U.S. patent application number 13/670550 was filed with the patent office on 2013-03-14 for clearing system that determines margin requirements for financial portfolios.
This patent application is currently assigned to Chicago Merchantile Exchange, Inc.. The applicant listed for this patent is Chicago Merchantile Exchange, Inc.. Invention is credited to Ankeet Dedhia, Moody Hadi, Suneel Iyer, Amy McCormick, Ketan Patel.
Application Number | 20130066807 13/670550 |
Document ID | / |
Family ID | 44188659 |
Filed Date | 2013-03-14 |
United States Patent
Application |
20130066807 |
Kind Code |
A1 |
Iyer; Suneel ; et
al. |
March 14, 2013 |
Clearing System That Determines Margin Requirements for Financial
Portfolios
Abstract
Methods, systems and apparatuses are described for calculating a
performance bond amount for a portfolio including interest rate
swaps. A risk calculation module (or risk processor) may assist in
the calculation. In some examples, values, such as swap (DV01)
dollar values and volatility values, and adjustments/factors, such
as calendar charge adjustments and liquidity charge minimums, may
be used to enhance the margin calculation. These values may be
maintained and updated in various ways, including but not limited
to, lookup tables, matrices, and other structures. The margin
calculations may be used by an exchange or clearinghouse to request
a portfolio holder to deposit additional funds towards a
performance bond associated with the portfolio.
Inventors: |
Iyer; Suneel; (Naperville,
IL) ; Hadi; Moody; (New York City, NY) ;
McCormick; Amy; (Chicago, IL) ; Patel; Ketan;
(Hanover Park, IL) ; Dedhia; Ankeet; (Chicago,
IL) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
Chicago Merchantile Exchange, Inc.; |
Chicago |
IL |
US |
|
|
Assignee: |
Chicago Merchantile Exchange,
Inc.
Chicago
IL
|
Family ID: |
44188659 |
Appl. No.: |
13/670550 |
Filed: |
November 7, 2012 |
Related U.S. Patent Documents
|
|
|
|
|
|
Application
Number |
Filing Date |
Patent Number |
|
|
13489693 |
Jun 6, 2012 |
8332301 |
|
|
13670550 |
|
|
|
|
12649267 |
Dec 29, 2009 |
8239308 |
|
|
13489693 |
|
|
|
|
Current U.S.
Class: |
705/36R |
Current CPC
Class: |
G06Q 40/06 20130101;
G06Q 40/04 20130101 |
Class at
Publication: |
705/36.R |
International
Class: |
G06Q 40/06 20120101
G06Q040/06 |
Claims
1. A method comprising: calculating, using an exchange computer
system, an initial value for a performance bond amount for one or
more interest rate swaps in a portfolio of financial assets; and
calculating, using the exchange computer system, an adjusted value
for the performance bond amount by adjusting the initial value by a
calendar charge adjustment to account for non-parallel shifts in a
swap curve.
2. The method of claim 2, further comprising generating a
notification based on the adjusted value.
3. The method of claim 1, wherein calculating the initial value
comprises calculating an initial value as a function of first and
second inputs, the first input comprises a value based on a
remaining maturity and fixed rate of the at least one interest rate
swap, and the second input comprises a value based on a value
determined without regard to the fixed interest rate of the at
least one interest rate swap.
4. The method of claim 3, wherein the first input comprises a swap
dollar value and the second input comprises a volatility value.
5. The method of claim 4, wherein calculating the initial value
comprises multiplying the first input by the second input.
6. The method of claim 1, wherein calculating the initial value
comprises calculating an initial value for a performance bond
amount for a plurality of interest rate swaps, calculating the
initial value further comprises, for each swap of the plurality,
multiplying a swap value corresponding to the swap by a volatility
value corresponding to the swap to obtain a product corresponding
to the swap, and calculating the initial value additionally
comprises summing the products corresponding to the swaps of the
plurality.
7. An apparatus comprising: a computer memory storing
computer-executable instructions; and a processor coupled to the
memory and configured to execute the instructions so as to cause
the apparatus to calculate an initial value for a performance bond
amount for one or more interest rate swaps in a portfolio of
financial assets, and calculate an adjusted value for the
performance bond amount by adjusting the initial value by a
calendar charge adjustment to account for non-parallel shifts in a
swap curve.
