U.S. patent application number 17/711115 was filed with the patent office on 2022-07-14 for system and method for providing futures contracts in a financial market enviroment.
The applicant listed for this patent is BGC PARTNERS, INC.. Invention is credited to Michael Sweeting.
Application Number | 20220222748 17/711115 |
Document ID | / |
Family ID | 1000006241978 |
Filed Date | 2022-07-14 |
United States Patent
Application |
20220222748 |
Kind Code |
A1 |
Sweeting; Michael |
July 14, 2022 |
SYSTEM AND METHOD FOR PROVIDING FUTURES CONTRACTS IN A FINANCIAL
MARKET ENVIROMENT
Abstract
A method for offering an asset in a financial environment is
provided that includes receiving a request to perform a selected
one of a purchasing and a selling operation for a futures contract.
The futures contract includes a first asset class having a first
value associated therewith and a second asset class having a second
value associated therewith. A price for the futures contract is
determined at least partially by the first and second values.
Inventors: |
Sweeting; Michael; (England,
GB) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
BGC PARTNERS, INC. |
NEW YORK |
NY |
US |
|
|
Family ID: |
1000006241978 |
Appl. No.: |
17/711115 |
Filed: |
April 1, 2022 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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13453548 |
Apr 23, 2012 |
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17711115 |
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13047127 |
Mar 14, 2011 |
8165943 |
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13453548 |
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10689185 |
Oct 20, 2003 |
7908193 |
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13047127 |
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Current U.S.
Class: |
1/1 |
Current CPC
Class: |
G06Q 40/04 20130101;
G06Q 40/00 20130101 |
International
Class: |
G06Q 40/04 20060101
G06Q040/04; G06Q 40/00 20060101 G06Q040/00 |
Claims
1. A method, comprising: receiving by at least one processor via a
communications network from respective computing devices a
plurality of requests to buy and to sell a futures contract,
wherein a buyer of the futures contract agrees to (i) buy one of a
plurality of assets from a first asset class underlying the futures
contract and (ii) buy one of a plurality of assets from a second
asset class underlying the futures contract at an expiration of the
futures contract, wherein a seller of the futures contract agrees
to (i) sell one of a plurality of assets from the first asset class
underlying the futures contract and (ii) sell one of a plurality of
assets from the second asset underlying the futures contract at the
expiration of the futures contract, wherein the first asset class
comprises fixed income bonds, wherein the second asset class
comprises credit default swaps issued on fixed income bonds, and
wherein the futures contract specifies: (i) a quantity of a fixed
income bond from the first asset class to be delivered at the
expiration of the futures contract, and (ii) a quantity of a credit
default swap from the second asset class to be delivered at the
expiration of the futures contract; and matching by the at least
one processor at least one of the requests to buy with at least one
of the requests to sell.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation of U.S. patent
application Ser. No. 13/453,548 filed Apr. 23, 2012, which is a
continuation of U.S. patent application Ser. No. 13/047,127 filed
Mar. 14, 2011 (now U.S. Pat. No. 8,165,943 issued Apr. 24, 2012),
which is a continuation of U.S. patent application Ser. No.
10/689,185 filed Oct. 20, 2003 (now U.S. Pat. No. 7,908,193 issued
Mar. 15, 2011), which are incorporated by reference herein in their
entireties.
TECHNICAL FIELD OF THE INVENTION
[0002] This invention relates in general to futures contracts and,
more particularly, to a system and method for providing a
cumulative asset class futures contract in a financial market
environment.
BACKGROUND OF THE INVENTION
[0003] Financial markets generally afford the opportunity for
investors to purchase an asset in order to achieve some degree of
profitability. Investment vehicles such as stocks, trusts, mutual
funds, pension funds, money markets, and bonds represent example
investment instruments that offer investors a choice for allocating
capital. One investment vehicle that has enjoyed sustained success,
increased notoriety, and the prospect for optimal yields is the
futures contract.
[0004] A futures contract is an agreement to buy or to sell a
specific quantity of some asset at some time in the future, whereby
the price of the asset is agreed upon at the time the agreement is
made. Any asset whose future price is uncertain is a candidate for
a futures contract. Example assets include government issued bonds,
corn, wheat, cotton, coffee, cocoa, pork bellies, gasoline, heating
oil, lumber, live cattle, gold, silver, yen, pounds, pesos, marks,
T-bills, Eurodollar CDs, or any other suitable asset or
commodity.
[0005] In any given marketplace, there are generally enough
consumers and producers who want to diminish the price uncertainty
(hedgers) and enough other traders willing to take on that risk
(speculators) in order for the futures contract to be successful,
i.e., worthwhile for the contract to be listed on a futures
exchange.
[0006] Unlike a stock, which represents equity in a company and an
asset that can be held for a long time, (if not indefinitely), a
futures contract generally has a finite life. A futures contract
can be used for hedging commodity price-fluctuation risks or for
taking advantage of price movements, rather than for the buying or
selling of the actual cash commodity. The word "contract" is used
to describe a futures arrangement because a futures contract
requires delivery of the commodity at a stated time in the future
unless the contract is liquidated before it expires.
[0007] A buyer of a futures contract (the party having a long
position) can agree on a fixed purchase price to buy the underlying
commodity (wheat, gold, or T-bills, for example) from the seller at
the expiration of the contract. The seller of a futures contract
(the party having a short position) can agree to sell the
underlying commodity to the buyer at expiration at the fixed sales
price. As time passes, the contract's value changes relative to the
fixed price at which the trade was initiated. This creates profits
or losses for the trader. In most cases, delivery associated with
the futures contract does not take place. Instead, both the buyer
and the seller, acting independently of each other, usually
liquidate their long and short positions before the contract
expires.
[0008] The endeavor of futures contracts is generally a zero-sum
equation. Futures contracts are marked to market daily. A futures
contract generally has no value when purchased or sold initially.
