U.S. patent application number 15/079743 was filed with the patent office on 2016-07-14 for facilitation of payments between counterparties by a central counterparty.
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 David Boberski, Richard Co, Edward Gogol, Mike Kamradt, John Labuszewski, John Nyhoff, Roberta Paffaro, John Wiley, Steve Youngren.
Application Number | 20160203459 15/079743 |
Document ID | / |
Family ID | 52810506 |
Filed Date | 2016-07-14 |
United States Patent
Application |
20160203459 |
Kind Code |
A1 |
Labuszewski; John ; et
al. |
July 14, 2016 |
FACILITATION OF PAYMENTS BETWEEN COUNTERPARTIES BY A CENTRAL
COUNTERPARTY
Abstract
A system for moving money between accounts of traders by a
central counterparty to facilitate payments, i.e. the movement of
funds, there between is disclosed which provides a flexible
mechanism which supports simpler accounting, new types of
derivatives contracts as well new types fees. The disclosed futures
contract, referred to as a "payer" contract, comprises a
"no-uncertainty" futures contract, i.e. the initial value and
settlement value parameters are defined, that leverages the
mechanisms of the clearing system to, for example, accommodate
related payments. Accordingly, a 1-to-many relationship between
contracts and prices is provided whereby each price component may
be assigned its own payer contract. The function of the payer
contract may be to guarantee the movement of money from related
positions. In one embodiment, payer contracts are dynamically
created whenever a payment is needed.
Inventors: |
Labuszewski; John;
(Westmont, IL) ; Nyhoff; John; (Darien, IL)
; Boberski; David; (Westport, CT) ; Kamradt;
Mike; (Chicago, IL) ; Paffaro; Roberta; (Sao
Paulo, BR) ; Gogol; Edward; (Chicago, IL) ;
Wiley; John; (New York, NY) ; Co; Richard;
(Chicago, IL) ; Youngren; Steve; (Elgin,
IL) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
Chicago Mercantile Exchange Inc. |
Chicago |
IL |
US |
|
|
Assignee: |
Chicago Mercantile Exchange
Inc.
|
Family ID: |
52810506 |
Appl. No.: |
15/079743 |
Filed: |
March 24, 2016 |
Related U.S. Patent Documents
|
|
|
|
|
|
Application
Number |
Filing Date |
Patent Number |
|
|
14573455 |
Dec 17, 2014 |
9311675 |
|
|
15079743 |
|
|
|
|
13162821 |
Jun 17, 2011 |
|
|
|
14573455 |
|
|
|
|
Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 20/10 20130101;
G06Q 40/04 20130101; G06Q 20/28 20130101; G06Q 40/00 20130101 |
International
Class: |
G06Q 20/28 20060101
G06Q020/28; G06Q 40/04 20060101 G06Q040/04 |
Claims
1. A computer implemented method of facilitating a payment between
traders based on a first position in a first instrument held by a
first trader to which a second trader is a counterparty, the method
comprising: determining, by a payment processor based on the first
position, the amount of a payment to be made from one of the first
or second trader to the other of the first or second trader in
advance of settlement thereof, the amount of the payment being
further based on accrued dividends associated with a reference
index; assigning, automatically by the payment processor based on
the first position, a second position to the first trader in a
futures contract characterized by a settlement date, a quantity and
a price, the second position being characterized by a value based
on the quantity and the price of the futures contract as of the
assigning, and a third position to the second trader, counter to
the second position, in the futures contract, the first and second
traders not being identified to each other; valuing, by a
settlement processor upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the spot value being based on the determined
payment amount; and modifying, by a margin processor, a first
account record associated with the first trader and a second
account record associated with the second trader, both stored in an
account database stored in a memory coupled with the processor, to
reflect a credit to the account of the first trader and a debit
from the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the second trader
or to reflect a debit from the account of the first trader and a
credit to the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the first
trader.
2. The computer implemented method of claim 1 wherein the reference
index comprises one of the S&P 500, the DJIA or the NASDAQ
100.
3. The computer implemented method of claim 1 further comprising:
when the account of the first trader is credited and the account of
the second trader is debited: determining, by the payment
processor, the amount of an interest payment to be made from the
first to the second trader in advance of settlement thereof based
on the amount credited to the first trader; assigning, by the
payment processor, a fourth position to the first trader in a
futures contract characterized by a settlement date, a quantity and
a price, the fourth position being characterized by a value based
on the quantity and the price of the futures contract as of the
assigning, and a fifth position to the second trader, counter to
the fourth position, in the futures contract, the first and second
traders not being identified to each other; valuing, by the
settlement processor upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the spot value being based on the determined
interest payment amount; and modifying, by the margin processor,
the first and second account records in the account database to
reflect a debit from the account of the first trader and a credit
to the account of the second trader in the amount of the difference
between the value of the second position and the spot value.
4. The computer implemented method of claim 1 further comprising:
when the account of the first trader is debited and the account of
the second trader is credited: determining, by the payment
processor, the amount of an interest payment to be made from the
second to the first trader in advance of settlement thereof based
on the amount credited to the first trader; assigning, by the
payment processor, a sixth position to the first trader in a
futures contract characterized by a settlement date, a quantity and
a price, the sixth position being characterized by a value based on
the quantity and the price of the futures contract as of the
assigning, and a seventh position to the second trader, counter to
the sixth position, in the futures contract, the first and second
traders not being identified to each other; valuing, by the
settlement processor upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the spot value being based on the determined
interest payment amount; and modifying, by the margin processor,
the first and second account records in the account database to
reflect a credit to the account of the first trader and a debit
from the account of the second trader in the amount of the
difference between the value of the second position and the spot
value.
5. The computer implemented method of claim 1 wherein the quantity
of futures contract is one, the assigning of the second and third
positions to the first and second traders respectively, further
comprising assigning the second and third positions in a plurality
of the futures contract, the quantity of the plurality of the
futures contract being determined based on the payment amount.
6. The computer implemented method of claim 1 wherein the value of
the second and third positions as of the assigning is one of zero
or non-zero.
7. The computer implemented method of claim 1 wherein the
determining, assigning, valuing and modifying are performed
periodically.
8. The computer implemented method of claim 7 wherein the
determining, assigning, valuing and modifying occur one of
quarterly, semiannually, or annually.
9. The computer implemented method of claim 1 wherein the
determining of the payment amount occurs upon occurrence of the
settlement date.
10. The computer implemented method of claim 1 wherein the quantity
of the futures contract is one, the assigning of the second and
third positions to the first and second traders respectively,
further comprising assigning the second and third positions in a
plurality of the futures contract, the quantity of the plurality of
the futures contract being determined based on the payment
amount.
11. The computer implemented method of claim 1 wherein the spot
value is valued based on a multiplier and a final settlement
value.
12. The computer implemented method of claim 1 wherein the first
instrument comprises a futures contract.
13. A system for facilitating a payment between traders based on a
first position in a first instrument held by a first trader to
which a second trader is a counterparty, the system comprising: a
payment processor coupled with a memory and operative to determine,
based on the first position, the amount of a payment to be made
from one of the first or second trader to the other of the first or
second trader in advance of settlement thereof, the amount of the
payment being further based on accrued dividends associated with a
reference index; and wherein the payment processor is further
operative to automatically assign, based on the first position, a
second position to the first trader in a futures contract
characterized by a settlement date, a quantity and a price, the
second position being characterized by a value based on the
quantity and the price of the futures contract as of the
assignment, and automatically assign a third position to the second
trader, counter to the second position, in the futures contract,
the first and second traders not being identified to each other; a
settlement processor coupled with the memory and operative to
value, upon occurrence of the settlement date, the futures contract
at a spot value different from the price of the futures contract,
the spot value being based on the determined payment amount; and a
margin processor coupled with the settlement processor and the
memory and operative to modify a first account record associated
with the first trader and a second account record associated with
the second trader, both stored in an account database stored in the
memory, to reflect a credit to the account of the first trader and
a debit from the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the second trader,
or to reflect a debit from the account of the first trader and a
credit to the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the first
trader.
14. The system of claim 13 wherein the reference index comprises
one of the S&P 500, the DJIA or the NASDAQ 100.
15. The system of claim 13 further comprising: when the account of
the first trader is credited and the account of the second trader
is debited: the payment processor being further operative to
determine the amount of an interest payment to be made from the
first to the second trader in advance of settlement thereof based
on the amount credited to the first trader, assign a fourth
position to the first trader in a futures contract characterized by
a settlement date, a quantity and a price, the fourth position
being characterized by a value based on the quantity and the price
of the futures contract as of the assignment, and assign a fifth
position to the second trader, counter to the fourth position, in
the futures contract, the first and second traders not being
identified to each other; the settlement processor being further
operative to value, upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the spot value being based on the determined
interest payment amount; and the margin processor being further
operative to modify the first and second account records in the
account database to reflect a debit from the account of the first
trader and a credit to the account of the second trader in the
amount of the difference between the value of the second position
and the spot value.
16. The system of claim 13 further comprising: when the account of
the first trader is debited and the account of the second trader is
credited: the payment processor being further operative to
determine the amount of an interest payment to be made from the
second to the first trader in advance of settlement thereof based
on the amount credited to the first trader, assign a sixth position
to the first trader in a futures contract characterized by a
settlement date, a quantity and a price, the sixth position being
characterized by a value based on the quantity and the price of the
futures contract as of the assignment, and assign a seventh
position to the second trader, counter to the sixth position, in
the futures contract, the first and second traders not being
identified to each other; the settlement processor being further
operative to value, upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the spot value being based on the determined
interest payment amount; and the margin processor being further
operative to modify the first and second account records in the
account database to reflect a credit to the account of the first
trader and a debit from the account of the second trader in the
amount of the difference between the value of the second position
and the spot value.
17. The system of claim 13 wherein the quantity of futures contract
is one, the payment processor being further operative to assign the
second and third positions in a plurality of the futures contract,
the quantity of the plurality of the futures contract being
determined based on the payment amount.
18. The system of claim 13 wherein the value of the second and
third positions as of the assignment is one of zero or
non-zero.
19. The system of claim 13 wherein the payment processor determines
the payment amount periodically.
20. The system of claim 19 wherein the payment processor determines
the payment amount one of quarterly, semiannually, or annually.
21. The system of claim 13 wherein the payment processor is
operative to determine the payment amount upon occurrence of the
settlement date.
22. The system of claim 13 wherein the quantity of the futures
contract is one, the assigning of the second and third positions to
the first and second traders respectively, further comprising
assigning the second and third positions in a plurality of the
futures contract, the quantity of the plurality of the futures
contract being determined based on the payment amount.
23. The system of claim 13 wherein the spot value is valued based
on a multiplier and a final settlement value.
24. The system of claim 13 wherein the first instrument comprises a
futures contract.
25. A system for facilitating a payment between traders based on a
first position in a first instrument by a first trader to which a
second trader is a counterparty, the system comprising: means for
determining, based on the first position, the amount of a payment
to be made from one of the first or second trader to the other of
the first or second trader in advance of settlement thereof, the
amount of the payment being further based on accrued dividends
associated with a reference index; means for assigning, based on
the first position, a second position to the first trader in a
futures contract characterized by the settlement date, a quantity
and a price, the second position being characterized by a value
based on the quantity and the price of the futures contract as of
the assigning, and a third position to the second trader, counter
to the second position, in the futures contract, the first and
second traders not being identified to each other; means for
valuing, upon occurrence of the settlement date, the futures
contract at a spot value different from the price of the futures
contract, the spot value being based on the determined payment
amount; and means for modifying the first account record associated
with the first trader and a second account record associated with
the second trader, both stored in an account database stored in a
memory to reflect a credit to the account of the first trader and a
debit from the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the second trader
or to reflect a debit from the account of the first trader and a
credit to the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the first
trader.
26. A system for facilitating a payment between traders based on a
first position in a first instrument held by a first trader to
which a second trader is a counterparty, the system comprising:
first logic stored in a memory and executable by a processor to
determine, based on the first position, the amount of a payment to
be made from one of the first or second trader to the other of the
first or second trader in advance of settlement thereof, the amount
of the payment being further based on accrued dividends associated
with a reference index; the first logic being further executable to
automatically assign, based on the first position, a second
position to the first trader in a futures contract characterized by
the settlement date, a quantity and a price, the second position
being characterized by a value based on the quantity and the price
of the futures contract as of the assignment, and a third position
to the second trader, counter to the second position, in the
futures contract, the first and second traders not being identified
to each other; second logic stored in the memory and executable by
the processor to value, upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the spot value being based on the determined
payment amount; and third logic stored in the memory and executable
by the processor to modify a first account record associated with
the first trader and second account record associated with the
second trader, both stored in an account database stored in the
memory to reflect a credit to the account of the first trader and a
debit from the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the second trader,
or to reflect a debit from the account of the first trader and a
credit to the account of the second trader in the amount of the
difference between the value of the second position and the spot
value when the difference represents a loss for the first trader.
Description
REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation of U.S. patent
application Ser. No. 14/573,455 (Attorney Ref. No. 4672/11002CUS)
filed Dec. 17, 2014, which is a continuation-in-part under 37
C.F.R. .sctn.1.53(b) of U.S. patent application Ser. No. 13/162,821
(Attorney Ref. No. 4672/11002AUS) filed Jun. 17, 2011, all of which
are hereby incorporated by reference in their entirety.
BACKGROUND
[0002] Futures Exchanges, referred to herein also as an "Exchange",
such as the Chicago Mercantile Exchange Inc. (CME), provide a
marketplace where futures and options on futures are traded.