8. The apparatus of claim 7, wherein calculating the initial value
comprises calculating an initial value as a function of first and
second inputs, the first input comprises a value based on a
remaining maturity and fixed rate of the at least one interest rate
swap, and the second input comprises a value based on a value
determined without regard to the fixed interest rate of the at
least one interest rate swap.
9. The apparatus of claim 8, wherein the first input comprises a
swap dollar value and the second input comprises a volatility
value.
10. The apparatus of claim 9, wherein calculating the initial value
comprises multiplying the first input by the second input.
11. The apparatus of claim 7, wherein calculating the initial value
comprises calculating an initial value for a performance bond
amount for a plurality of interest rate swaps, calculating the
initial value further comprises, for each swap of the plurality,
multiplying a swap value corresponding to the swap by a volatility
value corresponding to the swap to obtain a product corresponding
to the swap, and calculating the initial value additionally
comprises summing the products corresponding to the swaps of the
plurality.
12. A non-transitory computer-readable storage medium containing
computer-executable instructions for performing a method
comprising: calculating an initial value for a performance bond
amount for one or more interest rate swaps in a portfolio of
financial assets; and calculating an adjusted value for the
performance bond amount by adjusting the initial value by a
calendar charge adjustment to account for non-parallel shifts in a
swap curve.
13. The non-transitory computer-readable storage medium of claim
12, wherein calculating the initial value comprises calculating an
initial value as a function of first and second inputs, the first
input comprises a value based on a remaining maturity and fixed
rate of the at least one interest rate swap, and the second input
comprises a value based on a value determined without regard to the
fixed interest rate of the at least one interest rate swap.
14. The non-transitory computer-readable storage medium of claim
13, wherein the first input comprises a swap dollar value and the
second input comprises a volatility value.
15. The non-transitory computer-readable storage medium of claim
14, wherein calculating the initial value comprises multiplying the
first input by the second input.
16. The non-transitory computer-readable storage medium of claim
12, wherein calculating the initial value comprises calculating an
initial value for a performance bond amount for a plurality of
interest rate swaps, calculating the initial value further
comprises, for each swap of the plurality, multiplying a swap value
corresponding to the swap by a volatility value corresponding to
the swap to obtain a product corresponding to the swap, and
calculating the initial value additionally comprises summing the
products corresponding to the swaps of the plurality.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This is application is a continuation of U.S. patent
application Ser. No. 13/489,693, filed Jun. 6, 2012, and entitled
"Clearing System That Determines Margin Requirements For Financial
Portfolios," which application is a continuation of U.S. patent
application Ser. No. 12/649,267, filed Dec. 29, 2009, and entitled
"Clearing System That Determines Margin Requirements For Financial
Portfolios" (now U.S. Pat. No. 8,239,308). The entire disclosures
of application Ser. Nos. 13/489,693 and 12/649,267 are incorporated
by reference herein.
TECHNICAL FIELD
[0002] The present invention relates to a portfolio of financial
instruments. In particular, aspects of the invention relate to
calculating a performance bond amount for a portfolio of financial
instruments.
BACKGROUND
[0003] According to Wikipedia, an interest rate swap (IRS) is a
derivative in which one party exchanges a stream of interest
payments for another party's stream of cash flows. IRSs can be used
by hedgers to manage their fixed or floating assets and
liabilities. They can also be used by speculators to replicate
unfunded bond exposures to profit from changes in interest rates.
IRS may come in many different types, including fixed-for-floating
rate swaps, floating-for-floating rate swaps, and fixed-for-fixed
rate swaps. The present value of a plain vanilla swap can be
computed using well-known formulas: the value of the fixed leg is
given by the present value of the fixed coupon payments known at
the start of the swap, and the value of the floating leg is given
by the present value of the floating coupon payment determined at
the agreed dates of each payment. Therefore, at the time the IRS is
entered into, there is no advantage to either counterparty.
[0004] IRSs, however, expose their holders to interest rate risk
and credit risk, Wikipedia explains. In a plain vanilla
fixed-for-floating swap, the party who pays the floating rate
benefits when rates fall. Meanwhile, credit risk on the IRS comes
into play if the swap is in the money or not. If one of the parties
is in the money, then that party faces credit risk of possible
default by another party.
