U.S. patent application number 14/034910 was filed with the patent office on 2014-01-23 for credit default swap post credit event.
This patent application is currently assigned to Chicago Mercantile Exchange Inc.. The applicant listed for this patent is Chicago Mercantile Exchange Inc.. Invention is credited to Nicholas Bellios, Kevin Fallon, Ketan Patel, Giuseppe Scimeca.
Application Number | 20140025559 14/034910 |
Document ID | / |
Family ID | 44143982 |
Filed Date | 2014-01-23 |
United States Patent
Application |
20140025559 |
Kind Code |
A1 |
Fallon; Kevin ; et
al. |
January 23, 2014 |
Credit Default Swap Post Credit Event
Abstract
Methods, systems and apparatuses are described for determining
that a credit event has occurred for an entity; determining an
upfront price and a bond price for a credit default swap
deliverable (CDSD) contract associated with the entity; determining
a first weighting for the upfront price and a second weighting for
the bond price; and calculating a settlement price for the CDSD
contract that is a function of the first weighting, the second
weighting, the upfront price, and the bond price.
Inventors: |
Fallon; Kevin; (Salem,
WI) ; Bellios; Nicholas; (Evanston, IL) ;
Patel; Ketan; (Hanover Park, IL) ; Scimeca;
Giuseppe; (Chicago, IL) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
Chicago Mercantile Exchange Inc. |
Chicago |
IL |
US |
|
|
Assignee: |
Chicago Mercantile Exchange
Inc.
Chicago
IL
|
Family ID: |
44143982 |
Appl. No.: |
14/034910 |
Filed: |
September 24, 2013 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
|
|
12637455 |
Dec 14, 2009 |
8571966 |
|
|
14034910 |
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Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/04 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/04 20060101
G06Q040/04 |
Claims
1. A computer implemented method comprising: determining that a
credit event has occurred for an entity; determining an upfront
price and a bond price for a credit default swap deliverable (CD
SD) contract associated with the entity; determining a weighting
for the upfront price and a weighting for the bond price, wherein
the upfront price weighting exponentially decreases and the bond
price weighting exponentially increases based on a time since the
credit event; and calculating, by a processor, a settlement price
for the CDSD contract that is a function of the upfront price
weighting, the bond price weighting, the upfront price, and the
bond price.
2. The method of claim 1, further comprising: receiving a plurality
of estimated upfront prices for the CD SD contract; determining
that the plurality of estimated upfront prices are less than a
quorum; and calculating at least one other estimated upfront price
based on a bond price, wherein the upfront price is an average of
the estimated upfront prices and the at least one other estimated
upfront price.
3. The method of claim 1, further comprising: receiving a plurality
of estimated upfront prices for the CD SD contract; determining
that the plurality of estimated upfront prices are less than a
quorum; and analyzing market data to determine bid and ask prices
for the CDSD contract to obtain at least one other estimated
upfront price, wherein the upfront price is an average of the
estimated upfront prices and the at least one other estimated
upfront price.
4. The method of claim 1 wherein the determining that the credit
event has occurred comprises determining that a non-restructuring
credit event has occurred, and the determining the upfront price
and the bond price, the determining the upfront price weighting and
the bond price weighting, and the calculating a settlement price
are performed in response to the determination that a
non-restructuring credit event has occurred.
5. An apparatus comprising: a processor; and a memory storing
computer executable instructions that, when executed, cause the
apparatus to perform operations comprising: determining that a
credit event has occurred for an entity; determining an upfront
price and a bond price for a credit default swap deliverable (CDSD)
contract associated with the entity; determining a weighting for
the upfront price and a weighting for the bond price, wherein the
upfront price weighting exponentially decreases and the bond price
weighting exponentially increases based on a time since the credit
event; and calculating a settlement price for the CDSD contract
that is a function of the upfront price weighting, the bond price
weighting, the upfront price, and the bond price.
6. The apparatus of claim 5, wherein the computer executable
instructions, when executed, cause the apparatus to perform
operations comprising: receiving a plurality of estimated upfront
prices for the CDSD contract; determining that the plurality of
estimated upfront prices are less than a quorum; and calculating at
least one other estimated upfront price based on a bond price,
wherein the upfront price is an average of the estimated upfront
prices and the at least one other estimated upfront price.