During a given trading day, as the price fluctuates, the futures
contract will take on value depending on whether the market price
rises or falls and whether the trader was long (bought the
contract) or short (sold the contract). Whatever gain or loss that
was achieved during the day is added to or subtracted from the
trader's account at the end of each trading day.
[0009] Futures trading is highly leveraged. For example, the price
change on a $1,000,000 Eurodollar CD can be controlled with a
margin of about only $700. These margins are not a down payment on
the contract. The margins are good faith deposits against an
adverse change in price. The loss on a futures contract can be much
greater than the margin. If the loss is greater than the funds in
the trader's account, the trader must put in more money. Such a
payment is normally triggered by a `margin call` issued by the
trading exchange.
SUMMARY OF THE INVENTION
[0010] Two components for any participant in a futures market are
liquidity and diversity. Liquidity refers to the ability to freely
buy and sell an asset in a given marketplace. Diversification
refers to the ability to offer a choice for investors such that
risk can be distributed among a host of investment vehicles.
Diversity spawns interest and helps protect an investor against
sharp marketplace fluctuations.
[0011] The non-homogeneous nature of most physical commodity and
financial markets, along with the market preferences for certain
types of grades of an underlying asset in a futures contract may
result in a physical delivery "squeeze" of the most favored asset
for delivery. If a particular standard or grade of a physical
commodity is the cheapest to store and deliver in a future
obligation, or if a specific bond or stock is clearly the cheapest
to deliver in a futures contract, then market participants can seek
to profit by controlling most of the market availability in that
particular asset to influence the price of the futures contract
with respect to the more general market for that asset class.
[0012] Accordingly, the ability to provide a futures contract that
is not subject to the possibility of a price squeeze for the
underlying cheapest to deliver asset presents a significant
challenge to anyone engaged in the endeavor of futures trading. It
is similarly challenging to provide such an investment vehicle that
would cover more than one asset class and, thereby, offer a more
diverse exposure to related underlying markets. Additionally, it
would be optimal if such a futures contract would not be subject to
artificial position limits applied to market participants.
[0013] From the foregoing, it may be appreciated by those skilled
in the art that a need has arisen for an improved investment
instrument that provides for enhances flexibility, liquidity, and
diversification for participating investors. In accordance with an
embodiment of the present invention, a system and a method for
offering one or more futures contracts in a financial market
environment are provided that substantially eliminate or greatly
reduce disadvantages and problems associated with conventional
investment approaches and instruments.
[0014] According to an embodiment of the present invention, a
method for providing a futures contract is offered that reflects a
multiple asset class investment instrument and includes receiving a
request to perform a selected one of a purchasing and a selling
operation for a futures contract. The futures contract includes a
first asset class having a first value associated therewith and a
second asset class having a second value associated therewith. A
price for the futures contract is determined at least partially by
the first and second values. A change in the first value due to a
cheapest to deliver parameter results in a change in the second
value.
[0015] According to another embodiment of the present invention, a
method for providing a futures contract is offered that reflects a
single asset class structure having multiple asset subclasses and
includes receiving a request to perform a selected one of a
purchasing and a selling operation for a futures contract. The
futures contract includes an asset class that includes a first
asset subclass having a first value associated therewith and a
second asset subclass having a second value associated therewith. A
price for the futures contract is determined at least partially by
the first and second values. A change in the first value due to a
cheapest to deliver parameter results in a change in the second
value.
[0016] Certain embodiments of the present invention may provide a
number of technical advantages. For example, according to one
embodiment of the present invention, an investment structure is
provided that allows potential investors to participate in an
investment instrument that reflects multiple asset classes or a
single asset class having multiple subclasses. The existence of
multiple delivery obligations reduces the chance of a delivery
squeeze at contract termination because no single instrument can
become clearly cheapest to deliver (CTD) by any appreciable margin.
Moreover, such an investment structure would avoid a single
security deliverable bias that may inhibit certain types of futures
contract arrangements.
[0017] Yet another advantage of an embodiment of the present
invention is increased liquidity. The investment vehicle provided
by the present invention offers a new hybrid asset that is
reflected by a cumulative multiple asset class or multiple subclass
configuration. This new configuration precludes market participants
from seeking to profit by controlling a majority of the market
availability in a particular asset in order to influence the price
of the futures contract with respect to the more general market in
that asset class or subclass. Such a monopoly strategy can inhibit
liquidity and is addressed by the proposed futures contract
structure.
[0018] Still another advantage associated with an embodiment of the
present invention is increased diversity. The asset classes for
delivery in a multiple asset class or multiple asset subclass
futures contract may be non-correlative. Thus, a broader market may
be represented by the futures contract. Previously, broader market
representation has been sought through cash settlement at
termination based upon the value of an index of the underlying
instrument prices. Due to the nature of traditional deliverable
futures contracts, any contract with a broad deliverable basket of
assets suffers from the accentuation of a CTD instrument, or from
the inability of a contract standard to deliver equivalent
valuations for differing asset classes. A cumulative asset class
futures contract has the ability to represent a wider underlying
market, while maintaining the principles of the underlying
instrument versus futures delivery price convergence.
[0019] Certain embodiments of the present invention may enjoy some,
all, or none of these advantages. Other technical advantages may be
readily apparent to one skilled in the art from the following
figures, description, and claims.
BRIEF DESCRIPTION OF THE DRAWINGS
[0020] To provide a more complete understanding of the present
invention and features and advantages thereof, reference is made to
the following description, taken in conjunction with the
accompanying figures, wherein like reference numerals represent
like parts, in which:
[0021] FIG. 1 is a simplified block diagram of an investment system
for providing a futures contract in a financial market environment
in accordance with an embodiment of the present invention;
[0022] FIG. 2 is a simplified block diagram of an example futures
contract in accordance with an embodiment of the present invention;
and
[0023] FIG. 3 is a flowchart illustrating a series of example steps
associated with a method for providing a futures contract in a
financial market environment.