[0005] Techniques for measuring risk of a swap are well known in
the industry. The DV01 approach uses the dollar value of a one
basis point (bps) change in a swap's fixed interest rate to measure
risk. DV01 is measured in units of USD per bps. Nevertheless,
enhanced techniques and devices to better calculate margin risk
associated with a portfolio comprising IRSs is desired.
BRIEF SUMMARY
[0006] A method is disclosed for calculating a performance bond
amount for a plurality of interest rate swaps in a portfolio of
financial assets using a risk calculation module. The margin
calculations may use a swap (DV01) dollar value and a volatility
value to determine the amount of a performance bond required of a
holder of the portfolio. If the margin calculation results in a
calculated performance bond amount that is greater than the current
amount of the holder's margin account balance, a request may be
sent to increase the margin account balance.
[0007] In another embodiment in accordance with aspects of the
invention, the performance bond amount calculated by the risk
calculation module may be enhanced by considering a calendar charge
adjustment to account for non-parallel shifts in a swap curve. In
yet another embodiment, the performance bond amount calculated by
the risk calculation module may be enhanced by considering a
liquidity charge minimum.
[0008] Moreover, various aspects of the aforementioned methodology
may be implemented in an apparatus comprising a risk calculation
module, one or more processors (e.g., risk processor), one or more
memories, and other modules. Information may be stored in the
memories to assist the risk calculation module (or risk processor)
in calculating a performance bond amount. Information corresponding
to a calendar charge lookup table, liquidity charge minimum lookup
table, volatility lookup table, and/or swap DV01 matrix may be
stored in the one or more memories.
[0009] Of course, the methods and systems of the above-referenced
embodiments may also include other additional elements, steps,
computer-executable instructions, or computer-readable data
structures. In this regard, other embodiments are disclosed and
claimed herein as well. In other embodiments, the present invention
can be partially or wholly implemented on a computer-readable
medium, for example, by storing computer-executable instructions or
modules, or by utilizing computer-readable data structures.
[0010] The details of these and other embodiments of the present
invention are set forth in the accompanying drawings and the
description below. Other features and advantages of the invention
will be apparent from the description and drawings, and from the
claims.
BRIEF DESCRIPTION OF DRAWINGS
[0011] The present invention may take physical form in certain
parts and steps, embodiments of which will be described in detail
in the following description and illustrated in the accompanying
drawings that form a part hereof, wherein:
[0012] FIG. 1 depicts an illustrative computer network system that
may be used to implement various aspects of the invention;
[0013] FIG. 2 illustrates an exemplary margining methodology in
accordance with aspects of the invention;
[0014] FIG. 3 shows a flowchart of an exemplary risk calculation
module (or risk processor) in accordance with various aspects of
the invention;
[0015] FIG. 4 shows a high-level illustration of an exemplary swap
DV01 matrix in accordance with various aspects of the
invention;
[0016] FIG. 5 shows a high-level illustration of an exemplary
volatility lookup table in accordance with various aspects of the
invention;
[0017] FIG. 6 shows a high-level illustration of an exemplary
calendar charge lookup table in accordance with various aspects of
the invention; and
[0018] FIG. 7 shows a high-level illustration of a liquidity charge
minimum lookup table in accordance with various aspects of the
invention.
DETAILED DESCRIPTION
[0019] Methods, systems and apparatuses are described for
calculating a performance bond amount for a portfolio of financial
assets, including interest rate swaps. A risk calculation module
(or risk processor) may assist in the calculation. In some
examples, values (e.g., swap DV01s, volatility values, etc.) and
adjustments/factors (e.g., calendar charge adjustments, liquidity
charge minimums, etc.) may be used to enhance the margin
calculation. These values may be maintained and updated in various
ways, including but not limited to, lookup tables, matrices, and
other structures. The margin calculations may be used by an
exchange or clearinghouse, for example, to request a portfolio
holder to deposit additional funds into a margin account towards a
performance bond. The clearinghouse (e.g., central counterparty to
financial products) may use the performance bond to counter margin
risk associated with the portfolio.