7. The apparatus of claim 5, wherein the computer executable
instructions, when executed, cause the apparatus to perform
operations comprising: receiving a plurality of estimated upfront
prices for the CDSD contract; determining that the plurality of
estimated upfront prices are less than a quorum; and analyzing
market data to determine bid and ask prices for the CDSD contract
to obtain at least one other estimated upfront price, wherein the
upfront price is an average of the estimated upfront prices and the
at least one other estimated upfront price.
8. The apparatus of claim 5 wherein the determining that the credit
event has occurred comprises determining that a non-restructuring
credit event has occurred, and the determining the upfront price
and the bond price, the determining the upfront price weighting and
the bond price weighting, and the calculating a settlement price
are performed in response to the determination that a
non-restructuring credit event has occurred.
9. A computer readable medium storing computer executable
instructions that, when executed, cause an apparatus to perform
operations comprising: determining that a credit event has occurred
for an entity; determining an upfront price and a bond price for a
credit default swap deliverable (CD SD) contract associated with
the entity; determining a weighting for the upfront price and a
weighting for the bond price, wherein the upfront price weighting
exponentially decreases and the bond price weighting exponentially
increases based on a time since the credit event; and calculating a
settlement price for the CDSD contract that is a function of the
upfront price weighting, the bond price weighting, the upfront
price, and the bond price.
10. The computer readable medium of claim 9, wherein the computer
executable instructions, when executed, cause the apparatus to
perform operations comprising: receiving a plurality of estimated
upfront prices for the CDSD contract; determining that the
plurality of estimated upfront prices are less than a quorum; and
calculating at least one other estimated upfront price based on a
bond price, wherein the upfront price is an average of the
estimated upfront prices and the at least one other estimated
upfront price.
11. The computer readable medium of claim 9, wherein the computer
executable instructions, when executed, cause the apparatus to
perform operations comprising: receiving a plurality of estimated
upfront prices for the CDSD contract; determining that the
plurality of estimated upfront prices are less than a quorum; and
analyzing market data to determine bid and ask prices for the CDSD
contract to obtain at least one other estimated upfront price,
wherein the upfront price is an average of the estimated upfront
prices and the at least one other estimated upfront price.
12. The computer readable medium of claim 9 wherein the determining
that the credit event has occurred comprises determining that a
non-restructuring credit event has occurred, and the determining
the upfront price and the bond price, the determining the upfront
price weighting and the bond price weighting, and the calculating a
settlement price are performed in response to the determination
that a non-restructuring credit event has occurred.
13. A computer implemented method comprising: determining that a
credit event has occurred for an entity; receiving a plurality of
estimated upfront prices for the CDSD contract; determining that
the plurality of estimated upfront prices are less than a quorum;
based on the determination that the plurality of estimated upfront
prices are less than a quorum, performing one of (a) or (b) (a)
calculating at least one other estimated upfront price based on a
bond price, and determining an upfront price as an average of the
estimated upfront prices and the at least one other estimated
upfront price, or (b) analyzing market data to determine bid and
ask prices for the CDSD contract to obtain at least one other
estimated upfront price, and determining an upfront price as an
average of the estimated upfront prices and the at least one other
estimated upfront price; determining a weighting for the upfront
price and a weighting for the bond price; and calculating, by a
processor, a settlement price for the CDSD contract that is a
function of the upfront price weighting, the bond price weighting,
the upfront price, and the bond price.
14. The method of claim 13, wherein (a) is performed.
15. The method of claim 13, wherein (b) is performed.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] The present application is a continuation of U.S. patent
application Ser. No. 12/637,455, filed Dec. 14, 2009, and titled
"Credit Default Swap Post Credit Event." The entire disclosure of
application Ser. No. 12/637,455 is hereby incorporated by reference
herein.