DETAILED DESCRIPTION
[0024] Traditional futures contracts are either deliverable on a
single asset class or cash settled on an index of the prices of
multiple underlying instruments within an asset class. For example,
the standard thirty-year United States government bond futures
contract is based upon a notional thirty-year United States
government bond of six percent coupon and thirty-year maturity. A
Standard and Poors 500 futures contract is based upon an index
value of 500 underlying stocks (the S&P 500), and a Chicago
grain futures contract is based upon a particular grade of
corn.
[0025] Futures contracts that accept terminal delivery of the
underlying asset class allow for differing instruments in the
deliverable "basket" by conversion factors (in the case of
financial futures) or product grading factors (in the case of
commodities contracts). This allows for the notional standard of
the futures contract to be upheld upon delivery, while facilitating
the economic structure for physical delivery of the underlying
asset.
[0026] Although the conversion formulae facilitate physical
delivery, the non-homogeneous nature of most physical commodity and
financial markets, along with the market preferences for certain
types of grades of the underlying asset, sometimes results in a
physical delivery squeeze of the most favored asset for delivery.
If a particular standard or grade of a physical commodity is the
cheapest to store and deliver according to a future obligation, or
if a specific bond or stock is clearly the cheapest to deliver
(CTD) in a financial futures contract, then market participants can
seek to profit by controlling most of the market availability in
that particular asset to influence the value of the futures
contract with respect to the more general market for that asset
class.
[0027] FIG. 1 is a simplified block diagram of an investment system
10 for providing futures contracts in a financial market
environment. Investment system 10 comprises an exchange platform
12, a communications network 14, a buyer 16, and a seller 18.
Exchange platform 12 may include a futures module 20 and a price
reporting/dissemination element 22. Futures module 20 may include a
processor 24 and a memory element 28, which may store one or more
futures contracts 30. Exchange platform 12 may be coupled to a
clearing house 36.
[0028] In accordance with the teachings of the present invention,
investment system 10 facilitates the trading of futures contract
30. In traditional trading of futures contracts the underlying
asset is susceptible to being manipulated in price terms to affect
the "basis" price difference between futures contract 30 and the
underlying asset(s) at terminal delivery. Investment system 10
addresses such an issue by providing a cumulative investment
vehicle that includes multiple asset classes or multiple subclasses
within a single asset class. Investment system 10 may offer futures
contract 30 in any suitable financial marketplace, whereby futures
contract 30 provides for a hybrid deliverable instrument. The
underlying assets of futures contract 30 may extend across multiple
asset classes, or multiple subclasses, and may include a wide array
of investment opportunities as more fully detailed herein.
[0029] Single-security deliverables generally bear a bias that
inhibits their marketability. Moreover, single-security
deliverables suffer from deficient liquidity constraints and poor
diversity offerings. Investment system 10 addresses such
inadequacies by offering futures contract 30 that reflects an
amalgamation of underlying assets, which provide for a multiple
instrument delivery. The multiple asset class or multiple asset
subclass futures contract configuration is such that the multiple
underlying deliverable assets cumulatively make up the total
deliverable obligation.
[0030] Whereas traditional futures contracts allow different
instruments to be delivered as a block to fulfil a deliverable
obligation, futures contract 30 can stipulate that each asset
class, or subclass, forms a particular percentage of the total
contract. The cumulative value of the individual asset sectors
constitutes the aggregated value of futures contract 30. The
structure of such a hybrid investment instrument effectively widens
the appeal of futures contract 30 because instead of having, for
example, one basket of a given futures contract with four different
bonds, futures contract 30 may provide three baskets of four
different bonds. Thus, because all three baskets must be delivered,
squeezing one element will increase the implied price of the other
two. In order to attempt to profit from such a squeeze, a person
would have to squeeze all three baskets; such a strategy is cost
prohibitive and, generally, cannot be achieved within any sensible
financial risk-reward scenario.
[0031] In certain embodiments of the present invention, the
existence of multiple delivery obligations reduces the chances of a
delivery squeeze at contract termination because no one instrument
can become clearly cheapest to deliver by an appreciable margin. If
market participants choose to attempt to control any one CTD
obligation, the subsequent effect on futures contract 30 is a
change in the value paid for the other remaining obligations. If
the exchange delivery settlement prices (EDSP) paid at contract
termination are raised for the other sectors' delivery obligations,
then the result is to balance any losses resulting from the squeeze
in one sector with profits from the other sectors. Thus, in a
general sense, futures contract 30 offers a cumulative investment
vehicle that counterbalances the ill effects of a CTD
parameter.
[0032] The asset classes for delivery in a multiple asset class or
multiple asset subclass futures contract may be non-correlative.
Thus, a broader market may be represented by futures contract 30.
Previously, broader market representation has been sought through
cash settlement at termination based upon the value of an index of
the underlying instrument prices. Due to the nature of traditional
deliverable futures contracts, any contract with a broad
deliverable basket of assets suffers from the accentuation of a CTD
instrument, or from the inability of a contract standard to deliver
equivalent valuations for differing asset classes. A multiple asset
class futures contract structure has the ability to represent a
wider underlying market, while adhering to the principles of the
underlying instrument versus futures delivery price
convergence.
[0033] Note that as defined herein, asset class includes a broad
range of financial categories and may refer to any investment
sector such as government bonds, T-bills, corporate debt, credit
sector debt, pension funds, money markets, trusts, mutual fund
shares, stocks, Eurodollar CDs, corn, wheat, cotton, coffee, cocoa,
pork bellies, gasoline, heating oil, lumber, live cattle, gold,
silver, yen, pounds, pesos, marks or any other suitable bond,
commodity, currency or debt instrument. The term asset class may
also be inclusive of any other suitable investment class, category,
division or grouping in a financial market where appropriate and
based on particular needs. Subclasses with the asset class may
refer to any investment vehicle that could designated as belonging
to the group or gamily of its associated asset class. For example,
a German bond could represent a subclass of a fixed income
government bond asset class. In other cases, multiple grades or
standards within any given asset class or commodity may represent
subclasses. Thus, a particular grade of wheat would be a subclass
of the more generic asset class `wheat commodity.` It should be
appreciated that such designations and categorizations are flexible
and may be made in accordance with particular market scenarios and
investment arrangements. The designation of classes or subclasses
is adaptable and can be varied considerably, where appropriate,
such that futures contract 30 is capable of offering multiple
deliverables in an investment vehicle in order to address a
potential squeeze for a particular asset.