[0020] FIG. 1 depicts an illustrative operating environment that
may be used to implement various aspects of the invention. The
operating environment is only one example of a suitable operating
environment and is not intended to suggest any limitation as to the
scope of use or functionality of the invention. Aspects of the
invention are preferably implemented with computer devices and
computer networks that allow the exchange/transmission/reception of
information including, but not limited to performance bond amount
requirements and trading information. An exchange computer system
100 receives market data, analyzes historical data, and calculates
various values, e.g., performance bond amounts, in accordance with
aspects of the invention.
[0021] Exchange computer system 100 may be implemented with one or
more mainframes, servers, gateways, controllers, desktops or other
computers. The exchange computer system 100 may include one or more
modules, processors, databases, and other components, such as those
illustrated in FIG. 1. Moreover, computer system 100 may include
one or more processors 140 (e.g., Intel.RTM. microprocessor,
AMD.RTM. microprocessor, risk processor, etc.) and one or more
memories 142 (e.g., solid state, DRAM, SRAM, ROM, Flash,
non-volatile memory, hard drive, registers, buffers, etc.) In
addition, an electronic trading system 138, such as the Globex.RTM.
trading system, may be associated with an exchange 100. In such an
embodiment, the electronic trading system includes a combination of
globally distributed computers, controllers, servers, networks,
gateways, routers, databases, memory, and other electronic data
processing and routing devices. The trading system may include a
trading system interface having devices configured to route
incoming messages to an appropriate devices associated with the
trading system. The trading system interface may include computers,
controllers, networks, gateways, routers and other electronic data
processing and routing devices. Orders that are placed with or
submitted to the trading system are received at the trading system
interface. The trading system interface routes the order to an
appropriate device.
[0022] A match engine module 106 may match bid and offer prices for
orders configured in accordance with aspects of the invention.
Match engine module 106 may be implemented with software that
executes one or more algorithms for matching bids and offers for
bundled financial instruments in accordance with aspects of the
invention. The match engine module and trading system interface may
be separate and distinct modules or component or may be unitary
parts. Match engine module may be configured to match orders
submitted to the trading system. The match engine module may match
orders according to currently known or later developed trade
matching practices and processes. In an embodiment, bids and orders
are matched on price, on a FIFO basis. The matching algorithm also
may match orders on a pro-rata basis or combination of FIFO and pro
rata basis. Other processes and/or matching processes may also be
employed.
[0023] Furthermore, an order book module 110 may be included to
compute or otherwise determine current bid and offer prices. The
order book module 110 may be configured to calculate the price of a
financial instrument. Moreover, a trade database 108 may be
included to store historical information identifying trades and
descriptions of trades. In particular, a trade database may store
information identifying or associated with the time that an order
was executed and the contract price. The trade database 108 may
also comprise a storage device configured to store at least part of
the orders submitted by electronic devices operated by traders
(and/or other users). In addition, an order confirmation module 132
may be configured to provide a confirmation message when the match
engine module 106 finds a match for an order and the order is
subsequently executed. The confirmation message may, in some
embodiments, be an e-mail message to a trader, an electronic
notification in one of various formats, or any other form of
generating a notification of an order execution.
[0024] A market data module 112 may be included to collect market
data and prepare the data for transmission to users. In addition, a
risk calculation module 134 may be included in computer system 100
to compute and determine the amount of risk associated with a
financial product or portfolio of financial products. An order
processing module 136 may be included to receive data associated
with an order for a financial instrument. The module 136 may
decompose delta based and bulk order types for processing by order
book module 110 and match engine module 106. The order processing
module 136 may be configured to process the data associated with
the orders for financial instruments.
[0025] A user database 102 may include information identifying
traders and other users of exchange computer system 100. Such
information may include user names and passwords. A trader
operating an electronic device (e.g., computer devices 114, 116,
118, 120 and 122) interacting with the exchange 100 may be
authenticated against user names and passwords stored in the user
database 112. Furthermore, an account data module 104 may process
account information that may be used during trades. The account
information may be specific to the particular trader (or user) of
an electronic device interacting with the exchange 100.