BACKGROUND
[0002] A (CDS) is a credit derivative contract between two
counterparties where a protection buyer makes periodic payments to
a protection seller, and receives a payoff if an underlying
financial instrument defaults or if a company undergoes
restructuring, bankruptcy, or upon the occurrence of another
contractually stipulated event. The spread of the CDS is the amount
the protection buyer must pay the protection seller over the length
of the contract, which can be expressed as a percentage of a
notional amount. For example, if the CDS spread of a company is 100
basis points, or 1.0% (1 basis point =0.01%), then an investor
buying $10 million worth of protection must pay $100,000. Payments
made by the protection buyer continue until either the CDS contract
expires or a credit event occurs (e.g., company defaults). A higher
CDS spread is a higher fee charged to protect against a company
defaulting and indicates that the company is considered more likely
to default by the market.
BRIEF SUMMARY
[0003] Methods, systems and apparatuses are described for
determining that a credit event has occurred for an entity;
determining an upfront price and a bond price for a credit default
swap deliverable (CDSD) contract associated with the entity;
determining a first weighting for the upfront price and a second
weighting for the bond price; and calculating a settlement price
for the CDSD contract that is a function of the first weighting,
the second weighting, the upfront price, and the bond price.
[0004] Of course, the methods, apparatuses, 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. The example
embodiments 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 that when executed, cause an
apparatus or processor to perform the operations described
herein.
[0005] The details of these and other embodiments are set forth in
the accompanying drawings and the description below. Other features
and advantages will be apparent from the description, drawings, and
claims.
BRIEF DESCRIPTION OF DRAWINGS
[0006] The example embodiments 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:
[0007] FIG. 1 depicts an illustrative operating environment that
may be used to implement various aspects of the example
embodiments.
[0008] FIG. 2 illustrates an example flow diagram of a method for
determining a settlement price of a CDSD contract.
DETAILED DESCRIPTION
[0009] FIG. 1 depicts an illustrative operating environment that
may be used to implement various aspects of the example
embodiments. 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 present
disclosure. Aspects of the present disclosure 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 may calculate various values, e.g.,
settlement prices, performance bond amounts, etc., in accordance
with aspects of the present disclosure.
[0010] 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, exchange 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. 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.
[0011] A match engine module 106 may match bid and offer prices for
orders configured in accordance with aspects of the present
disclosure. 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 present disclosure. 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 First In First Out
(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.
[0012] 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.
[0013] A market data module 112 may be included to collect market
data and prepare the data for transmission to users. In addition, a
settlement pricing module 134 may be included in exchange computer
system 100 to perform settlement of trades. 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.
[0014] A user database 102 may include information identifying
traders, dealers, and other users of exchange computer system 100.
Such information may include user names and passwords. A trader or
dealer operating an electronic device (e.g., computer devices 114,
116, 118, 120 and 122) interacting with the exchange computer
system 100 may be authenticated against user names and passwords
stored in the user database 102. 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 computer system 100.
[0015] 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.
[0016] 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.
[0017] 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 Embodiments
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
exchange computer system 100 and displaying to a user. In another
example, computer device 118 may include computer-executable
instructions for receiving market data from exchange computer
system 100 and displaying that information to a user. In yet
another example, a processor 140 of exchange 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.
[0018] Of course, numerous additional servers, computers, handheld
devices, personal digital assistants, telephones and other devices
may also be connected to exchange 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.
[0019] The example embodiments provide systems, apparatuses, and
methods that determine a settlement price (i.e., marked-to-market
value) of single name credit default swap deliverable (CDSD)
contracts held in a Clearing House implemented by the exchange
computer system 100. The exchange computer system 100 may determine
settlement prices for CDSD contracts at predetermined times (e.g.,
twice a day corresponding with when the London and New York markets
close) to facilitate trading of the CDSD contracts after a credit
event occurs.
[0020] Before the credit event, a CDSD contract of single name
entity may trade in quote spreads in basis points. The quote spread
may be the spread in basis points derived from the upfront price
using the International Swaps and Derivatives Association CDS
Standard Model, using a market standard recovery rate (e.g., 40%
recovery rate for senior, and 25% for subordinate debt) and flat
term structure (e.g., standardized quote of 120 bps against a 100
bps coupon). Other quote spreads may also be used.