[0034] Deliverable bonds in traditional single asset class bond
futures contracts are generally subject to delivery price
adjustments by the futures exchanges on which they are traded.
Their values are adjusted by a series of conversion factors in an
attempt to equalize the economic status of each bond to fit
delivery into a notional contract standard. In practice, the
mathematics of conversion factor adjustments dictate that unless
the yield-to-maturity curve for the asset class is essentially a
flat horizontal line, one bond will often be clearly the cheapest
to deliver for a short position to fulfil physical delivery
obligations. Any other bond delivery would cost the futures short
participant more money to deliver in the delivery obligation.
[0035] For example, in September of 1998 and June of 1999 a squeeze
was exerted on the CTD German Government Bond ("Bund") underlying
the Deutsche Terminborse (OTB: now Eurex AG) Ten-year maturity
German Government bond futures contract. The CTD six percent coupon
(Jul. 4, 2007) maturity bond was bought heavily and locked away by
market participants in the cash markets and also borrowed heavily
in the repurchase (funding) markets for sell-back dates past the
futures delivery date. The resulting increase in value of the
September 1998 and June 1999 futures contracts, with respect to the
rest of the market, was so noticeable that it undermined the status
and market standard of the futures contract itself. The DTB was
forced to set artificial position limits on subsequent futures
contracts to avoid another squeeze. Futures market participants'
exposure in this contract was therefore narrowed to this particular
CTD bond, even when the futures contract standard was for a wider
selection of deliverable assets. Market participants hedging
underlying bond positions in these DTB (now Eurex AG) futures
contracts are also now subject to artificial position limits that
can curtail their hedging strategies. Such limits may also affect
the price of the futures contracts with respect to the underlying
assets in a seemingly arbitrary way upon invocation.
[0036] According to certain embodiments of the present invention,
the structure of futures contract 30 obviates such limitation
issues by providing a multiple asset class or multiple asset
subclass investment vehicle that cannot be squeezed. Insulation
from such a dilemma is provided for by multiple underlying
deliverable assets, which cumulatively make up the total
deliverable obligation.
[0037] Exchange platform 12 is a trading architecture that
facilitates the purchase and sale of one or more futures contracts
30. Exchange platform 12 is operable to receive and to process
requests associated with transactions relating to futures contract
30. Exchange platform 12 may be a computer, a server, a management
center, a single workstation, or a headquartering office for any
person, business, or entity that seeks to manage the trading of
futures contract 30. Accordingly, exchange platform 12 may include
any suitable hardware, software, personnel, devices, components,
elements, or objects that may be utilized or implemented to achieve
the operations and functions of an administrative body or a
supervising entity that manages or administers a trading
environment.
[0038] Exchange platform 12 may be owned and operated by any
suitable entity having the authority to operate in the distribution
of futures contracts. For example, exchange platform may be a
recognized futures exchange, such as the CX (representing the
Cantor Financial Futures Exchange) A connection may be present
between exchange platform 12 and any other futures exchange (e.g.
the Chicago Board of Trade (CBOT)), whereby information associated
with any transaction that is proposed by buyer 16 or seller 18 is
relayed to an appropriate exchange to consummate the transaction.
Thus, exchange platform 12 may operate as a proxy between buyer
16/seller 18 and a corresponding exchange that can record and
confirm a tendered purchase or sale of futures contract 30.
Alternatively and where authorized, exchange platform 12 may
perform such trade execution functions independently. Exchange
platform 12 may also deliver real-time financial data to buyer 16
or seller 18 in order to provide pertinent financial information to
be used to make decisions as to whether to purchase or to sell
futures contract 30. This relay of financial information may be
performed via price reporting/dissemination element 22 or any other
suitable element. Data, such as pricing information, asset class,
maturity data, historical quotes, or moving averages, for example,
may be provided to buyer 16 and seller 18. Other financial data may
also be readily delivered and based on particular needs. In order
to deliver information that is accurate and timely, price
reporting/dissemination element 22 may be coupled to a
corresponding futures exchange communications link that carries
such financial data. Alternatively, price reporting/dissemination
element 22 may gather such critical information from any
appropriate location (e.g. a server operable to deliver real-time
information to investors) such that the desired financial data is
delivered to buyer 16 or seller 18.
[0039] Communications network 14 is a communicative platform
operable to exchange data or information between buyer 16/seller 18
and exchange platform 12. Communications network 14 represents an
Internet architecture in a particular embodiment of the present
invention, which provides buyer 16 or seller 18 with the ability to
electronically execute trades or initiate transactions to be
delivered to an authorized exchange trading floor. Alternatively,
communications network 14 could be a plain old telephone system
(POTS), which buyer 16 or seller 18 could use to perform the same
operations or functions. Such transactions may be assisted by a
broker associated with exchange platform 12 or manually keyed into
a telephone or other suitable electronic equipment in order to
request that a transaction be executed. In other embodiments,
communications system 14 could be any packet data network (PDN)
offering a communications interface or exchange between any two
nodes in investment system 10. Communications network 14 may
alternatively be any local area network (LAN) I metropolitan area
network (MAN), wide area network (WAN), wireless local area network
(WLAN), virtual private network (VPN), intranet, or any other
appropriate architecture or system that facilitates communications
in a network or telephonic environment.