[0026] The trading network environment shown in FIG. 1 includes
computer (i.e., electronic) devices 114, 116, 118, 120 and 122. The
computer devices 114, 116, 118, 120 and 122 may include one or more
processors, or controllers, that control the overall operation of
the computer. The computer devices 114, 116, 118, 120 and 122 may
include one or more system buses that connect the processor to one
or more components, such as a network card or modem. The computer
devices 114, 116, 118, 120 and 122 may also include interface units
and drives for reading and writing data or files. Depending on the
type of computer device, a user can interact with the computer with
a keyboard, pointing device, microphone, pen device or other input
device. For example the electronic device may be a personal
computer, laptop or handheld computer, tablet pc and like computing
devices having a user interface. The electronic device may be a
dedicated function device such as personal communications device, a
portable or desktop telephone, a personal digital assistant
("PDA"), remote control device, personal digital media system and
similar electronic devices.
[0027] Computer device 114 is shown communicatively connected to
exchange computer system 100. Exchange computer system 100 and
computer device 114 may be connected via a T1 line, a common local
area network (LAN) a wireless communication device or any other
mechanism for communicatively connecting computer devices. Computer
(i.e., electronic) devices 116 and 118 are coupled to a local area
network ("LAN") 124. LAN 124 may have one or more of the well-known
LAN topologies and may use a variety of different protocols, such
as Ethernet. Computers 116 and 118 may communicate with each other
and other computers and devices connected to LAN 124. Computers and
other devices may be connected to LAN 124 via twisted pair wires,
coaxial cable, fiber optics or other media. Alternatively, a
wireless personal digital assistant device (PDA) 122 may
communicate with LAN 124 or the Internet 126 via radio waves. PDA
122 may also communicate with exchange computer system 100 via a
conventional wireless hub 128. As used herein, a wireless PDA 122
includes mobile telephones and other devices that communicate with
a network via radio waves. FIG. 1 also shows LAN 124 connected to
the Internet 126. LAN 124 may include a router to connect LAN 124
to the Internet 126. Computer device 120 is shown connected
directly to the Internet 126, however, the connection may be via a
modem, DSL line, satellite dish or any other device for
communicatively connecting a computer device to the Internet.
[0028] The operations of computer devices and systems shown in FIG.
1 may be controlled by computer-executable instructions stored on
computer-readable storage medium. Embodiments also may take the
form of electronic hardware, computer software, firmware, including
object and/or source code, and/or combinations thereof. Embodiment
may be stored on computer-readable media installed on, deployed by,
resident on, invoked by and/or used by one or more data processors
(e.g., risk processor), controllers, computers, clients, servers,
gateways, networks of computers, and/or any combinations thereof.
The computers, servers, gateways, may have one or more controllers
configured to execute instructions embodied as computer software.
For example, computer device 114 may include computer-executable
instructions for receiving interest rate and other information from
computer system 100 and displaying to a user. In another example,
computer device 118 may include computer-executable instructions
for receiving market data from computer system 100 and displaying
that information to a user. In yet another example, a processor 140
of computer system 100 may be configured to execute
computer-executable instructions that cause the system 100 to
calculate a performance bond amount required to balance risk
associated with a portfolio.
[0029] Of course, numerous additional servers, computers, handheld
devices, personal digital assistants, telephones and other devices
may also be connected to computer system 100. Moreover, one skilled
in the art will appreciate that the topology shown in FIG. 1 is
merely an example and that the components shown in FIG. 1 may be
connected by numerous alternative topologies.
[0030] FIG. 2 illustrates an exemplary margining methodology to
calculate performance bond amounts for interest rate swaps. In step
202, a risk calculation module (or risk processor) may be used to
calculate a performance bond amount for a plurality of interest
rate swaps in a portfolio. The portfolio may include financial
instruments other than just spot vanilla interest rate swaps. For
example, the portfolio may be using interest rate swaps to hedge
against risk associated with fixed or floating assets and
liabilities in the portfolio. In addition, the financial
instruments in the portfolio may be based in different
currencies.