Futures is a term used to designate all contracts covering the
purchase and sale of financial instruments or physical commodities
for future delivery or cash settlement on a commodity futures
exchange. A futures contract is a legally binding agreement to buy
or sell a commodity at a specified price at a predetermined future
time. An option is the right, but not the obligation, to sell or
buy the underlying instrument (in this case, a futures contract) at
a specified price within a specified time. Each futures contract is
standardized and specifies commodity, quality, quantity, delivery
date and settlement. Cash Settlement is a method of settling a
futures contracts by cash rather than by physical delivery of the
underlying asset whereby the parties settle by paying/receiving the
loss/gain related to the contract in cash when the contract
expires.
[0003] Typically, the Exchange provides a "clearing house" which is
a division of the Exchange through which all trades made must be
confirmed, matched and settled each day until offset or delivered.
The clearing house is an adjunct to the Exchange responsible for
settling trading accounts, clearing trades, collecting and
maintaining performance bond funds, regulating delivery and
reporting trading data. Essentially mitigating credit. Clearing is
the procedure through which the Clearing House becomes buyer to
each seller of a futures contract, and seller to each buyer, also
referred to as a "novation," and assumes responsibility for
protecting buyers and sellers from financial loss by assuring
performance on each contract. This is effected through the clearing
process, whereby transactions are matched. A clearing member is a
firm qualified to clear trades through the Clearing House. In the
case of the CME's clearing house, all clearing members not
specifically designated as Class B members are considered Class A
clearing members. In the CME there are three categories of clearing
members: 1) CME clearing members, qualified to clear transactions
for all commodities; 2) IMM clearing members, qualified to clear
trades for only IMM and IOM commodities; and 3) IMM Class B
clearing members, solely limited to conducting proprietary
arbitrage in foreign currencies between a single Exchange-approved
bank and the IMM and who must be guaranteed by one or more Class A
non-bank CME or IMM clearing member(s). Note that a "member" is a
broker/trader registered with the Exchange.
[0004] As an intermediary, the Exchange bears a certain amount of
risk in each transaction that takes place. To that end, risk
management mechanisms protect the Exchange via the Clearing House.
The Clearing House establishes clearing level performance bonds
(margins) for all Exchange products and establishes minimum
performance bond requirements for customers of Exchange products. A
performance bond, also referred to as a margin, is the funds that
must be deposited by a customer with his or her broker, by a broker
with a clearing member or by a clearing member with the Clearing
House, for the purpose of insuring the broker or Clearing House
against loss on open futures or options contracts. This is not a
part payment on a purchase. The performance bond helps to ensure
the financial integrity of brokers, clearing members and the
Exchange as a whole. The Performance Bond to Clearing House refers
to the minimum dollar deposit which is required by the Clearing
House from clearing members in accordance with their positions.
Maintenance, or maintenance margin, refers to a sum, usually
smaller than the initial performance bond, which must remain on
deposit in the customer's account for any position at all times.
The initial margin is the total amount of margin per contract
required by the broker when a futures position is opened. A drop in
funds below this level requires a deposit back to the initial
margin levels, i.e. a performance bond call. If a customer's equity
in any futures position drops to or under the maintenance level
because of adverse price action, the broker must issue a
performance bond/margin call to restore the customer's equity. A
performance bond call, also referred to as a margin call, is a
demand for additional funds to bring the customer's account back up
to the initial performance bond level whenever adverse price
movements cause the account to go below the maintenance.
[0005] The accounts of individual members, clearing firms and
non-member customers doing business through the Exchange must be
carried and guaranteed to the Clearing House by a clearing member.
As mentioned above, in every matched transaction executed through
the Exchange's facilities, the Clearing House is substituted as the
buyer to the seller and the seller to the buyer, with a clearing
member assuming the opposite side of each transaction. The Clearing
House is an operating division of the Exchange, and all rights,
obligations and/or liabilities of the Clearing House are rights,
obligations and/or liabilities of the Exchange. Clearing members
assume full financial and performance responsibility for all
transactions executed through them and all positions they carry.
The Clearing House, dealing exclusively with clearing members,
holds each clearing member accountable for every position it
carries regardless of whether the position is being carried for the
account of an individual member, for the account of a non-member
customer, or for the clearing member's own account. Conversely, as
the contra-side to every position, the Clearing House is held
accountable to the clearing members for the net settlement from all
transactions on which it has been substituted as provided in the
Rules.
BRIEF DESCRIPTION OF THE DRAWINGS
[0006] FIG. 1 shows a block diagram of an exemplary network for
trading futures contracts, including in which payer contracts may
be implemented, according to one embodiment.
[0007] FIG. 2 a block diagram of an exemplary implementation of the
system of FIG. 1 for facilitating payments between counterparties,
e.g. first and second traders, by a central counterparty.
[0008] FIG. 3 depicts a flow chart showing operation of the system
of FIGS. 1 and 2.
[0009] FIG. 4 shows an illustrative embodiment of a general
computer system 400 for use with the system of FIG. 1.
DETAILED DESCRIPTION OF THE DRAWINGS AND PRESENTLY PREFERRED
EMBODIMENTS
[0010] A system for moving money between accounts of traders by a
central counterparty to facilitate payments, i.e. the movement of
funds, there between is disclosed which provides a flexible
mechanism which supports simpler accounting, new types of
derivatives contracts as well as new types of fees. As was
discussed above, in futures contract clearing, a margin account
offsets losses or gains related to the price change of a contract.
If a trader's contract price increases or decreases, the change in
value is reflected in the margin account. In fact, generally the
only way to move money in or out of a margin account is by changing
the price of the futures contract. This is a one-to-one
relationship: one contract, one cash flow. Current systems,
however, cannot handle related cash flows like coupons, interest on
variation margin, or other periodic or occasional payments made by
one trader to another while the related position remains open, e.g.
a one-to-many relationship: one contract, two or more cash flows.
In the over-the-counter ("OTC") market, for example, if a trader's
position decreases, the trader must make a cash payment
(collateral) to the prime broker account of the counterparty. An
important distinction in OTC markets is that any collateral in the
prime broker account of a counterparty remains the property of the
trader, and thus the trader is entitled to at least one additional
margin account cash flow, which is interest on the collateral.
Current futures contract clearing systems do not support this type
of payment requiring separate/external ad hoc payment and
accounting mechanisms to manage.
[0011] Exchange derivative contracts having a periodic or sporadic
payment from one party to the contract to the other; or, a payment
between the exchange and a party to a derivatives contract, have
been proposed. However, a problem with such payments is that
exchange clearing systems must be coordinated with adjacent
non-exchange owned and operated bookkeeping services and systems to
account for and manage these related payments. So even if the
exchange were to configure its systems accordingly to accommodate
such periodic or other related payments, difficulties are often
experienced in coordinating these capabilities with the (many)
bookkeeping service providers or the (many) proprietary bookkeeping
systems, such as "front-end" independent software vendors ("ISV's")
and "back-end" bookkeeping services that interact with the
Exchange. Thus, acceptance of novel contracts that utilize such
periodic payments may be impeded.
[0012] The disclosed futures contract, referred to as a "payer"
contract, comprises a "no-uncertainty" futures contract, i.e. the
initial value and settlement value parameters are defined and/or
pre-determined and, thereby, the buyer and seller are not exposed
to market risk. The disclosed payer contract leverages the
mechanisms of the clearing system to accommodate, for example, a
related, e.g. life cycle, payment featured by a traditional
contract to which it may be paired. Accordingly, a 1-to-many
relationship between contracts and prices is provided whereby each
price component may be assigned its own payer contract. The
function of the payer contract is to guarantee, by creating a
defined and riskless position value and settlement value, the
movement of money from related positions. In one embodiment, payer
contracts are dynamically created whenever a payment is needed in
relation to some other position held by the parties, though they
may be manually created in such situations as well. In addition,
the traders among which the payment is to be transferred need not
know of each other, the disclosed mechanism, and the central
counterparty underpinnings, facilitating anonymous payments there
between.
[0013] The disclosed embodiments have application with respect to a
potentially wide variety of exchange traded, multi-laterally
cleared derivatives contracts and have the advantage of being
"implementable" by an Exchange without explicit coordination with
adjacent non-exchange owned and operated bookkeeping service
providers. In particular, any contract structure that contemplates
a "pass-through" of monetary value for the purposes of creating a
pseudo coupon payment, dividend payment, fee payment, swap payment,
rolling spot interest pass-through payment, etc. may use the
disclosed embodiments to effect payment.
[0014] Derivative contracts, such as those traded or cleared at CME
Group, have become increasingly complex in recent years. In
particular, the demand to replicate the operational requirements of
over-the-counter (OTC) derivatives with their emphasis on
customization has proven to be challenging. The disclosed payer
contract may address these issues and difficulties,
[0015] For example, consider a contract that replicates an interest
rate swap ("IRS") which, typically, contemplates periodic swaps of
cash calculated by reference to a fixed and a floating interest
rate. It will be appreciated that such occasional payments are not
a standard feature of futures contracts and are not simply a
function of the daily mark-to-market ("MTM") of a futures contract
by reference to the daily settlement price. Rather, standard
futures contracts contemplate a single "reckoning" upon a single
final settlement date.
[0016] A payer contract may be generated by an Exchange, such as
CME Group, so as to flow seamlessly into adjacent private systems,
including back-end bookkeeping service systems, obviating the
necessity for the bookkeeping service to build out new
capabilities. That is, while the Exchange, and/or Clearing House
thereof, may still need to build the capability of generating payer
contracts, such as on an automated basis, when these auto-generated
contracts are created, they may flow into accounts that are kept in
adjacent bookkeeping systems easily.
[0017] In one embodiment a payer contract may be valued on a
"binary basis", referred to as a "binary option," at either $0 or
$1, at the discretion of the Exchange. The "switch" may be set by
the Exchange in the same way that a cash-settled futures contract
is valued at a particular value on its final settlement date. Thus,
an account holding a long payer contract may receive either $0 or
$1 on the final settlement date of the contract. An account holding
a short payer contract may receive either $0 or be obligated to pay
$1 on the final settlement date of the contract.
[0018] It will be understood that a margin account offsets gains or
losses related to the price change of a futures contract held by a
trader. If a trader holds a "long" position (obligated to buy) on a
contract for which the price increases or holds a "short" position
(obligated to sell) on a contract for which the price decreases,
the trader's risk of loss goes down and their margin requirement
will go down which may result in funds being credited to their
margin account by the clearing and margin mechanisms of the
Exchange, the crediting occurring substantially simultaneously with
a debiting of similar magnitude from the margin account of the
trader holding the counter position. That is, for the trader
holding a long position on a contract for which the price decreases
or holding a short position on a contract for which the price
increases, the trader's risk of loss goes up and their margin
requirement will go up which may result in funds being debited from
their margin account. The clearing organization of the central
counter party automatically determines the daily contract
settlement prices and corresponding margin requirements for the
traders and automatically moves the funds as appropriate to ensure
performance by the parties. In the case of a cash-settled contract,
at the settlement date, the buyer and the seller may simply
exchange the difference in the associated cash positions. The cash
position is the difference between the spot price of the asset on
the settlement date and the agreed upon price as dictated by the
future contract. If the spot price is less than the contract price,
the buyer pays the seller the difference. If the spot price is more
than the contract price, the seller pays the buyer the difference.
This cash settlement may be effected via the margin accounts of the
traders as described above.
[0019] By generating payer contracts on an automated basis in
particular accounts held at the Clearing House, funds may
effectively be moved from one party, the "payor", to the other
party, the "payee", of contracts booked on the Exchange. That is,
in the case of binary payer contracts, by assigning a quantity of
contracts based on the payment amount, which may be determined at,
or prior to, settlement, the appropriate amount may be paid by the
payor to the payee. Given the operation of the margining systems of
the Exchange, this may be accomplished by valuing the position in
the contracts at a zero value and then setting a non-zero value,
e.g. $1 per contract, at settlement, thereby creating an increase
in contract value and a gain for the long position and loss for the
short position, the margining mechanisms of the Exchange
automatically, or naturally, moving the appropriate funds from the
account of the short trader to the account of the long trader.
Conversely, the position in the contracts may be initially valued
at a non-zero amount, e.g. $1, and then settled at a value of zero,
thereby creating a decrease in the contract value and a loss for
long position and a gain for the short position, the margining
mechanisms of the Exchange automatically, or naturally, moving the
appropriate funds from the account of the long trader to the
account of the short trader. In either case, the initial contract
value and settlement value, and assignment of corresponding long
and short positions to the payor and payee, are implementation
dependent. The utility of the disclosed payer contracts may be
extended and applied in many other ways as described below.
[0020] It will be appreciated that construction of a payer contract
as a "binary option" valued at either $0 or $1 at expiration may
imply certain limitations. Consider that some systems of the
Exchange or adjacent front-end or back-end systems may be limited
in terms of the field size reserved in their record keeping systems
or databases for quantity of futures contracts traded or held. For
example, if a system is constructed to reserve 4 decimal digits, or
the binary equivalent thereof, for the quantity field, the maximum
number of futures contracts may be limited to 9,999. Or, if the
quantity field is limited to 5 digits, the maximum quantity may be
99,999. This may be problematic if the value to be transferred is
greater than $1 times that maximum quantity.