[0040] Buyer 16 and seller 18 are clients, customers, prospective
investors, or entities wishing to access or to initiate a
communication with exchange platform 12 to be delivered via
communications network 14. Alternatively, buyer 16 and seller 18
may represent any device or object that seeks to initiate a
communication on behalf of another entity or element, such as a
program, a database, or any other component, device, element, or
object capable of initiating a voice or a data exchange within
investment system 10. Data, as used herein in this document, refers
to any type of numeric, voice, or script data, or any other
suitable information in any appropriate format that may be
communicated from one point to another. In an example embodiment,
buyer 16 and seller 18 are investors interested in purchasing or
shorting futures contract 30. Buyer 16 and seller 18 may also be
simple seeking to review performance characteristics of futures
contract 30 or to ascertain specific details relating to the assets
contained therein.
[0041] Buyer 16 and seller 18 may each be provided with an end user
interface comprising a central processing unit (CPU). The end user
interface may be employed by either buyer 16 or seller 18 in order
to initiate transactions or to perform asset-monitoring functions
within investment system 10. Alternatively, such an end user
interface may be replaced with any other suitable interface or
object that facilitates communications between buyer 16, seller 18,
and any other element within investment system 10, such as: a
cellular telephone, an electronic notebook, a personal digital
assistant (PDA), or any other suitable device (wireless or
otherwise), component, or element capable of accessing one or more
elements within investment system 10. The end user interface may
also comprise any suitable interface for a human user such as a
display, a microphone, a keyboard, or any other appropriate
terminal equipment according to particular configurations and
arrangements. In addition, the end user interface may be a unique
element designed specifically for communications involving the
purchase or sale of futures contract 30. Such an element may be
fabricated or produced specifically for financial applications
involving buyer 16 and seller 18.
[0042] Futures module 20 includes processor 24 and memory element
28 in accordance with one example embodiment of the present
invention. Futures module 20 is operable to receive requests from
buyer 16 or seller 18 and to process those requests such that
financial transactions involving futures contract 30 may be
performed. Futures module 20 may have a link or a connection to a
futures market trading floor, or some other suitable coupling to
any suitable element that allows for such transactions to be
consummated. The resultant futures contract 30 that is formulated
may be suitably stored in memory element 28 after being properly
managed and secured by processor 24. Processor 24 may also assist
in processing any financial terms or conditions (e.g. desired
interest rate, type of asset class, etc.) requested by buyer 16 or
seller 18. In cases where futures module 20 is unable to match the
requested financial parameters or tendered contract terms provided
by buyer 16 or seller 18 with that which is available in the
trading marketplace, futures module 20 may contact buyer 16 or
seller 18 and notify either of the circumstances surrounding the
inability to fulfill such an order.
[0043] It should be noted that the internal structure of futures
module 20 is malleable and can be readily changed, modified,
rearranged, or reconfigured in order to achieve its intended
operations. Accordingly, futures module 20 may be equipped with any
suitable component, device, application specific integrated circuit
(ASIC), hardware, software, processor, algorithm, read only memory
(ROM) element, random access memory (RAM) element, erasable
programmable ROM (EPROM), electrically erasable programmable ROM
(EEPROM), or any other suitable object that is operable to
facilitate the operations of futures module 20. Considerable
flexibility is provided by the structure of futures module 20 in
the context of investment system 10. Thus, it can be easily
appreciated that futures module 20 could be readily provided
external to exchange platform 12 such that communications involving
buyer 16 and seller 18 could still be accommodated and handled
properly. In other embodiments, futures module 20 could perform one
or more of the tasks provided by price reporting/dissemination
element 22 such that accurate pricing information and other
relevant financial data could be adequately communicated to buyer
16 and seller 18.
[0044] In an alternative embodiment, communications network 14
and/or futures module 20 may be replaced entirely or partially with
a person, providing a human interface to a corresponding futures
trading exchange. In such an embodiment, an agent of exchange
platform 12 or any other suitable person or representative may be
contacted by buyer 16 or seller 18 (e.g. via the telephone, a
network, other suitable electronic equipment, or directly by word
of mouth). The agent or representative may receive a request from
buyer 16 or seller 18 to execute some transaction involving futures
contract 30. The agent or representative may then proxy or broker
the request to an appropriate futures trading floor for execution
of the transaction. The agent or representative may then record the
transaction once it has been consummated and contact buyer 16 or
seller 18 to confirm that the transaction has been executed. A
receipt may then be issued to buyer 16 or seller 18 indicating the
terms of futures contract 30.
[0045] Clearing house 36 is an element that cooperates with
exchange platform 12 in order to ensure a fair and proper execution
of transactions and trades initiated by buyer 16 or seller 18.
Futures exchanges generally have a clearing association (i.e.
similar to clearing house 36), which operates in conjunction with
the futures exchange in a manner similar to a bank clearing house.
Membership in the clearing association is generally composed of
well-capitalized members of the exchange and corporations or
partnerships, one of whose officials is often an exchange member.
Exchange members who do not join the clearing association can clear
their trades through a member of the association. Each member of
clearing house 36 allocates fixed original margins and maintains
them with clearing house 36 in the event of adverse price
fluctuations. In such instances, clearing house 36 may call for
additional margins throughout the day without waiting for a routine
end-of-day settlement.
[0046] In operation of an example embodiment of futures contract
30, such an investment vehicle may be applied to a particular
credit sector. If a traditional futures contract was based upon a
standard of four to five-and-one-half year maturity of United
States corporate debt from issuers of a certain type or of a
certain S&P and/or Moody's credit standard, then a particular
CTD issue for the contract would likely result. Trading
opportunities in the contract would also be present from both new
corporate issues qualifying for the contract delivery and from
issue ratings upgrades or downgrades from the ratings agencies. Due
to the smaller outstanding issue size of many corporate bond
issues, the likelihood of a squeeze on the CTD would be
accentuated.