[0031] In step 204, the balance of an account (e.g., margin
account) associated with the portfolio may be compared with the
performance bond amount calculated in step 202. If the balance is
insufficient to cover the calculated performance bond amount, then
a notification may be generated that an increase in the amount of
the account to at least the calculated performance bond amount is
required. The holder of the portfolio may be requested (in step
206) to increase the amount of the margin account to at least the
calculated performance bond amount. The holder of the portfolio may
be the owner of the portfolio, a trustee appointed to act as
fiduciary for managing the portfolio, or any other person or entity
responsible for the portfolio. The generated notification and
requesting may be performed through electronic communication (e.g.,
e-mail, SMS, instant message, etc.) or through manual communication
(e.g., a "margin call" from a customer service representative). In
an alternative embodiment, the holder may have a prior agreement
with an exchange (or other entity) to automatically increase a
margin account amount simply in response to receiving a request (of
step 206). In such an arrangement, information about an account
designated by the holder may be maintained in an account data
module 104 and the account may be funded with sufficient assets
(e.g., from another account, from another brokerage account, etc.)
to cover such "margin calls."
[0032] Meanwhile, if the margin account balance is sufficient to
cover the calculated performance bond amount, then no action may be
necessary (e.g., as in step 208). Alternatively, the holder of the
portfolio may be notified (in step 210) that the margin account
balance is in surplus compared to the requisite performance bond
amount calculated (in step 202). The notification (of step 210) may
be carried out in numerous ways, including but not limited to,
using electronic communication (e.g., e-mail, SMS, instant message,
etc.) or manual communication (e.g., a "margin call" from a
customer service representative).
[0033] Referring to FIG. 3, a risk calculation module (or risk
processor) in accordance with various aspects of the invention may
calculate a performance bond amount for a plurality of interest
rate swaps in a portfolio. The risk calculation module (or risk
processor) may calculate the basic performance bond amount based a
function (e.g., multiplication) of a swap (DV01) dollar value and a
volatility value corresponding to each interest rate swap in the
portfolio. For example, the risk calculation module (or risk
processor) may receive (in step 302) a swap (DV01) dollar value for
an interest rate swap. Swap (DV01) dollar values are measured in
the same units as DV01, but are a function of a swap's remaining
maturity and its fixed rate. The risk calculation module (or risk
processor) may also receive (in step 304) a volatility value for an
interest rate swap. The risk calculation module (or risk processor)
may perform a function (e.g., multiplication) of these two values
to determine the basic performance bond amount required to manage
the risk associated with the interest rate swap. If the portfolio
contains multiple interest rate swaps, the basic performance bond
amount may be calculated in the aforementioned manner for each
interest rate swap in the portfolio, and, for example, the
multiplications may be summed (in step 306) to calculate a total
performance bond amount required for the plurality of interest rate
swaps in the portfolio.
[0034] The volatility value received at the risk calculation module
(or risk processor) and used in the basic performance bond amount
calculation may be determined using a volatility lookup table
indexed by swap tenors at predetermined intervals. The volatility
value of an interest rate swap is based on the time remaining until
maturity of the interest rate swap. In other words, the swap tenor
may indicate the amount of time remaining until the swap matures.
The volatility value may be irrespective of the fixed rate of an
interest rate swap. For example, all interest rate swaps with one
year remaining until maturity may be grouped together and analyzed
to determine the volatility value for the particular swap tenor
(e.g., 1 year). As such, a search of the volatility lookup table by
swap tenor (i.e., the amount of time remaining until maturity)
returns the volatility value (in units of basis points) for the
appropriate swap tenor. The volatility value may be input into the
risk calculation module (or risk processor).
[0035] The volatility lookup table may be populated with values
using the results of a historical analysis of spot swap fixed
settlements. In one example, two years (or other duration of time)
worth of historical 2-day returns (or returns of over another time
period) of spot swap fixed settlements may be obtained from a data
service (e.g., Bloomberg, etc.) or from the trade database 108.
These two-day returns may be used to obtain 99.sup.th percentile
(or other percentile) historical volatilities for historical spot
swap data. For example, FIG. 5 illustrates an exemplary volatility
lookup table in accordance with various aspects of the invention.