[0021] Thus, in an alternate embodiment, an "analog" payer contract
may be defined instead of, or in addition to, the binary payer
contract. It will be recognized that the binary payer contract is a
variant of the analog payer contract in which case it need not be
specifically defined. Analog payer contracts may be valued on an
analog scale akin to a standard index futures contract, having a
quantity, which may be greater than or equal to 1, and price
associated therewith. Thus, they may be cash-settled at, for
example, a multiplier $X, e.g. a pseudo quantity, multiplied by an
arbitrary value or Final Settlement Price that may range from
infinity (.infin.) to negative infinity (-.infin.). Alternatively,
the multiplier may be altered, e.g. instead of establishing the
multiplier at $1, it may be at $0.01, $10, $100, $1,000, $10,000,
$100,000 as appropriate for the specific application. The
multiplier and final settlement price may be determined based on
the amount of the payment to be made and, for example, the
respective record keeping fields sizes, i.e. such that the
magnitude of the respective multiplier/quantity and settlement
price values can be handled by the record keeping systems, e.g. to
avoid overflow, and still be used to handle the expected payment
amounts. It will be further appreciated that the balancing of the
magnitude of the multiplier versus the magnitude of the price may
vary but still achieve the same payment amount and, therefore, may
be based on other factors such as the convenience of the traders in
viewing, reporting and comprehending the values, etc.
[0022] For example, an analog payer contract having an initial
value of zero, may be valued at $1.times.Final Settlement Price at
settlement. The Final Settlement Price may be established at
10,000. Thus, the analog payer contract is valued at $10,000
(=$1.times.10,000.00). The account holding a single long position
(quantity=1) in the analog payer contract may receive $10,000 while
the account holding a single short position pays $10,000.
[0023] Payer contracts may have many applications, such as in the
context of exchange cleared interest rate swaps ("IRS") where these
contracts may be used to move the "price alignment interest"
("PAI"). For example, the buyer of an IRS may be required to pay
the seller a value calculated by reference to a fixed rate of
interest on a periodic basis for the life of the transaction. The
seller of an IRS may be required to pay the buyer a value
calculated by reference to a floating or dynamic rate of interest
on a periodic basis for the life of the transaction. Typically,
these payments are "netted" so that gross values are not
transferred but only net values. Payer contracts may be utilized to
provide for such transfers of value.
[0024] Payer contracts may also be: linked with interest rate
derivatives contracts for purposes of making what may essentially
be regarded as coupon payments from one party of the trade to the
other; linked with equity based derivatives contracts for purposes
of making what may essentially be regarded as dividend payments
from one party of the trade to the other; and/or used to implement
rolling spot contracts which are established from time to time in
the context of FX markets and are designed to price in manner
similar to the spot value of a currency by requiring a, typically,
daily payment that reflects the interest rate differential between
the two currencies.
[0025] Alternatively, or in addition thereto, payer contracts may
be used to implement fee payments, such as transaction fees. The
typical exchange fee model is based on volume or turnover, i.e.,
when a trade is consummated, both buyer and seller pay a
pre-determined exchange fee. However, futures contracts do not
typically contemplate fees based on the value or notional value of
the underlying instrument, which may be considered in a manner
similar to a management fee typically associated with fund
investments. While there have been some attempts to collect what
may be regarded as a form of management or holding fee in the
context of CME TRAKRS, i.e. non-traditional futures contracts
designed to provide customers with a cost-effective way to invest
in a broad-based index of stocks, bonds, currencies or other
financial instruments avoiding, for example, the need for a
portfolio manager and potential adverse tax consequences, and some
over-the-counter commodity indexes listed on CME Group facilities,
these products and this fee system required complex programming and
coordination with back-end bookkeeping services. Payer contracts
may be created to pay these fees from an account to the account of
the Exchange or possibly to other accounts held by those with
rights in a particular contract or other arrangements to share in
fees.
[0026] The disclosed payer contracts may be created with various
nomenclature designations, e.g., coupons, dividends, rolling spot
payments, swap payment, fee, etc. By attaching such nomenclature to
these contracts, akin to the way that the term "E-mini S&P 500
futures" may be associated in clearing and bookkeeping systems with
the ticker symbol "ES," the purpose of such payer contract may be
made transparent to those examining an account statement. Likewise,
payer contracts with different underlying purposes may be
constructed with different contract terms and conditions as deemed
most conducive to the purpose.
[0027] While the disclosed embodiments will be described in
reference to the CME, it will be appreciated that these embodiments
are applicable to any Exchange, including those which trade in
equities and other securities. The CME Clearing House clears,
settles and guarantees all matched transactions in CME contracts
occurring through its facilities. In addition, the CME Clearing
House establishes and monitors financial requirements for clearing
members and conveys certain clearing privileges in conjunction with
the relevant exchange markets.
[0028] Referring now to FIG. 1, there is shown a block diagram of
an exemplary network 100 for trading futures contracts, including
in which payer contracts may be implemented, according to the
disclosed embodiments. The network 100 couples market participants
104, 106, such as those entities 104 wishing or needing to make a
payment, also referred to as payors, and those entities 106 to
which the payment is to be made, also referred to as payees, with
an exchange 108, such as the CME, also referred to as a central
counterparty or intermediary, via a communications network 102,
such as the Internet, an intranet or other public or private,
secured or unsecured communications network or combinations
thereof. The network 100 may also be part of, or alternatively
coupled with a larger trading network, allowing market participants
104 106 to trade other products, such as futures contracts, options
contracts, foreign exchange instruments, etc., via the exchange
108, including derivatives contracts featuring periodic or
occasional payments prior to settlement. It will be appreciated
that the plurality of entities utilizing the disclosed embodiments,
e.g. the market participants 104, 106, may be referred to as
payors, payees, lenders, borrowers, traders, market makers or by
other nomenclature reflecting the role that the particular entity
is performing with respect to the disclosed embodiments and that a
given entity may perform more than one role depending upon the
implementation and the nature of the particular transaction being
undertaken, as well as the entity's contractual and/or legal
relationship with another market participant 104 106 and/or the
exchange 108.
[0029] Herein, the phrase "coupled with" is defined to mean
directly connected to or indirectly connected through one or more
intermediate components. Such intermediate components may include
both hardware and software based components. Further, to clarify
the use in the pending claims and to hereby provide notice to the
public, the phrases "at least one of <A>, <B>, . . .
and <N>" or "at least one of <A>, <B>, <N>,
or combinations thereof" are defined by the Applicant in the
broadest sense, superseding any other implied definitions
herebefore or hereinafter unless expressly asserted by the
Applicant to the contrary, to mean one or more elements selected
from the group comprising A, B, . . . and N, that is to say, any
combination of one or more of the elements A, B, . . . or N
including any one element alone or in combination with one or more
of the other elements which may also include, in combination,
additional elements not listed.
[0030] The exchange 108 implements the functions of matching 110
buy/sell transactions, clearing 112 those transactions, settling
114 those transactions and managing risk 116 among the market
participants 104 106 and between the market participants and the
exchange 108, as well as payment functionality 122 for
administering payments between payors and payees as will be
described. The exchange 108 may be include or be coupled with one
or more database(s) 120 or other record keeping system which stores
data related to open, i.e. un-matched, orders, matched orders which
have not yet been delivered, as well as payments made or owing, or
combinations thereof.
[0031] Typically, the exchange 108 provides a "clearing house" (not
shown) which is a division of the Exchange 108 through which all
trades made must be confirmed, matched and settled each day until
offset or delivered. The clearing house is an adjunct to the
Exchange 108 responsible for settling trading accounts, clearing
trades, collecting and maintaining performance bond funds,
regulating delivery and reporting trading data. Essentially
mitigating credit. Clearing is the procedure through which the
Clearing House becomes buyer to each seller of a futures contract,
and seller to each buyer, also referred to as a "novation," and
assumes responsibility for protecting buyers and sellers from
financial loss by assuring performance on each contract. This is
effected through the clearing process, whereby transactions are
matched. A clearing member is a firm qualified to clear trades
through the Clearing House.
[0032] In the presently disclosed embodiments, the Exchange 108
assumes an additional role as the central counterparty in payment
transactions, i.e., the Exchange 108, via the margin mechanisms,
will become the payee to each payor and payor to each payee, and
assume responsibility for protecting payees and payors from
financial loss by assuring performance on each payment contract, as
is done in normal futures transactions. Additionally, the Exchange
108 may further assume the role as administrator of products, i.e.
derivatives contracts, which require payments, computing when a
payment is due, computing the amount of the payment and
automatically generating the payer contracts to effect the payment
by the due date. As used herein, the term "Exchange" 108 will refer
to the centralized clearing and settlement mechanisms, risk
management systems, etc., as described below, used for futures
trading, including the described enhancements to facilitate payment
transactions. By assuming this intermediary role and employing
credit screening and risk management mechanisms, derivatives
contracts having periodic or occasional payments may be implemented
for parties desiring such contracts. Further, additional revenue
sources for the Exchange may be facilitated, such as account
maintenance fees on accounts holding open futures positions.
[0033] Referring back to FIG. 1, a system 124 for facilitating a
payment between a first trader 104 and a second trader 106 by a
central counterparty 108 which requires the first and second
traders 104 106 to each maintain associated accounts in which funds
are deposited to cover trading losses. The system includes an
account database 120 stored in a memory 404 discussed below with
reference to FIG. 4, the account database 120 comprising a first
account record associated with the first trader 104 which includes
data reflecting funds maintained on account to cover trading losses
by the first trader 104, and a second account record associated
with the second trader 106 which includes data reflecting funds
maintained on account to cover trading losses by the second trader
106.
[0034] The system 124 further includes a payment processor 122
coupled with the database 120, or memory 404 storing it, and
operative to determine the amount of a payment to be made from one
of the first or second trader 104 106 to the other of the first or
second trader 104 106 at a settlement date, wherein the payment
processor 122 is further operative to assign the first trader 104 a
first position in a futures contract characterized by the
settlement date, a quantity and a price, the first position being
characterized by a value based on the quantity and the price of the
futures contract as of the assignment, and assign the second trader
106 a second position, counter to the first position, in the
futures contract, the first and second traders not being identified
to each other. In one embodiment, the payment processor 122 is
operative to determine the payment amount upon occurrence of the
settlement date. Alternatively, the payment amount is determined in
advance of the settlement date.
[0035] The system 124 further includes a settlement processor 114
coupled with the database 120, or memory 404 storing it, and
operative to value, upon occurrence of the settlement date, the
futures contract at a spot value different from the price of the
futures contract, the difference being based on the determined
payment amount.
[0036] In addition, the system 123 includes a margin processor 116
coupled with the settlement processor 114 and the database 120, or
memory 404, and operative to modify the first and second account
records in the account database to reflect a credit to the account
of the first trader 104 and a debit from the account of the second
trader 106 in the amount of the difference between the value of the
first position and the spot value when the difference represents a
loss for the second trader 106, and modify the first and second
account records in the account database to reflect a debit from the
account of the first trader 104 and a credit to the account of the
second trader 106 in the amount of the difference between the value
of the first position and the spot value when the difference
represents a loss for the first trader 104.
[0037] In one embodiment, the payment processor 122 may be further
operative to automatically assign the first and second positions to
the first and second traders 104 106 based on a second position in
a second instrument held by the first trader 104 to which the
second trader 106 is a counterparty. For example, the second
instrument may include a interest rate derivative, the payment
comprising a coupon payment, the second instrument may include an
equity based derivatives contract, the payment comprising a
dividend payment, the second instrument may include a foreign
exchange spot contract, the payment comprising an interest rate
differential payment, the second instrument may include interest
rate swap, the payment comprising an interest payment, the second
instrument may include a loan of collateral, the payment comprising
an interest payment, the payment may include a transaction fee, or
combinations thereof.
[0038] In one embodiment, the quantity of futures contract may be
1, the payment processor 122 being further operative to assign the
first and second positions in a plurality of the futures contract,
the quantity of the plurality of the futures contract being
determined based on the payment amount. For example, the value of
the first and second positions as of the assignment may be zero
wherein the spot value is non-zero. Alternatively, the spot value
may be valued based on a multiplier and a final settlement value,
wherein the multiplier may be 0.01, 0.10, 1.00, 10.00, 100.00,
1000.00, 10,000.00, or some other value.
[0039] In one embodiment, the value of the first and second
positions as of the assignment may be non-zero, such as based on a
multiplier and a final settlement value, and wherein the spot value
may be zero. The multiplier may include 0.01, 0.10, 1.00, 10.00,
100.00, 1000.00, 10,000.00, or some other value.
[0040] Referring to FIG. 2, there is shown a block diagram of an
exemplary implementation of the system 124 for facilitating
payments between counterparties, e.g. first and second traders, by
a central counterparty which requires the first and second traders
to each maintain associated accounts in which funds are deposited
to cover trading losses, the central counterparty comprising a
processor 202 and a memory 204 coupled therewith, such as the
processor 402 and memory 404 shown in FIG. 4 and described in more
detail below. The system 124 includes an account database 120
stored in the memory 204, the account database 120 comprising a
first account record associated with the first trader 104 which
includes data reflecting funds maintained on account to cover
trading losses by the first trader 104, and a second account record
associated with the second trader 106 which includes data
reflecting funds maintained on account to cover trading losses by
the second trader 106. The system 124 further includes first logic
206 stored in the memory 204 and executable by processor 202 to
determine the amount of a payment to be made from one of the first
or second trader 104 106 to the other of the first or second trader
104 106 at a settlement date, i.e. the payment amount is determined
in advance of settlement thereof and then paid on the settlement
date. The first logic 206 may be further executable to assign the
first trader 104 a first position in a futures contract
characterized by the settlement date, a quantity and a price, the
first position being characterized by a value based on the quantity
and the price of the futures contract as of the assignment, and
assign the second trader 106 a second position, counter to the
first position, in the futures contract, the first and second
traders 104 106 not being identified to each other.
[0041] The system 124 further includes second logic 208 stored in
the memory 204 and executable by the processor 202 to value, upon
occurrence of the settlement date, the futures contract at a spot
value different from the price of the futures contract, the spot
value, and thereby the difference, being based on the determined
payment amount.