[0047] Using futures contract 30 such a squeeze can be effectively
avoided, whereby the deliverable bond standard is expanded along
with the asset classes deliverable in futures contract 30. A
cumulative five-year maturity asset futures contract structure is
implemented in futures contract 30 and based on a four to
five-and-one-half year maturity deliverable instruments standard
for senior debt obligations and five-year maturity derivative
contracts issued by/on a particular corporate sector. For example,
a telecom credit futures contract may consist of World Telecom
companies (such as France Telecom, British Telecom, Deutsche
Telecom, Verizon, Vodafone, Nokia, ATT, etc.). Such a configuration
could take the form, for example, of 50% corporate telecom bonds
(of a certain minimum size outstanding) and 50% corporate telecom
Credit Default Swaps (CDS) using reference obligations sourced from
the first two categories. Note that in this example, futures
contract 30 represents a multiple asset structure, whereby fixed
income bonds represents the first asset class (making up 50% of
futures contract 30) and the CDSs represent the second asset class
(also making up 50% of futures contract 30).
[0048] The pricing methodology for futures contract 30 in this
example may be provided in basis points per annum. The bond portion
of futures contract 30 may be represented by a basis points spread
difference of the yield to maturity of the six percent coupon
(five-year maturity) delivery standard. This is with reference to
the United States fixed rate achievable for funds for five years,
in exchange for floating rate payments every six months at each
six-month United States London Inter-Bank offered rate as re-fixed.
Using a par-par asset swap structure and the basis points over
Libor standard for fixed income asset pricing, the bond sector
deliverables may be priced as a basis-points-per-annum yield spread
that the bond effectively pays over this five-year
fixed-for-floating Libor rate.
[0049] On delivery of a bond from the delivery basket into a future
short position, the delivery price (in the notional six percent
five-year futures example) of that bond may be calculated by: 1)
ascertaining a traditional bond futures price for a six percent
coupon five-year maturity standard bond from the "yield spread over
Libor" EDSP of futures contract 30, and the five-year International
Swaps and Derivatives Association (ISDA) United States
fixed-for-floating rate of that day (standard asset swap structure
calculations may be performed by using the ISDA fixing rates for
the whole fixed-for-floating rate yield curve up to five-year
maturity on the futures delivery day); and 2) applying a standard
futures conversion factor algorithm to adjust the value paid for a
delivered bond to that ascertained above for the six percent
five-year notional futures.
[0050] The CDS half of futures contract 30 may be represented by
basis points per annum of the five-year United States nominal CDS
contract, as paid by a protection buyer (futures short position) to
the protection seller (futures long position) on any of the
underlying basket's corporate entities. When delivery of the CDS
half of futures contract 30 is executed, a futures short may buy
five-year CDS protection from an opposing long counterparty. This
may be done for the designated reference entity he chooses,
agreeing to pay the futures long counterparty the EDSP basis points
per annum on the notional amount "in delivery."
[0051] As CDS contracts may be counterparty credit sensitive, a
cash settlement option (at the current CDS market price as polled
by the facilitating futures exchange in the CDS marketplace) may be
exercisable by the short futures participant, in the event that the
long (to which he--has been matched in the delivery process) has
either: a) a closely correlated credit perception with the
reference entity used in the CDS delivery process (for example, the
buyer is British Telecom Treasury with the deliverable reference
entities all being Telecom companies, and the CTD potentially is
British Telecom itself), orb) there exists, at the time of
delivery, a bilateral credit restriction between the two
counterparties that would stop the contract being written.
[0052] In cases where it is likely that a CTD instrument for the
deliverable basket would be identified for the bond (or syndicated
loan) asset class baskets of deliverable debt obligations, the
nature of the CDS asset class is such that these derivatives can be
created between counterparties at will. Note that any rise in the
futures price due to a squeeze on an underlying bond or syndicated
loan would manifest a higher price paid on terminal delivery for
the underlying CDS asset class sector. This would create an
incentive for market participants to sell futures contract 30 in
order to deliver CDS contracts (exchange a yearly basis points fee
for credit protection on the reference entity) at an advantageous
arbitrage against their short position.
[0053] This futures contract 30 delivery reflects CDS contracts
where the futures short market participant has agreed to buy, at
the futures terminal delivery date, protection against default of
the reference entity (and is, thus, paying money) for as long as
the reference entity is not in default. When in default, the holder
could "put" the reference entity asset at par value to the credit
protection seller. The price difference between a CDS and the
par-par asset swap price of the underlying entity reference
obligations is referred to as the "basis," and is an
often-arbitraged spread trade amongst professional market
participants. Futures contract 30 in this example, therefore, also
reflects this "basis" in its pricing methodology.
[0054] It is again noteworthy to identify that the above example
implementation of the hybrid structure of futures contract 30 is an
example embodiment of the invention used only for purposes of
discussion and teaching. Futures contract 30 may be applied to a
host of other asset classes and inclusive of, for example, total
return swaps, convertible bonds, subordinated debt, equity,
syndicated loans, futures contracts provided across currency
sectors to enable cross currency baskets of the same asset class
(e.g. G7: ten year bonds from the seven main economies of the
world), or other cross currency debt obligations from multiple
countries.
[0055] For example, in another embodiment, the futures contract
employs deliverable bond obligations of a ten-year maturity from
each of a group of three major economies (e.g., Germany, United
States, and Japan). The contract's three deliverable baskets thus
span across currency sectors to enable cross-currency baskets of
the same asset class (e.g., the group of three main economies'
ten-year fixed income bonds). Thus, the contract has not only an
interest rate component, but also a foreign exchange component. The
futures contract of this embodiment is preferably based upon a
deliverable standard of 8.5-to-10.5-year maturity bonds, with a
nominal six percent coupon contract standard. A conventional
conversion factor approach may also be used to attempt to equalize
the deliverability of each qualifying bond in each of the three
currency baskets. Each basket is delivered in its own currency of
origin. The final contract value as delivered is made up of the
bonds delivered. Any foreign exchange changes from inception of a
futures position to delivery date are inherent in the contract. For
the same reasons as those discussed above, the contract is far less
susceptible to CTD squeezes.
