buying or selling a loan
or for reinsuring through the system.
[0054] An alternative embodiment, in the loan context, works in
reverse and credits, according to some schedule, a portion of the
fees incurred with respect to transactions associated with a patron
who buys and/or sells loans through the system against the fees
incurred for lending through the system. In the insurance context,
this alternative embodiment works in reverse and credits, according
to some schedule, a portion of the fees earned with respect to a
patron in reinsuring through the system against the fees incurred
by the patron in a transaction for writing insurance through the
system. In yet another embodiment, in the loan context, the fees
incurred in buying and/or selling loans through the system are
credited against the fees for lending through the system, and the
fees incurred for lending through the system are credited against
the fees for buying and/or selling loans through the system. In yet
another embodiment, in the insurance context, the fees incurred in
reinsuring through the system are credited against the fees for
writing insurance through the system, and the fees incurred writing
insurance through the system are credited against the fees for
reinsuring through the system.
[0055] These structures encourage lenders/insurers to patronize the
system with larger, rather than smaller, volumes, and to offer the
most varieties of loans, lines of credit, or insurance at the
lowest interest rates or insurance premiums and at the best
possible terms, and by patronizing the secondary market in loans or
reinsurance with the best possible bids and offers.
[0056] The end result is that in order to compete in the consumer
finance and/or insurance markets, lenders, buyers and/or sellers of
loans, insurers, reinsurers and/or reinsureds must have access to
the statistics, which encourages them to patronize the system with
competitive offerings to get access to the statistics, which
increases the competitiveness of the market, increases its volume,
and promotes its efficiency. Therefore, some embodiments prime the
market for efficiency and incorporate a positive feedback mechanism
that maintains that efficiency. It is understood, however, that the
priming of embodiments might be assisted by advertising and other
marketing techniques.
[0057] The data processing system 101 may provide a market for: (1)
the provision of loans, lines of credit and/or insurance from a
plurality of lenders/insurers to a plurality of applicants, and (2)
the buying and selling of loans between buyers and sellers of
loans, or reinsurance of existing policies by a plurality of
reinsurers to a plurality of reinsureds (not shown); and in any
event, receives and stores data elements and updated data elements
and new data items about such transactions. One or more loan
application processors or insurance agents and one or more loan
processors or underwriters might advantageously be engaged to
facilitate the provision of loans, lines of credit, or insurance
between lenders/insurers and applicants.
[0058] An "application processor" is an intermediary that prepares
a loan or insurance application (e.g., by filling out the
paperwork, by entering the applicant's pertinent information into
data processing system 101 via a computer terminal, etc.). Although
a sophisticated applicant can act as his or her own application
processor, it might be desirable for a less sophisticated applicant
to have another entity act as an application processor.
[0059] An "application" may, depending on context, include an
inquiry regarding a loan or line of credit and/or insurance,
without a full application being prepared and considered for
funding.
[0060] A "loan processor" is an entity that evaluates the
compliance of a loan and/or insurance application against lending
and/or insurance underwriting standards. Although lenders/insurers
often act as their own loan processors, a lender/insurer might
employ another entity to act as a loan processor.
[0061] Furthermore, because many entities in the loan, credit and
insurance industries are large and sophisticated, it is common for
a single entity to perform different roles at different times or
with respect to different transactions. Therefore, a single entity
can be:
[0062] (i) a lender, or
[0063] (ii) a buyer or seller of loans, or
[0064] (iii) an application processor, or
[0065] (iv) a loan processor, or
[0066] (v) an insurer, or
[0067] (vi) or reinsurer, or
[0068] (vii) a reinsured, or
[0069] (viii) an underwriter, or
[0070] (ix) an applicant; or
[0071] (x) an insurance agent, or
[0072] (xi) any combination of i-x.
[0073] Data processing system 101 receives data from each lender,
applicant, application processor, loan processor, buyer and/or
seller of loans, insurer, reinsurer, reinsured, insurance agent
and/or underwriter, and in some embodiments, endeavors to match
lenders/insurers with appropriate applicants and reinsurers with
appropriate reinsureds, to facilitate the provision of loans and
lines of credit. Each lender, applicant, application processor,
loan processor, buyer and/or seller of loans, insurer, reinsurer,
reinsured, insurance agent and/or underwriter is advantageously
capable of providing data to and receiving data from data
processing system 101 via a data network (e.g., the Internet, etc.)
or via a telephone network (e.g., the Public Switched Telephone
Network, etc.) or both.
[0074] FIG. 2 depicts an illustrative embodiment of data processing
system 101, which illustrates the updating of data reports with new
data items and the earning of a system credit from submission of
new data items.
[0075] The invention includes the following advantages:
[0076] data processing system 101 can provide buyers and sellers of
loans with statistics regarding the market in pools of loans, which
can be used by the buyers and/or sellers of loans to: (1) assess
the value of an individual loan, (2) assess the value of a loan or
pool of loans, (3) determine which types of loans they desire to
buy and sell, and (4); arbitrage those buyers and/or sellers,
reinsurers, and/or reinsureds who do not have access to the
statistics.
[0077] data processing system 101 may provide reinsurers, and/or
reinsureds with statistics regarding the market in insurance and
reinsurance that are of value in: (1) assessing the cost/value of
individual policies that are to be reinsured; (2) determining which
policies they desire to reinsure and at what price, and (3)
arbitraging those reinsurers and/or reinsureds who do not have
access to the statistics.
[0078] data processing system 101 may provide buyers and/or sellers
with an efficient market for the purchase and sale of the servicing
of pools of loans (e.g., providing payment collection and other
administrative overhead, etc.).
[0079] data processing system broadly provides an efficiently
priced market by allowing for transaction fees to wholly or
partially offset one another or have either offset access to
strategically critical market information--even prospectively
across asset classes and product lines.
[0080] These inducements are possible because the costs of doing
business for lenders, insurers, reinsurers, reinsureds and buyers
and/or sellers of loans and the interest rates or insurance
premiums and fees to applicants are unnecessarily high because
efficient markets for loans, lines of credit, insurance and
reinsurance do not exist. Furthermore, if a highly efficient market
for loans, lines of credit, insurance and reinsurance did exist,
the cost of doing business for lenders, insurers, reinsurers,
reinsureds and buyers and/or sellers of loans could decrease, the
interest rates or insurance premiums and fees to applicants could
decrease, and the provider of the market could also make a profit.
Furthermore, the existence of an efficient market could even
provide lenders/insurers with a larger profit than they make now if
operating costs drop more quickly than interest rates or insurance
premiums drop. In other words, the intermediation of an efficient
market between applicants, lenders, insurers, reinsurers,
reinsureds and buyers and/or sellers of loans can actually make the
cost of loans, lines of credit, or insurance to applicants go down,
the cost of doing business to lenders, insurers, reinsurers,
reinsureds and buyers and/or sellers of loans go down and the
profits to lenders, insurers, reinsurers, reinsureds and buyers
and/or sellers of loans go up. Therefore, data processing system
101 endeavors to provide a market for the provision of loans, lines
of credit, insurance and reinsurance that is highly efficient.
[0081] The efficiency of the market for loans, lines of credit
and/or insurance (the primary or retail market) may be affected by
the efficiency of the market in pools of loans and/or reinsurance
(the secondary or wholesale market) and vice versa. Therefore, data
processing system 101 may improve the efficiency of both the
primary market and the secondary market so that, to the extent the
efficiency in one enhances the efficiency in the other, a synergy
of efficiency between the two markets is affected. For example, to
effect this synergy, fees incurred by a patron to the
owner/operator of data processing system 101 for lending through
the primary market might be credited against the fees incurred by
the patron to the owner/operator of data processing system 101 for
buying and/or selling through the secondary market (and vice
versa).
[0082] Risk Transfer
[0083] The present invention extends the above described apparatus
and methods and extends them to a encompass systems for risk
discovery and analysis, with associated pricing adjustments, and an
exchange or index product for use on an exchange that trades risk
transfer and/or financial products that transfer risk, whether in
primary or secondary markets. Credits are earned from use of the
system, index or exchange. There can be an index of credits. An
index may be used to either offset or reflect the measure of
transparency. All transactions may be tracked. All credits are
tracked--and can be made fungible to cross financial sector or
product lines.
[0084] Historically, auction markets have provided the most
efficient, and preferred means of price discovery for an insurance
or financial product. In insurance, reinsurance and capital
markets, there are brokers and agents that act as intermediaries
between buyers and sellers. Brokers charge "transaction fees" for
the transactions that they intermediate. Intermediaries can
purchase insurance or financial products in an auction market for
sale or brokerage to principals. It is also possible for a
principal to acquire the product directly without using an
intermediary.
[0085] When an intermediary functions in an auction market, their
fees are generally smaller because the intermediary is functioning
as agent and the commission is stated. However, when an
intermediary functions in a negotiated deal--not an auction market,
the costs often grow as the intermediary seeks to expand his gross
margin. Intermediation costs run between 7-20% (700-2000 basis
points) in the property and casualty markets, and a maximum of 5%
(500 basis points) for "riskless" NASD-mandated capital market
transactions.
[0086] The cost of intermediation (but not a completed transaction)
in the methodology of the present invention is an "all-in" 0.5% (50
basis points). The new inventive methodology or solution enhances
price discovery by providing data and analytics on the
transactions, contracts, and market activity. This data is provided
in real time and on an interactive basis to support accurate risk
pricing. Lower execution costs and improved price discovery in the
market in time leads to cost savings for all market participants,
including the consumer.
[0087] For a market to function optimally there must be confidence
in the meaning and value of its contractual obligations. Confidence
in the contracts increases liquidity in the markets for insurance
and other financial products. Establishment and disclosure of
standards, statistics, and definitions applicable to the contracts
is fundamental to creating that confidence. This is achieved
through disclosure of the terms and conditions of the contracts as
well as the clear establishment of necessary underwriting criteria.
The use of the invention enables the establishment of standards,
definitions, and statistics necessary to optimal functioning of the
market, and to creating reliable contracts. The inventive solution
does not impose the terms and conditions of the contracts, but
rather encourages them to be established naturally in the free
market--exposed and fully transparent.
[0088] The invention proposes a free market solution to
dysfunctional, illiquid markets. The inventive solution focuses on
the exchange of underwriting standards in insurance, loans and
lines of credit, as well as the creation of data and analytics
relating to the markets for those products.
[0089] An important part of the inventive solution is sorting and
matching to the best deal. Through this process, prospective
counterparts to a transaction offer increasingly detailed
information about themselves in order to better target and price
the transaction. This process also helps to control and lower costs
by assuring a truly competitive environment.
[0090] The inventive methodology fosters market transparency and
induces usage through the grant of an economic benefit to all
market participants. The key element in the process that achieves
these points is an economic benefit, specifically, a system credit
arising from system usage which is identified by the trademark name
"Transaction Credit." The Transaction Credit system credit attaches
to each transaction fee. The Transaction Credit system credit
offsets either the cost of future transaction fees, or the cost of
access to market-critical information. The Transaction Credit
system credit encourages more transactions by lowering costs,
generating more market data, and demonstrably improving market
liquidity, thereby calming markets. It provides an economic
inducement for greater participation as well as a self-priming
mechanism for the market--a stimulus that is not inflationary.
[0091] Each and every constituent part of the financial market food
chain--whether a consumer, intermediary, transaction platform,
workflow or process enabler, or an investor--is invited, but never
compelled, to participate in every stage of the transaction.
[0092] All markets "clear" risk (meaning that they price risks and
transform them into acceptable and manageable structures) at what
is called the clearing house price. The clearing house price is a
function of many things, most importantly, comparable transactions.
As a result, the more the risk can be defined and standardized, the
more easily the market clears, defines and standardizes it.
[0093] It is estimated that there are as much as $200 trillion in
annual catastrophic environmental risks in the U.S. Distributing
these catastrophic environmental risks efficiently allows for
future stability in the marketplace as the fee income from these
risk transfers can offset current losses. Even at the fully-loaded
estimated 0.5% cost of the inventive methodology can save the
nation trillions of dollars.
[0094] Moreover, the methodology can be expanded to other
large-scale risks (allocation of natural resources, food, medicine,
population, even threats to civil peace), or the focus can be
narrowed to further granularly define on a going forward basis all
existing financial instruments.
[0095] The solution of applying the invention to risk transfer is
applicable to any financial instrument and market participant for
which there is a primary and secondary market, and intermediation.
This includes loans, lines of credit, insurance and reinsurance,
derivative and other financial products. In a model, additional
revenues flow from incremental transaction fees or the purchase of
information.
[0096] The solution involves a universal Transaction Credit system
credit that conveys an economic benefit, displayed electronically,
that fosters the development of an "Infomediary" that carries the
necessary data and analytics to clarify the marketplace. This
credit will be used to support a an effective utility, thus
offering a more efficient and volume-enhancing electronic
distribution network for a full range of financial products,
including financial products that impact all forms of risk
transfer. The result gives clear, economic and strategic advantage
to the system user and induces usage generating business
volumes.
[0097] Sitting at an electronic meeting place of product creation,
transaction and pricing is a measure of fees, associated credits
and remaining terms of use that buy economic and strategic
advantage for users through provision of critical market
information.
[0098] Such information is, without limit, a description of:
individual risk(s) covered; specific financial exposure per
product; amount of government coverage of potential loss;
diversification or incidence or percentage risk per investment pool
(which can include a single risk category or multiple risk
categories such as environmental, weather, interest rate,
counterparty and other analyzable risks); original and subsequent
market pricing; and market volumes--an effective "ticker" of all
appropriate financial market information available in real
time.
[0099] Over time, an analysis of the operational metrics involved
in all aspects of product creation can be re-deployed to enhance
operational efficiency, facilitate document exchange, vetting and
certification, reveal market excesses, create new products or
predict, mitigate and, in some cases, even avoid risk.
[0100] This technology can be superimposed on an existing, de facto
marketplace, singly or in a serial fashion to create a virtual
community of interests, a truly collaborative effort that accesses
all necessary capital pools. It can be easily organized using
today's technology and financial skills at low cost relative to any
other solution, open to all, enhancing and linking--but not
disturbing--all sectors and transaction platforms in the
marketplace. It is an approach that is entirely optional and
voluntary, in which all participants trade transparency-related
information for lower costs.
[0101] Key to the process is the electronic real-time display of
the clear economic benefit available from the Transaction Credit
system credits for each and every market participant, their
financial impact and their remaining term of use.
[0102] One should look for low-cost ways of improving transparency
in all credit, insurance and risk-related markets. There is a need
to try to grow the market out of its current inefficiency.
[0103] Attributes of the system include:
[0104] (1) It is neutral--it does not favor any one special
interest group or constituency.
[0105] (2) It is internet-focused (thereby creating widest market
reach).
[0106] (3) It focuses on underwriting standards and statistics.
[0107] (4) It provides its own economic and strategic benefits.
[0108] (5) It is transparency-inducing, without being
transparency-requiring (each counterpart does precisely what they
choose, in terms of disclosing their unique circumstance and paying
an appropriate price).
[0109] (6) It delivers increasingly granular real-time data and
analytics for all financial products with primary and secondary
markets.
[0110] (7) It is the lowest-cost method relative to all other
solutions.
[0111] (8) It is entirely volitional.
[0112] (9) It carries the benefit of both organic and viral growth
(caused by the fact that trade participants always lower costs,
gain revenues and market share; whereas non-participants lose).
[0113] (10) The public demonstrably wins through better pricing of
goods and services.
[0114] (11) It is easily adaptable to all current transaction
platforms and technology.
[0115] (12) It can be initiated almost overnight, simply by
executive mandate.
[0116] (13) It provides a stimulus (made clearest through an
electronic display) without any inflationary risk.
[0117] (14) It facilitates easy entry and exit of new
product/services.
[0118] (15) It does not require additional expansion of government
functions or bureaucracy.
[0119] (16) It is a private market solution; an American
innovation.
[0120] (17) It tracks all market transactions, and forms a
low-to-no-cost audit trail.
[0121] (18) It could look like a Government Sponsored Enterprise
that sponsors transparency, not needing to make financial
guarantees, simply validating that the information is disclosed
anonymously.
[0122] (19) It can predict, mitigate and, possibly, avoid risk.
[0123] (20) It is capable of presenting as a dedicated search
engine for Financial Services.
[0124] (21) It is friendly to all sectors.
[0125] (22) It encourages massive market growth of all types of
risk transfer instruments and securities.
[0126] The financial marketplace consists of numerous products that
have evolved out of the most basic designations of equity and debt.