[0021] As the entity becomes more distressed, the quote spread may
dramatically increase (e.g., go from 50 basis points to 1000 basis
points) and the CDSD contract may quoted using upfront pricing,
rather than using the quote spread. The upfront price may be
defined as a percentage of the notional amount of the trade that
the protection buyer pays the protection seller, in addition to the
running standard coupon (e.g., five year protection on GE is 7.6%
upfront at 500 bps). Other methods for defining an upfront price
may also be used.
[0022] When a credit event occurs, parties may have long and short
positions in the CDSD contract. Conventionally, an auction is
conducted on what dealers think the CDSD contract of a defaulting
entity is worth a predetermined number of days (e.g., 30 days)
after the occurrence of the credit event. Conventional systems
provide the parties with two options after the credit event is
identified: wait and take delivery under the CDSD contract; or if
they want out sooner, use upfront pricing to determine a settlement
price for the CDSD contract.
[0023] As the auction date approaches, trading of CDSD contracts
based on upfront prices becomes very illiquid. To price the CDSD
contracts, traders often have to rely on where a bond for the CDSD
contract is trading. In some instances, however, there are many
more CDSD contracts than bonds. The auction price, however, is
based on bids and offers for the bonds. The example embodiments
described herein may determine settlement prices for CDSD contracts
at predetermined times to facilitate trading of the CDSD contracts
after a credit event occurs prior to the auction date.
[0024] FIG. 2 illustrates an example flow diagram of a method for
determining a settlement price of a CDSD contract. The method may
be implemented on the exchange computer system 100.
[0025] In block 202, the method may include determining that a
credit event has occurred for an entity and a type of the credit
event. In an example embodiment, the exchange computer system 100
may receive a credit event message from the International Swaps and
Derivatives Association (ISDA), an Exchange Determination Board
(e.g., Chicago Mercantile Exchange Determination Board) or other
entity deeming that a credit event has occurred for the entity.
Examples of a credit event types include (a) a non-restructuring
credit event (e.g., bankruptcy or failure to pay) and (b) a
restructuring credit event.
[0026] The credit event message may also identify a Credit Event
Determination (CED) date, a Credit Event Effective (CEE) date, a
Credit Event Processing (CEP) date, or any combination thereof. The
CED date may be the date that the ISDA or the Exchange
Determinations Board announces that a credit event has occurred.
The CEE date may be as early as 60 days prior to the CED date. The
CEP date may be the date that the exchange computer system 100
begins processing CDSD contracts for the entity, and may be on or
after the CED date. If the credit event is a non-restructuring
event, the method may proceed to block 204. If the credit event is
a restructuring event, the method may proceed to block 212.
[0027] In block 204, the method may include determining an upfront
price and a bond price for the CDSD contract associated with the
entity. For a non-restructuring credit event, the exchange computer
system 100 may determine an end-of-period upfront price for the
CDSD contract. In an example embodiment, the exchange computer
system 100 may receive upfront pricing messages from one or more
dealer computers 114 providing a dealer estimate for the upfront
price of the CDSD contract. The exchange computer system 100 may
then average or otherwise process the dealer upfront prices to
determine the upfront price used by the exchange computer system
100.
[0028] Also, the exchange computer system 100 may require that at
least a quorum of dealers (e.g., 4 or more) provide upfront prices
for averaging. If less than a quorum respond, the exchange computer
system 100 may make market observations, such as on bid/ask prices
for the CDSD contract, to obtain an upfront price for use in the
average. The exchange computer system 100 may also use prices of a
cheapest-to-deliver (CTD) bond on the CDSD contract to supplement
the dealer upfront prices to determine the average upfront price.
The exchange computer system 100 may identify the
cheapest-to-deliver (CTD) bond among a list of deliverable bonds
per ISDA protocol and may collect the price of the CTD bond. The
exchange computer system 100 may also limit which bonds qualify as
the CTD bond. For example, the exchange computer system 100 may
limit the CTD bonds to those where a volume of the most recent bond
trade is greater than a predetermined amount (e.g., $1 million).