[0056] FIG. 2 is a simplified block diagram of an example futures
contract 30. Futures contract 30 represents the legal instrument
that may be used to bind buyer 16 or seller 18 to a stipulated
agreement. Futures contract 30 may take any appropriate form such
as a written document, an e-mail, a facsimile message, a computer
display, an entry in an account, or a verbal agreement between two
parties. Futures contract 30 provides considerable flexibility in
its terms, representations, and stipulations. In general, any
information or data that may be germane or of interest to a futures
contract participant may be included in futures contract 30,
provided that the included terms are mutually agreeable to the two
(or more) parties bound by futures contract 30.
[0057] In one embodiment, used for purposes of teaching and example
only, futures contract 30 includes a listing of asset classes, or
subclasses, which are to be included in the agreement. In the
example provided, the asset subclasses are listed numerically and
represent a German government bond, an Italian government bond, and
a French government bond. Note that in this example, the German,
Italian, and French bonds are subclasses within a single asset
class. The asset subclasses would be part of a single asset group,
namely fixed income government bonds. Each row that lists the asset
subclass includes a maturity parameter, a percentage rate being
offered by the bond, and a price associated with one block of the
asset, which may be determined by an administrator of futures
module 20 or a trading exchange.
[0058] Futures contract 30 may also include a number of additional
provisions, stipulations, or conditions, which may include items
such as settlement terms 40, delivery terms 50, exchange fees 60,
limitations 70, and miscellaneous items 80. A myriad of other
potential segments may be provided within futures contract 30, as
the embodiment of FIG. 2 represents simply one example arrangement
of futures contract 30. Such variations may be based on the
particular needs of the parties implicated by futures contract
30.
[0059] In accordance with the example implementation of FIG. 2,
futures contract 30 represents an agreement to purchase long-term
debt, carrying a notional six percent coupon for bullet
(non-callable non-putable) Euro Government debt for Germany,
France, and Italy. These debt instruments are provided in this
example with a maturity range between twenty-five and thirty-five
years.
[0060] Settlement terms 40 may include information relating to
contract size (e.g. EUR 100,000). Short positions at expiration may
be required to deliver domestic government bonds issued by Germany,
France, and Italy at delivery and a minimum issued size, for
example, of Euro ( ) 3 billion. In this example embodiment, each
delivery comprises a third of each deliverable country sector debt,
with a tolerance (for example) of up to +/-1%. Settlement terms 40
may also include a quotation, reflecting a percentage of par value
to two decimal places.
[0061] Another term that could be included in settlement terms 40
is any provision relating to the last available trading day. In one
example, three exchange trading days prior to the delivery day of
the relevant month could be provided for futures contract 30.
Trading in futures contract 30 for the delivery month could cease
at 11:30 AM (CET). Daily settlement prices could also be accounted
for in settlement terms 40. An appropriate algorithm could be used
to offer a volume-weighted average price of the last five minutes
of the day. If more than ten trades have occurred during the final
minute of trading, then the volume-weighted average price of all
trades that occurred during that last minute could be used. If
realistic market conditions are deemed not to have been observed,
then an administrator of the futures exchange can establish the
settlement price according to current market values of the
underlying cash bonds.
[0062] Delivery terms 50 may include information relating to the
delivery day associated with futures contract 30. For example, the
10th calendar day of the delivery month may be designated as the
delivery day. Delivery months could also be specified by delivery
terms 50 and provided, for example, as the three successive months
within the cycle March, June, September, and December. Delivery
notification could also be accounted for, where open short
positions would notify the proper entity of the debt instruments,
they will deliver by the end of trading on the last trading day in
that delivery month. The delivery process could also be specified
in delivery terms 50. For example, Euroclear delivery versus
payment on the delivery day could be designated. Delivery failures
could allow a futures exchange to enforce delivery of another bond
of that country sector. If another bond is unavailable, the sector
immediately above in credit perception could be used. The futures
exchange could allocate penalties, or compensations, to apply in
the absence of bond substitution availability.
[0063] Delivery settlement price could be accounted for in delivery
terms 50 using an algorithm that offers a volume-weighted average
price of the last five minutes of the day. If more than ten trades
have occurred during the final minute of trading, then the
volume-weighted average price of all trades that occurred during
that last minute can be used. If realistic market conditions are
deemed not to have been observed (i.e. if no bids and offers were
present in the last five minutes), an authoritative entity could
establish the stock price via a median price polling algorithm of
the underlying cash bonds using information provided by market
practitioners.
[0064] Exchange fees 60 may include information relating to
conversion factors, for example, stipulating that the price of the
bond (at 6.00% yield-to-maturity) on the designated delivery day.
Italian government bonds (also referred to as "BTPs") could use the
Bloomberg Market Standard annualized true gross yield to price
calculation for their conversion factors. Exchange terms may also
include payment stipulations for allocations made the day after the
last day of trading. Actual exchange fees may be provided, for
example, on a per lot basis.
[0065] Limitations 70 may include information relating to items
such as margining requirements. For example, an initial margin
having a designated amount per contract may be provided. Normal
variation margin procedures may be implemented and in accordance
with clearing house 36 procedures and guidelines. Daily price limit
guidelines may also be provided for within limitations 70 or
designated as infinite in other scenarios. Position limits may also
be accounted for in limitations 70.
[0066] Miscellaneous items 80 may include any other suitable
information chosen or selected by buyer 16, seller 18, or an
administrator of exchange platform 12. For example, trading hours
and vacation days could be specified in such a section. Other
information provided in miscellaneous items 80 may be offered where
appropriate and based on particular needs.
[0067] Note that the example embodiments described above can be
replaced with a number of potential alternatives where appropriate.
The configurations discussed herein only offer some of the numerous
potential applications of futures contract 30. Any number of
additional structures may also be readily accommodated by futures
contract 30. One such example structure could include thirty-year
United States treasury bonds, thirty-year United Kingdom government
gilt bonds, thirty-year French government bonds, thirty-year German
government bonds, thirty-year Japanese government bonds, etc.
(providing for a G7 (the group of seven industrial nations)
architecture. Thus, a basket of different currency bonds may be
provided for in a single futures contract 30. In other scenarios,
futures contract 30 may include mutual fund shares in combination
with stock securities and corporate debt. Any number of
combinations, permutations, and groupings of asset classes or asset
subclasses may be implemented in accordance with the teachings of
futures contract 30.