Product specialization has resulted in linguistic and semantic
differences, similar to those that can be found in different
national languages in the world's countries. The transactional
conventions and methodologies for scoring and rating the products
that are associated with these differences can result in real price
and term discontinuities, just as they appear in society as
different approaches with different meanings. As is well known to
those in the trade, it is possible through one kind of financial
engineering or another to change high risk assets into low risk
ones through various kinds of aggregation, diversification, hedging
and division of risk. As a result, a single C risk can be
re-configured into a product that appears to have AAA-risk
characteristics. Of course, the individual asset retains the same
characteristic that it always had; it is the pooled, re-configured
and financially re-engineered aggregation of products that is
measured differently. The difference is most easily seen as the
analysis becomes increasingly granular. The disease that might
infect one class or sub-class of assets may not necessarily spread
to the whole--and then again it might. The financial world has now
seen how this result can play out to disrupt the entire marketplace
in the subprime mortgage crisis of 2007-2008. This is a clear
example of a financial "perfect storm".
[0127] Separately, the invention focuses on giving individual
financial product characteristics a more ordered methodology for
analysis. In loans and lines of credit, insurance and reinsurance,
and in related derivative products, our work has looked at the
creation of basic approaches to compare the characteristics of the
individual risk into an associated product and to track the
performance on both a past and a going forward basis in the
resulting product placements. The invention contemplates the
establishment of an electronic Transaction Credit system credit
system to generate liquidity; collecting underwriting standards and
statistical measures and connecting them to fees across all
participating sectors in insurance and reinsurance; operating and
strategic relationships in insurance between risk intermediation
(brokerage), product origination and risk underwriting (insurer)
and investor participation in narrowly defined risk aspects
(reinsurance); and, operating metrics in both the most complex and
evolved instruments (mortgages), as creating a methodology for
observing how inquiry can be handled and distributed in order to
direct each product inquiry to a proper risk carrier.
[0128] This work facilitates product movement for the placement of
various kinds of risk into different types of financial
products.
[0129] Additionally, focus is on the development of measures for
predicting, mitigating and avoiding risks--and other products.
Risks exist almost without limit in finance and financial market
participants each look at--and price--risk in a unique way. Risk
avoiders, risk intermediaries and risk investors can be seen to be
constantly engaged in a struggle either to reduce or to add the
perception of risk in order to charge for their ability to place it
with a third party. The more the conventions that measure risk can
be accepted, the lower the costs.
[0130] Looking at the individual operating metrics of each risk
intermediator allows one to see when specific risks enter the
financial food chain. Since humans perceive reality
retrospectively, recently experienced and understood risks tend to
appear larger than those in the more distant past. In other words,
identifying individual risks so that they can be placed in the past
facilitates both their pricing and their identification.
[0131] This kind of thinking is associated with Gaussian mathematic
concepts which look at history in terms of a statistical past. Risk
occurs, in terms of this type of mathematics, in some kind of
linear or "normalized" fashion that can be grouped in such
classifications as standard deviations. What needs to be understood
is that, in fact, risk occurs elliptically, in an irregular or
non-symmetric fashion. Current measures of risk look at either
frequency or severity of risk; they do not account for both the
frequency of the severity and/or the severity of the frequency. It
can be predicted statistically when a hurricane will hit the US. It
can be predicted statistically when a hurricane will hit a city.
Presently, it is not possible to predict when, like Katrina in New
Orleans, a hurricane will hit a low-lying city and overwhelm the
levies, resulting in incomprehensible damage. That is because such
a catastrophe has not even been imagined. Since humans past
reference their experience, calling it wisdom, they presently use
history to project the future. This cannot be done, because the
future, by its nature, has not necessarily been observed in the
past. Experts judge that it will take 50 years of supercomputing to
process such risk. The need to evaluate the risks properly is
immediate. This invention provides a solution.
[0132] Reference is made to a torus when considering risk analysis.
This is a geometric surface and interior shaped like a donut. It is
described as "a surface generated by rotating a circle about an
axis that is in the same plane as the circle but does not intersect
it." A torus resembles a donut and is a subtype of a toroid. On
occasion, if one were graphing risk in three dimensions, it would
appear as a kind of oddly-shaped toroid, bulging with each unique
circumstance. Risk occurs this way. In other words, the ordinary
locus of points that describe the surface of this kind of object is
pulled apart by a unique circumstance, in effect a particularized
experienced risk that can be measured. Different types of toruses
should be studied as identifying different types of risk.
[0133] Reference is made to LaGrangian Mathematics when considering
risk analysis as it describes movement tied to a constant structure
(as each financial product by definition can be seen as tied to a
constant structure)--something like a pendulum with movable
support.
[0134] If one could connect all the elements of all the financial
product origination, transacting and processing platforms in real
time and present the results graphically and compare them to the
observed results, one could measure when a risk "bulged", expanded
or stretched, or unduly constrained, stopped or established an
illiquid circumstance (or similar price discontinuity), as measured
by the shape of the donut.
[0135] This can be seen to apply to the Transaction Credit system
credits that have been referenced which have the capability of
linking all types of platforms. A ubiquitous credit (one that is in
widespread use) can be seen as a common tool for measuring market
risk, by business etc. Credits create a single indicia with real or
perceived predictive value. To help visualize, as ball bearings are
to data so credits equal a magnet; and as ball bearings are to
credits so data is to a magnet--with each magnetic flow pulling the
other through the system. Data flows toward those with credits and
credits flow toward those with data.
[0136] The invention contemplates a new kind of risk
measurement--possibly predictive, mitigative or avoiding.
[0137] Transaction credits link not just similar, but also
dissimilar products, across all origination, transacting and
processing financial and non-financial platforms, inclusive of all
types of goods and services. In other words, linkages are created
between, not just one product having a primary and secondary
market. Linkages are created between all financial products having
primary and secondary markets. This allows credits which are more
ubiquitous. The credits may flow along more paths including
cross-product paths, enabling risk and financial product
performance measurements that look beyond a single class of
financial product and associated risks.
[0138] Credits are used to track business and non-business volumes
and to observe the various elements that comprise them. This has
the effect of using a credit to standardize different measures.
[0139] Comparable operating metrics, (which may be visualized as
forming a graphic type of CAT scan) all types of origination,
transacting and processing platforms--for financial and
non-financial (commercial) products--are compared in real time when
a risk is perceived, in order to see if the risk, and specific
performance of a financial or non-financial product, can be related
to the operations of any platform. This allows one to look inside
the entire supply chain of financial products to see if a perceived
risk can be linked to any particular type of platform, industry, or
type. The risk is perceived as a "bulging"--like an aneurism in a
vein--in the toroid-type graphic analogy.
[0140] Comparable market metrics (inclusive of gross movement by
price or size are accomplished. Actual performance of given
financial or non-financial products or instruments, by any measure,
is identified in linguistic or semantic terms and a search for like
elements occurs.
[0141] The invention considers all intersections of data, inclusive
of both operating and market metrics as potentially risk
predictive. The invention contemplates a new kind of hedge for the
coming market transparency and greater impact of risk prediction.
The invention includes the following concepts:
[0142] 1. an index comprised of financial Transaction Credit system
credits;
[0143] 2. an index comprised of non-financial Transaction Credit
system credits;
[0144] 3. an index comprising both financial and non-financial
transaction and non Transaction Credit system credits;
[0145] 4. an index focused on operating metrics, as described
above; and/or
[0146] 5. various indices combining operating metrics and
transacting credits.
[0147] The invention includes a new kind of targeted "search" tool
for computers.
[0148] Transaction credits are used as a tracking measure for
finance and commerce and ordered by usage, number, size, type, etc.
Market data, inclusive of Transaction Credit system credits and
volumes, is embedded in software that connects to a central
database that is the search engine. Searches are ordered by
statistical relationships between discrete market transactions, as
measured by a Transaction Credit system credit/index. Searches are
ordered by ranking credits according to the size of the discounts
they will buy on specific transaction fees/costs. Searches are
ordered by the net cost, by product type, inclusive of the discount
given to a specific recipient.
[0149] The invention contemplates an environment in which the above
tool exists. The invention further contemplates creating a new kind
of "credit wallet" or "21st century money" that generates liquidity
and asset valuations. Every person has a stock of credits for all
their assets: cash, real property, personal property, automobile,
life insurance, other insurance, stocks, bonds, other financial
products, etc. which may be traded and for which there is an index
for trading or exchange with transparency and data and information
is given.
[0150] There is maintained a schedule or listing of all assets,
financial, non-financial, commercial and collectable.
[0151] There is an effective real time pricing of the above, in
which present or past bids/offers are compared by software
"spiders" searching all kinds of transaction platforms, auctions,
sales etc.
[0152] In the inventive system, the search (including one that is
semantic or linguistic) is targeted by past credits. In the
inventive system, the search may also be ordered by time necessary
to clear and liquefy the asset. There is a consolidated display of
associated pricing and current valuations that form a new kind of
liquidity measure.
[0153] The invention contemplates a display of risk-related
information from varied sources (data flows, marketplaces, analytic
resources) and paying for these service feeds through ubiquitous
credits that accompany and can relate to transaction fees for
financial products.
[0154] All of the above system concepts may include varying the
value of the credit by the amount of the stated cost of a service
to be absorbed. Additionally, the value of the credits may be
varied by:
[0155] a. the conversion rate of the credit into a good, service or
transaction fee;
[0156] b. the remaining term of the credit;
[0157] c. the present value of the combination of a and b
(above);
[0158] d. the addition of one other factor having economic impact
and known to those familiar in the art; and/or
[0159] e. the weighting of the estimated incidence of risk.
[0160] The invention contemplates the above described methods and
systems wherein the offset of credits from transaction fees
references differences between varying types of financial products;
wherein the offset of credits from transaction fees references
varying types of both financial and non-financial products; and/or
wherein the offset of fees in any one market sector is offset
against the cost of access to information describing the
transactions or the marketplace in general.
[0161] As mentioned above, the invention introduces a "credit
wallet", tracking in real time the individual, aggregate and
remaining value and time of unused credits--or discounts--of
commercial value to offset the cost of transactions:
[0162] designing a transaction system or electronic marketplace,
specifically to assign credit prices/designations from bonafide
bids/offers, to enhance both liquidity and fungibility between
different credit structures;
[0163] a specific methodology for summing such credits to arrive at
a new effective net price;
[0164] by ranking size of acceptable or exchangeable credit;
[0165] the ordering of such pricings to inform or rank "search"
functions on a computer according to their effective net price;
and/or
[0166] use in combination with a cell phone that identifies the
user, assuring credit-worthiness, facilitating business
dealings.
[0167] The invention devises a central market mechanism for credits
and/or discounts:
[0168] inclusive and exclusive of one in which access to various
services is offered in exchange for consumer willingness to lower
privacy requirements (i.e. trading privacy restrictions for
favorable pricing or some kind).
[0169] The invention further contemplates operating as a valve
separating market sectors.
[0170] A. A valve between market sectors opens and closes in such a
way (as if pulsing) that it induces increased transactions, data or
analytic draw downs or both.
[0171] B. It creates a measurement of the history of flows (stasis
is not good) between the two sectors as a guide for providing price
or term inducements.
[0172] C. It offers progressively more "granular" information and
provides increasingly refined product views.
[0173] D. The emphasis of the analytics will shift from improving
operational and volume performance to focus on strategic benefits,
product positioning, transaction patterns, and possibly as early as
year 3, risk analysis.
[0174] E. Real time data and analytics are grown organically out of
customer inquiry and will be sufficiently robust to compel usage by
all industry participants.
[0175] F. A database displays and cross references all elements
relevant to policy issuance, including, without limitation:
volumes, by broad product type or sub group, by region, by time,
price, terms, type of counterpart, etc.; operating metrics; audit
trails; and, in time, both granular and high level risk performance
by insurance product or insured type analyzed as far down as
performance on the individual policy level.
[0176] In summary, there is a valve between market sectors which
opens and closes in such a way (pulsing) that it induces increased
transactions, data or analytic draw downs or both; creates and
enables a measurement of the history of flows (stasis is not good)
between the sectors as a guide for providing price or term
inducements. Real time data and analytics grow organically out of
customer inquiry and will be sufficiently robust to compel usage by
all industry participants. Electronic database displays and cross
references all elements relevant to product and/or policy issuance,
including, without limitation: volumes, by broad product type or
sub group, by region, by time, price, terms, type of counterpart,
etc.; operating metrics; audit trails; and, in time, both granular
and high level risk performance by insurance product or insured
type analyzed as far down as performance on the individual policy
level offering progressively more "granular" information leading to
increasingly refined product views. Over time the emphasis of the
analytics shifts from improving operational and volume performance
to focus on strategic benefits, product positioning, transaction
patterns, and risk analysis.
[0177] The invention also contemplates measuring risk from inquiry
through loan/policy performance to reveal predictive aspects.
[0178] A. The invention resolves the application/submission
process.
[0179] B. It measures risk from-inquiry-through-loan/policy
performance to reveal predictive aspects (an entirely new
measure).
[0180] C. It offers progressively more "granular" information
provides increasingly refined product views.
[0181] D. Emphasis of the analytics will shift from improving
operational and volume performance to focus on strategic benefits,
product positioning, transaction patterns, and possibly as early as
year 3, risk analysis.
[0182] E. Real time data and analytics are grown organically out of
customer inquiry and will be sufficiently robust to compel usage by
all industry participants.
[0183] F. A database displays and cross references all elements
relevant to policy issuance, including, without limitation:
volumes, by broad product type or sub group, by region, by time,
price, terms, type of counterpart, etc.; operating metrics; audit
trails; and, in time, both granular and high level risk performance
by insurance product or insured type analyzed as far down as
performance on the individual policy level.
[0184] The invention resolves key inefficiencies of the multiple
application submission process through the electronic compilation
of inquiry and transaction details; real time data and analytics
grow organically out of customer inquiry and will be sufficiently
robust to compel usage by all industry participants. An electronic
database displays and cross references all elements relevant to
product and/or policy issuance, including, without limitation:
volumes, by broad product type or sub group, by region, by time,
price, terms, type of counterpart, etc.; operating metrics; audit
trails; and, in time, both granular and high level risk performance
by insurance product or insured type analyzed as far down as
performance on the individual policy level offering progressively
more "granular" information leading to increasingly refined product
views. Over time the emphasis of the analytics shifts from
improving operational and volume performance to focus on strategic
benefits, product positioning, transaction patterns, and risk
analysis.
[0185] The invention further contemplates:
[0186] A. Map and grade key lending/insurance product elements;
[0187] B. Map and grade key industry metrics;
[0188] C. Offering progressively more "granular" information
provides increasingly refined product views;
[0189] D. Emphasis of the analytics will shift from improving
operational and volume performance to focus on strategic benefits,
product positioning, transaction patterns, and, possibly as early
as year 3, risk analysis;
[0190] E. Real time data and analytics grown organically out of
customer inquiry and will be sufficiently robust to compel usage by
all industry participants;
[0191] F. Database displays and cross references all elements
relevant to policy issuance, including, without limitation:
volumes, by broad product type or sub group, by region, by time,
price, terms, type of counterpart, etc.; operating metrics; audit
trails; and, in time, both granular and high level risk performance
by insurance product or insured type analyzed as far down as
performance on the individual policy level.
[0192] The invention allows the user to map and grade key
lending/insurance product elements and map and grade key industry
metrics: Real time data and analytics grow organically out of
customer inquiry and will be sufficiently robust to compel usage by
all industry participants. Electronic database displays and cross
references all elements relevant to product and/or policy issuance,
including, without limitation: volumes, by broad product type or
sub group, by region, by time, price, terms, type of counterpart,
etc.; operating metrics; audit trails; and, in time, both granular
and high level risk performance by insurance product or insured
type analyzed as far down as performance on the individual policy
level offering progressively more "granular" information leading to
increasingly refined product views. Over time the emphasis of the
analytics shifts from improving operational and volume performance
to focus on strategic benefits, product positioning, transaction
patterns, and risk analysis.
[0193] The invention further includes positioning a search function
in cyberspace as an exchange. The search function serves to:
[0194] direct all transactional and informational flows to improve
market knowledge and business efficiencies;
[0195] give the borrower/insured--or their designee--a choice on
resolving the application/submission process;
[0196] take the information resulting from this resolution of
multiple application or policy submissions and replay it in the
form of anonymous industry real time inquiry or transaction
analytics;
[0197] require increasing levels of volumes of closed transactions
from exchange participants;
[0198] price the service so as to provide incentives for
transacting in products where there is limited use (give it away at
first, then price as the data and analytics become more
valuable);
[0199] devise a valve between any two market sectors that opens and
closes in such a way (pulsing) that it induces increased
transactions, data or analytic draw downs or both (The system
creates a measurement of the history of flows (stasis is not good)
between the two sectors as a guide for providing price or term
inducements.);
[0200] measure risk from inquiry through loan/policy performance to
reveal predictive aspects;
[0201] return an equal dollar override on all exchange profits to
broker and carrier members (thus advantaging smaller members who
derive an override an high levels of transactions) but compensate
those with larger volume with access to more market information (to
their strategic benefit);
[0202] map and grade key lending/insurance product elements;
and/or
[0203] map and grade key industry metrics.