The exchange computer system 100 may determine that no suitable CTD
bonds are available if the volume is less than the predetermined
amount. An upfront price based on the CTD bond price may be 100%
minus the CTD bond price. For example, if a bond price is 15%, then
an upfront price based on the bond price may be 85% (i.e.,
100%-15%=85%).
[0029] In block 206, the method may include determining iteratively
adjustable weightings. The iteratively adjustable weightings may
change over time and may adjust the proportion of the settlement
price that is attributed to the upfront price and the bond price.
The iteratively adjustable weightings may adjust over time to
reflect the portion of the settlement price attributable to the
bond price and the upfront price of the CDSD contract between the
time the credit event is identified and the auction date. For
example, at the beginning of the 30 days preceding an auction, the
exchange computer system 100 may more heavily weight the settlement
price based on the upfront price to reflect the supply and demand
of people deciding to get out of the CDSD contract via an upfront
level. As the 30 day cycle approaches the auction date, the
exchange computer system 100 may more heavily weight the settlement
price using the bond price for the CDSD contract. The exchange
computer system 100 therefore may adjust the iteratively adjustable
weightings over time to increase the proportion of the settlement
price attributable to the bond price, and to decrease proportion of
the settlement price attributable to the upfront price.
[0030] Initially, to determine the iteratively adjustable
weightings, the exchange computer system 100 may determine whether
both the upfront price and the CTD bond price are available. If
neither is available, the exchange computer system 100 may use the
previous day's price as the settlement price. If only one or the
other is available, the exchange computer system 100 may use the
available price (i.e., bond price or upfront price) as the
settlement price. If both are available, the exchange computer
system 100 may calculate weightings for the upfront price and the
bond price. For example, the exchange computer system 100 may
determine iteratively adjustable weights X, Y and Z based on an
initial 99.5% confidence interval, where the iterations are
determined at predefined time intervals (e.g., hours, days,
etc.)
[0031] For time period T=0:
Y=99.5% or 0.995
X=Y 2+0
Z=(1-X)
[0032] At time period T=1:
Y.sub.T-1=X.sub.T-0 2+0
[0033] X and Z are determined as shown above.
[0034] At time period T=2
Y.sub.T-2=X.sub.T-1 2+0
[0035] Thus, for time period T, Y.sub.T=X.sub.T-1 2+0. In other
words, over time, the proportion of the settlement price attributed
to the bond price may exponentially increase and to the upfront
price may exponentially decrease.
[0036] Table 1, below, provides an example of the iteratively
adjustable weightings beginning on the date a credit event is
identified.
TABLE-US-00001 TABLE 1 Day Y X Z Credit Event 1 0.995 0.990025
0.009975 2 0.990025 0.980149501 0.01985 3 0.98015 0.960693044
0.039307 4 0.960693 0.922931124 0.077069 5 0.922931 0.85180186
0.148198 6 0.851802 0.725566408 0.274434 7 0.725566 0.526446612
0.473553 8 0.526447 0.277146036 0.722854 9 0.277146 0.076809925
0.92319 10 0.07681 0.005899765 0.9941 11 0.0059 3.48072E-05
0.999965
[0037] These weights X, Y, and Z may be tailored or refined to
reflect empirical or other data to more accurately reflect the
value and risk associated with a given CDSD contract.
[0038] In block 208, the method may include calculating a
settlement price for the single name CDSD contract that is a
function of the iteratively adjustable weightings, the bond price,
and the upfront price. In an example embodiment, the exchange
computer system 100 may determine a settlement price (Ws) for the
CDSD contract of a defaulted entity W as a function of the Bond
Price (Wz) and the Upfront Price (Wy) using the following
equation:
CDSD settlement price (Ws)=((100-Wy)*X)+(Z* Wz) Eqn (1):
[0039] For example, if: [0040] Bond Price (Wz)=13.5 [0041] Upfront
Price (Wy)=85.5 then the CDSD settlement price (Ws) on day 3 based
on the values of X and Z from table 2 below may be determined to
be:
[0041] CDSD settlement price
(Ws)=((100-85.5)*0.96)+(0.04*13.5)=14.46
[0042] The values in Table 2 below reflect the proportion of the
settlement price attributed to the upfront price and to the bond
price over time.