[0068] FIG. 3 is a simplified flowchart illustrating a series of
example steps associated with one implementation of investment
system 10. The example of FIG. 3 references a futures contract 30,
which is a multiple asset class investment instrument that may be
electronically traded. In such an implementation, futures contract
30 is made up of three constituent asset subclasses of European
debt of a maturity of thirty years at the time of contract
expiration. Futures contract 30 may also have a traditional
notional six percent coupon. While the deliverable bonds are
sourced from European debt, there may be three deliverable sectors
within the one futures contract 30 that are utilized for delivery.
Thus, at step 100 a buyer may initiate a request to purchase
futures contract 30 (i.e. a long position) in hopes that its
underlying asset structure appreciates. Rather than allowing one
deliverable bond, sourced from the three different eligible country
debt classes, a bond from each country sector may be delivered as
the terminal delivery obligation associated with futures contract
30.
[0069] In this example scenario, it is presumed that the Italian
sector tends to be the higher yielding sector due to an impaired
credit perception of Italy, as it relates to Germany and France. A
traditional futures contract based upon these three market sectors
would exhibit the Italian bond of the shortest duration as clearly
the CTD bond in a normal upwardly sloping yield curve, which would
enhance the possibility of a squeeze on this underlying CTD bond.
This would have the effect of reducing liquidity/participation
characteristics of the market.
[0070] At step 102, a request may be communicated from buyer 16 to
exchange platform 12, the request traversing communications network
14. At step 104, the request may be received by futures module 20,
which may attempt to match the proposed terms with an available
futures contract 30 that satisfies the request. Note that because
futures contract 30 is based upon three deliverable sectors, and
all three delivery obligations are performed by market participants
at contract termination. Squeezing the Italian sector CTD would
have the effect of also increasing the price paid for the German
and French sector CTDs. Futures short position participants have
the ability to balance delivery losses associated with purchasing
highly priced Italian CTD bonds with delivery profits associated
with purchasing relatively lower priced German and French CTD
bonds, relative to the futures contract price that reflects all
three sectors at once.
[0071] If a futures long market participant chose to squeeze
futures contract 30, they would need to buy all three sector CTDs
in considerable size to do so. The effect of buying just one sector
is negated by a higher price on delivery of the other two. The
total outstanding amounts of the deliverable bonds is their
cumulative outstanding amounts, making it more difficult to corner
any particular futures delivery, and also allowing representation
of a broader range of thirty-year European government debt.
[0072] At step 106, buyer 16 may be duly authenticated by an
administrator of exchange platform 12 such that he is approved for
the proffered transaction. The request may then be sent to a
futures trading exchange to consummate the proposed transaction at
step 108. Alternatively, exchange platform 12 may execute such a
transaction in cases where it is authorized to do so. At step 110,
a confirmation of the execution of the transaction may be received
and forwarded to buyer 16. Buyer 16 may then maintain his long
position in futures contract 30 until buyer 16 opts to exit futures
contract 30 by selling the asset. Settlement terms may be reached,
and a price agreed upon as described above with reference to FIG.
2, whereby various protocols may be used to determine such
elements.
[0073] Note that the raising in price of one sector CTD allows
another bond within that sector to come into play as a deliverable
possibility. If one CTD Italian bond is squeezed, and the price of
the bond relative to the rest of the market rises, then the price
of futures contract will rise to the point where the next cheapest
to deliver bond for that sector becomes more of an economic
possibility. This is due in part to the profits that become
accumulated in the other two country sector deliveries, whereby the
futures price is measurably higher and no longer reflects a fair
value of the three sector CTDs.
[0074] As described above, the elements and operations listed in
FIGS. 1 and 3 may be achieved with use of investment system 10 in
any number of contexts and applications. Accordingly,
communications capabilities, data processing features and elements,
suitable infrastructure, adequate personnel and management, and any
other appropriate software, hardware, or data storage objects may
be included within investment system 10 to effectuate the tasks and
operations of the elements and activities associated with futures
contract 30. Accordingly, FIG. 1 provides only one example of a
suitable processing and communications platform from which futures
contract 30 may be traded.
[0075] Although the present invention has been described in detail
with reference to particular embodiments in FIGS. 1-3, it should be
understood that various other changes, substitutions, and
alterations may be made hereto without departing from the sphere
and scope of the present invention. For example, although the
preceding FIGS. have referenced a number of bond structures that
serve as a basis for futures contract 30, any suitable financial
instruments, debts, securities, stocks, or commodities may be
readily substituted for such bonds and, similarly, benefit from the
teachings of the present invention.
[0076] Additionally it should be noted that although the example
embodiments have described an example trading exchange platform 12,
any suitable entity could facilitate transactions involving futures
contract 30. For example, private entities that are authorized to
trade in futures may readily implement such a financial
architecture without departing from the teachings of investment
system 10. In still other scenarios, numerous other participants
could be included within the rubric of buyer 16 and seller 18. For
example, pension fund representatives, shareholders, mutual fund
managers, and any other appropriate investing entity may
participate in such a futures market.
[0077] Numerous other changes, substitutions, variations,
alterations, and modifications may be ascertained to one skilled in
the art and it is intended that the present invention encompass all
such changes, substitutions, variations, alterations, and
modifications as falling within the spirit and scope of the
appended claims. In order to assist the United States Patent and
Trademark Office (USPTO) and additionally any readers of any patent
issued on this application in interpreting the claims appended
hereto, Applicant wishes to note that the Applicant: (a) does not
intend any of the appended claims to invoke paragraph six (6) of 35
U.S.C. section 112 as it exists on the date of filing hereof unless
the words "means for" or II step for" are specifically used in the
particular claims; and (b) does not intend by any statement in the
specification to limit his invention in any way that is not
otherwise reflected in the appended claims.
* * * * *