[0204] Using the concepts disclosed in the patent for a "Data
Processing System For Making the Market For Insurance and
Reinsurance More Efficient" incorporated by reference herein above
as a guide for structure, the invention intends the following:
[0205] 1. To partner with all strategically appropriate entities,
wherever possible, to expedite development of an exchange (ECN),
and to build market presence and transaction volume. For example,
one of the earliest challenges is resolving issues for brokers and
carriers surrounding multiple submissions (complete with relevant
customer-driven data "sorts"), issuance, and maintenance for
insurance policies.
[0206] 2. To present a familiar, intuitive interface of service to
any industry participant.
[0207] 3. In the first three years, to develop the interface of
system software as early on as possible, to facilitate industry use
of the ECN, and thus to capture, analyze and display in real time a
variety of market elements of critical interest to industry
participants. In year three, dependent on system development and
sophistication, an intense marketing effort will accompany each new
system rollout.
[0208] 4. Progressively more "granular" information will provide
increasingly refined product views. In addition to the 40,000+
brokers and 8000-odd insurers, this information will be of keen
interest to: product developers; market and risk analysts; data
miners; rating companies; investment bankers; security market
traders and analysts; regulators from 55 states and jurisdictions;
and, electronic and print distribution companies focused on
business information. Over time, the emphasis of the analytics will
gradually shift from improving operational and volume performance
to include a focus on strategic benefits, product positioning,
transaction patterns, and, possibly as early as year 3, risk
analysis. The data that is to be collected and displayed will grow
organically out of customer inquiry. In time the unique, real time
data and analytics will be sufficiently robust as to compel usage
by all industry participants.
[0209] 5. The second five years will build on this base and extend
it into new market areas all of which have been previously
referenced: a greater focus on data base sales and infomediary
functions; building additional strategic interfaces; and, an entry
into both international markets and reinsurance. The necessary
information flows naturally out of the company's intention to
develop or partner on resolving the issue of multiple submissions
and issuance of insurance policies. The individual data elements,
including anything that can even broadly be considered underwriting
data, as well as volumes can be aggregated and analyzed as a
function of handling the submission. This database can be
contrasted, through its granularity, with the currently available
high level carrier developed and regulator aggregated information.
Because of an initial broker customer interface, as well as an
intended future agency management system relationships,
claims-paying analytics as a predictive tool will be used to begin
enhancing the exchange entry into both the global and the
reinsurance market.
[0210] The model is designed to develop a database that displays
and cross-references all elements relevant to policy issuance,
including, without limitation: volumes, by broad product type or
sub group, by region, by time, price, terms, type of counterpart,
etc.; operating metrics; audit trails; and, in time, both granular
and high level risk performance by insurance product or insured
type analyzed as far down as performance on the individual policy
level.
[0211] There are several aspects to the confidential strategy and
proprietary drivers that need to be explained:
[0212] 1. Use of an electronic communications structure;
[0213] 2. All market access fees (other than initial broker or
carrier membership fees) are paid by the borrowers or insureds;
[0214] 3. The size of these fees will be based on "shadow" credits
equal to a certain 50 to possible 75 basis points (0.5 to 0.75%) of
premium charged;
[0215] 4. These credits will be used to offset charges of what will
be initially very high level but, over time, increasingly detailed
statistics available to the trade;
[0216] 5. Initially the charges for the data will be low, allowing
widespread access to the information, at first virtually given away
to gain experience;
[0217] 6. Reactions to, and requests for, data and analytics will
be closely monitored to guide future growth;
[0218] 7. This information flows naturally out of the intention to
develop or partner on resolving the issue of multiple submissions
and issuance of insurance policies as the individual data elements
and volumes can be aggregated and analyzed as a function of
handling the submission. This database can be contrasted, through
its granularity, with the currently available high level carrier
developed and offered and regulator aggregated information. Because
of an initial broker customer interface--and future agency
management system relationships, claims-paying analytics as a
predictive tool will be used to begin enhancing the exchange entry
into both the global and the reinsurance market.
[0219] 8. Over time, and through normal growth, small brokers (or,
alternatively, insurers/reinsurers) gain a significant tool for
leveling the playing ground for insurer/reinsurers (or,
alternatively, broker) access. However, they have a relatively
limited ability to buy increasingly sophisticated and significant
data and analytics using their credits--because they don't do
sufficient business in term of dollar volumes to generate enough
credits. They pay dollars for access;
[0220] 9. Over time, and through normal growth, large brokers (and,
alternatively, insurers/reinsurers) gain a significant tool for
leveling the playing ground for competing in the middle market and
for smaller accounts and have a wider-than-normal range of
insurer/reinsurers (and, alternatively, broker) access. They have
an enhanced ability to buy significant data and analytics because
the dollar size of their credits is greater than (therefore it buys
more information) that of their smaller, competitors;
[0221] 10. This information flows naturally out of the initial
intention of the company to develop or partner on resolving the
issue of multiple submissions and issuance of insurance policies.
Then, the individual data elements and volumes can be aggregated
and analyzed as a function of handling the submission. (This
database can be contrasted, through its granularity, with the
currently available high level carrier developed and offered and
regulator aggregated information. Because of our initial broker
customer interface--and future agency management system
relationships, claims-paying analytics as a predictive tool will be
used to begin enhancing the exchange entry into both the global and
the reinsurance market.);
[0222] 11. The ever-increasing data flow results in improved
granularity of information;
[0223] 12. A constantly more detailed database permits all
participants to see "where they are, where they are not, and where
they should be" in terms of industry products, services and
operating metrics and to develop derivative markets;
[0224] 13. Volume is driven through the exchange by either
advantageously raising/lowering the cost or increasing/shortening
the term of either the exchange access or "infomediary" fees to
drive volumes from one sector to the other; and,
[0225] 14. While the exchange has the capacity from the outset to
"go global", a robust database and partnering with agency
management systems creates an increasingly unique
inquiry-through-policy performance market view that enhances risk
analysis and is likely to be of interest to insurers/reinsurers.
This helps create a specific road to future entry into the
international insurance/reinsurance.
[0226] The interaction of the different parts of the model system
and method transforms the market for insurance into a highly
efficient one with higher levels of submissions bound and reduces
"failure-to-close" levels. The model marketplace presents a
familiar and intuitive operating platform that requires no internal
reorganization from clients while supporting the creation of a
common language and market standardization for participants. Any
changes in business practices are organic.
[0227] The particular linkage of market sectors, plus the concept
of providing market-driven access to key data, can be expected to
encourage high levels of volume and associated information through
the marketplace, resulting in an anonymous, critically important,
proprietary database of insurance inquiry and activity across a
full policy life cycle from initial inquiry throughout final
disposition.
[0228] The database enables participants who originate insurance to
more granularly match the needs of insureds to appropriate insurers
against more precise market pricing and underwriting or risk
profiles. This, in turn provides industry participants the unique
opportunity to "map", in real-time, all insurance "coordinates" and
to correctly position their insurance inquiries and products in the
marketplace for maximum effect.
[0229] The database provides transaction information and economic
insights that are more immediate, better, broader and more targeted
than any comparable data. This layered database, available only to
participants, reveals market information that can give significant
strategic advantage to: brokers, insurance and reinsurance carriers
(especially for product positioning, risk management, and market
analysis). It also creates a real-time audit trail, facilitating
and lowering the cost of regulation.
[0230] The invention contemplates use and creation of "the valve"
to control the interaction between transactions and data flows.
[0231] The ability to assess risk by looking at the insurance
policy life span from the initial inquiry through issuance and
claims paying history is new (across multiple insurance companies,
brokers, reinsurers and regulators). Heretofore, policy performance
was assessed retrospectively and in the aggregate from data
provided by individual carriers to the trade. The data was broadly
undifferentiated except for issuance date, product, state, etc.
With capture and retention of granular inquiry components, analysis
of risk can be implied historically--starting with the inquiry.
[0232] Differentiating granular policy inquiry, submission or
issuance components brings the ability to better target the
matching of insured to carrier as well as to determine un-served or
underserved market niches. The greater the differentiation, the
more easily are the matches as well as the niches exposed.
[0233] Displaying what's going on in the marketplace in real-time
lets market participants see where they are, where they are not,
and where they should be. As a result, market intelligence is
disseminated faster and better and market positioning is
improved.
[0234] The invention facilitates the capture of all data associated
with a transaction and aggregates, and recycles the information to
help create new products or other market possibilities. It provides
better opportunity for targeted growth at lower acquisition costs.
It provides improved ability to determine competitive position in
marketplace. It provides improved accuracy of submissions and
underwriting information. More granularly matches insurer risk
transfer needs to reinsurers. The invention increases customer
retention. More granularly matches insureds to insurers against
more precise market pricing and underwriting. The invention
enhances ability to monitor the effects of competition. The
invention, further, yields lower marketing and communication costs.
It renders low cost and anonymous entry and exit for new products
and services.
[0235] Using the invention, there will be quicker turnaround time
for receiving quotes; more competitive quotes for insureds to
consider from the marketplace; more efficient processing of
policies, endorsements, and claims; and perhaps most importantly,
the insureds will know and be able to see that their insurance
package was competitive with the marketplace. Over the long-term,
the ECN should drive cost out of the system just from the sheer
efficiencies and create more competitive products that should
ultimately reduce the cost of insurance products for everyone.
[0236] Additional market intelligence reports will be available
regarding: individual agent and broker hit ratios (i.e. risks
offered vs. those actually written by insurer, by line of business,
by type of risk); risk placement declinations by insurer and
agent/broker, including declination reasons; performance-to-sales
goals, giving year-to-date comparisons of insurer placements vs.
goals; and many more.
[0237] The invention:
[0238] Creates faster turnaround time and increased accuracy for
quotes, business processing, insurance and reinsurance
submissions;
[0239] Enables more efficient and accurate communication between
brokers, insurers and reinsurers;
[0240] Recognizes risk characteristic differences in the submission
of a particular risk by multiple insurance intermediaries and
rejects the incorrect/incomplete ones, controlling the integrity of
the marketplace;
[0241] Corrects lack of control over electronic documentation
flow;
[0242] Uses market disclosure by anonymous counterparts to improve
matching and transparency;
[0243] Provides analytics that are presented anonymously except to
appropriate regulators;
[0244] Provides verifiable audit trail to facilitate regulatory
oversight and support for customer inquiry;
[0245] Analyzes submission/quoting process for individual
participant carriers to determine the competitive and
non-competitive risk bidding variables;
[0246] Increases issuance and servicing efficiencies;
[0247] Maps, in real-time, all insurance co-ordinates and correctly
positions insurance inquiries in marketplace;
[0248] Preserves the individual underwriting criteria and
guidelines of the insurance companies;
[0249] Provides ability to benchmark;
[0250] Improves oversight of business to broker, broker to insurer,
and insurer to reinsurer transactions; and/or
[0251] Provides metrics that measure operating performance.
[0252] Multiple policy submission problems are resolved (without a
broker functioning as an intermediary) and the resulting data is
displayed to participants with the credits from transactions
somewhat offsetting the cost of data and analytic access.
[0253] There are several aspects of the invention to mention:
[0254] 1. All market access fees (other than initial broker or
carrier membership fees) are paid by the insureds in the form of an
exchange access fee which may differ from a commission on an
exchange;
[0255] 2. The size of these fees will be based on "shadow" credits
equal to the dollars of the exchange fees charged and exchangeable
into credits [new];
[0256] 3. These credits will be used to offset charges of what will
be initially very high level but, over time, increasingly detailed
statistics (granularity and its greater value for identifying
pockets of advantage);
[0257] 4. Initially the charges for the data will be low, allowing
widespread access to the information--which will be so high level
that it will be virtually given away. However, as the database
becomes more robust the price of database access is increase;
[0258] 5. Reactions to, and requests for, exchange data and
analytics will be closely monitored to guide future growth;
[0259] 6. Over time, and through normal growth, small brokers
(insurers/reinsurers) gain a significant tool for leveling the
playing ground for insurer/reinsurers (broker) access. However,
they have a relatively limited ability to buy increasingly
sophisticated and significant data and analytics using their
credits--because they don't do sufficient business in term of
dollar volumes to create enough credits to buy much data. As a
result, they pay incremental dollars for access. This is the key
method for offsetting the fact that both small and large brokers
(carriers) receive the same market share at a controlled price.
However, the larger participants gain access to more data and
analytics because they do much more business in terms of absolute
dollars even when their percentages are equal to those of other
market participants;
[0260] 7. Over time, and through normal growth, large brokers (and
insurers/reinsurers) gain a significant tool for leveling the
playing ground for competing in the middle market and for smaller
accounts and have a wider-than-normal range of insurer/reinsurers
(broker) access. They have an enhanced ability to buy significant
data and analytics because the dollar size of their credits is
greater than (therefore buys more) that of their smaller
participants. This "netback" of information for dollars is
potentially new and integral to our invention. It is not obvious
that large brokers would prefer access to more information than a
greater profit share but in fact they do and this invention is
centered around that fact. This is because the information can lead
to increased product creation or differentiation which in turn can
lead back to more profit share through enhanced strategic
positioning and diminished risk transfer costs.
[0261] 8. All brokers agree as part of their membership contract to
flow a minimum, and growing, percentage (from 2% to 50% over ten
years) of their property and casualty business through the
exchange;
[0262] 9. The ever increasing data flow results in improved
granularity of information--and granularity creates new market
opportunities;
[0263] 10. An increasingly detailed database permits all
participants to see "where they are, where they are not, and where
they should be" in terms of industry products, services and
operating metrics and to develop derivative markets;
[0264] 11. Volume is driven through the exchange by either
advantageously raising/lowering the cost or increasing/shortening
the term of either the exchange access or "infomediary" fees;
and
[0265] 12. While the exchange has had the capacity from the outset
to "go global", a robust database and partnering with agency
management systems creates an increasingly unique
inquiry-through-policy-performance market view that enhances risk
analysis and is likely to be of interest to insurers/reinsurers.
Resolution of multiple policy submissions, etc. also looks at
comparative industry metrics in real time. This helps create a
place for a future and international insurance/reinsurance
exchange.
[0266] The invention extends the linked marketplace from consumer
through transaction platform to a clearance bank and end user
investor. It induces involvement in exchanges by making critical
market data available to transacting members on a conditional (i.e.
time, price, by circumstance, etc.) basis.
[0267] The invention is a data processing system that collects the
full range of industry data (i.e. the approximately 100,000 cells
of information per loan (mortgages are one example), line of credit
or individual insurance product down to the policy level) and runs
that data through a common sieve.
[0268] Drawing down from a plurality of lenders and insurers, it
gives a picture of market activity.
[0269] Government reporting is necessary. Today the insurance
regulators report only what insurers or third party "alleged"
experts tell them are the facts. The industry stands on a threshold
of facing massive regulatory operating constraints. The NAIC
collects 100,000 cells of information per insurer and product. The
NAICs database still is unable to tie transactions together because
it doesn't actual track the position of products in the marketplace
or connect their performance in near time or real-time. Similarly,
it is entirely dependent on third party reporting to assess values.
This raises significant solvency systemic risks that need to be
immediately resolved,
[0270] The system puts all financial products through a common
sieve, through a funnel that measures the attributes that are
associated with each data report and system credit, whereby one can
measure the attributes of each transaction against the same or
similar attributes of other transactions, then the entire structure
and the placement of each product all becomes much more efficient.
The attributes may be definitional standards such as size of
transaction; technical standards, such as loan-to-value,
debt-to-income, credit score; or Governmental standards, such as
FHL or Fanny Mea eligible or percentage of government guarantee.
Granularity of information makes the market easier to monitor.
Importantly, to regulators, one of the political fall outs of
Spitzer's investigations was Congress blame of state oversight.
Even if Congress wanted to, it cannot solve these economic problems
in an informational vacuum.
[0271] The invention compares multiple insurers/lender, their
products and attributes and permits the insurance/loan seeker to
choose the one that has the attributes or underwriting standards
that are important to him.
[0272] Any regulator of financial products can use their signals
from commonly captured data. Spider software can look in up to now
closed files such as pdf files with semantic searches to find
attributes and reveal risk characteristics. Financial products are
searched for their attributes to reveal risks. Analytics can be
defined going forward.
[0273] The invention contemplates a system for valuing, the
placement and/or performance of insurance/reinsurance and/or
loans/lines of credit by such factors familiar to those skilled in
the art:
[0274] by what risk factors,
[0275] by what delivery means or channel,
[0276] with what claims history per premium dollar,
[0277] by product,
[0278] by ROE or ROI,
[0279] by what diversification,
[0280] by what reinsurance counterpart,
[0281] by what rating,
[0282] by what time frame from inquiry to placement, and/or
[0283] as a factor of the time per term per product.
[0284] The power to change individual pricing in real time by state
or locality or other factor or combination of factors results in
greater control of risk diversification. Risk is measured from
initial inquiry through issuance to clearing house to registry,
with or without performance history--thus yielding full
transparency across life cycle.