TABLE-US-00002 TABLE 2 Bond Upfront Price Price Day Weight X Weight
Y 1 1% 99% 2 2% 98% 3 4% 96% 4 8% 92% 5 15% 85% 6 27% 73% 7 47% 53%
8 72% 28% 9 92% 8% 10 99% 1% 11 100% 0%
[0043] In table 2, the bond price and the upfront price are
weighted approximately equally at day 7, and thereafter the
percentage of the settlement price attributed to the bond price
increases and to the upfront price decreases.
[0044] The exchange computer system 100 may determine the
settlement price as per this methodology for all tenors of CDSD
contracts. Table 3 below further presents an example of various
values of a CTD bond price, a 1--Upfront price, a CTD bond weight,
an upfront weight, and a single name CDSD price, and how these
values change over time based on a credit event identified on Jan.
14, 2009.
TABLE-US-00003 TABLE 3 CTD CTD Bond 1- Bond Upfront CDSD- Date
price Upfront weight weight price Jan. 14, 2009 16.75 18.74 1% 99%
18.72 Jan. 15, 2009 16.50 17.56 2% 98% 17.54 Jan. 16, 2009 16.50
18.58 4% 96% 18.50 Jan. 20, 2009 16.75 18.58 8% 92% 18.44 Jan. 21,
2009 17.25 18.80 15% 85% 18.57 Jan. 22, 2009 17.63 18.09 27% 73%
17.96 Jan. 23, 2009 16.92 18.72 47% 53% 17.87 Jan. 26, 2009 16.92
18.22 72% 28% 17.28 Jan. 27, 2009 16.92 18.08 92% 8% 17.01 Jan. 28,
2009 16.92 17.54 99% 1% 16.92 Jan. 29, 2009 14.00 16.75 100% 0%
14.00 Jan. 30, 2009 14.00 16.44 100% 0% 14.00 Feb. 2, 2009 14.00
15.93 100% 0% 14.00 Feb. 3, 2009 14.00 16.40 100% 0% 14.00 Feb. 4,
2009 14.00 16.54 100% 0% 14.00 Feb. 5, 2009 15.25 17.00 100% 0%
15.25 Feb. 6, 2009 15.25 15.50 100% 0% 15.25 Feb. 9, 2009 15.25
14.37 100% 0% 15.25 Feb. 10, 2009 12.00 14.50 100% 0% 12.00
Auction: 12.00
[0045] From block 208, the method may then proceed to block 210 and
end. Returning to block 202, the method may determine that the
credit event is a restructuring credit event and may proceed to
block 212.
[0046] In block 212, the method may include converting all CDSD
contracts to bilateral contracts by matching sellers and buyers by
notional amount outstanding. For example, the exchange computer
system 100 may match sellers and buyers by notional amount
outstanding to convert all CDSD contracts to bilateral contracts.
Matched buyer and seller pairs may either physically settle or
continue to trade. If physically settling, the method may proceed
to block 214. If continuing to trade, the method may proceed to
block 216.
[0047] In block 214, the method may include the matched buyer and
seller pairs physically settling. In an example embodiment, the
protection buyer delivers the notional amount of deliverable
obligations of the defaulting entity to the protection seller in
return for the notional amount paid in cash. After physically
settling, the method may proceed to block 210 and end.
[0048] Referring again to block 212, if continuing to trade, the
method may proceed to block 216. In block 216, the method may
include the continued trading of the CDSD contracts and may proceed
to block 218.
[0049] In block 218, the method may include determining a daily
settlement price for a single name CDSD contract. For example, the
exchange computer system 100 may gather prices for each of the
tenors available for the CDSD contracts and executed prices, quoted
prices, and position marks for the affected CDSD contracts. The
method of FIG. 2 may then end.
[0050] The present disclosure 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 disclosure may conceive of changes or other embodiments or
variations, which utilize the principles of this disclosure without
departing from the broader spirit and scope of the disclosure as
set forth in the appended claims. For example, although numerous
examples recite CDSD contracts, 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 disclosure contemplated herein.
* * * * *