For example, for an interest rate swap with five months remaining
(i.e., a 5 M tenor), FIG. 5 indicates a volatility value of 80 bps
(see ref. 502). Meanwhile, for interest rate swaps, irrespective of
their fixed rates, with a 3 year tenor, the volatility value is 40
bps (see ref. 504). One skilled in the art will appreciate that the
volatility lookup table may be implemented in various ways,
including but not limited to, as a software modules (e.g., "Other
Module" in FIG. 1) that receives swap tenor as an input parameter
returns the corresponding volatility value. The volatility lookup
table may be stored in computer memory and accessed by such a
module. One skilled in the art will appreciate that the swap tenor
value provided as an input parameter may be rounded as appropriate
to identify a swap tenor "bucket" (i.e., substantially same time
remaining until maturity) in the volatility lookup table. In an
alternative embodiment, the volatility lookup table may be more or
less granular with respect to swap tenor. For example, with
sufficient computing power available, the swap tenor granularity
may be weekly, daily, hourly, in realtime, etc., and the values in
the table may be updated weekly, daily, hourly, in realtime,
etc.
[0036] Furthermore, the swap (DV01) dollar value received at the
risk calculation module (or risk processor) and used in the basic
performance bond amount calculation may be determined using a swap
DV01 matrix based on the time remaining until maturity of the
interest rate swap (i.e., swap tenor) and the fixed rate of the
interest rate swap. Unlike a volatility value, the swap (DV01)
dollar value for an interest rate swap is dependent on the fixed
rate of the swap. As such, a search of the 2-dimensional swap DV01
matrix by both swap tenor (i.e., the amount of time remaining until
maturity) and the fixed rate of the swap, then returns the swap
(DV01) dollar value (in units of USD per basis point) for the
appropriate swap tenor and fixed rate. The swap (DV01) dollar value
may be input into the risk calculation module (or risk
processor).
[0037] Referring to FIG. 4, the swap DV01 matrix may accommodate
swaps of any swap tenor. In one example, the swap (DV01) dollar
value of a 3 year swap tenor with a fixed rate of 2.060% may be
located at ref 402 in FIG. 4. In another example, the swap DV01
matrix may run out to 30 years, and be broken into a granularity of
months. One skilled in the art will appreciate that the granularity
may be increased or decreased as desired. For example, the
granularity may be increased to show daily maturities. In another
example, monthly increments may be shown for swap tenors up to one
year, then swap tenors may be shown at quarterly increments.
Likewise, the swap DV01 matrix may accommodate swaps within a range
of interest rates (e.g., 0.1% to 10.0%). The granularity of the
fixed swap rates may be increased or decreased as desired. For
example, the fixed rates may increment in 10 bps increments. The
swap DV01 matrix may be updated daily because the values in the
matrix depend on swap tenor, which inherently changes with the
passage of time. The swap DV01 matrix may be populated with data
generated from a historical analysis.
[0038] One skilled in the art will appreciate that the swap DV01
matrix may be implemented in various ways, including but not
limited to, as a software modules (e.g., "Other Module" in FIG. 1)
that receives swap tenor and interest rate as input parameters and
returns the corresponding swap (DV01) dollar value. The swap DV01
matrix may be stored in computer memory and accessed by such a
module. One skilled in the art will appreciate that the values
provided as an input parameters may be rounded as appropriate to
identify a swap tenor "bucket" or interest rate "bucket" in the
matrix. With sufficient computing power available, the matrix may
be updated weekly, daily, hourly, in realtime, etc.
[0039] Per the aforementioned basic margin calculation methodology
the calculated performance bond amount is based on swap dollar
values and volatilities of each swap contract. However, such
calculations may be enhanced to fully account for the totality of
the risk associated with the portfolio. For example, margin risk
calculated based purely on a swap dollar value basis can result in
a performance bond amount that is too low to be commensurate with
the true risk of a portfolio. Rather, the risk calculation may be
enhanced by providing consideration to numerous factors, including,
but not limited to, liquidity and other forms of risk posed by
interest rate swaps.
[0040] The risk calculation module (or risk processor), in some
embodiments in accordance with aspects of the invention, may adjust
the calculated performance bond amount by a calendar charge
adjustment to account for non-parallel shifts in the swap curve.
Calendar charges are margin charges in addition to the
aforementioned basic margin calculations (based on swap dollar
values and volatility values). They account for the true 99% 2-day
risk with a given spread. Calendar charges may be calculated using
historical data (e.g., two years of historical data, with 2-days of
P&L coverage, and 99% value at risk (VaR)).