[0285] The invention uses granularity to induce usage. It uses
netbacking to induce usage. It provides convergence of information
flows. It uses information flows to move profit margins away from
products. The invention establishes a universal clearing house for
all financial products.
[0286] Despite potentially enabling technologies, it is presently
impossible in virtually any industry to assess the entire food
chain from initial inquiry to application through pricing, funding,
product fulfillment, registration and subsequent performance. The
result is an inability to judge or compare across products,
services and industries: conversions at each step of the process,
pull-throughs to completed orders, effectiveness and subsequent
performance of specific wares, types of assistance and markets. The
invention addresses these problems.
[0287] The invention identifies fundamental problems in the
financial services and insurance markets and is a solution. Many of
the problems in the markets arise from inadequate information,
inaccessible information, and no current (real-time) information.
Regulators are obliged to rely on historical data, available to
them only well after the fact, and only to the degree that the
regulated entity allows access to information about operations.
This limited and untimely access to information inhibits the
efficacy of regulatory initiatives. The inability to accurately
determine pricing or transaction terms, contributes to market
illiquidity and operating inefficiencies for market makers. All
market participants are negatively impacted by their inability to
access sufficient information to allow accurate pricing.
[0288] The invention's solution creates Transaction Credit system
credits which provide immediate economic benefit to the market
participant. This is accomplished by linking information to each
and every fee charged for a transaction. The credits and the
database are displayed electronically. These credits act as a
unique, multi-faceted mechanism for accessing all data and activity
in the system. The result is increased transparency of the
markets.
[0289] Use of the credits, which offset the cost of future
transaction fees, or the cost of information, encourages more
transactions, generates more market data, and demonstrably improves
market liquidity, calming markets. The Transaction Credit system
credits act as an unobtrusive window into market activity for
regulators. Market-makers use of the credits effectively promotes
additional transactions which pump more money into the system.
[0290] This invention is adaptable to any operating system, drives
business volumes and directs market shares. It lowers operating
costs and improves operating controls. The unique transaction
platform and database functions as a central information clearing
facility for financial product. Each transaction is "tagged" with a
Transaction Credit system credit and both the data and the
Transaction Credit system credits are displayed. The system enables
the unique, real-time monitoring of market and transaction data.
All market participants benefit from access to this better and more
timely information, resulting in more accurate pricing, as well as
improved risk prediction, mitigation and avoidance.
[0291] The job of regulators is becoming more complex and
sophisticated as insurance and capital markets converge. Insurers
are increasingly involved in investing in, and/or insuring, capital
markets products. But here too the market has not successfully
cleared the risks. The current crisis can be seen to be rooted in
the fact that we have organized the broad financial marketplace
into discrete silos that do not properly link transactions and
free-flowing information. Each party defines their business
circumstance uniquely--and to their own benefit. Separate
organizations each fly their own flag and ardently refuse to
cooperate in a consistent way, except to add individualized costs
to each transaction, each trying to convince the customer of the
value of their institution alone. Most every consumer and market
participant has had the experience of the exasperating, bewildering
search across the financial food chain for an appropriately-priced
product and a targeted execution for their unique needs.
[0292] If, as it is often said, fear and greed rule the markets,
then surely a time of potential global collapse presents a real
opportunity to re-write the rules, using correct and appropriate
definitions, and using modern tools and logical incentives to
restore calm. This same fear and greed also impedes recovery as
there is currently no alternative, unified system that exists for
transacting that also gathers and analyses all information in real
time.
THE SOLUTION OF THE INVENTION
[0293] The invention is a free market solution for the freeing of
market information flows so that they are added back to the
contract in near time or real time after it has been formed. This
is not about additional legislation or additional regulatory bodies
or enlarging the federal government. This is about enabling the
existing state regulatory bodies to fulfill their mandates by
putting in place appropriate and necessary 21st century information
tools.
[0294] In about October, 2004, Eliot Spitzer found alleged fraud in
the insurance industry and blamed the state regulators for missing
it. Further financial problems were encountered with Hurricane
Katrina. More recently the housing mortgage crisis has evolved. The
need for the invention grows with the severity of the current
financial crisis. The invention includes notions of transparency.
The inventive approach advances market clarity, risk analytics,
principle-based accounting, and much more.
[0295] The invention focuses on creating solutions to the
fundamental problems of the insurance and financial services
markets of the last 10 years. The invention includes the
methodology for an electronically-presented insurance data exchange
that unites buyers, brokers, insurers and re-insurers for the sole
purpose of creating data and statistics to clarify policy terms,
price, and underwriting standards--and to reduce costs.
[0296] The answer to the financial crises, a clear and
naturally-grown-through-competitive-forces solution, lies in the
proposed tracking credit that follows a transaction, carrying an
economic benefit and identifying all descriptive aspects of price,
terms conditions and final asset performance. Counterparts that can
elect to be transparent (including all product providers and
consumers) can be encouraged with pure economic benefit to provide
whatever regulatory details are deemed necessary to comply with
both established and evolving rules. The economic incentives occur
in the form of clearly lower costs and can be further supported by
a broad range of other regulatory incentives.
[0297] All regulators need to see and be able to understand ALL
elements of financial product creation and performance in order to
begin to determine both investment suitability of the particular
financial product for insurers and/or proper risk analysis and
pricing for the consumer, as well as proper market conduct.
[0298] The regulatory body such as the NAIC might consider
sponsoring a search for ALL appropriate market analytics, as
determined by all questions and complaints offered by all parties.
The "Infomediary" piece of the inventive model focuses on this kind
of transparency and, over time, new products and services will grow
to support more granular information. At present, the regulators do
not understand how the products in which the insurance companies
invest are created--or by what standards. Here is an example:
rating agencies and regulators alike routinely accept 99.9% or
99.99% product performance assurances offered by product providers,
lenders, insurers, investment banks, etc. But, doing the
mathematics, one can see this actually means that losses of one in
one thousand or one in ten thousand risks are considered
acceptable. As the subprime market debacle shows, massive markets
(such as credit derivatives, bonds insurance, securitization,
municipals, etc) can be disabled with this sort of seemingly safe
risk when it is played out against magnitudes of multi-trillion
dollar markets. (There have been more than $600 trillion in
derivative risk instruments owned world-wide.)
[0299] The invention proposes that all market participants open
their loan-qualifying and risk transfer underwriting standards, as
well as their associated contract prices, terms and conditions, to
one another in a system. Transparency and market standardization
used jointly are proven method of increasing business volumes and
lowering the costs of risk transfers. When accompanied by the
patented comparative focus on underwriting standards and statistics
across all forms of financial contracts and paired with the patent
pending claimed inducements for use, the system works to deliver a
seamless whole. The demonstrated approach works, as well, for all
financial instruments having primary and secondary markets and
market intermediation, as well as for related derivative
securities. It is intended that such a system be entirely
volitional. It will experience a natural growth curve, because
trade participants will be clearly advantaged by greater market
share and consumer acceptance--as well as access to increasingly
important and detailed strategic market data and analytics.
Financial market regulators must be able to access and understand
both transactional and operational process down to the smallest
metrics if they are to safeguard the system.
[0300] The inventive model rewards transacting counterparts who are
willing to be transparent with more business at lower prices. The
competitive process will grow volumes, reduce the costs and
significantly increase gross profits--but at lower spreads.
Ratification that the entire process (from earliest inquiry to
final placement with an investor) is in full compliance with
current regulation, offering transparent, competitive terms and
conditions, can be easily signified, at-low-to-almost-no-cost, to
the marketplace. The invention proposes using what we call "The
Seal of the Deal.TM.". This proposed two-part process begins with a
"Deal Seal.TM." that confirms that the product origination process
is orderly and conforms with accepted rules of fair practice from
earliest inquiry, going forward; while the designation "Deal
Sealed.TM.", the second part, means that all transactions and
performance characteristics are being tracked, monitored and fed
into a universal database (in a way that complies with the most
current regulation). The resulting database improves financial risk
prediction, mitigation and avoidance by flagging all
discontinuities in market function. The designation and the data
can be under regulatory control, with the financial trade paying to
display the designation.
[0301] The key feature of these models is a credit system that
demonstrably reduces costs to all participants, as it improves
information (i.e. transparency). It is the engine and the fuel for
all these models. Comparable to credit card incentives, this
visible electronic real-time display of Transaction Credit system
credits derived from transaction fees is accessible from each
transaction platform--each business silo--and is unique to and for
each user.
[0302] The credits "buy" lower fees for the next transaction and/or
for access to strategically critical market information. The
credits are defined by each recipient of a fee for each transacting
client--and these credits can, optionally, "travel" across
transaction and product processing platforms, at the sole
discretion of each business. The credits have the effect of
creating strategic alliance treaties between competing business
models, bringing the markets together, and functioning as
ubiquitous tracking devices.
[0303] This is a linking technology. Transaction credits work as
simply as paper clips or Post-It Notes.RTM. and can connect
transactions in innumerable ways like some present day financial
"Velcro.RTM.". They increase market participation and reward the
transparent, active customer most. Importantly, since the credit
assignment and their respective term are under the direct control
of the management, market shares can actually be directed to
underserved sections of a business.
[0304] Addressing the de facto threat of a dysfunctional financial
system provides a historic opportunity for states to provide
leadership in the creation of a solution. There is precedence for
the states asserting such leadership.
[0305] The invention contemplate re-building a software platform in
a manner that conforms to the ideas described herein: "a
transaction platform linked to market information."
[0306] The interests of the nation and the financial services
industry can be further enabled by beginning to distribute the risk
transfer of the $200 trillion market of catastrophic environmental
risks with carefully defined and carefully controlled products. The
markets can be grown out of their present dilemma. The cost of
distribution of these instruments (as well as the costs of past
mistakes) can only be borne by truly transparent markets that price
risk appropriately. Importantly, there are lessons to be learned
from the current crisis that must never be repeated, if the
nation--in the form of the integrity of its currency, a country's
most basic measure of value--is to survive. [0307] Confidence comes
with transparency. [0308] Transparency comes with increasingly
defined granular market information. [0309] Free flowing
information alone can restore confidence in, and restore calm to
the markets.
[0310] Creating systems and solutions that support the development
of financial products addressing the problems positions both the
nation and the world to re-focus priorities and actually grow
markets going forward.
[0311] The key problems left unaddressed by current regulatory
structures are:
[0312] a. Financial markets regulators must have access to
appropriate and reasonably granular market information, including
comparative analytics, performance reviews (by individual
investments), operating metrics, etc. At a minimum, there must be
contractual clarity (to properly assess issues of moral hazard and
risk), as well as real markets, preferably price and terms in real
time. Because regulators do not currently have access to sufficient
data they appear frequently too overwhelmed to think: regulation
suffers.
[0313] b. Financial markets regulators often leave their jobs to go
to work for the institutions they regulate, meaning that their
results can (however unwittingly) be biased in their analysis in
favor of the institutions they regulate. (An example: Recently, an
insurer declared that a $2 million life insurance policy had
lapsed, while electronically generated bank records proved the
contrary. Absent any appropriate statistics on lapse rates, the
regulators found for the insurer, refusing to cross-reference the
records provided that reveal a fraud against this consumer. The
Attorney General has since written in behalf of the insured to the
Insurance Commissioner and the matter will be reviewed. But
statistical analysis of comparative lapse rates would presumably
reveal the reason behind the insurer's bias.)
[0314] c. Financial markets regulators often permit regulated
entities to determine the rules by which they are
regulated--meaning that even those who might abuse the system for
financial advantage get to opine freely on how the measures are to
be interpreted.
[0315] d. Financial markets regulators consider measures of a 99.9
or 99.99 percent statistical certainty of risk avoidance to be
appropriate. However, this level of certainty still allow for
errors in between 1 in a 1000 and 1 in 10,000 circumstances. That
result is unacceptably when implicating multi-trillion dollar risks
or markets.
[0316] e. The frequency of occurrence for a peril or hazard is
different than a measure of frequency occurrence for a particular
risk of a particular severity.
[0317] f. Experts claim it will take 50 years to move from current
statistical measures (Gaussian math) to ones that properly predict
the frequency of a particular risk severity.
[0318] g. Data density increases dynamically the perception of
frequency of a risk (i.e. today's more sensitive measures make risk
seem to occur more often).
[0319] Market convergence has not caused "straight-through
processing" in financial services, or any unifying force that
connects the transactional food chain and would reduce wholesale
and retail sector costs in insurance and reinsurance, loans and
lines of credit.
[0320] The way that regulation functions means that the framework
is constantly fragmented. This is called the retail/wholesale
market disconnect. (For example, in capital markets, there is
currently no price/term discovery across market sectors, meaning
the critical linkage is lost between: time; initial inquiry;
primary market execution with price and description of risk;
subsequent performance of risk; secondary market pricing of risk;
etc. If these separate market aspects were connected by a clear
economic benefit; costs would come down, volumes would
increase.)
[0321] Current risk measures are proven inadequate by the nature of
the current global crisis. Holding companies must all use
comparable measures with clear explanations for any divergences
from a standard.
[0322] A methodology must be used that connects all links in the
marketplace chain in a seamless process that encourages market
efficiency through pure economic benefit. The invention creates a
related, market solution for the insurance industry.
[0323] Key objectives of financial regulation are:
[0324] a. Price/term discovery;
[0325] b. Standardization of work and process flows, operating
metrics, underwriting standards, risk and performance measures,
documents, etc.
[0326] c. Clarity of risk description;
[0327] d. Operating efficiency; and
[0328] e. Ease and cost of audit.
[0329] Government guaranteed institutions must have at least the
same--preferably stronger--standards than those that exist for
un-guaranteed institutions.
[0330] The cost of money is the stabilizing element for all
unregulated institutions because it is presumed to be correct, risk
variable and market priced (except for fraud).
[0331] Granular data, analysis and operating metrics are a
requirement for proper market oversight.
[0332] The absence of data and analytics and uniform work and
process flow measures consistently blinds regulation--just as it
impedes the marketplace where best information is a proven
determinant of performance. The invention proposes use of a
Transaction Credit system credit that buys access to both lower
next transaction costs and lower costs of access to information.
This approach should result in a "viral" adoption of a uniform set
of basic principles of regulation.
[0333] The consumer has his interest consistently ill-served by
financial market regulators (at least when it comes to insurance
and banking/lending markets) because the markets are opaque.
Injection of transparency, strategic market intelligence that
reveal critical information and advantage, needs to be structurally
induced with an economic incentive.
[0334] State regulators are the "critical canary in the (financial)
birdcage" on a local level, as no federal response is presently
available. However, any form of regulation is impossible without
access to proper data and analytics.
[0335] The United States is the acknowledged leader in both market
creation and technology. It should use these strengths to define
and re-define the regulatory (and transactional) space to meet its
needs. The recent sales of transaction platforms to foreign
interests indicate the value of these assets. Keeping them under
domestic control can best occur by linking transactions (The
Market) to information (Technology).
[0336] Depository Institutions
[0337] Various structural approaches to the existence of depository
institutions can co-exist if there are common visible marketplaces,
with data and analytics that reflect the precise financial
circumstance, along with standardized documents, clearance
functions, etc.
[0338] The optimal approach to all markets is that they are wild
and free, volatile, visible and subject to legitimate market forces
(including fear and greed).
[0339] If the above is true, central bank regulation is able to
better focus on policy issues, leaving transactional detailed
analysis to local authorities.
[0340] No solution is appropriate if it does not have conventions
that actually induce usage through economic and strategic benefit
in the on-going creation of an efficient, transparent
marketplace.
[0341] The consumer must always receive a proper regulatory
response and, should that response not occur, the consumer needs
recourse through multiple branches of government.
[0342] Insurance
[0343] Federal interests must focus on limiting all possibility for
subsidized markets. Insurance and banking--like all financial
services--are best left wild and free, where competitive forces
prevail over time.
[0344] All markets need more operating and pricing efficiency--and
this comes from lower costs, which clearly and inevitably, results
from the approach of the invention.
[0345] Securities and Futures
[0346] All financial markets are united in the sense that they
provide different solutions to risk transfer: standardize the
marketplace and you standardize products and operations. Some risks
are local and require state regulation. All solutions require
standardization of work and process flows and the resulting
descriptions, data/analytics and operating metrics. Regulation is
always best when it is limited by any particular need, other than a
search for what actually is occurring in the marketplace. This can
only happen in an efficient market--one that is governed by the
rational search for the incremental profit dollar.
[0347] All regulation must be balanced, weighing the needs of the
consumer at least equally with that of the institutional investor.
All market sectors need to be united and subject to a common
measure, one that finds them "the best deal" at the lowest cost.
Liquid cash markets lead to liquid futures markets, which in turn
lead to liquid options markets. This can only occur when the
arbitrage between the sectors is exposed to competitive threat,
which occurs when the sectors are made transparent--as can happen
immediately by using the solution of the invention in a visible
setting that evidences clear economic benefit.