[0042] In addition, the system 124 includes third logic 210 stored
in the memory 204 and executable by the processor 202 to modify the
first and second account records in the account database to reflect
a credit to the account of the first trader 104 and a debit from
the account of the second trader 106 in the amount of the
difference between the value of the first position and the spot
value when the difference represents a loss for the second trader
106, and modify the first and second account records in the account
database to reflect a debit from the account of the first trader
104 and a credit to the account of the second trader 106 in the
amount of the difference between the value of the first position
and the spot value when the difference represents a loss for the
first trader 104.
[0043] FIG. 3 depicts a flow chart showing operation of the system
of FIGS. 1 and 2. In particular FIG. 3 shows a computer implemented
method of facilitating a payment between a first trader and a
second trader by a central counterparty which requires the first
and second traders to each maintain associated accounts in which
funds are deposited to cover trading losses, the central
counterparty comprising a payment processor 122, a settlement
processor 114, a margin processor 116, and a memory (not shown)
such as the memory 404 of FIG. 4, coupled with the payment,
settlement and margin processors 122 114 116. The method includes:
providing, by the central counterparty, an account database stored
in the memory, the account database comprising a first account
record associated with the first trader which includes data
reflecting funds maintained on account to cover trading losses by
the first trader, and a second account record associated with the
second trader which includes data reflecting funds maintained on
account to cover trading losses by the second trader (block 302);
determining, by the payment processor 122, the amount of a payment
to be made from one of the first or second trader to the other of
the first or second trader at a settlement date (block 304), such
as upon occurrence of the settlement date or prior thereto, i.e.
the payment amount is determined in advance of settlement thereof
and then paid on the settlement date; assigning, by the payment
processor 122, the first trader a first position in a futures
contract characterized by the settlement date, a quantity and a
price, the first position being characterized by a value based on
the quantity and the price of the futures contract as of the
assigning (block 306); assigning, by the payment processor 122, the
second trader a second position, counter to the first position, in
the futures contract, the first and second traders not being
identified to each other (block 308); valuing, by the settlement
processor 114 upon occurrence of the settlement date, the futures
contract at a spot value different from the price of the futures
contract, the spot value, and thereby by the difference, being
based on the determined payment amount (block 310); modifying, by
the margin processor 116, the first and second account records in
the account database to reflect a credit to the account of the
first trader and a debit from the account of the second trader in
the amount of the difference between the value of the first
position and the spot value when the difference represents a loss
for the second trader (block 312); and modifying, by the margin
processor 116, the first and second account records in the account
database to reflect a debit from the account of the first trader
and a credit to the account of the second trader in the amount of
the difference between the value of the first position and the spot
value when the difference represents a loss for the first trader
(block 314).
[0044] In one embodiment, the assigning to the first and second
traders is automatically performed by the central counterparty
based on a second position in a second instrument held by the first
trader to which the second trader is a counterparty. For example,
the second instrument may include a interest rate derivative, the
payment comprising a coupon payment, the second instrument may
include an equity based derivatives contract, the payment
comprising a dividend payment, the second instrument may include a
foreign exchange spot contract, the payment comprising an interest
rate differential payment, the second instrument may include
interest rate swap, the payment comprising an interest payment, the
second instrument may include a loan of collateral, the payment
comprising an interest payment, the payment may include a
transaction fee, or combinations thereof
[0045] In one embodiment, the quantity of futures contract may be
1, the assigning of the first and second positions to the first and
second traders respectively, further comprising assigning the first
and second positions in a plurality of the futures contract, the
quantity of the plurality of the futures contract being determined
based on the payment amount.
[0046] In one embodiment, the value of the first and second
positions as of the assigning may be zero and the spot value may be
non-zero, such as based on a multiplier and a final settlement
value. The multiplier may include 0.01, 0.10, 1.00, 10.00, 100.00,
1000.00, 10,000.00, or other value.
[0047] In one embodiment, the value of the first and second
positions as of the assigning may be non-zero wherein the spot
value is zero. The value of the first and second positions may be
based on a multiplier and a final settlement value where the
multiplier may be 0.01, 0.10, 1.00, 10.00, 100.00, 1000.00,
10,000.00 or another value.
[0048] While the disclosed embodiments were discussed above with
respect to the payment of price alignment interest for Interest
Rate Swap contracts, as was discussed above, the disclosed
embodiments have application with respect to a potentially wide
variety of exchange traded, multi-laterally cleared derivatives
contracts, including new contract types not implemented previously.
As discussed above, the disclosed payer contracts are cash-settled
constructs that may be assigned to long and short futures accounts.
They are arbitrarily assigned a cash value on a specified final
settlement date and may be used to provide for the mechanical
payment or pass-through of a cash amount from long to short; or,
from short to long, as appropriate. Accordingly, the disclosed
payer contract may be used in conjunction with appropriately
structured futures contracts to more simply, accurately and
efficiently mimic or otherwise simulate, using a central
counterparty based data and transaction processing system, the
financial and/or economic characteristics of various other
financial instruments which feature periodic cash flows among the
participants to the transaction.
[0049] For example, the disclosed payer contract may be used in
conjunction with an appropriately structured futures contract to
simulate an exchange traded fund ("ETF"), a Treasury instrument
(coupon bearing fixed income or money market instrument), a
Treasury Inflation Protected Security, or an Interest Rate Swap
instrument. While the disclosed simulated instruments will be
described with respect to being implemented using the payment
mechanism, e.g. payer contract, described above, it will be
appreciated that other mechanisms for facilitating the movement of
the periodic cash flows may be used.
[0050] This disclosed embodiments may be used to implement: (1)
Dividend Accruing Futures (DAF) Contracts; (2) Fixed
Settlement/Coupon Generating Futures Contracts; (3) Inflation
Protected Futures (IPFs); and (4) Futures Contracts Using Fixed vs.
Floating Rate Pass-Through, as will be described. In particular,
these instruments, which, as described below, may be constructed as
a futures contract, all utilize a cash "pass-through" mechanism,
such as the payer contract discussed above, from short to long; or,
long to short, contingent upon the circumstances. Further, they all
use this mechanism in an attempt to replicate the cash flows of
other extant financial products.
[0051] In one embodiment, the Dividend Accruing Futures (DAFs)
contract contemplates the periodic--likely quarterly--payment from
shorts to longs in an amount dictated by the observed dividend
accruals associated with a stock index, e.g., the Standard &
Poor's 500 (S&P 500). This mimics the quarterly payment of
accrued dividends to holders of Exchange Traded Funds (ETFs) such
as the S&P 500 SPDRs ETF.
[0052] In one embodiment, the Fixed Settlement/Coupon Generating
Futures contract contemplates a periodic payment of an amount
established by reference to a fixed percentage applied to a fixed
base amount such as 2% of $100,000 on an annualized basis ($2,000),
or 1% of $100,000 on a semi-annual basis. This payment would flow
from short to long. This mimics the structure of a Treasury
security.
[0053] In one embodiment, the Inflation Protected Futures (IPF)
contract likewise contemplates a periodic payment of an amount
established by reference to a fixed percentage applied to a base
amount. But in this case, the base amount is variable as a function
of inflation. Thus, we might have a 2% annual payment or 1%
semi-annually applied to $100,000 or $1,000. But if the inflation
reference has risen by 1% by the next semi-annual payment date, the
base amount may have risen to $101,000--and 1% of $101,000 equals
$1,010. This payment would flow from short to long. This mimics the
structure of a Treasury Inflation Protected Security or TIPS.
[0054] In one embodiment, the futures contract using a fixed vs.
floating rate pass-through may contemplate a periodic (quarterly or
semi-annual) payment of an amount established by the differential
between a fixed rate such as 2% annually or 0.5% quarterly against
a fixed base amount such as $100,000- or $500 quarterly. This fixed
amount is matched with a floating rate established by reference to
current LIBOR rates or other short-term rates applied to a fixed
base amount--such as 1.2% annualized applied to $100,000 on a
quarterly basis--or $300 [=(1.2%/4).times.$100,000]. Balancing the
$500 fixed payment with a $300 floating rate payment, we have a net
payment of $200. In this case, the net payment of $200 would pass
from short to long. But assume that the floating payment is 3%
annualized or $750 on a quarterly basis [=(3%/4).times.$100,000].
Thus, the net payment is -$250 or the $500 fixed payment vs. the
$750 floating payment. This net payment of $250 would pass from
long to short. This is intended to mimic the structure of a
conventional or "plain vanilla" interest rate swap (IRS)
instrument.
[0055] As will be appreciated, the above introduced instruments,
which may be implemented as futures contracts as will be described
in more detail below, mimic the structure of various other
financial instruments traded per different regulatory
regimes--specifically, ETFs, Treasuries, TIPS and over-the-counter
(OTC) IRS instruments. Further, by utilizing futures contracts a
central clearing/counter party based transaction processing system
may be used which provides for risk/credit management via the
novation and margin processes as well as allowing for netting
and/or offsetting of positions. This may further allow the herein
described contracts to be traded in combination, e.g. as a spread
transaction. For example, by trading a spread between a standard
futures contract and a Dividend Accruing Futures contract, one may
be able to effectively trade dividends. Where a trader holds a
position in one of the disclosed contracts they may further hold
correlated positions which may allow for a reduced margin amount
due to a reduction in their risk of loss. For example, a Dividend
Accruing Futures contract may be correlated with an S&P 500
futures contract.
[0056] There are multiple potential advantages in these structures
as outlined below: [0057] Hedging Utility--The central purpose of
any futures contract may be to provide a risk-management or hedging
vehicle. Because the above introduced contracts are designed to
mimic the cash flows of the instrument with which they are linked,
the hedging utility of the products may be tremendously enhanced.
Futures contracts today are generally linked with items such as
stocks, bonds or swaps in much less direct fashion without any
periodic cash flows at all. Thus, asset managers are compelled to
drive often complicated "hedge ratios" to find the appropriate way
to structure a hedge. While the monetary value of the futures
contract may generally parallel the value of the hedged instrument,
there are still many loose ends because of the inability to mimic
the cash flows. [0058] Hedge Accounting Issues--In the United
States, one may apply so-called "hedge accounting principles" per
the Financial Accounting Standards Board Statement No. 133 (FASB
133). This Statement is intended to address situations where, for
example, one is holding an asset on the balance sheet on a cost
basis--but may be compelled to recognize gains and losses in the
underlying asset in each income statement to the extent that they
may be "marked-to-market" (MTM). Under certain conditions, FASB 133
allows the asset holder to defer recognition of gains and losses in
a futures contract or other derivative instruments until such time
as the (presumably offsetting) loss or gain, respectively, is
recognized with respect to the hedged asset. [0059] But one must
often jump through some hoops to qualify for hedging accounting
practices. There are two methods to so qualify--the (1) correlation
test; and (2) the critical terms test. [0060] The correlation test
means that one must apply an ex-ante and post-hoc test to ascertain
sufficient correlation between the hedged item and the hedging
vehicle. As a general rule, the accounting profession accepts an
ex-ante correlation of 80% or a correlation coefficient (R-squared)
of 90%. In addition, there is a post-hoc test to determine that the
movements in the hedging vehicle fluctuated within a range of
80-125% of movements in the asset to be hedged. It is sometimes
difficult to meet this post-hoc test criteria where there has been
very little movement in the market. Thus, hedgers typically prefer
situations where they may apply the so-called critical terms test.
I.e., where they are simply required to document that the various
key terms in the hedged instrument correlate closely with the key
terms of the derivative with which they are conducting the hedge.
These critical terms may include a matching of the notional size of
the hedged item and derivative; the maturation of the two items,
etc. In addition, the cash flows of the hedged asset may, under
some circumstances be considered amongst the critical terms. [0061]
The disclosed embodiments are intended to facilitate hedging by
rendering it easier to qualify for FASB 133 hedge accounting
treatment by reference to the critical terms test. [0062] Futures
as Investment Vehicles--While there is no strict rule in this
regard, futures are generally considered and utilized as short-term
"trading vehicles" that are often "flipped" with high frequency. On
the other hand, items such as ETFs, Treasury securities, TIPS, IRS
instruments are often regarded as longer-term or buy-and-hold
"investment vehicles." Even the tax treatment of futures under IRS
Section 1256 promotes use of futures as short-term trading vehicles
instead of long-term investment vehicles. This section of the Code
requires that, under certain circumstances, the gain or loss on
futures contracts be treated as if 60% were long-term capital gain
or loss and 40% were short-term capital gain or loss. Thus, futures
traders may qualify for a net reduced tax rate relative to a
straight S-T capital item--but a higher rate relative to a L-T
capital item. Thus, "traders" gravitate towards futures while
"investors" who may hold an asset for an extended period might tend
to gravitate towards these other items such as ETFs, Treasuries,
TIPS or swaps. [0063] Periodically, however, legislators consider
measures that would "mainstream" the tax treatment of futures,
eliminating the 60/40 tax treatment. Thus, futures product
structures may be considered that are more familiar and palatable
on the part of traditional long-term investors as a possible
strategic initiative. These structures render futures more suitable
as investment vehicles. [0064] Cash/Futures Arbitrage--Cash/futures
arbitrage is the process by which professional traders attempt to
capitalize on small aberrations between the value of a futures
contract and its underlying cash or spot instrument. To the extent
that these transactions may be concluded on very small profit
margins with minimal risk, the arbitrage is considered successful
in promoting "cash/futures convergence"--ensuring that futures
actually track or parallel or correlate highly with the underlying
cash or spot instrument. Or to put it another way, that the futures
price is efficiently determined.
[0065] These futures structures that mimic the value of the
underlying cash or spot instrument promote efficient arbitrage by
minimizing the economic or monetary differences between futures and
spot instruments. This efficiency generates macroeconomic benefits
in the sense that it enhances the potential effectiveness of a
hedge, i.e., it enhances risk management benefits.