[0041] A calendar charge lookup table may be stored in computer
memory (e.g., memory accessible to the risk calculation module) to
provide calendar charge adjustment values for particular swap tenor
combinations in the portfolio. For example, assume the basic
performance bond calculation (based on swap dollar values and
volatility values) results in a performance bond amount of $650.
Also assume that the portfolio contains just two interest rate
swaps: one with swap tenor of 1 month and another with a swap tenor
of 3 years. The calendar charge lookup table may provide that a 1
month to 3 year spread in the exemplary portfolio results in a
calendar charge adjustment value of $250. As such, the total
performance bond amount required to manage the risk of the
portfolio is $900 (i.e., $650 plus $250). One skilled in the art
will appreciate that the calendar charge lookup table may be
divided into varying granularity. For example, in FIG. 6, the table
may be simplified by dividing swap tenors into tiers and assigning
a calendar charge adjustment value based on tier combinations (see
ref. 602). A first tier may be all swap tenors 1 year or less, a
second tier may be swap tenors from 1 year to 2 year, and a third
tier may be swap tenors greater than 2 years, but not less than 10
years, and a fourth tier may be all swap tenors greater than 10
years. In an alternate embodiment, the calendar charge lookup table
may be done at the finest granularity (e.g., daily) to provide for
greater precision in calculating the adjustment value. One skilled
in the art will appreciate that the amount of computing power
required for accessing and maintaining such a table would be
greater.
[0042] The risk calculation module (or risk processor), in some
embodiments in accordance with aspects of the invention, may adjust
the calculated performance bond amount to a liquidity charge
minimum to account for liquidity risks inherent to swap tenors.
Liquidity charges may be calculated using historical data (e.g.,
two years of historical data, with 2-days of P&L coverage, and
99% VaR). The liquidity charge minimum may be used to ensure that
performance bond requirements are not too low. For example, FIG. 7
illustrates an exemplary liquidity charge minimum lookup table
indexed by swap tenor tiers and gross notional values. For example,
a portfolio of three 1-year swaps with a gross notional amount of
$6 million, would be subjected to a liquidity charge minimum of
$400 (see ref 702). As such, if the calculated performance bond
amount is less than $400, then the performance bond amount may be
adjusted at the risk calculation module (or risk processor) to be
at least $400. Meanwhile, if the calculated performance bond amount
is already greater than the $400 floor, then the performance bond
amount may be left unchanged.
[0043] In accordance with aspects of the invention, a clearinghouse
may act as a central counter party on the interest rate swaps. As
such, the clearinghouse may centrally clear the interest rate swaps
in the portfolio. Moreover, the clearinghouse may be able to
calculate performance bond amount requirements on a daily (or other
predetermined interval) basis or realtime basis. At least one
benefit of an exchange-traded swap (i.e., centrally cleared), as
opposed to the over-the-counter (OTC) type, is that the swap may be
is cleared, marked-to-market, and facilitated by the clearinghouse.
This may promise more interesting capital efficiencies for
institutions that may cross-margin one swap against another.
[0044] In another embodiment in accordance with aspects of the
invention, software modules may be included in computer system 100
to provide a holder of a portfolio with advance notice of the
effect of a possible trade on margin requirements. As such, the
holder (e.g., trader) may consider the margin account effects of
his/her actions before proceeding, thus avoiding a potential margin
call. In yet another embodiment, an interactive display may be
generated to show the total gross notional value of a portfolio (or
group of portfolios) and the performance bond amount posted in
association with those portfolio(s). As such, an auditor of a
clearinghouse can instantly view and manage the risk at any given
time. Other information, e.g., charges due to curve shocks, spread
charges, total margin, portfolio DV01, gross notional value, and
other information may be displayed on the graphical user interface.
One skilled in the art will appreciate that the numerous data and
analysis described above may be used to enhance risk management of
a clearinghouse.
[0045] The present invention has been described herein with
reference to specific exemplary embodiments thereof. It will be
apparent to those skilled in the art that a person understanding
this invention may conceive of changes or other embodiments or
variations, which utilize the principles of this invention without
departing from the broader spirit and scope of the invention as set
forth in the appended claims. For example, although numerous
examples recite interest rate swaps, one skilled in the art will
appreciate that the novel principles disclosed herein may be
applied to other types of financial instruments and still fall
within the scope of the invention contemplated herein.
* * * * *