[0348] Moore's Law initially postulated doubling data chip
densities every 18 months. Decades later, this law has placed
massive data density in the hands of the potential analyst. Still,
there remains no consistent approach to unite, collect and deploy
the data and use it to clarify financial markets. This must change
if the marketplace is to properly clear the necessary risks in a
cost-efficient manner.
[0349] The inventive solution is applicable to all financial
markets and includes immediate market acceptance due to lower
transaction costs. It includes: [0350] An electronic display of
specific economic credits that, at the option of the participant,
can be used to buy low cost variable term, discounted access to
future transactions and/or related market information; [0351] The
capture of all data related to a transaction resting in an
"Infomediary" section of the marketplace; [0352] A credit display
of linkages that create a seamless chain of work flows: "straight
through processing"; and/or [0353] Low cost entry and exit of new
products/services, resulting in a more vibrant marketplace.
[0354] Benefits of the inventive solution to insurance/reinsurance
and loans and lines of credit include:
[0355] Market intelligence: access to all necessary information
about the counterpart and the proposed, or executed,
transaction;
[0356] Standardized data structures for documents, clearance,
communications, risk performance, etc.;
[0357] Cross-sector arbitrage;
[0358] A listing of unique, fungible, and ubiquitous credits,
available to participants and based on paid transaction fees. It is
usable for a defined term and functions as a clear economic benefit
in the form of a cost reduction of either the next transaction fee
or access to strategically critical market information;
[0359] A branding mechanism that offers a distinguishing feature
that defines a fully complying marketplace, with counterparts that
perform as expected; and/or
[0360] Transaction driving credits as credits drive transactions,
which results in viral growth.
[0361] The result is lower costs, improved liquidity, greater
revenues, growing market shares for participants--a vibrant
marketplace that is always stimulative to the economy without being
inflationary. The invention rivals FNMA and FHLMC--it covers all
products (not just mortgages), it has potentially full market reach
(with potential retail, not just a wholesale, market focus), and
global, not just domestic, markets. The invention includes a
proposal for an exchange for insurance and reinsurance and forming
an exchange for loans and lines of credit. The invention addresses
issues of catastrophic risk exposure facing the nation, as well as
broader issues of risk transfer and distribution.
[0362] The bond insurance crisis highlights deficiencies in the
availability of information relating to disclosure of statistical
descriptions and analyses that would enable market participants to
better assess risks and make informed investment decisions. The
inventor has offered the following observation and solutions to the
credit and liquidity, as well as bond insurance crisis:
[0363] The crisis is caused, in part, by the absence of real-time
information flows, focused on reliable price and term "discovery"
which, in turn, contributes to market illiquidity and operating
inefficiencies to the detriment of all market participants.
[0364] The solution is to link information to transaction fees to
generate Transaction Credit system credits that are visibly
displayed on an electronic screen. These Transaction Credit system
credits can then be used to offset the cost of future transactions
or information and analytics.
[0365] According to the invention, what is needed are two things:
(1) a new framework for disclosure and reporting of comprehensive
data and analytics pertaining to all financial instruments,
including loans, lines of credit, other financial products, as well
as insurance, reinsurance and securitized insurance risks; and (2)
a new transaction platform, an "Electronic Communications Network"
(ECN) or other data highway, like the Internet, in which financial
products are bought and sold and where detailed data on the
composition of the assets, and of the transactions is collected,
stored, and displayed. This data is available, wherever possible,
on a real-time basis. The activity on the ECN is fueled by the
Transaction Credit system credits as buyers and sellers redeem
those credits to either do more business, or to access market and
product information.
[0366] Focus is on securitized insurance risks in the financing of
catastrophic risks, the impact the recent bond insurance crisis is
likely to have on that effort, and outlines of some options for
solving the catastrophe insurance and credit market crisis through
the creation of more efficient and transparent capital markets.
Particular attention will be given to the Homeowners Defense Act of
2007 (H.R. 3355/S. 2310) that includes a provision to create a
state-run National Catastrophe Risk Consortium that would:
[0367] act as a centralized repository of state risk information
that can be accessed by private-market participant interested in
underwriting risk-linked securities or entering into reinsurance
contracts . . . (and) use an acquired catastrophe risk database to
perform research and analysis that encourages standardization of
the risk-linked securities market.
[0368] See CRS Report RS22756, The Homeowners' Defense Act: An
Overview, by Rawle O. King.
[0369] The National Catastrophe Risk Consortium ("Consortium")
envisioned in H.R. 3355/S. 2310 would aggregate catastrophe
property risk from participating state-sponsored risk transfer
mechanisms and transfer that risk to investors in the private
capital markets. The Consortium is premised on finding a low (or
lowest) cost risk financing solution that generates market
competition by exposing risk transfer opportunities in a way that
makes evident the cost savings for participants using the system,
possibly in real (or near real) time.
[0370] In theory, the Consortium envisioned under H.R. 3355/S. 231
would be set up to facilitate transparency in risk transfer markets
in the process of clarifying market opportunities for growth for
both standardized exchange-traded derivatives and highly customized
over-the-counter (OTC) contracts tailored for a specific buyer,
lower the costs for the consumer and effectively induce usage.
Given the fact that portions of the voting public remain cynical
concerning the efficacy of any specific government solution, a
model is necessary to which everyone can relate, and believe in,
and that clearly reduces costs while increasing both competition
and financial innovation in the marketplace. It is critical that
the economic benefit--the determining value proposition--be evident
to all users of the Consortium in a manner that provides sufficient
incentive for universal participation. Some economists would agree
that this can best be accomplished by letting pure market forces
determine the specific convertibility of credits into services, in
terms of both price and time and (optionally) displaying the
result.
[0371] The Consortium could use the inventive systems and methods
described herein.
[0372] Transparency in Capital and Risk Transfer Markets
[0373] Most insurance market experts would agree that solutions to
the catastrophic property risk financing problem will require
financial innovation and access to capital from outside the
insurance and reinsurance industry. However, financial innovation
and the rising importance of alternative capital pools (i.e., hedge
funds, private equity funds, sovereign wealth groups) for financing
insurance risk could raise challenges in terms of the evaluation of
risk, correct identification of the ultimate bearers of risk, and
proper assessment as to whether they can manage it. There is
nothing wrong with complex financial structures so long as there is
disclosure and analysis of pricing and risk facing market
participants.
[0374] Opaque Capital Markets
[0375] Economists have observed that the crisis in the credit
markets called the "subprime mortgage crisis" arose in part because
investors did not exercise sufficient due diligence. The problem is
one of moral hazard: the market must provide sufficient incentives
for proper performance so that individuals acting in their own best
interests cannot end up being bad for the system as a whole. Such
problems undermine the very meaning of a contract which, in turn,
reduces belief that the risk will be cleared by the market. It is
not uncommon for bond brokers and dealers to use outdated or
unrealistic prices to value their portfolios and to price
securities. For example, they might not publish quotes, and money
managers and other investors might not have a way to determine with
certainty the value of asset-backed securities in mutual funds,
hedge funds and other investment vehicles. Risks must be clearly
defined and contractually assigned in ways that can be tracked in
order for contracts to retain their meaning.
[0376] The argument goes as follows: Investors were impeded in
exercising due diligence by a lack of transparency and disclosure
about the risk profile of new structured financial instruments.
Transparency in the pricing and terms of securities is essential
for financial market efficiency. Transparent financial markets
should, by definition, have provided accurate information to allow
for transactional price and terms for securities and financial
instrument of all types in real time to be readily available to
everyone, encouraging market participants to entrust their money to
the markets.
[0377] In October 2007, as part of a broad initiative to study the
competitiveness of U.S. capital markets, the Department of the
Treasury undertook a broad review of the regulatory structure
associated with financial institutions. The purpose of the study is
to find ways to improve efficient, reduce overlap, strengthen
consumer and investor protection, and ensure that financial
institutions have the ability to adapt to evolving market dynamics,
including the increasingly global nature of financial markets. See
U.S. Dept. Of Treasury, "Review by the Treasury Department of the
Regulatory Structure Associated with Financial Institutions,"
Federal Register, no. 72, Oct. 17, 2007, p. 58939.
[0378] Officials within the U.S. Treasury have also signaled the
importance of information and transparency in capital markets. In a
speech before the Euromoney Bond Investors Congress in London on
Feb. 27, 2008, Phillip Swagel, Assistant Treasury Secretary for
Economic Policy, commented on the U.S. economy. He observed that
providing better information will likely be one of the main
recommendations that will come from the analysis that the Treasury
is undertaking into the underlying reasons for the housing and
credit market crisis of 2007-2008. He noted that a lack of
transparency and easy access to information is at the heart of the
disruption that has affected both market participants and more
broadly the global economy. For this reason, the Treasury is
primarily focusing on the lack of availability and use of
information about the quality of the mortgages underlying MBS, CDOs
and the range of related instruments, as well as ways to improve
market discipline in the areas of disclosure and due diligence.
Limited access to and limited demand for information throughout the
securitization chain facilitated lax underwriting standards. Market
participants, Swagel noted, had the incentive to demand such
information but, because of expectations about continued home price
increases, there was a reduced level of due diligence.
[0379] Transparency and Data Availability in Capital Markets
[0380] A standard framework for the collection and disclosure of
asset-level information that will help capital market participants
price risk and thereby aid the market to achieve on-going price
adjustment. Access to information can be improved through the
activities of a national catastrophe financing facility that
collects and disseminates critical catastrophe property risk
information to the capital markets and acts as a financial
intermediary for managing and insuring catastrophe risks--i.e., a
new, national framework for managing and insuring risks of
large-scale catastrophes, initially environmental but in time
extending to all risk transfer. Existing insurance industry
organizations and institutions, such as the Insurance Services
Office (ISO), enable insurers to achieve and share economies of
scale in the collection and analysis of data, but these
organizations have not completely dealt with the unique
underwriting and pricing requirements for catastrophe
insurance.
[0381] Electronic Transaction Platform for Trading Catastrophic
Property Risks
[0382] There are a number of possible modes of implementing an
efficient electronic transaction platform for trading catastrophic
property risks, but an exchange platform seems to be most feasible
because it is a familiar construct; and, such a centralized utility
facilitates transactions and associated data collection. One could,
for example, run a transaction platform as a central marketplace
for all markets, a single platform through which all others could
transact. What is key is a linking mechanism such as the
Transaction Credit system credit. This methodology keeps the cost
of participation low; and, an exchange platform is a flexible
structure which, when coupled with a database, may even evolve into
a search engine for the financial industry--an interesting path for
long term industry development, a logical extension of the nation's
proven skills in market creation and information technology.
[0383] The Homeowners Defense Act of 2007
[0384] Lessons can be learned from the current bond insurance
crisis to help policymakers ensure that the same mistakes are not
made with respect to catastrophic property risk transfer when
implementing Title 1 of H.R. 3355/S. 2310--the Homeowners' Defense
Act of 2007. This legislation would create a state-run facility
designed to allow states to pool catastrophic risks, divide that
pool into portions sold to a wide range of investors through direct
placements or in over-the-counter markets.
[0385] On one level, what is proposed is the abandonment of the
individual silos of 18th-20th century business models--in favor of
creating a 21st century union of all forms and methodologies for
credit risk transfer that result in financial products. All risk
transfer, whether insurance- or capital markets-related, can be
allowed to compete on an open playing field. Understanding that
such a proposal allows for the inevitable market excesses, and
occasional disruptions, that come from truly free markets, allows
us to see the reason for regulation, which in turn requires data
and analytics to keep it informed. The invention proposes new
methodologies that link transactions directly to information.
[0386] An important consideration is cost. Running a competitive
auction to the best bidder for any type of risk transfer is
estimated to cost approximately 50 basis points (1/2 of one
percent) in this system, as opposed to a maximum NASD-mandate cost
of 500 basis points (5%) or more typical insurance/reinsurance
spreads of 1000-1500 basis points (10-15%). Clearly the functions
are not precisely comparable; but, overtime, the resulting but
long-avoided market transparencies can be expected to result in
massive saving to the consumer. Presented against the entire market
of $200 trillion in annual catastrophic risk transfer, the savings
between present 10% annual gross margins and 0.5% auctions, in
which end users can participate along with intermediaries,
approximate $19 trillion annually. The nation could lead the world
in creating such a solution--and our notions of wedding capitalism,
market creation and capitalism could be exported, as it is expanded
to include many other types of risk. Most important, as the
analysis and the market itself becomes more granular over time, new
elements of risk prediction, along with risk mitigation, possibly
avoidance, could be created. New products will be priced to a
consumer who once again can rely on the financial markets to clear
risk efficiently.
[0387] The solution of the present invention is applicable to any
financial instrument and market participant for which there is a
primary and secondary market, and intermediation. These include
loans, lines of credit, as well as insurance and reinsurance.
Revenues flow from incremental transaction fees or the purchase of
information. It is simple in the same way that a paper clip, or a
rubber band, or a ball bearing are each very simple, adaptable, and
useful in their design. The solution is a universal Transaction
Credit system credit that conveys an economic benefit, displayed
electronically, that fosters the development of an
"Infomediary".
[0388] One should look for low-cost ways of improving transparency
in all credit and insurance markets. We should try to grow the
market out of and past its current inefficiency. To accomplish the
cost minimizing efforts in setting up the electronic facility, the
Consortium could charge a "transaction and/or data access fee"
generated from either the primary or secondary market that would
contain a comparable credit used to off-set the cost of either
access to associated transparency-creating market information, or a
second distribution-related transaction fee from another market
sector. This credit will be used to support this facility thus
offering a more efficient and volume-enhancing electronic
distribution network for a full range of financial products,
including financial products that affect all forms of risk
transfer. The result gives clear, economic and strategic advantage
to the system user and induces usage, generating business
volumes.
[0389] Sitting at the nexus of product creation, transaction and
pricing is a measure of fees, associated credits and remaining
terms of use, which buys economic and strategic advantage for users
through provision of critical market information. Such information
is--without limit--a description of: individual risk(s) covered;
specific financial exposure per product; amount of government
coverage of potential loss; diversification or incidence or
percentage risk per investment pool; original and subsequent market
pricing; and market volumes--an effective "ticker" available in
real time. This measure can be superimposed on an existing, de
facto marketplace. It can be organized using today's technology and
financial skills, open to all, enhancing--but not disturbing--the
marketplace.
[0390] The inventive solution can be applied to resolve the problem
facing the bond insurers. The problem facing bond insurers stems
from the fact that they are part of a chain of investors that
purchased assets or instruments without knowing exactly what they
were investing in. The banks made loans to certain borrowers,
effectively adjusting their lending criteria and standards to suit
a broader class of borrowers, thus accommodating more of the
financially weaker borrowers. The key was in banks setting interest
rates at ever lower levels, with the expectation that borrowers
would be able to support higher rates later on in the life of the
loan. Those loans were pooled, wrapped, labeled and sold as "asset
backed securities."
[0391] But the magnitude of the weakness of the individual
borrowers was not disclosed on a per contract basis. Indeed, it was
not readily discoverable because the details of the loans were not
available. The financial guarantee companies (bond insurers) were
then providing evaluations and ratings on the credit quality of the
banks' loan portfolios, and of the asset backed securities, without
really knowing the precise composition of the loans. In other
words, the root of the problem lies in the absence of, or lack of
access to, full and accurate information (i.e.,
"transparency").
[0392] The solution of the present invention tracks the composition
of the assets or financial instruments and details of transactions
as they occur. If it was paper we would put paper clips or
"post-it" notes on all or certain pages of the documents where
critical information is to be found. Instead, imagine a Transaction
Credit system credit was "stuck" onto each electronic file
containing the details of a transaction. The Transaction Credit
system credit has at least five valuable features:
[0393] It provides economic value in that it can be used to offset
future transaction fees, and/or to offset the cost of acquiring
transaction and market data.
[0394] It provides incentives to conduct repeat business as
participants are more likely to use a credit with real value. The
credits also have terms--the precise definition of which can be
used to induce usage.
[0395] It is tradeable.
[0396] It is structured to reduce cost of regulatory compliance.
Financial service regulators would find the concept of the credits
intriguing because reviewing a flow of credits reveals market
sector activity by business volumes, and product demand on an
increasingly granular basis. The database provides insight into
progressively more detailed information that otherwise must be
collected through a much more labor intensive, time consuming and
costly process of on-site examination and review of the regulated
businesses.
[0397] It is a tightly-focused new tool for public policy, a
clearly non-inflationary economic stimulus, with immediate
application. A Transaction Credit system credit "grafts" to any
transaction platform or technology and immediately targets "search"
functions. It is searchable. A search engine can search credits. A
search engine can search for attributes or terms of financial
products.