[0066] Rolling Spot--The disclosed Dividend Accruing Futures
("DAF"), Fixed Settlement/Coupon Generating Futures Contract, and
Futures Contract Using Fixed vs. Floating Rate Pass-Through
contracts, described in more detail below, share certain
similarities to Rolling Spot contracts that contemplate a periodic
pass-through from one party to the contract to the other party.
However, Rolling Spot contracts have only been applied in the
context of currency or FX products. Thus, the pass-through is a
function of the applicable short-term interest rate in one currency
that comprises the subject currency pair vs. the applicable
short-term interest rate in the other currency that comprises the
subject currency pair. E.g., if one created a Rolling Spot contract
based upon the pairing between the U.S. dollar (USD) and Euro
(EUR), then the periodic (daily) pass-through would be reflected in
the relationship between USD short-term rates vs. EUR short-term
rates.
[0067] The disclosed contracts differ in the sense that
pass-through of a short-term rate component is not contemplated but
rather, for example, a stock dividend accrual. Further
distinguishing this contract from Rolling Spot contracts, the
pass-through would be administered on a quarterly basis or
semi-annual basis, noting, for example, that in the U.S., dividends
are typically paid by corporations on a quarterly basis, U.S.
Treasuries make coupon payments semi-annually or IRS contracts
administer cash flows quarterly or semiannually--rather than on a
daily basis as is typical with Rolling Spot contracts.
[0068] Rolling Spot contracts are frequently traded in
over-the-counter (OTC) markets, most typically in London where they
are often marketed as a subset of the "Contract for Differences" or
CFD markets. The Rolling Spot concept was invented and deployed at
CME in 1992.
[0069] TRAKRS--Some years ago, CME in partnership with Merrill
Lynch, offered TRAKRS futures contracts which were futures
contracts that featured a daily pass-through from long to short
reflecting short-term interest rates along with some added
amounts--that were NOT passed through from long to short but rather
retained in the Clearing House and paid out as fees. Notably, this
pass-through was never tied to dividends at all. These contracts
utilized some other unique features as well, including an initial
marketing period prior to launch where investors were effectively
solicited to be brought in on the first effective date of the
contract, akin to the way in which an IPO might be marketed. TRAKRS
also featured a very small contract value to compete with ETFs; a
100% margin scheme for long investors; and, a no-action letter per
which TRAKRS could be sold by SEC Registered Representatives (RRs),
i.e., stock brokers, and placed in securities accounts.
Dividend Accruing Futures ("DAF") Contracts
[0070] The disclosed embodiments relate to a novel futures contract
construction design featuring a periodic cash payment (passed
through the exchange Clearing House or CH) from seller (short) to
buyer (long). The futures contract is settled in cash to the spot
value of the reference underlying index on the final settlement
date. It is contemplated that the reference underlying index shall
be the spot value of a specific stock index, e.g., the Standard
& Poor's 500 (S&P 500), Dow Jones Industrial Average
(DJIA), NASDAQ-100, etc. Likewise, the cash payment shall be
established by reference to the accrued dividends associated with
the reference underlying index, e.g., S&P 500, DJIA,
NASDAQ-100, etc.
[0071] Current stock index futures contracts do not provide for any
periodic payments of any sort but are simply settled in cash based
upon the spot value of the underlying index upon the final
settlement date. As a result, stock index futures prices will trade
at levels, relative to the spot value of the underlying index,
which reflect "cost of carry" considerations. Specifically, the
futures price will reflect the spot price plus financing costs less
dividends.
Stock Index Futures Price=Spot Stock Index Price+Financing
Charges-Dividends
[0072] This is a complexity that presents a "learning curve" of
sorts to prospective traders in stock index futures. By providing
for a periodic cash payment from short to long (most likely on a
quarterly basis but possibly on a different schedule, e.g., daily,
weekly, monthly, annually), our equation is altered to eliminate
dividends, simplifying the futures contract design.
Stock Index Futures Price=Spot Stock Index Price+Financing
Charges
[0073] It is possible to list a futures contract that is settled by
reference to the total return associated with a stock index, i.e.,
a "total return index futures." A total return index is one that
incorporates both the fluctuations of the stocks that comprise the
index PLUS the accrued dividends associated with those stocks. Note
that the return on a total return index by rule exceeds the return
on the spot version of the same index by an amount equal to the
accrued dividends. However the issue associated with reference to a
total return index is the quoted value of the total return index is
very much disconnected from the quoted spot value of the index.
This disconnection means that the average trader cannot "relate" to
the value of the total return index as it does not resemble the
spot index value with which he/she may be accustomed to
referencing.
[0074] The disclosed dividend accruing futures maintain a much more
direct link to the spot value of the index, adjusted only by
finance charges represented in short-term interest rates.
[0075] Consider the following contract specifications for a
possible S&P 500 Dividend Accruing Futures (DAF) contract which
may resemble the construction of an Exchange Traded Fund (ETF) but
registered and constructed as a futures contract.
[0076] An ETF is a security that tracks an index, a commodity or a
basket of assets like an index fund, but trades like a stock on an
exchange. ETFs experience price changes throughout the day as they
are bought and sold. An ETF holds assets such as stocks,
commodities, or bonds, and trades close to its net asset value over
the course of the trading day. Most ETFs track an index, such as a
stock index or bond index. ETFs may be attractive as investments
because of their low costs, tax efficiency, and stock-like
features. One of the most widely known ETFs is called the Spider
(SPDR), which tracks the S&P 500 index and trades under the
symbol SPY.
TABLE-US-00001 Exemplary Contract: S&P 500 Dividend Accruing
Futures Contract Value $1 .times. Standard & Poor's 500 Stock
Price Index. E.g., if S&P 500 = 1,956.50 index points, value of
one futures contract nominally valued at $1,956.50 (=$1 .times.
1,956.50 index points) Contract Months Listing of a single contract
month in March, June, September and December quarterly cycle,
extending five (5) years in future. E.g., if contract is listed in
Dec-14, we might list single contract maturing Dec-19. Quote Quoted
in index points, e.g., 1,956.50, in minimum increments Convention
(or "tick size") of 0.10 index points (or $0.10 per contract unit)
Dividend Accrual Dividend Accrual Pass-Through payment is made in
cash on a Pass-Through quarterly basis, from short to long, on
3.sup.rd Friday of quarterly cycle months, equivalent to dividends
accrued associated with S&P 500 over quarterly period Interest
Rate Interest Rate Pass-Through payment is made in cash on a
quarterly Pass-Through basis, from long to short, on 3.sup.rd
Friday of quarterly cycle months, equivalent to average daily
3-month LIBOR rate applied to value of stock index, over quarterly
period Hours of Trade Offered exclusively on CME Globex .RTM.
electronic trading platform on Mondays-Fridays from 8:30 am-3:15 pm
(CT) Trading Ends 3:00 pm (CT) on business day preceding third
Friday of contract month with contingencies if underlying index
should not be published on that day Final Cash settled to Special
Opening Quotation (SOQ) of S&P 500 Settlement
[0077] This product design eliminates dividend accruals from
futures contract pricing. As such, the contract will trade at
levels more closely resembling spot values. This pricing mechanism
therefore becomes much more closely aligned with spot values and
becomes more intuitive from the perspective of prospective
customers, notably including possible retail customers.
[0078] The essence of the disclosed embodiments is to pass-through
an accrued dividend in the context of a futures contract. However,
it may also further address the finance charge component of the
cost of carry relationship.
[0079] There are two possible ways of addressing the interest rate
component: [0080] 1. Interest Rate Pass-Through--Just as a periodic
cash payment or pass-through may be required from short to long
reflecting dividend accrual, a periodic cash pass-through from long
to short reflecting short-term financing rates may be required.
This interest rate pass-through may serve to neutralize the
financing component of cost of carry. The interest rate
pass-through may be administered on a daily or other periodic basis
as appropriate and need not conform to the contemplated quarterly
pass-through associated with accrued dividends. The net result,
having eliminated both dividends and finance charges from our
pricing considerations, is that the futures price should closely
reflect the spot value of the index. [0081] 2. 100% or 50%
Margining--Alternatively, it may be required that the long post
100% margining in cash which is passed through (via the Clearing
House and Clearing Members) to the account of the short. The short
is thereupon required to post collateral to secure the receipt of
that cash. Or, a 50% cash payment from long to short, corresponding
to typical margin requirements as administered in spot equity
markets, may be required. In any event, this feature would
essentially offset or at least mute to an extent the leverage
associated with buying futures. As a result, this would tend to
offset in whole or part financing charges from cost of carry
considerations, and in turn cause the futures contract to align
much more closely with spot index levels.
[0082] Note that Exchange-Traded Funds (or ETFs) typically align
reasonably closely with the spot value of the index with which they
are designed to track. These ETFs are margined like other stocks
and are constructed to offer a periodic (generally quarterly)
dividend.
[0083] Thus, these Dividend Accruing Futures contracts (DAFs) might
be considered a prospective challenger to the popularity of ETFs. A
DAF may be constructed with the 100% or 50% margining feature as
described above coupled with a very small (for a futures contract)
contract size that mimics the value of a single ETF share.
Fixed Settlement/Coupon Generating Futures Contracts
[0084] The disclosed embodiments relate to a novel futures contract
construction design featuring a fixed final settlement price and
periodic cash payments (passed through the exchange Clearing House
or CH) from seller (short) to buyer (long) fixed at X % of the
final settlement value.
[0085] The futures contract is settled in cash to an arbitrary
fixed final settlement value, e.g., $100,000, and quoted in percent
of that "par value," e.g., 100% of par, 103% of par, 98% of par.
Likewise, the cash payment shall be established by reference to a
fixed amount (or "coupon") applied to the fixed final settlement
value. These cash payments or coupons may be quoted as X % of the
final settlement value and payable on a semi-annual basis, e.g., 2%
of $100,000 on an annual basis or 1% of $100,000 on a semi-annual
basis. The disclosed embodiments use of fixed (as opposed to the
customary variable) final settlement value for a futures contract;
coupled with the pass-through payment of a fixed "coupon" from
short to long on a periodic basis.
[0086] The disclosed embodiments present a novel futures contract
construction design featuring a fixed final settlement price and
periodic cash payments (passed through the exchange Clearing House
or CH) from seller (short) to buyer (long) fixed at X % of the
final settlement value.
[0087] In particular, the disclosed embodiments feature--(1) a
futures contract that features a fixed, as opposed to variable,
final settlement value; and, (2) a futures contract that
contemplated a periodic cash payment or pass-through (as in passing
from the account of the short to the account of the long through
the Clearing House). Let's consider each in turn.
[0088] Fixed Final Settlement Value--Cash-settled futures contracts
are typically settled, per the final settlement date, by reference
to the (variable) value of some reference, e.g., a stock index, the
value of a fixed income security index or interest rate, etc. The
disclosed contract design contemplates that the final settlement
value of the futures contract shall be fixed at some arbitrarily
established value, e.g., $100,000 or $1,000,000, possibly quoted in
percent of that "par value," e.g., 98% of par, 100% of par, 103% of
par.
[0089] Coupon Payment--Current (cash-settled) futures contracts do
not provide for any periodic payments of any sort but are simply
settled in cash based upon the spot value of a specified underlying
reference index or value upon the final settlement date. As a
result, these futures contracts will trade at levels, relative to
the spot value of the underlying instrument, which reflects "cost
of carry" considerations. Specifically, the futures price will
reflect the spot price plus financing costs less any payouts
associated with the underlying instrument, possibly in the form of
stock dividends, fixed income coupon payments, etc., and as
appropriate in the context of the underlying reference
instrument.
Futures Price=Spot Price+Financing Charges-Payouts
[0090] This is a complexity that presents a "learning curve" of
sorts to prospective futures traders who are not otherwise familiar
with practices in the futures markets. By providing for a periodic
cash payment from short to long (most likely on a semi-annual basis
but possibly on a different schedule, e.g., daily, weekly, monthly,
annually), the equation for the disclosed contract is altered to
eliminate payouts, simplifying the futures contract design.
Futures Price=Spot Price+Financing Charges
[0091] While these two features depart rather radically from
anything that has ever been attempted within the regulatory context
of futures markets, the net result is that the structure of the
resulting futures contract will resemble that of a "garden-variety"
fixed income security--specifically a bond or note. There may be
some regulatory controversy regarding whether a futures contract's
final settlement value may be fixed rather than variable to the
extent that such feature may be said to eliminate the uncertainty
of the final outcome. However, it may be argued that the
uncertainty associated with the contract lies in the fact that the
value of the contract will fluctuate in price in response to a
variety of economic factors including prevailing market interest
rates. Thus, there will be ample volatility or uncertainty in the
value of the contract on an interim basis prior to its final
settlement value.
[0092] There are certainly other futures contracts which are based
upon fixed income securities, notably including CME Group's line of
Treasury bond and note futures contracts. These contracts call for
the delivery, in final satisfaction of the contract, of a Treasury
security with certain specified characteristics and using a system
of delivery price differentials [the "conversion factor (CF)
invoicing system] to account for the varying valuation of
Treasuries with somewhat different coupons and maturities.
[0093] These "classically constructed" Treasury futures have been
in use as a risk-management tool dating back to 1977 with great
success. But while these contracts generally reflect the economic
value of Treasury securities, they are not constructed to precisely
track the cash flows--including periodic coupon payments--of fixed
income securities.
[0094] The disclosed embodiments track a specifically defined fixed
income instrument in terms of maturity and (significantly) coupon
payments.
[0095] This contract features two rather unique features--(1) a
fixed final settlement value; and (2) a periodic cash pass-through
constructed as a "coupon payment." The first of these features is,
to our knowledge, completely unique in the context of futures
markets. There are, however, some products or possibly intellectual
properties that utilize periodic cash pass-through payments.
Significantly, none of these items--as documented below--were ever
constructed as a coupon payment.
[0096] Coupon Bearing Futures (CBFs)--Consider the following
contract specifications for a possible Coupon Bearing Futures (CBF)
contract which are intended to reflect the construction and cash
flows of a coupon bearing fixed income instrument such as a
Treasury bond or note--but registered and constructed as a futures
contract.
TABLE-US-00002 Exemplary Contract: Coupon Bearing Futures (CBF)
Contract Value Settled in Cash to a Final Settlement Value of
$100,000 ("par value") Contract Months Listing of a single contract
month in March, June, September and December quarterly cycle,
extending two (2), five (5), ten (10) or thirty (30) years in
future. E.g., if contract is listed in Dec-14, we might list single
5-year contract maturing Dec-19. Quote Quoted in percent of par in
minimum increments of one-half of one Convention thirty-second or
1/2 of 1/32.sup.nd of 100% of par. This equates to $15.625 per
"tick." Coupon Coupon Pass-Through payment is made in cash on the
semi-annual Pass-Through anniversary of the original listing date
of the contract, paid from short to long. Coupon payment is defined
as X % of par value (on an annual basis) or 1/2 of X % of par value
(on a semi-annual basis). Thus, a 2% quoted coupon implies a $1,000
semi-annual payment. Interest Rate Interest Rate Pass-Through
payment is made in cash on a semi- Pass-Through annual basis, from
long to short, the semi-annual anniversary of the original listing
date of the contract, equivalent to average daily 3-month LIBOR
rate applied to value of stock index, over quarterly period Margins
Coupon Bearing Futures to be margined and leveraged in much the
same way as futures are margined and leveraged currently - by
reference to 1-day's close-to-close price risk Hours of Trade
Offered exclusively on CME Globex .RTM. electronic trading platform
on Mondays-Fridays from 8:30 am-3:15 pm (CT) Trading Ends 3:00 pm
(CT) on business day preceding third Friday of contract month with
contingencies if underlying index should not be published on that
day Final Cash settled to Final Settlement Value of $100,000 ("par
value") Settlement
[0097] Money Market Futures (MMFs)--In another application of this
invention, that would rely solely upon the fixed final settlement
value feature--and which does not contemplate the periodic payment
of a "coupon," we may construct a "Money Market Futures" (MMF)
contract. An MMF is generally a futures contract that is listed
with a final settlement date that is one year or less in duration.
MMFs do not contemplate periodic coupon payments but are settled in
cash at a fixed final settlement date, akin to CBFs as explained
above.
[0098] The net result is that the MMF contract may reflect the cash
flows associated with a money market instrument and may offer
useful properties from a risk-management or hedging perspective.
Such a contract may be constructed as shown below.
TABLE-US-00003 Exemplary Contract: Money Market Futures (MMF)
Contract Value Settled in Cash to a Final Settlement Value of
$1,000,000 ("par value") Contract Months Listing of a single
contract month in March, June, September and December quarterly
cycle, extending no more than one year in the future. E.g., if
contract is listed in Dec-14, we might list single 1-year contract
maturing Dec-15. Quote Quoted in percent of par value in 0.0001%.
E.g., a quote of Convention 99.6234% of par equates to $992,340
(=99.6234% .times. $1,000,000). Minimum price increment or tick
size of $10 (=0.0001% .times. $1,000, 000) Daily Interest Interest
Rate Pass-Through payment is made in cash on a daily basis, Rate
Pass- from long to short, equivalent to a designated short-term
interest rate, Through e.g., effective Fed Funds rate, applied to
the final settlement or par value of contract. Margins MMFs to be
margined and leveraged in much the same way as futures are margined
and leveraged currently - by reference to 1-day's close- to-close
price risk Hours of Trade Offered exclusively on CME Globex .RTM.
electronic trading platform on Mondays-Fridays from 8:30 am-3:15 pm
(CT) Trading Ends 3:00 pm (CT) on business day preceding third
Friday of contract month with contingencies if underlying index
should not be published on that day Final Cash settled to Final
Settlement Value of $1,000,000 ("par value") Settlement
[0099] Aligning Cash-Flows Even More Closely--The essence of the
disclosed embodiments is the fixed final settlement value coupled
(at least in the case of the CBF) with a coupon-style cash
pass-through--all in the context of a futures contract. The concept
of a periodic interest rate pass-through as part of the patent
invention is included in the possible futures contract
specifications shown above as a means of further addressing the
cost of carry considerations that cause futures prices to depart
from the value of a cash or spot item.
[0100] This proposed periodic cash pass-through from long to short
reflecting short-term financing rates is proposed to neutralize the
financing component of cost of carry. The interest rate
pass-through may be administered on a daily or semi-annual or other
periodic basis as appropriate. In any event, the net result is that
the futures price should closely reflect the spot value of the
index.
[0101] With respect to converging the pricing of these products
with bonds, notes or money market instruments, it may be required
that the long post 100% margining in cash which is passed through
(via the Clearing House and Clearing Members) to the account of the
short. The short is thereupon required to post collateral to secure
the receipt of that cash. This feature would essentially offset the
leverage associated with buying futures. As a result, this would
tend to offset financing charges from cost of carry considerations,
and in turn cause the futures contract and its associated cash
flows to align much more closely with spot index levels.
[0102] CBFs and MMFs are designed to mimic the cash flows
associated with coupon-bearing fixed income; and, money market
instruments, respectively. By more closely aligning the cash flows
of an instrument registered and offered as a futures contract, we
hope to provide risk-management or hedging utilities.
Inflation Protected Futures ("IPF"'s)
[0103] The disclosed embodiments relate to Inflation Protected
Futures ("IPF"'s) which are novel futures contracts designed to
link closely with inflation as reflected in the Consumer Price
Index (CPI), or possibly other measures of inflation such as the
variations on CPI, PPI, Personal Consumption Expenditures, etc.
They are cash-settled futures designed to mimic the cash flows
associated with Treasury Inflation Protected Securities (TIPS).
Treasury Inflation-Protected Securities (or TIPS) are the
inflation-indexed bonds issued by the U.S. Treasury. The principal
is adjusted to the Consumer Price Index (CPI), the commonly used
measure of inflation. When the CPI rises, the principal adjusts
upward. If the index falls, the principal adjusts downwards.[9] The
coupon rate is constant, but generates a different amount of
interest when multiplied by the inflation-adjusted principal, thus
protecting the holder against the official inflation rate (as
asserted by the CPI).
[0104] This unique futures contract design features the following:
[0105] 1. Variable Notional Contract Size--The contract size or
trading unit of an IPF is initially established at some arbitrary
par value, e.g., $100,000, and may be quoted in percent of par,
e.g., 98% of par, 100% of par, 103% of par. Henceforth, the
contract unit is linked to the raw value of the Non-Seasonally
Adjusted (NSA) U.S. City Average All Items Consumer Price Index for
all Urban Consumers (CPI-U), released on a monthly basis. (See
www.bls.gov/cpi/) Specifically, the face value of a security will
fluctuate as a function of the security's Index Ratio (IR) as
identified by the U.S. Treasury Department. (The Treasury
Department published index ratios (IR) for reference in the context
of Treasury Inflation Protected Securities (TIPS). The IR is the
ratio of the Reference CPI for the trade settlement date to the
Reference CPI for the TIPS issue's dated date. The Index Ratio
reflects realized inflation since the issue date and is used to
accrete the face value of the security. These figures are published
at the following hyperlink:
http://www.treasurydirect.gov/instit/annceresult/tipscpi/tipscpi.htm)
E.g., assume that the futures contract is initially established
with an IR=1.00 or 100% of par. Assume further that the Index Ratio
(IR) increased by 10% and was at 1.10. Thus, the nominal value of
an IPF is adjusted to 110% of par (=100%.times.1.10). Should the
value of CPI-U should decline over the life of the IPF, the
notional value of an IFP at futures contract maturity is
established at the original par value, providing protection in a
deflationary environment. Note that this contract is distinct from
other futures contracts offered in that the interim and final
notional values of the contract are periodically reset by reference
to inflation. The final cash settlement value is established at the
adjusted notional contract value linked to the IR, with the
exception that it cannot be less than 100% of par at expiration.
This "floor" feature is likewise unique to a futures contract.
[0106] 2. Coupon Payment--In addition to the variable notional
contract size linked to inflation, the contract also offers a
periodic (e.g. semi-annual) cash payment to be paid from the
account of the short to the account of long, passed through the
Exchange Clearing House. This coupon payment is fixed, upon
contract listing, at X % of the current notional contract value of
the IPF. E.g., if the annual coupon of an IPF was originally
established at 2% and the notional futures contract value is 100%
of a par value of $100,000, the annual payment would be 2% of 100%
of $100,000 or $2,000. (It is contemplated that this value may be
paid in two semi-annual payments of $1,000 each for a total of
$2,000.) But if the IR had increased by 10% and was at 1.10, the
IPF's notional value would be adjusted to 110% of par or $110,000.
The coupon rate remains at 2%, resulting in an interest payment of
2.2% ($2,200) on an annual basis or 1.1% ($1,100) on a semi-annual
basis.
[0107] The disclosed embodiments relate to the use of the variable
futures contract size linked to inflation; coupled with the
pass-through payment of a coupon from short to long on a periodic
basis that is fixed as a percentage amount of par value but is
implicitly linked to inflation as a result of the variable futures
contract size linked to inflation measures. The disclosed
embodiments present a novel futures contract construction design
that is intended to mimic the cash flows associated with a Treasury
Inflation Protected Security (TIPS) instrument as currently issued
on a regular basis by the U.S. Treasury Department.
[0108] This futures contract--an Inflation Protected Futures
(IPF)--is unique insofar as it is a futures contract that . . . (1)
is cash settled to a notional value linked to inflation; and (2)
calls for a periodic pass-through from short to long of a cash
value that is established as a fixed proportion of the notional
value of the contract--implicitly linking this coupon to
inflation.
[0109] The disclosed embodiments feature--(1) a futures contract
that features a periodically administered notional value that is
linked to CPI-U; and, (2) a futures contract that contemplated a
periodic cash payment or pass-through (as in passing from the
account of the short to the account of the long through the
Clearing House) that is fixed as a percentage value but implicitly
linked to inflation in light of feature #1.
[0110] No other contract design or system is tied to measures of
inflation in this way and which is designed to mimic the cash flows
and, therefore, value of a TIPS instrument.
[0111] Exchanges, including CME Group, have listed CPI futures in
the past. These products were cash settled to the fluctuating value
of the CPI as the final settlement date. Although the concept was
sound, these products uniformly failed. Still, these products did
not mimic the cash flows or value of a TIPS instrument as directly
as does the currently proposed solution
[0112] This contract features two rather unique features--(1) a
periodically (monthly) adjusted notional value, linked to CPI-U;
and (2) a periodic cash pass-through constructed as a "coupon
payment" but implicitly tied to inflation because it is applied to
the periodically adjusted notional value of the contract.
[0113] Inflation Protected Futures (IPFs) are uniquely designed to
mimic the cash flows associated with a Treasury Inflation Protected
Security (TIPS) as issued by the U.S. Treasury Department. The
table below summarizes the product design.
TABLE-US-00004 Exemplary Contract: Inflation Protected Futures
(IPFs) Contract Value Settled in Cash to a Final Settlement Value
of $100,000 ("par value") adjusted by reference to fluctuations in
the raw value of CPI-U. Notional value of futures contract to be
adjusted monthly by reference to Index Ratio ("IR") as identified
by U.S. Treasury Dept. E.g., if the IR increases by 10% from 100%
of par, notional contract value is increased to 110% or par or
$110,000. Contract Months Listing of a single contract month in
March, June, September and December quarterly cycle, extending two
(2), five (5), ten (10) or thirty (30) years in future. E.g., if
contract is listed in Dec-14, we might list single 5-year contract
maturing Dec-19. Quote Quoted in percent of par in minimum
increments of one-half of one Convention thirty-second or 1/2 of
1/32.sup.nd of 100% of par. This equates to $15.625 per "tick."
Coupon Coupon Pass-Through payment is made in cash on the
semi-annual Pass-Through anniversary of the original listing date
of the contract, paid from short to long. Coupon payment is defined
as X % of (periodically adjusted) par value (on an annual basis) or
1/2 of X % of par value (on a semi- annual basis). Thus, a 2%
quoted coupon implies a $1,000 semi- annual payment based upon par
value of $100,000. Interest Rate Interest Rate Pass-Through payment
is made in cash on a semi- Pass-Through annual basis, from long to
short, the semi-annual anniversary of the original listing date of
the contract, equivalent to average daily 3-month LIBOR rate
applied to value of stock index, over quarterly period Margins
Coupon Bearing Futures to be margined and leveraged in much the
same way as futures are margined and leveraged currently - by
reference to 1-day's close-to-close price risk Hours of Trade
Offered exclusively on CME Globex .RTM. electronic trading platform
on Mondays-Fridays from 8:30 am-3:15 pm (CT) Trading Ends 3:00 pm
(CT) on business day preceding third Friday of contract month with
contingencies if underlying index should not be published on that
day Final Cash settled to Final Settlement Value of $100,000 ("par
value") Settlement
[0114] Aligning Cash-Flows Even More Closely--The disclosed
embodiments create a futures contract that mimics the cash flows
and valuation of a TIPS instrument--but within the context of a
futures contract. The concept of a periodic short-term interest
rate or financing rate pass-through as part of the patent invention
may be included in the possible futures contract specifications
shown above as a means of further addressing the cost of carry
considerations that cause futures prices to depart from the value
of a cash or spot item.