[0398] The inventive system would receive immediate market
acceptance, because it accomplishes demonstrable cost reduction,
from a broad range of financial market participants who understand
the products, assets, instruments and risks currently being traded
in the capital markets. Participants would see visible (electronic)
markets in real-time to offer the most competitive pricing and
terms. The structure would facilitate low cost entrance and exit of
products and services in a targeted response to market need. The
structure will deliver greater revenues, allow participants to grow
and direct market share according to the credits they grant (or
accept the reality that non-participation always loses it), create
more product to respond to the needs of the market, and ensure
ongoing expanded opportunities for profitability through the
transaction of a credit index that allows participants to actually
hedge the advent of transparency. Furthermore, to encourage timely
disclosure of relevant information by market participants, the
value of the Transaction Credit may be correlated to or defined by
the timeliness of the disclosure of such information. The use of a
time-dependent element acts to counterweight the effects of
market-crashing events by making information available, which in
turn improves market liquidity. Thus, each transaction, each
participant, and each risk element is identified by a Transaction
Credit identification code that is a identifies the item and time
stamps the time of information disclosure in order that the value
of the Transaction Credit can reflect timeliness.
[0399] Credits travel across all transaction platforms and
information, process/work flow enabler in the full food chain for
both financial products and commerce in general, whenever and
wherever a transparency-creating event occurs. This is meant to
include even contract performance on a granular level experienced
by the investor or a service provider acting in his interest.
[0400] Track-able linkages are formed between and across different
silos in the chain. The credits themselves in any form or format
may form the linkages through which the information is exchange
and/or embedded.
[0401] The invention includes a search engine based on totaling up
all credits unique to an entity, as just one aspect of a variety of
different search algorithms based on the collecting of Transaction
Credit system credits. It specifically does not exclude other
groupings that allow for Transaction Credit system credit
fungibility.
[0402] Analysis of metrics similar to those disclosed in U.S.
patent application Ser. No. 10/859,017 filed Jun. 1, 2004 and
entitled "Monetizing Declined Applications for Credit" by the
present inventor and incorporated herein by reference, across an
inclusive network of participants to reveal anomalies in product
performance (such as when a contaminated product entered a
financial system) can be used to predict, mitigate and possibly
avoid risk.
[0403] A financial contract--the jurisprudential basis of all loans
and lines of credit, insurance and reinsurance--is not a static
instrument. Indeed, all sorts of risks are effectively contained
and described in its underwriting standards, its associated
statistics and transaction details, all effectively contained in
the sum of the contract, what might even be referenced as expressed
in its terms and conditions.
[0404] Increasingly in times of credit tightening, it is useful to
add back information to a contract in real time, information that,
by itself, might impact either the credit worthiness of a
contractual counterpart and/or the value of an asset.
[0405] The present invention links all: transaction platforms
(exchanges, clearing banks, loan seekers and lenders, insurance
seekers and insurers, inter-dealer or wholesale brokers and the
last stage investor) as well as their process and work flow
enablers, credit raters, information providers--any and all in a
linked series of transaction platforms complete with a information
resource in a single data processing system.
[0406] The linking element is the system credit which contains a
direct or indirect reduction in cost of subsequent related
transaction fees or in access to strategically critical market
information. The system credits are a limited term grant of
financial advantage that are effectively traded for transparency
creating information.
[0407] Transparency without clarity has little use. So analytics
embedded in the system credit to add value to the
information--particularly if it affects either the costs of risk
transfers or the valuation of an asset. Algorithms related to the
system credits are used to search for the best deal, or to create
indices that measured the use of credits (as one measure and
hedging tool for the onset of transparency) and/or the development
of a credit wallet, a new type of credit card that supports
financial market transactions that allows for the aggregation and
exchange of different kinds of system credits.
[0408] The present invention stands at the intersection of
transactions and their information, updating each contract with
actual financial performance data. The updated data re-creates
value in old financial contracts by attaching new, relevant,
value-establishing data. As a result, market function is restored
or improved and made more liquid by re-tooling relationships
between existing market participants and transaction platforms to
track critical information. Those who participate grow greater
market share, incremental revenues and clearer value. The financial
market participants pay the person who voluntarily provides the
fresh data with the Transaction Credit system credit.
[0409] The present invention is particularly directed at a systems
and method of putting back information into a contract after it is
formed relating to its covered risks, as expressed in its
underwriting standards and transaction details, and tracking them
all going forward in time. The embedded data structures relate to
underwriting standards and transaction details and updated risk
factors. The Transaction Credit system credit can be used to fund
actual purchases, charitable functions, gift-giving, and public
policy resolutions.
[0410] The present invention is directed at a solution such as the
real life problems which led to the massive interventions by the
Federal Government to support AIG in 2008 and 2009. AIG's financial
problems arose in the operations of its Financial Products Group
(AIGFP). AIGFP products were based on leveraging the value of the
AIG AAA credit rating. AAA ratings can change over time, and as
AIG's rating fell, more and more capital was required to keep
AIGFP's business model operational. In the process, AIGFP took on
ever greater risks/excessive risks--all still linked to the
original AAA bond rating of the parent.
[0411] AIG had a system, "the position analysis and storage system"
(PASS), designed to assess the necessary "market, accounting and
transaction details". This system failed in large part because of
the extreme efforts within the financial services industry to keep
markets opaque by hoarding, not sharing, critical information. This
absence of consistent measures of cross platform performance data
made it impossible counterparties to properly assess risk.
Ultimately, there was a gross miscalculation of risk. AIGFP
reportedly made the assumption that a perfect storm of financial
reversals could never occur simultaneously, and therefore was a de
minimus risk. AIGFP executives said the swaps contracts were like
catastrophe insurance for events that would never happen. The
absence of the necessary information to properly assess risks led
to a near-complete failure on the part of rating agencies and
regulators to properly perform their core responsibilities to
maintain reasonable order and valuation oversight in financial
markets and to consistently assess the risk of each corporate
credit and financial structure in order to protect the public.
[0412] The present invention presents a data processing platform
that is truly transparent, inclusive of all origination,
distribution and investment entities. This structure allows for
comparative analysis across markets, transaction platforms, and
products, in real-time and inclusive of actual up-to-date
investment performance.
[0413] Comparative analysis is also necessary when considering
accounting measures which artificially seek to "freeze frame" a
company's performance into a single moment in time, often looking
solely at mark-to-market, mark-to-method, mark-to-model price
methodologies. Each is likely to be right or wrong for an instant
in time but it is important to remember no one methodology
necessarily conveys an accurate picture.
[0414] The present solution addresses these problems through a
system which: provides all necessary information on an on-going
real-time basis; diversifies risk transfers away from a specific
and positive correlation with credit; establish a neutral
marketplace for all risk transfer that incorporates insurance and
reinsurance, and loans and lines of credit; allow a free flow of
information: let all market participants have access to real time
data feed on market activity that enables real price discovery;
establishes genuine regulatory oversight, equipped with tools
appropriate to the 21st century, which puts the interest of the
people ahead of the interest of the participating institutions
alone; and establishes genuinely autonomous credit rating agencies
whose analysis and ratings are not "for sale".
[0415] The present invention may be implemented in data processing
systems that manage all data related to financial transactions in
loans and lines of credits (including mortgages), insurance,
reinsurance, derivative products, and other financial instruments
(collectively, "Financial Products"). As described above, such data
processing systems induce widespread market participation through
the use of "Transaction Credit" system credits; capture most, if
not every, data point(s) relating to a Financial Product, from its
origination to its maturity; store the data in a central
repository; provide the data and analytics in real-time (or
near-real-time) and in as much detail as desired, in a manner
accessible to all market participants and other interested parties,
including regulators; and, track all key aspects of the Financial
Products in real time (or near real time), including performance on
a per transaction basis, from first inquiry through origination to
final maturity.
[0416] The data captured in the data processing system includes
price, term, and risk; counterparty risk and other risk exposures.
The system analytics software provides comparison of critical risk
features, key attributes and operating measures of the financial
products from origination to maturity with data from similar
products both historical and current and can help in signaling
market anomalies and emerging dangers.
[0417] For the convenience of the reader, the above description has
focused on a representative sample of all possible embodiments, a
sample that teaches the principles of the invention and conveys the
best mode contemplated for carrying it out. The description has not
attempted to exhaustively enumerate all possible variations.
Certainly in March 2009, regulatory oversight and enablement, as
well as risk and asset valuation, becomes a specific concern on a
local, national, and global level. Other un-described variations or
modifications are possible. For example, where multiple alternative
embodiments are described, in many cases it is possible to combine
elements of different embodiments, or to combine elements of the
embodiments described here with other modifications or variations
that are not expressly described. Many of those un-described
variations, modifications and variations are within the literal
scope of the following claims, and others are equivalent.
[0418] For a market to function optimally, there must be confidence
in the meaning and value of its contractual obligations. Confidence
in the contracts increases liquidity in the markets for insurance,
loans and lines of credit and other financial products.
Establishment and disclosure of standards, statistics, and
definitions applicable to the contracts is fundamental to creating
that confidence. This is achieved through disclosure of the terms
and conditions of the individual contracts as well as the clear
establishment of necessary underwriting criteria regarding all of
the descriptive aspects and valuative methodologies of the risk or
asset. The use of the invention enables the establishment of
standards, definitions, and statistics necessary to optimal
functioning of the market, and to creating reliable contracts. The
inventive solution does not impose the terms and conditions of the
contracts, but rather encourages them to be established naturally
in the free market--exposed and fully transparent.
[0419] All markets "clear" risk (meaning that they price risks and
transform them into acceptable and manageable structures) at what
is called the clearing house price. The clearing house price is a
function of many things, most importantly, comparable transactions.
As a result, the more the risk can be defined and standardized, the
more easily the market clears, defines and standardizes it.
[0420] If one were creating banking, insurance and capital markets
business models anew, one would not be using models that are
conceptually grounded in the 18th to 20th centuries. One would
instead focus on 21st century technology and this nation's proven
strengths in market creation. This country has long been esteemed
for free markets, resilience, and innovation. The current breakdown
in finance provides the opportunity to update structures and
practices and to utilize current technology in devising a solution
that supports growing dynamic financial and commercial markets.
[0421] The current business model for many companies and their
regulators relies on periodic (monthly, quarterly or yearly)
financial statements made that provide a snapshot of the company's
financial position as of a historical date. Often, a company may
hold securities among its assets that fluctuate in value, although
the rules that surround how the different methodologies by which
they may be accounted can be fixed. Those securities may be valued
according to differing accounting conventions. For example, the
Financial Accounting Standards Board (FASB) has issued standards
for how firms should value such securities. Under these standards,
the securities are categorized into one of three levels:
[0422] Level 1--markets determine pricing
[0423] Level 2--"observable inputs" determine pricing
[0424] Level 3--"unobservable inputs" determine pricing
[0425] The securities in each level are valued at the beginning and
end of every reporting period. The company describes the method of
valuing each level of assets in its reporting. For Level 3
securities, the company should report information about purchases,
sales, issuances, and settlements on either a gross or net
basis.
[0426] However, during times of economic crisis, these approaches
are not sufficient to provide an accurate valuation of securities
held by a company. This is particularly true for derivative, pooled
securities which are bundles of assets collected from different
originators and repackaged and sold to investor companies. If the
company's management does not completely understand the value of
the assets they own, the financial statements they issue will be
misleading to regulators and investors.
[0427] The present invention provides a way to gather information
about an individual risk or asset within a security and will
benefit regulators and investors by providing greater transparency
in security valuation.
[0428] The present invention inherently changes this disconnect in
value perception by updating all of the definitions of financial
products in real time, inherently supporting proper market
clarification, transparency, full disclosure of price and
terms--with continuous re-pricings.
[0429] In accordance with one aspect of the invention, financial
products markets where there are a first sector for origination of
the financial products (such as sale of insurance, or making of
loans to borrowers) and a second sector for resale (or chains of
resales) of a fractional interest or entire interest of the insurer
or lender in the financial product, data is captured in the course
of each transaction involving the financial product. The data is
recorded in a data storage system so that each financial product,
and its underwriting standards, and related subsequent activity and
transactions involving that financial product are stored. The
recorded data includes the original terms of the financial product
and its value, and the changed terms of the financial product and
its value arising from external events or from the subsequent
transactions, and original and updated valuations of financial
products contracts bundled in a pooled security. One critical
measure is the per contract performance level as measured by either
its current or anticipated cash flows. The data report is provided
in a predefined standard format and can be continuously updated
with new, relevant information. The data report is available to
parties that conduct transactions in the two sectors, and can be
made available to government regulators over the full life of the
financial contract or aggregation of contracts.
[0430] During application processes for financial products,
including specifically, consumer-directed financial products,
including but not limited to life insurance, annuities, medical
insurance, homeowner's insurance, renter's insurance, automobile
insurance, secured loans, mortgages, home equity loans, automobile
loans, personal loans or lines of credit and unsecured loans, and
credit card revolving loans, as well as business-directed financial
products of the same type including mortgages for investment
properties and loans and lines of credit provided for use as
operating capital, offered by a plurality of offerors, information
is obtained in the application processes.
[0431] Those applications are then examined in accordance with
underwriting standards of the financial products company, and in a
due course, a financial product is issued to the client/purchaser,
and a future income stream is provided to the financial products
company/issuer.
[0432] That future income stream can then be sold by the financial
products company/issuer to a subsequent investor. The subsequent
investor may pool together numerous such future income streams and
sell the pooled future income streams as a pooled security. The end
purchaser who buys some portion of, or the entirety of, the pooled
security seeks to obtain a stable future income stream for their
investment, but as recent experience has shown, it is not certain
that the future income stream will in fact be stable. And if it
turns out that the income stream is not stable, then the actual
value of the security is not the value by which it was originally
entered into the financial records of the company.
[0433] Furthermore, there may be deceptive or fraudulent practices
associated with the financial products contracts. For example,
product originators, trader/intermediaries and investors may take
steps to obscure or enhance value. For example, using the triple
AAA value of an asset or tranche without revealing that the risk
element is so high as to reduce value; or holding securities or
instruments that require notification of a third party in order to
vary the terms and conditions/pricing of an asset so that timely
notification is not possible; or the insertion of "the appearance
of risk" to risk situations in order to enhance spread. (For
example purchasing a large pool of assets purchased at 89, then
selling a large portion at 104 without applying the 15 point profit
to the remainder of the pool to reduce the effective cost).
[0434] In order to obtain an accurate valuation is necessary to go
into each pooling of asset backed and derivative securities,
breaking down each package into its component contracts. Each
component contract in a pooled security is identified and that data
is stored in a data file. The underwriting standards that were
applied at the time of issuance of the contracts are identified and
stored in data file(s). (The underwriting standards are the key
risk descriptors unique to each contract.) Each and every element,
price and term and condition, representation and warranty of each
contract is identified and stored in data file(s). Data associated
with each component contract is identified and stored in data
file(s). The stored data extends through the applicable time
periods of the contract(s), ranging from first inquiry through to
current real time cash flow performance, with all of the
information constantly updated and re-valued in near or real
time.
[0435] The present invention in one embodiment is a data processing
system having one or more program executing computers, and one or
more data storage devices, which processes data captured in the
application processes and in subsequent transactions. In
particular, the invention incorporates one or more computer program
products executing on the data processing system 101, which
incorporate the following steps: [0436] receiving or extracting or
generating data elements regarding financial products contracts,
[0437] determining valuations of the financial products contracts
by calculation or comparison methods; [0438] creating a data report
in a standard data format containing the financial products
contracts data elements, [0439] storing the data report in the one
or more data storage devices, [0440] receiving new data items
regarding one or more of the financial products contracts, [0441]
adding to or modifying the data report to create an updated data
report incorporating the new data items, [0442] determining updated
valuations of the financial products contracts by calculation or
comparison methods, and [0443] storing the updated data report with
the updated valuations of the financial products contracts in the
one or more data storage devices.
[0444] The financial products contracts will typically comprise
insurance contracts, reinsurance contracts, loans, or lines of
credit, or subsequent and derivative transactions relating thereto,
including reinsurance, and derivative securities such as
collateralized debt obligations.
[0445] The data elements regarding financial products contracts can
include one or more of insurance underwriting standards, insurance
financial terms, insurance applicant data, loan application
standards, loan financial terms, loan applicant data, or comparable
transaction details, as well as valuative measures provided by
third parties such as medical findings or appraisals.
[0446] Thus, for example, in the case of a mortgage, the data
elements can include one or more of loan underwriting standards of
the loan originator; loan terms such as the size or amount of
mortgage, the type of loan (primary mortgage or home equity), the
loan to value (LTV) and/or combined loan to value (CLTV) ratios,
the mortgage rate (Fixed or Adjustable rate (including reset
date)), appraisal value, appraiser name, the primary/secondary
residence; the Origination Date, the holder of original
note/location of assignment documents, prepayment history; and
title search; and loan applicant data such as age, income,
employment history/type, credit history, debt to income (DTI), and
documentation provided.
[0447] The data report created from these data elements is in a
standard format so that the data contained in the report is
consistently searchable, combinable, and updatable. Thus, the data
in the data report can be used to instantiate an OLAP cube for
analysis of the data contained in the reports. The data elements
can be stored in a relational database or other database.
Alternatively, in a preferred embodiment, the data elements do not
require a relational database and are stored with associated data
tags to identify each data element. In the most preferred
embodiment, the data tags are XML tags. In one version of the
preferred embodiment, the standard data format is an XBRL
(eXtensible Business Reporting Language) data format.
[0448] New data items regarding one or more of the financial
products contracts or contract elements might include one or more
of payment history, appraised value, loan to value ratio,
comparable transaction details, comparable property defaults or
value changes or risks, related financial instrument changes, or
derivative contract data. The new data items regarding one or more
of the financial products contracts can relate to one or more of
the following types of risks: asset valuation, bankruptcy, credit,
currency, changes in sentiment, counterparty, country, definitional
(absence of standardization), diversification, economic (Inflation,
recession and interest rates--yield curve), environmental,
liquidity, litigation, market crash, moral hazard, performance or
operating risk, spread, terrorism or war, transaction, transfer,
transparency, volatility, or volumes.
[0449] In one embodiment, the financial products contracts comprise
credit derivative swap contracts; and the new data items may
disclose changes in related financial products, or defaults in
related financial products.
[0450] The one or more computer programs perform calculations with
respect to the new data items to determine risk conditions; and add
to or modify the data report to create a risk updated data report
incorporating determined risk conditions, which are preferably
identified in the apparatus with risk condition data tags.
Preferably, the risk conditions are determined relative to
predetermined standards but, with newly understood risks constantly
being identified, the use of overlays of relational
risk-identifying databases can be useful, indeed necessary.
[0451] This data can then be used to calculate value, either by
using financial analysis tools, or by making a comparison to one or
more comparable instruments having a known value or related risk.
The process is the same for each type of financial risk. Real
valuations may be established by linking different
accounting/jurisprudential/regulatory standards, contract types,
valuations by "comparable asset types" and anticipated cash flows,
overlays of different databases detailing any form of risk-related
subjects. The latter would include everything from comparisons of
operating metrics that measure different type of operating
performance risks on a per platform basis (as measured by:
conversion/pull-through rates), to value or risk-related
information like appraisals, medical histories, mortality rates,
diet and exercise, economic or geographic or geologic information,
etc.
[0452] Although the conceptual framework applied is consistent
across all financial products contracts, the valuation approach
will vary by asset type or product grouping. Thus the valuation of
instruments derived from cash markets will apply different
standards than the valuation of instruments derived from mortgage
markets or insurance markets. In the same way, cash instruments,
futures instruments, and option instruments will all have separate
valuation approaches.
[0453] The data reports are continuously updated to reflect changes
arising from external events or from the subsequent transactions.
The data reports can be made available to parties in either a
primary or secondary market for the financial products. In one
preferred embodiment, one or more computer programs executing on
the data processing system determine if a person has provided data
elements regarding financial products contracts to the data
processing system and calculate a system credit related to a
quantity of data elements provided by the person. The system credit
may be applied by the person to a cost of obtaining data reports
from the data processing system.
[0454] The data processing systems 101 to be most effective should
collect data from a range of sources, including originators,
purchasers, rating agencies, regulators, data providers on trends
and relationships between factors and affected elements, for
example, in connection with weather, calendar, medical, location,
and other conditions. It is desirable therefore to incorporate one
or more mechanisms that prime an efficient market and that
reinforce the efficiency of the market. Three illustrative
mechanisms are:
[0455] First, where the data processing system 101 constitutes an
offering/closing system or exchange for the sale of financial
products, the pro rata fees incurred with respect to transactions
associated with a patron for patronizing the system might decrease
as the total fees incurred by transactions associated with that
patron increase. For example, although the owner/operator of data
processing system 101 might receive a fee from a lender/insurer
when the lender/insurer closes a loan or writes an insurance policy
through the system, a portion of the fee might be remitted back to
the lender/insurer for having closed a large volume of business
through the system in a given interval. Advantageously, the fees
from all types of loans, lines of credit and/or insurance policies
are aggregated for determining the amount of the remittance.
[0456] Therefore, this mechanism encourages lenders/insurers to
patronize the system with larger, rather than smaller, volumes,
which is accomplished by endeavoring to offer the most varieties of
loans, lines of credit, or insurance at the lowest interest rates
or insurance premiums and at the best possible terms.
[0457] Second, some or all of the parties who patronize the system
might receive statistics compiled by the system on the condition of
the market in loans, lines of credit, and/or insurance products.
Although these statistics cost the owner/operator of data
processing system 101 little to compile, their value is so great
that lenders, insurers, reinsurers, reinsureds and buyers and/or
sellers of loans who do not have access to the statistics will have
difficulty, in the long run, in competing with those who do. An
analogy makes the situation clear; a trader of stocks without
access to the stock ticker and current bid and offer quotations can
be arbitraged by a trader who does.
[0458] Furthermore, although some or all of the statistics might be
sold for cash, the statistics are advantageously given for free, or
sold at a subsidized price, to those patrons of the system who
actually disclose necessary data in the system. Advantageously, the
price for the statistics decreases as the measure of fees incurred
by transactions associated with a patron increases. For the
purposes of this specification, the provision of statistics for
free, or at a subsidized price, to those patrons of the system who
close loans, buy and/or sell loans, write insurance policies,
and/or reinsure risks or both through the system is called
"netbacking."
[0459] Netbacking also encourages lenders/insurers, as well as
individual borrowers and insureds, to patronize the system with
larger, rather than smaller, volumes, which is accomplished by
endeavoring to offer the most varieties of loans, lines of credit,
or insurance at the lowest interest rates or insurance premiums and
at the best possible terms.
[0460] Third, a portion of the fees incurred with respect to
transactions associated with a lender for lending through data
processing system 101, or with an insurer for writing policies to
insurance applicants, might be credited against the fees incurred
with respect to transactions associated with the lender for buying
and/or selling loans through the system, or with respect to
reinsurance transactions (as either buyer, seller, reinsurer and/or
reinsured). For example, many lenders desire to sell a loan
immediately after they have made it, and many insurers who write
policies immediately seek reinsurance (i.e., to transfer all, or a
portion of, the risk associated with the policy to a reinsurer). It
is, therefore, possible that a lender/insurer will lend to an
applicant or write a policy through the system, and incur a fee for
doing so, and then sell that loan or reinsure that policy through
the system and incur a second fee. Data processing system 101
credits, according to some credit schedule, a portion of the fees
associated with a patron for lending or writing insurance through
the system against the fees incurred for buying or selling a loan
or for reinsuring through the system.
[0461] An alternative embodiment, in the loan context, works in
reverse and credits, according to some schedule, a portion of the
fees incurred with respect to transactions associated with a patron
who buys and/or sells loans through the system against the fees
incurred for lending through the system. In the insurance context,
this alternative embodiment works in reverse and credits, according
to some schedule, a portion of the fees earned with respect to a
patron in reinsuring through the system against the fees incurred
by the patron in a transaction for writing insurance through the
system. In yet another embodiment, in the loan context, the fees
incurred in buying and/or selling loans through the system are
credited against the fees for lending through the system, and the
fees incurred for lending through the system are credited against
the fees for buying and/or selling loans through the system. In yet
another embodiment, in the insurance context, the fees incurred in
reinsuring through the system are credited against the fees for
writing insurance through the system, and the fees incurred writing
insurance through the system are credited against the fees for
reinsuring through the system.
[0462] These structures encourage lenders/insurers to patronize the
system with larger, rather than smaller, volumes, and to offer the
most varieties of loans, lines of credit, or insurance at the
lowest interest rates or insurance premiums and at the best
possible terms, and by patronizing the secondary market in loans or
reinsurance with the best possible bids and offers.
[0463] The end result is that in order to compete in the consumer
finance and/or insurance markets, lenders, buyers and/or sellers of
loans, insurers, reinsurers and/or reinsureds must have access to
the statistics, which encourages them to patronize the system with
competitive offerings to get access to the statistics, which
increases the competitiveness of the market, increases its volume,
and promotes its efficiency. Therefore, some embodiments prime the
market for efficiency and incorporate a positive feedback mechanism
that maintains that efficiency. It is understood, however, that the
priming of embodiments might be assisted by advertising and other
marketing techniques.
[0464] Data processing system 101 may receive data from each
lender, applicant, application processor, loan processor, buyer
and/or seller of loans, insurer, reinsurer, reinsured, insurance
agent and/or underwriter, and in some embodiments, endeavors to
match lenders/insurers with appropriate applicants and reinsurers
with appropriate reinsureds, to facilitate the provision of loans
and lines of credit. Each lender, applicant, application processor,
loan processor, buyer and/or seller of loans, insurer, reinsurer,
reinsured, insurance agent and/or underwriter is advantageously
capable of providing data to and receiving data from data
processing system 101 via a data network (e.g., the Internet, etc.)
or via a telephone network (e.g., the Public Switched Telephone
Network, etc.) or both.
[0465] Referring again to FIG. 2, it depicts an illustrative
embodiment of data processing system 101, which illustrates the
updating of data reports with new data items and the earning of a
system credit from submission of new data items.
[0466] The invention includes the following advantages: [0467] data
processing system 101 can provide buyers and sellers of loans with
statistics regarding the market in pools of loans, which can be
used by the buyers and/or sellers of loans to: (1) assess the value
of an individual loan, (2) assess the value of a loan or pool of
loans, (3) determine which types of loans they desire to buy and
sell, and (4); arbitrage those buyers and/or sellers, reinsurers,
and/or reinsureds who do not have access to the statistics. [0468]
data processing system 101 may provide reinsurers, and/or
reinsureds with statistics regarding the market in insurance and
reinsurance that are of value in: (1) assessing the cost/value of
individual policies that are to be reinsured; (2) determining which
policies they desire to reinsure and at what price, and (3)
arbitraging those reinsurers and/or reinsureds who do not have
access to the statistics. [0469] data processing system 101 may
provide buyers and/or sellers with an efficient market for the
purchase and sale of the servicing of pools of loans (e.g.,
providing payment collection and other administrative overhead,
etc.). [0470] data processing system broadly provides an
efficiently priced market by allowing for transaction fees to
wholly or partially offset one another or have either offset access
to strategically critical market information--even prospectively
across asset classes and product lines.
[0471] These inducements are possible because the costs of doing
business for lenders, insurers, reinsurers, reinsureds and buyers
and/or sellers of loans and the interest rates or insurance
premiums and fees to applicants are unnecessarily high because
efficient markets for loans, lines of credit, insurance and
reinsurance do not exist. Furthermore, if a highly efficient market
for loans, lines of credit, insurance and reinsurance did exist,
the cost of doing business for lenders, insurers, reinsurers,
reinsureds and buyers and/or sellers of loans could decrease, the
interest rates or insurance premiums and fees to applicants could
decrease, and the provider of the market could also make a profit.
Furthermore, the existence of an efficient market could even
provide lenders/insurers with a larger profit than they make now if
operating costs drop more quickly than interest rates or insurance
premiums drop. In other words, the intermediation of an efficient
market between applicants, lenders, insurers, reinsurers,
reinsureds and buyers and/or sellers of loans can actually make the
cost of loans, lines of credit, or insurance to applicants go down,
the cost of doing business to lenders, insurers, reinsurers,
reinsureds and buyers and/or sellers of loans go down and the
profits to lenders, insurers, reinsurers, reinsureds and buyers
and/or sellers of loans go up. Therefore, data processing system
101 endeavors to provide a market for the provision of loans, lines
of credit, insurance and reinsurance that is highly efficient.
[0472] The efficiency of the market for loans, lines of credit
and/or insurance (the primary or retail market) may be affected by
the efficiency of the market in pools of loans and/or reinsurance
(the secondary or wholesale market) and vice versa. Therefore, data
processing system 101 may improve the efficiency of both the
primary market and the secondary market so that, to the extent the
efficiency in one enhances the efficiency in the other, a synergy
of efficiency between the two markets is affected. For example, to
effect this synergy, fees incurred by a patron to the
owner/operator of data processing system 101 for lending through
the primary market might be credited against the fees incurred by
the patron to the owner/operator of data processing system 101 for
buying and/or selling through the secondary market (and vice
versa).
[0473] In one embodiment, the solution involves a universal
Transaction Credit system credit that conveys an economic benefit,
displayed electronically, that fosters the development of an
"Infomediary" that carries the necessary data and analytics to
clarify the marketplace. This credit may be used to support an
effective utility, thus offering a more efficient and
volume-enhancing electronic distribution network for a full range
of financial products, including financial products that impact all
forms of risk transfer. The result gives clear, economic and
strategic advantage to the system user and induces usage generating
business volumes.
[0474] This technology can be superimposed on an existing, de facto
marketplace, singly or in a serial fashion to create a virtual
community of interests, a truly collaborative effort that accesses
all necessary capital pools. It can be easily organized using
today's technology and financial skills at low cost relative to any
other solution, open to all, enhancing and linking--but not
disturbing--all sectors and transaction platforms in the
marketplace. It is an approach that is entirely optional and
voluntary, in which all participants trade transparency-related
information for lower costs.
[0475] Attributes of the system include: [0476] (1) It is
neutral--it does not favor any one special interest group or
constituency. [0477] (2) It is internet-focused (thereby creating
widest market reach). [0478] (3) It focuses on underwriting
standards and statistics. [0479] (4) It provides its own economic
and strategic benefits. [0480] (5) It is transparency-inducing,
without being transparency-requiring (each counterpart does
precisely what they choose, in terms of disclosing their unique
circumstance and paying an appropriate price). [0481] (6) It
delivers increasingly granular real-time data and analytics for all
financial products with primary and secondary markets. [0482] (7)
It is the lowest-cost method relative to all other solutions.
[0483] (8) It is entirely volitional. [0484] (9) It carries the
benefit of both organic and viral growth (caused by the fact that
trade participants always lower costs, gain revenues and market
share; whereas non-participants lose). [0485] (10) The public
demonstrably wins through better pricing of goods and services.
[0486] (11) It is easily adaptable to all current transaction
platforms and technology. [0487] (12) It can be initiated almost
overnight, simply by executive mandate. [0488] (13) It provides a
stimulus (made clearest through an electronic display of
transaction credits) without any inflationary risk. [0489] (14) It
facilitates easy entry and exit of new product/services. [0490]
(15) It does not require additional expansion of government
functions or bureaucracy. [0491] (16) It is a private market
solution; an American innovation. [0492] (17) It tracks all market
transactions, and forms a low-to-no-cost audit trail. [0493] (18)
It could look like a Government Sponsored Enterprise that sponsors
transparency, not needing to make financial guarantees, simply
validating that the information is disclosed anonymously. [0494]
(19) It can predict, mitigate and, possibly, avoid risk. [0495]
(20) It is capable of presenting as a dedicated search engine for
Financial Services. [0496] (21) It is friendly to all sectors.
[0497] (22) It encourages massive market growth of all types of
risk transfer instruments and securities.
[0498] The present invention focuses on giving individual financial
product characteristics a more ordered methodology for valuation
analysis. In loans and lines of credit, insurance and reinsurance,
and in related derivative products, the system has looked at the
creation of basic approaches to determine valuation and to track
the performance on both a past and a going forward basis in the
resulting product placements.
[0499] The system puts all financial products through a common
sieve, through a funnel that measures the attributes that are
associated with each data report and system credit, whereby one can
measure the attributes of each transaction against the same or
similar attributes of other transactions, then the entire structure
and the placement of each product all becomes much more
efficient.
[0500] An electronic database may display and cross reference all
elements relevant to product and/or policy issuance, including,
without limitation: volumes, by broad product type or sub group, by
region, by time, price, terms, type of counterpart, etc.; operating
metrics; audit trails; and, in time, both granular and high level
risk performance by insurance product or insured type analyzed as
far down as performance on the individual policy level offering
progressively more "granular" information leading to increasingly
refined product views. Over time the emphasis of the analytics may
shift from improving operational and volume performance to focus on
strategic benefits, product positioning, transaction patterns, and
risk analysis.
[0501] The solution of the present invention tracks the composition
of the assets or financial instruments and details of transactions
as they occur. If it was paper we would put paper clips or
"post-it" notes on all or certain pages of the documents where
critical information is to be found. Instead, imagine a Transaction
Credit system credit was "stuck" onto each electronic file
containing the details of a transaction. The Transaction Credit
system credit has at least five valuable features: [0502] It
provides economic value in that it can be used to offset future
transaction fees, and/or to offset the cost of acquiring
transaction and market data. [0503] It provides incentives to
conduct repeat business as participants are more likely to use a
credit with real value. The credits also have terms--the precise
definition of which can be used to induce usage. [0504] It is
tradeable. [0505] It is structured to reduce cost of regulatory
compliance. Financial service regulators would find the concept of
the credits intriguing because reviewing a flow of credits reveals
market sector activity by business volumes, and product demand on
an increasingly granular basis. The database provides insight into
progressively more detailed information that otherwise must be
collected through a much more labor intensive, time consuming and
costly process of on-site examination and review of the regulated
businesses. [0506] It is a tightly-focused new tool for public
policy, a clearly non-inflationary economic stimulus, with
immediate application. A Transaction Credit system credit "grafts"
to any transaction platform or technology and immediately targets
"search" functions. It is searchable. A search engine can search
credits in order to determine "best pricing" and/or an appropriate
or preferred match. A search engine can search for attributes or
terms of financial products.