[0115] This proposed periodic cash pass-through from long to short
reflecting short-term financing rates is proposed to neutralize the
financing component of cost of carry. The interest rate
pass-through may be administered on a daily or semi-annual or other
periodic basis as appropriate. In any event, the net result is that
the futures price should closely reflect the spot value of the
index.
[0116] With regards to converging the pricing of these products
with bonds, notes or money market instruments, it may be required
that the long post 100% margining in cash which is passed through
(via the Clearing House and Clearing Members) to the account of the
short. The short is thereupon required to post collateral to secure
the receipt of that cash. This feature would essentially offset the
leverage associated with buying futures. As a result, this would
tend to offset financing charges from cost of carry considerations,
and in turn cause the futures contract and its associated cash
flows to align much more closely with spot index levels. This
feature would represent an alternative to the periodic short-term
interest rate pass through as outlined in the table above.
[0117] IPFs are designed to mimic the cash flows associated with a
TIPS instrument. By more closely aligning the cash flows of an
instrument registered and offered as a futures contract, we hope to
provide risk-management or hedging utilities.
Futures Contract Using Fixed Vs. Floating Rate Pass-Through
[0118] The disclosed embodiments relate to a novel futures contract
construction design featuring a series of periodic cash payments
(passed through the exchange Clearing House or CH) between seller
(short) to buyer (long). The value of this pass-through amount is
established periodically by reference to the differential between
an established fixed rate (x %) and a floating rate (y %). The
fixed rate is established in advance of contract listing while the
floating rate is established at each periodic pass-through date by
reference to current market conditions.
[0119] The futures contract is settled in cash to an arbitrary
fixed final settlement value, e.g., $100,000, and quoted in percent
of that "par value," e.g., 100% of par, 103% of par, 98% of par.
Likewise, the cash payment shall be established by reference to the
difference between a pre-established fixed amount (or "coupon") vs.
a floating amount that may be tied to any number of different
rates, including the ICE Administration 3-month LIBOR rate, noting
that is the same rate vs. which CME Eurodollar futures are settled.
These cash payments or coupons may be quoted as X % of the final
settlement value and payable on a periodic basis, e.g., quarterly
or semi-annually.
[0120] Other features that are relatively unique may likewise be
applied to the futures contract. The disclosed embodiments relate
to the use of fixed vs. floating rate pass-through payment of a
fixed "coupon" from short to long on a periodic basis.
[0121] The net result of this contract design is to create a
futures contract whose cash flows, and resulting valuation, closely
parallels the cash flows and valuation of an actual interest rate
swap (IRS).
[0122] Previous contract designs that have been used over the years
to address a futures contract that is based on an IRS instrument
were: [0123] 1. CME Swap Contract--In the early 2000s, CME launched
an IRS futures contract that was constructed to dovetail with, and
be readily "spreadable," vs. a Eurodollar futures contract. It was
cash settled to the quoted fixed rate or coupon rate associated
with IRS instruments of different tenors, e.g., 2-years, 5-years,
10-years. It was quoted as 100--IRS Rate using the so-called "IMM
Index." This contract traded moderately for some years but
eventually fell into disuse and was delisted. [0124] 2. CBOT Swap
Contract--About the same time as CME launched its original swap
futures contract, the CBOT launched their own version of a swap
contract. It was constructed to dovetail with, and be readily
spreadable, vs. CBOT Treasury futures contracts. It was settled in
cash to a value calculated as the price of a bond with a nominal
coupon rate given a yield equal to the fixed rate or coupon rate
associated with IRS instruments of different tenors, e.g., 5-years,
10-years, 30-years. It was quoted in percent of par in increments
of 1/32nd of par or fractions thereof--akin to a Treasury security
or Treasury futures contract. This contract also traded moderately
but fell into disuse. [0125] 3. LIFFE Swapnote Futures--The London
International Financial Futures Exchange (LIFFE) also listed a swap
based futures contract in the early 2000s referred to as swapnote
futures. It was constructed in a manner that was very similar to
that used by CBOT. However, it utilized a more involved calculation
to identify the value of the contract. Rather than using a singular
yield like the CBOT model, it referred to various values for IRS
instruments across the spectrum of the yield curve--the swap
curve--to find the value of each individual reset or payment date.
This design was offered under license from a firm which had
patented this specific concept. These contracts continue to be
lightly traded at LIFFE. [0126] 4. CME Group Deliverable Swap
Futures (DSFs)--In December 2012, CME Group launched DSFs. These
are futures contracts that call for the delivery of actual IRS
instruments of varying tenors (2-year, 5-year, 10-year and 30-year)
that are cleared and held by the CME Clearing House (CH). These
contracts are quoted as 100 less the Non-Par Value (NPV) of the
swap. They are listed with a pre-established coupon rate. These
contracts are actively traded and growing in popularity.
[0127] The swap futures contracts discussed above have all achieved
varying degrees of success or failure, as the case may be. They all
reflect the value, to one degree or another, of an actual interest
rate swap. Significantly, however, none of them truly parallel the
cash flows associated with an actual IRS instrument.
[0128] The current proposal for an IRSF addresses this issue with
use of a periodic fixed vs. floating rate cash flow.
[0129] It is certainly very feasible to use the swap contracts
discussed above to hedge the risks associated with holding an
actual IRS instrument. However, in all cases, this involves some
effort to model the sensitivity of the value of these futures
contract relative to the sensitivity of the actual IRS instrument
to be hedged, to a dynamic rate environment.
[0130] The disclosed embodiments are intended to create a futures
contract design which is simpler and more straightforward to deploy
for risk management purposes. Because we seek to mimic the cash
flows of an IRS instrument, this should minimize the modeling
necessary to create an efficacious hedge strategy.
[0131] In order to illustrate how this contract might be
constructed, consider the following summary futures contract design
specifications which features the fixed final settlement value
coupled with the periodic cash payment or pass-through tied to a
value calculated as a fixed vs. floating rate payment.
TABLE-US-00005 Exemplary Contract: Interest Rate Swap Futures
(IRSFs) Contract Value Settled in Cash to a Final Settlement Value
of $100,000 ("par value") Contract Months Listing of a single
contract month in March, June, September and December quarterly
cycle, extending two (2), five (5), ten (10) or thirty (30) years
in future. E.g., if contract is listed in Dec-14, we might list
single 5-year contract maturing Dec-19. Quote Quoted in percent of
par value, e.g., 98%, 100%, 103% of the Convention $100,000 par
value. Quoted in minimum increments or ticks of 0.01% of par which
equates to $10.00 per tick (=0.01% .times. $100,000) Fixed vs. The
differential between the established fixed coupon rate and floating
Floating Rate rate is paid in cash on the quarterly anniversary of
the original listing Pass-Through date of the contract. If fixed
coupon rate > floating rate, the net payment flows from short to
long; if fixed coupon rate < floating rate, the net payment
flows from long to short. Fixed Coupon Is established by Exchange
at time of contract listing to generally Rate reflect prevailing
swap rates, rounded to nearest 1/8.sup.th of 1%, e.g., 1.125%,
1.25%, 1.375%, 1.500%. Fixed coupon rate paid semi- annually based
upon par value of contract. Floating Rate Is established by
reference to 3-month LIBOR rate and paid quarterly based upon par
value of contract. Margins IRSFs to be margined and leveraged in
much the same way as futures are margined and leveraged currently -
by reference to 1-day's close- to-close price risk Hours of Trade
Offered exclusively on CME Globex .RTM. electronic trading platform
on Mondays-Fridays from 8:30 am-3:15 pm (CT) Trading Ends 3:00 pm
(CT) on business day preceding third Friday of contract month with
contingencies if underlying index should not be published on that
day Final Cash settled to Final Settlement Value of $100,000 ("par
value") Settlement
[0132] IRSFs are designed to mimic the cash flows associated with
fixed vs. floating rate IRS instruments. By more closely aligning
the cash flows of an instrument registered and offered as a futures
contract, we hope to provide risk-management or hedging
utilities.
Cash Flow Examples
[0133] Theoretical examples of the cash flows potentially
associated with each of the four (4) contract designs are set forth
below.
Dividend Accruing Futures (DAFs)
[0134] Assume that a futures contract is created that is valued at
$50.times.S&P 500 Stock Market Index. The value of a
conventionally constructed stock index futures may be modeled, by
reference to "cost of carry" considerations as follows.
Conventional Futures = Spot + Finance Costs - Anticipated Dividends
= Spot .times. [ 1 + ( days 360 ) .times. Rate ] - Anticipated
Dividends ##EQU00001##
[0135] Thus, the value of a conventionally constructed stock index
futures price may be calculated as 1,892.66 as of the 93rd day
until expiration given a spot index value of 1,900.00 and an
assumed financing or interest rate of 0.40%. But the Dividend
Accruing Futures or DAF price would be further adjusted in
anticipation of the dividend pass-through amount.
DAF=Spot+Finance Costs-Anticipated Dividends+Anticipated Pass
Through Amount
[0136] Note that the simplifying assumption of a 9.00 index point
quarterly accrual of dividends without any "surprises" or
unanticipated deviances from that assumption is being used. Thus, a
somewhat greater value for the DAF is calculated at 1,910.66 on the
93.sup.rd day until expiration. This value anticipates the 9.00
index point pass-through on the 90.sup.th day until expiration
along with a further assumed 9.00 index point pass-through on the
final settlement day some 93 days later.
TABLE-US-00006 Nominal Days til Stock Conventional Conventional DAF
Contract Anticipated Pass- Expiration Index Futures Basis DAF Basis
Value Dividends Through 93 1,900.00 1,892.66 -7.34 1,910.66 10.66
$95,533 9.30 92 1,920.00 1,912.76 -7.24 1,930.76 10.76 $96,538 9.20
91 1,890.00 1,882.81 -7.19 1,900.81 10.81 $95,041 9.10 90 1,890.00
1,882.89 -7.11 1,891.89 1.89 $94,595 9.00 9.00 89 1,870.00 1,862.95
-7.05 1,871.95 1.95 $93,597 8.90
[0137] It has been assumed, for the purposes of illustration, that
the spot index value is perfectly stable on the day prior to the
pass-through and on the day of the actual pass-through. Note that
the DAF basis declines substantially on the pass-through day. It
will be therefore appreciated that this mimic the behavior of a
stock or ETF on the ex-dividend date.
[0138] Note that the pass-through amount may be anticipated but not
necessarily known with certainty until it is fully accrued by the
periodic pass-through date.
Fixed Settlement/Coupon Generating Futures
[0139] This contract design is intended to mimic the behavior of a
Treasury security that generates semi-annual interest payments. The
value of the futures contract is fixed as of the final settlement
date at a nominal value, call it $100,000.
[0140] The value of a conventionally constructed futures contract
may vary prior to that point in time as a function of cost of carry
considerations. This is a function of the finance costs associated
with buying and holding the security--or short-term interest rates
less any anticipated payouts associated with the security in the
form of coupon payments. This is very much analogous to the
analysis above in the context of DAFs.
Conventional Futures=Spot+Finance Costs-Anticipated Coupons
[0141] But the value of the hybrid futures contract contemplated
here is further adjusted by the anticipated receipt of the
pass-through--which represents a pseudo coupon payment as it is
calculated as a function of a fixed rate applied to a fixed base or
principle value.
Hybrid Futures=Spot+Finance Costs-Anticipated Coupons+Pass Through
Amount
[0142] For purposes of this exposition, it is assumed that yields
are completely stable and, as a result, the futures price is quite
stable apart from the impact of cost of carry considerations. This
is an unrealistic assumption but it nonetheless allows one to
isolate the impact of carry considerations upon the value of a
conventional futures vs. one that is constructed using our hybrid
method and featuring a pass-through from short to long that
resembles a coupon payment.
TABLE-US-00007 Fixed Final Conventional Normal Hybrid Hybrid Pass-
Anticipated Days Settlement Futures Basis Futures Basis Through
Coupons 183 $100,000 $99,187 $813.33 $101,187 -$1,187 $1,016.67 182
$100,000 $99,191 $808.89 $101,191 -$1,191 $1,011.11 181 $100,000
$99,196 $804.44 $101,196 -$1,196 $1,005.56 180 $100,000 $99,200
$800.00 $100,200 -$200 $1,000 $1,000.00 179 $100,000 $99,204
$795.56 $100,204 -$204 $994.44
[0143] Note that the value of the hybrid futures contract
experiences a dramatic decline on the day of the pass-through
payment. This is akin to the way in which an actual fixed income
security would behave in the sense that when one buys a Treasury
note or bond, one pays the price of the security plus interest
accrued since the last semi-annual interest payment date. Note that
the hybrid futures contract value performs akin to the way in which
the "all-in" value of a cash note or bond would behave approaching
a coupon payment date.
Inflation Protected Futures
[0144] Inflation Protected Futures ("IPF"'s) represent a variation
on the theme of a security that mimics the cash flows of a cash
bond or note, as discussed above. But these futures contracts are
intended to mimic the performance of a Treasury Inflation Protected
Security or TIPS. TIPS are sold by the U.S. Treasury with a stated
principle or face value and a fixed coupon paid semi-annually. But
the principal value of the security is tied to the Consumer Price
Index for All Urban Consumers or CPI-U. Every month, as the CPI-U
is released, the effective principal value of the security is
adjusted. Thus, if the security has an initial principle value of
$100,000 but inflation rises by 3% (for example) over the course of
a year, the principal value is adjusted upwards to $103,000. The
IPF futures contract works in an analogous manner.