[0507] The present invention presents a data processing platform
that is truly transparent, inclusive of all origination,
distribution and investment entities. This structure allows for
comparative analysis across markets, transaction platforms, and
products, in real-time and inclusive of actual up-to-date
investment performance. The full process of Illuminating financial
markets is long overdue. It is necessary to re-build the
marketplace from a dependence on opaque 20th century artificial
structures to a reality-based 21st century system where value can
be assessed as previously hidden risk descriptions and associated
cash flows are each unlocked.
[0508] As discussed, credit markets and financial markets are
presently opaque. As a result, one critical issue is risk
detection/assessment and, with this, appropriate financial
valuation. Information currently lags, or can be hoarded,
preventing valuation on the most granular per financial
contract/asset basis. This creates market asymmetry and, as a
consequence, illiquidity in the marketplace.
[0509] To address this, the transparency-inducing system disclosed
herein infuses markets with risk-illuminating information that
facilitates market function, liquidity, risk tracking and the
performance and sanctity of a contract. This can occur with
near-real-time updates of a broad range of risk-containing
contractual elements, inclusive of those that detail operating
conversion/pull-throughs at specific points in the origination or
intermediation process. This provides a comprehensive and
encompassing (of all market participants and engines) solution to
the current financial crisis.
[0510] It is appreciated that flat, Gaussian mathematics-based
analytics of risk data can be inherently flawed. Risk actually
occurs elliptically, with an associated need to capture, display
and analyze information according to its precise incidence and
updated Bayesian experience (along with qualitative elements, such
as the intensity of data) throughout the full life cycle of all
perils. As a result, it is necessary to create an effective
risk-differentiating "ticker tape" on all contracts and any
derivatives products that will include real time tracking.
[0511] This system disclosed herein is designed to encompass any
portion of, or the full spectrum of, a contract. For example, from
loan origination, and the first inquiry by a consumer, to the final
maturity, or end disposition. The information that describes the
origination of a loan and all related risk and valuation data may
be entered into the system and becomes transparent and trackable.
These defining risk parameters of each loan can be provided or
displayed anonymously, in real-time or near real-time. Such
information may always be accessible to all market participants,
including regulators, rating agencies, investors and market
makers.
[0512] The risk data provided to the system can be accessed to take
as macro or micro a view of overall market or product-specific or
transaction-specific information as the user desires. A lender's
underwriting standards describe the risk that he is willing to
take, and which can be shifted to others downstream. The loan
documents further specify the obligations of each counter-party to
the financial contract. This data will always be accessible no
matter what happens to the loan--even if it gets sliced and diced
into derivative products that use only a portion of the original
loan instrument.
[0513] As the loan ages, its performance is tracked and its risk
updated. The performance and other related risk data is stored in
the database. Each descriptive element and any changes may be
embedded and stored in a "Transaction Credit." The Transaction
Credit, in turn, has direct financial benefit to the participant.
Thus, all market participants have the optional ability to "trade"
transparency in exchange for lower costs. A Transaction Credit is a
unique, anonymous identifier that can be applied to reduce the cost
of future transactions, or of strategically important market
information.
[0514] The Transaction Credit also serves as a tracking device.
Transaction credits continuously add information and value, even as
the loan ages, enhancing liquidity and powering business volumes.
This unique tool provides incentive for participation and tracking
risk characteristics of each instrument.
[0515] A reporting mechanism acts as a "living contract" that
updates history along with data capture of all risk elements from
first inquiry to final contract disposition. The data capture and
risk analytics may focus on near real-time comparative
conversion/pull-through metrics at each process point in the
origination and intermediation of all contracts and their
aggregations.
[0516] The "living contract" combines and resolves all ontology and
taxonomy issues that can result in regulatory, accounting,
jurisprudential or regulatory arbitrage, with specific and
cross-reference views on operating metrics, risk-defining
contractual elements, informational updates (at least coincident
with each intermediation), per-contract cash flow performance
reviews as they occur, and the diversification of credit risks with
those risks (such as natural catastrophic disaster) that do not
positively correlate to credit--plus an ability to mine differing
risk databases of all non-correlating risks.
[0517] This information may be presented in a manner that will
facilitate risk-specific and risk-differentiated cash, futures
options and associated indices, as well as the coincident arbitrage
between these markets. At each point along the way: Data is
collected, linked and tracked; Data is viewed in real time;
Transaction Credits may be earned--reducing costs.
[0518] All of the above may utilize: time-stamping, unique encoded
(per risk) identifiers, both veracity gradings by some acceptable
scaler and sourcing statements (by counterparts, processors,
outsourcers, investment banks, etc.), as well as real-time per
contract/asset valuations of comparable risks--to create an online
ticker tape, supported by the "living contract."
[0519] Some risks which may be disclosed in this process include,
but are not limited to: Asset valuation, Bankruptcy, Credit,
Currency, Changes in sentiment, Counterparty, Country, Definitions
(Absence of standardization), Diversification of risk, Economic
(Inflation, recession and interest rates--yield curve),
Environmental, Liquidity, Litigation, Market crashes, Moral Hazard,
Performance/Operating risk, Spread, Terrorism/war, Transaction,
Transfer, Transparency (i.e. Price and term discovery), Volatility,
Volumes (i.e. price discontinuity by transaction amount or "size"),
underwriting standards, and Terms and conditions.
[0520] As a loan is held in an investment pool, the details of the
individual loans and pricing characteristics must be fully and
accurately known and described. Today, this information is
difficult, if not impossible to obtain. But in the system disclosed
herein, any loan within the portfolio can be made fully transparent
down to the key data elements. The precise original underwriting
standard can be accessed and compared against other risks. And
those data points can be used to create new informational or
investment products. Wherever it goes, no matter how many times it
is repackaged and resold, the data associated with that loan
remains in the data processing system, fully transparent for all
market participants.
[0521] Participants can view in the system the data of the specific
loan, lending activity in the retail market, and transactional
activity in the secondary market and all related risks.
Participants can compare performance of the loan, and of all
related products based off of it. Thus, regulators can detect
disturbing market trends as they emerge. This may empower
regulators to oversee transparent markets without the need for
regulation.
[0522] Over time, a rich repository of market data is formed. The
display of data in real time creates a "ticker tape" on the markets
for loans and lines of credit, which has never existed before. This
will enable price discovery and the tracking and establishment of
asset values. It provides a methodology of ascribing reliable asset
values and credit ratings to securitized and structured products.
This in turn creates more efficient markets by exposing differences
in market pricing, which both provides arbitrage opportunities, but
at the same time limits excessive arbitrage, leading to more robust
financial markets.
[0523] Timely access to loan data, compared across transaction
platforms, can be used to identify particular bellwether events
such as systemic risks and concentrated counterparty risks, shifts
in borrowing activity, loan repayments, refinancing activity, or
resale of derivative risks and much more. Participants can track
and model these data points to assess the actual performance and
risk profile of assets.
[0524] The system facilitates identification of impending toxic
trends, excessive inventory by loan type and other warning signs,
thereby "connecting the dots" to form a comprehensive view of
systemic risk. With this information in hand, the owner, investor,
evaluator or regulator can take the appropriate steps to manage the
risk.
[0525] The only way to grow such a complex marketplace is to
enhance the product creation process and to assure that the risks
are both appropriately measured and "costed" to the intended
investment result. In this way, it is possible for the product
origination process and the anticipated financial performance of
each contract to secure the marketplace.
[0526] A frank and transparent identification and grading of all
contractual and associated risks in product creation enables growth
of the financial markets--massively. Once that identification and
grading (i.e., standardization) is complete, we can begin to price
the risks openly, out of a more complete understanding of the
likely incidence of each defined peril. The full disclosure across
a product's life cycle, induced by incentives that reduce costs or
increase market advantage, provides the financial system with a
stronger foundation.
[0527] The ability to view risk data electronically in near- or
real-time from both macro and micro views is particularly useful
when it is necessary to value complex, rarely traded and unique
aggregations of contracts, such as those that commonly occur in
both the property-casualty sectors of insurance and the structured
finance sector of capital markets. The ability to review, compare
and contrast macro-to-micro views of risk-disclosing,
value-impacting information such as that disclosed herein has not
heretofore been captured or displayed across the full life cycle of
each financial contract or aggregation.
[0528] It facilitates the entry/exit of new products and creates
new forms of currency. Further, it restores confidence in a level
playing field in financial services, demonstrably lowers costs for
all participants, measures and compares risks and values
electronically.
[0529] Referring now to FIG. 3, shown is a schematic block diagram
depicting one embodiment of the system according to the present
teachings. The system may comprise numerous pieces of software
executing on computer readable media that interact with a database
200 to store, retrieve, and manipulate data for users 216, 218, 220
through a network 214. In one embodiment, although not limited
thereto, the network 214 may be the Internet and the system may
comprise a general user interface which allows users to access the
system through a website. In this way, users can have real-time
access to market data anytime and from anywhere.
[0530] The system may comprise the following pieces of software
executing on computer readable media, although not limited thereto:
instrument creating software 202 for creating financial instrument
data records and storing them in the database; risk creating
software 204 for creating risk data records and storing them in the
database; risk association software 206 for associating risk data
records with financial instrument data records; risk updating
software 208 for updating risk data records (e.g, risk value,
etc.); financial instrument evaluation software 210 for evaluating
the value of a financial instrument based at least in part on any
associated risks; and reporting software 212 for reporting data
related to financial instrument data records and/or risk data
records.
[0531] It is to be appreciated that the risk creating software 204
may create risk data records, store them in the database, and
associate them with financial instrument records without the need
for risk associating software 206, although not limited thereto. In
addition, while risk updating software 208 may be used to update
risk associated with a financial instrument, it may be preferable
to create new risk data records, thereby keeping a record of the
change in risk over the life of a financial instrument.
[0532] Following is one exemplary embodiment of a financial
instrument data record schema, although not limited thereto:
TABLE-US-00001 Transpar- Instrument Title Type Market Owner ency
Index Value ($) VA-90991 Mortgage Primary John 78% $400,000
residential Smith TV-887 Line of Primary Cathy 98% $45,000 credit
home Newman equity TX-0001 Life Primary Sarah 45% $600,000
insurance insurance Velo
[0533] Each financial instrument data record may have associated
with it a number of risk data records. Following is one exemplary
embodiment of a risk data record schema, although not limited
thereto:
TABLE-US-00002 Financial Current Risk Instrument Date Type Value
VA-90991 Mar. 7, 2010 Loan to value .8 VA-90991 Mar. 7, 2010
Appraisal $500,000 TX-0001 Jan. 1, 2007 Age 23 TV-887 Feb. 12, 2009
Credit rating 680 TV-887 Feb. 12, 2009 Comparable .5 transaction
rating VA-90991 Nov. 19, 2009 Portfolio .8 diversification of owner
VA-90991 Nov. 19, 2009 Environmental .9 catastrophe risk rating
TX-0001 Jul. 22, 2008 Market economic 1 indicators
In this way, the creator of a financial instrument not only
discloses all of the risks that they use to value the instrument,
but those risks can be updated as necessary by creating new
associated risk data records. Risk data records may have a
date/time stamp in order to determine whether they are current and
the change in risk can be tracked during the life of a financial
instrument. The associated risk data records allow a real-time or
near-real-time calculation of a financial instrument's value by
users of the system.
[0534] The reporting software 212 may be able to report on any
attributes of risk data records and/or financial instrument data
records, although not limited thereto, from the broadest view to
the most granular. For example, in one embodiment it is possible to
report on a financial instrument and then see each associated risk.
In another, it may be preferable to report on all "loan to value"
type risks to see how much risk is in the marketplace should there
be a downturn in real estate values. Similarly, it may be
preferable to report on all financial instruments in a particular
portfolio, owned by a particular entity, or all "mortgage" type
instruments, although not limited thereto. It is to be appreciated
that any number of different reporting options are possible with
the system disclosed herein and it is not limited to any particular
embodiment.
[0535] Referring now to FIG. 4, shown is a schematic block diagram
depicting one embodiment of data association according to the
present teachings. As shown, each financial instrument 300, 302,
304 can be associated with one or more risks 310, 312, 314, 316. As
an example, a lender may create a mortgage loan financial
instrument 300. When doing so, the lender may provide information
on the risks 310, 312 associated with that loan (e.g., underwriting
standards, loan-to-value, appraisal value, borrower's payment
history, title search, etc.). It is appreciated that any financial
instrument may be used with the system disclosed herein and any
number of different types of risks may be used to evaluate an
instrument, and the current teachings are not limited the
particular embodiments provided.
[0536] The disclosure of risks 310, 312 permit real-time valuation
of the loan by instrument evaluation software 210 (shown in FIG.
3), even though risks (e.g., risk values, etc.) may change during
the life of the instrument. This also provides the ability to
compare similar instruments. A proper valuation of a financial
instrument can be determined at any given time, which may be
accessible by all other market participants, leveling the playing
field and increasing the liquidity of the market. Algorithms may be
employed to determine value based upon the relative weight and/or
calculated risk value of any risk, although not limited thereto.
One embodiment of the relative weights of risk is presented in the
table below, although the present teachings are not limited to this
particular embodiment:
TABLE-US-00003 Risk Calculated Risk Value Relative Weight
Risk.sub.1 $25,000 .2 Risk.sub.2 $15,000 1 Risk.sub.3 $30,000
.8
[0537] During the life of the instrument, the risks associated with
the instrument may change, such as loan terms and other factors.
Risks can be updated by risk updating software 208 (shown in FIG.
3) or by adding new risk data records. Financial instruments may be
repackaged, resold and sliced and diced in any number of different
ways, which may occur on secondary markets. When this happens, only
a portion of the original risk may travel with the new instrument.
However, because risks are disclosed in the system, they can
travel, or track, any instrument that incorporates those risks. As
an example, shown in FIG. 4 a new instrument 302 may incorporate
further risk(s) 314 to the risks 310, 312 associated with
instrument 300.
[0538] Reporting software 212 (shown in FIG. 3) may permit users to
access the wealth of market data in the system and report on
instruments, risks, or any attributes associated thereto. This may
be useful for regulators, for example, who may watch certain types
of risks, industries, markets, sectors, portfolios, instruments, or
any other piece or pieces of granular information to determine
overall market changes. Instruments can be classified by type,
geographic region, currency, originator, or any number of different
attributes. Similarly, risks can be classified by type, time,
related field, or any number of different types. This way, system
users can access the wealth of information by any number of
different attributes. This enables the identification of trends.
Money can also be tracked using the system, which provides a
solution to national security concerns regarding the flow of
illicit funds.
[0539] In exchange for providing information on the risks 310, 312,
314, 316 associated with financial instruments 300, 302, 204,
transaction credits 320, 322, 324, 326 may be earned. These credits
may have value in and of themselves, for example, as payment for
accessing reporting mechanisms in the system. In this way, a user
can not only be compensated by disclosing all of the risks involved
in a financial instrument, but those risks can be tracked in all
subsequent instruments and the earned credits can be used or
traded. This enhances liquidity since risks are disclosed and the
veracity of any disclosure can be tracked back to the disclosing
party. Credits may be tied to each risk, instrument and disclosing
party, although not limited thereto.
[0540] Referring now to FIG. 5, shown is a flowchart depicting one
embodiment of the method according to the present teachings. The
following steps may be performed, although not limited thereto:
create instrument(s) 400; create risk(s) 402; associate risk(s)
with instrument(s) 404; update risks 406; and evaluate the value of
the instrument 408, which may be done based on the disclosed
risk(s). The steps may be repeated as necessary to create
additional instruments, for example, where instruments are
repackaged in secondary markets. The system may acts as a "clearing
house" for settling transactions between users of the system. This
way, financial instruments can be easily sold, repackaged and sold
again, all while real-time value and associated risks are
disclosed. The method may also include reporting data contained in
the system to users (shown in FIG. 3).
[0541] The embodiments of the invention described in the foregoing
are illustrative and the invention is not limited to these
embodiments. Any computer configuration and architecture satisfying
the speed and interface requirements herein described may be
suitable for implementing the system and method of the present
embodiment. Many modifications and other embodiments will come to
mind to those skilled in the art to which this pertains, and which
are intended to be and are covered by both this disclosure and the
appended claims. It is intended that the scope of the present
teachings should be determined by proper interpretation and
construction of the appended claims and their legal equivalents, as
understood by those of skill in the art relying upon the disclosure
in this specification and the attached drawings.
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