[0145] To illustrate, assume that the IPF has a face or principal
value of $100,000. But on the day on which there is 180 days
remaining until IPF expiration, CPI-U is released and shows an
(unexpected) gain of +1% in inflation. Thus, the principal value of
the futures contract is upwardly adjusted to $101,000 or upwardly
adjusted by 1%. Assume that the coupon payment of 2% annually or 1%
on a semi-annual basis is due on the day when there are 181 days
left until expiration. This implies that pass-through amount from
short to long would equal $1,000 or 1% of $100,000. Had the
pass--through value become due when the principal value was
upwardly adjusted to $101,000, that pass-through value would have
been $1,010 (=1% of $101,000).
TABLE-US-00008 Principal Normal Normal Hybrid Pass- Days Value
Futures Basis Futures Hybrid Basis Through Coupon 183 $100,000
$99,187 $813.33 $101,197 -$1,197 $1,016.67 182 $100,000 $99,191
$808.89 $101,201 -$1,201 $1,011.11 181 $100,000 $99,196 $804.44
$100,206 -$206 $1,000 $1,005.56 180 $101,000 $100,192 $808.00
$101,202 -$202 $1,010.00 179 $101,000 $100,196 $803.51 $101,206
-$206 $1,004.39
[0146] Again, the value of the IPF mimics the "all-in" value (price
plus accrued interest) of the TIPS. We have also applied the very
simplifying (and ultimately unrealistic) assumption that
marketplace yields and therefore price levels are stable over the
course of these days. Note, that regardless of the fluctuations of
the market, the principal value against which the final futures
settlement price are based and against which the coupon
pass-through amount is calculated, is as indicated in our
table.
Fixed vs. Floating Rate Futures
[0147] The Fixed vs. Floating Rate Futures (Interest Rate Swap
Futures ("IRSF")) is a futures contract that mimics the performance
of a fixed vs. floating interest rate swap instrument as might be
offered on an over-the-counter (OTC) basis. For purpose of this
illustration, assume that the futures contract is constructed to
provide for a quarterly pass-through that reflects a quarterly
coupon of 2% and a floating rate tied to the ICE Administration
Ltd. LIBOR rate--which happens to be 1.6% in our example. Assume
for purposes of this illustration that rates are stable over the
course of the days depicted in our example. The principal value of
the futures contract is fixed at $100,000 at expiration. We have
also applied other simplifying assumptions including use of a
Act/360-day count basis.
[0148] The differential between the 2% fixed rate and the 1.4%
floating rate is 0.6% on an annualized basis. Applied semi-annual
to the principal value of $100,000, we have a pass-through payment
from short to long equal to $300 [=(2%-1.4%).times.$100,000].
TABLE-US-00009 Principal Normal Normal Hybrid Pass- Fixed vs. Days
Value Futures Basis Futures Hybrid Basis Through Floating 183
$100,000 $99,898 $101.67 $100,498 -$498 $305.00 182 $100,000
$99,899 $101.11 $100,499 -$499 $303.33 181 $100,000 $99,899 $100.56
$100,199 -$199 $300 $301.67 180 $100,000 $99,900 $100.00 $100,200
-$200 $300.00 179 $100,000 $99,901 $99.44 $100,201 -$201
$298.33
[0149] Again, this product mimics the cash flows of interest rate
swap instruments that are available for trading on an OTC
basis.
[0150] Referring to FIG. 4, an illustrative embodiment of a general
computer system 400 is shown. The computer system 400 can include a
set of instructions that can be executed to cause the computer
system 400 to perform any one or more of the methods or computer
based functions disclosed herein. The computer system 400 may
operate as a standalone device or may be connected, e.g., using a
network, to other computer systems or peripheral devices. Any of
the components discussed above may be a computer system 400 or a
component in the computer system 400. The computer system 400 may
implement a match engine, margin processing, payment or clearing
function on behalf of an exchange, such as the Chicago Mercantile
Exchange, of which the disclosed embodiments are a component
thereof.
[0151] In a networked deployment, the computer system 400 may
operate in the capacity of a server or as a client user computer in
a client-server user network environment, or as a peer computer
system in a peer-to-peer (or distributed) network environment. The
computer system 400 can also be implemented as or incorporated into
various devices, such as a personal computer (PC), a tablet PC, a
set-top box (STB), a personal digital assistant (PDA), a mobile
device, a palmtop computer, a laptop computer, a desktop computer,
a communications device, a wireless telephone, a land-line
telephone, a control system, a camera, a scanner, a facsimile
machine, a printer, a pager, a personal trusted device, a web
appliance, a network router, switch or bridge, or any other machine
capable of executing a set of instructions (sequential or
otherwise) that specify actions to be taken by that machine. In a
particular embodiment, the computer system 400 can be implemented
using electronic devices that provide voice, video or data
communication. Further, while a single computer system 400 is
illustrated, the term "system" shall also be taken to include any
collection of systems or sub-systems that individually or jointly
execute a set, or multiple sets, of instructions to perform one or
more computer functions.
[0152] As illustrated in FIG. 4, the computer system 400 may
include a processor 402, e.g., a central processing unit (CPU), a
graphics processing unit (GPU), or both. The processor 402 may be a
component in a variety of systems. For example, the processor 402
may be part of a standard personal computer or a workstation. The
processor 402 may be one or more general processors, digital signal
processors, application specific integrated circuits, field
programmable gate arrays, servers, networks, digital circuits,
analog circuits, combinations thereof, or other now known or later
developed devices for analyzing and processing data. The processor
402 may implement a software program, such as code generated
manually (i.e., programmed).
[0153] The computer system 400 may include a memory 404 that can
communicate via a bus 408. The memory 404 may be a main memory, a
static memory, or a dynamic memory. The memory 404 may include, but
is not limited to computer readable storage media such as various
types of volatile and non-volatile storage media, including but not
limited to random access memory, read-only memory, programmable
read-only memory, electrically programmable read-only memory,
electrically erasable read-only memory, flash memory, magnetic tape
or disk, optical media and the like. In one embodiment, the memory
404 includes a cache or random access memory for the processor 402.
In alternative embodiments, the memory 404 is separate from the
processor 402, such as a cache memory of a processor, the system
memory, or other memory. The memory 404 may be an external storage
device or database for storing data. Examples include a hard drive,
compact disc ("CD"), digital video disc ("DVD"), memory card,
memory stick, floppy disc, universal serial bus ("USB") memory
device, or any other device operative to store data. The memory 404
is operable to store instructions executable by the processor 402.
The functions, acts or tasks illustrated in the figures or
described herein may be performed by the programmed processor 402
executing the instructions 412 stored in the memory 404. The
functions, acts or tasks are independent of the particular type of
instructions set, storage media, processor or processing strategy
and may be performed by software, hardware, integrated circuits,
firm-ware, micro-code and the like, operating alone or in
combination. Likewise, processing strategies may include
multiprocessing, multitasking, parallel processing and the
like.
[0154] As shown, the computer system 400 may further include a
display unit 414, such as a liquid crystal display (LCD), an
organic light emitting diode (OLED), a flat panel display, a solid
state display, a cathode ray tube (CRT), a projector, a printer or
other now known or later developed display device for outputting
determined information. The display 414 may act as an interface for
the user to see the functioning of the processor 402, or
specifically as an interface with the software stored in the memory
404 or in the drive unit 406.
[0155] Additionally, the computer system 400 may include an input
device 416 configured to allow a user to interact with any of the
components of system 400. The input device 416 may be a number pad,
a keyboard, or a cursor control device, such as a mouse, or a
joystick, touch screen display, remote control or any other device
operative to interact with the system 400.
[0156] In a particular embodiment, as depicted in FIG. 4, the
computer system 400 may also include a disk or optical drive unit
406. The disk drive unit 406 may include a computer-readable medium
410 in which one or more sets of instructions 412, e.g. software,
can be embedded. Further, the instructions 412 may embody one or
more of the methods or logic as described herein. In a particular
embodiment, the instructions 412 may reside completely, or at least
partially, within the memory 404 and/or within the processor 402
during execution by the computer system 400. The memory 404 and the
processor 402 also may include computer-readable media as discussed
above.
[0157] The present disclosure contemplates a computer-readable
medium that includes instructions 412 or receives and executes
instructions 412 responsive to a propagated signal, so that a
device connected to a network 420 can communicate voice, video,
audio, images or any other data over the network 420. Further, the
instructions 412 may be transmitted or received over the network
420 via a communication interface 418. The communication interface
418 may be a part of the processor 402 or may be a separate
component. The communication interface 418 may be created in
software or may be a physical connection in hardware. The
communication interface 418 is configured to connect with a network
420, external media, the display 414, or any other components in
system 400, or combinations thereof. The connection with the
network 420 may be a physical connection, such as a wired Ethernet
connection or may be established wirelessly as discussed below.
Likewise, the additional connections with other components of the
system 400 may be physical connections or may be established
wirelessly.
[0158] The network 420 may include wired networks, wireless
networks, or combinations thereof. The wireless network may be a
cellular telephone network, an 802.11, 802.16, 802.20, or WiMax
network. Further, the network 420 may be a public network, such as
the Internet, a private network, such as an intranet, or
combinations thereof, and may utilize a variety of networking
protocols now available or later developed including, but not
limited to TCP/IP based networking protocols.
[0159] While the computer-readable medium is shown to be a single
medium, the term "computer-readable medium" includes a single
medium or multiple media, such as a centralized or distributed
database, and/or associated caches and servers that store one or
more sets of instructions. The term "computer-readable medium"
shall also include any medium that is capable of storing, encoding
or carrying a set of instructions for execution by a processor or
that cause a computer system to perform any one or more of the
methods or operations disclosed herein.
[0160] In a particular non-limiting, exemplary embodiment, the
computer-readable medium can include a solid-state memory such as a
memory card or other package that houses one or more non-volatile
read-only memories. Further, the computer-readable medium can be a
random access memory or other volatile re-writable memory.
Additionally, the computer-readable medium can include a
magneto-optical or optical medium, such as a disk or tapes or other
storage device to capture carrier wave signals such as a signal
communicated over a transmission medium. A digital file attachment
to an e-mail or other self-contained information archive or set of
archives may be considered a distribution medium that is a tangible
storage medium. Accordingly, the disclosure is considered to
include any one or more of a computer-readable medium or a
distribution medium and other equivalents and successor media, in
which data or instructions may be stored.
[0161] In an alternative embodiment, dedicated hardware
implementations, such as application specific integrated circuits,
programmable logic arrays and other hardware devices, can be
constructed to implement one or more of the methods described
herein. Applications that may include the apparatus and systems of
various embodiments can broadly include a variety of electronic and
computer systems. One or more embodiments described herein may
implement functions using two or more specific interconnected
hardware modules or devices with related control and data signals
that can be communicated between and through the modules, or as
portions of an application-specific integrated circuit.
Accordingly, the present system encompasses software, firmware, and
hardware implementations.
[0162] In accordance with various embodiments of the present
disclosure, the methods described herein may be implemented by
software programs executable by a computer system. Further, in an
exemplary, non-limited embodiment, implementations can include
distributed processing, component/object distributed processing,
and parallel processing. Alternatively, virtual computer system
processing can be constructed to implement one or more of the
methods or functionality as described herein.
[0163] Although the present specification describes components and
functions that may be implemented in particular embodiments with
reference to particular standards and protocols, the invention is
not limited to such standards and protocols. For example, standards
for Internet and other packet switched network transmission (e.g.,
TCP/IP, UDP/IP, HTML, HTTP, HTTPS) represent examples of the state
of the art. Such standards are periodically superseded by faster or
more efficient equivalents having essentially the same functions.
Accordingly, replacement standards and protocols having the same or
similar functions as those disclosed herein are considered
equivalents thereof.
[0164] The illustrations of the embodiments described herein are
intended to provide a general understanding of the structure of the
various embodiments. The illustrations are not intended to serve as
a complete description of all of the elements and features of
apparatus and systems that utilize the structures or methods
described herein. Many other embodiments may be apparent to those
of skill in the art upon reviewing the disclosure. Other
embodiments may be utilized and derived from the disclosure, such
that structural and logical substitutions and changes may be made
without departing from the scope of the disclosure. Additionally,
the illustrations are merely representational and may not be drawn
to scale. Certain proportions within the illustrations may be
exaggerated, while other proportions may be minimized. Accordingly,
the disclosure and the figures are to be regarded as illustrative
rather than restrictive.
[0165] One or more embodiments of the disclosure may be referred to
herein, individually and/or collectively, by the term "invention"
merely for convenience and without intending to voluntarily limit
the scope of this application to any particular invention or
inventive concept. Moreover, although specific embodiments have
been illustrated and described herein, it should be appreciated
that any subsequent arrangement designed to achieve the same or
similar purpose may be substituted for the specific embodiments
shown. This disclosure is intended to cover any and all subsequent
adaptations or variations of various embodiments. Combinations of
the above embodiments, and other embodiments not specifically
described herein, will be apparent to those of skill in the art
upon reviewing the description.
[0166] The Abstract of the Disclosure is provided to comply with 37
C.F.R. .sctn.1.72(b) and is submitted with the understanding that
it will not be used to interpret or limit the scope or meaning of
the claims. In addition, in the foregoing Detailed Description,
various features may be grouped together or described in a single
embodiment for the purpose of streamlining the disclosure. This
disclosure is not to be interpreted as reflecting an intention that
the claimed embodiments require more features than are expressly
recited in each claim. Rather, as the following claims reflect,
inventive subject matter may be directed to less than all of the
features of any of the disclosed embodiments. Thus, the following
claims are incorporated into the Detailed Description, with each
claim standing on its own as defining separately claimed subject
matter.
[0167] It is therefore intended that the foregoing detailed
description be regarded as illustrative rather than limiting, and
that it be understood that it is the following claims, including
all equivalents, that are intended to define the spirit and scope
of this invention.
* * * * *
References