Risk Management Contracts and Method and Apparatus for Trading Same

• US 20070233594A1
• Filed: 05/13/2005
• Published: 10/04/2007
• Est. Priority Date: 05/14/2004
• Status: Active Grant

• Current Assignee: North American Derivatives Exchange, Inc. (IG Group Holdings PLC)
• Original Assignee: North American Derivatives Exchange, Inc. (IG Group Holdings PLC)
• Inventors: Nafeh, John
• Granted Patent: US 7,693,778 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

Key features of these methods, apparatus, and designs include (but are not limited to) innovations and implementations of futures securities custom tailored to specific clienteles; the notion of using one or more variable pay-out futures contracts as devices for hedging; the notion of hedging contracts having variable pay-outs; the notion of variable payout hedging contracts having limited exposure; the notion of freezing assets of an originator of an order to buy or sell a variable pay-out contract sufficient to cover a maximum exposure of the contract; the notion of determining whether an originator of an order to buy or sell a variable pay-out contract has assets sufficient to cover the contract at the time of placing the order; the notion of determining whether an originator of an order to buy or sell a variable pay-out contract has assets sufficient to cover the contract immediately before fulfilling the order and charging a penalty to an originator of an order to buy or sell a variable pay-out contract who does not have assets sufficient to cover the contract.

Claims

1. A method of creating an efficient market for sharing risk, the method comprising the steps of:

establishing a computer-network based contract trading system electronically accessible by prospective traders;

selling, over said trading system, variable pay-out contracts;

subsequent to a sale of said variable pay-out contracts, accepting for resale over said trading system, any of said contracts;

reselling, over said trading system, accepted contracts;

settling said contracts; and

assessing a fee therefore.

2. The method of claim 1, wherein the step of establishing a computer-network based contract trading system electronically accessible by prospective traders includes establishing a computer-network based contract trading system electronically accessible by prospective traders via at least the internet.

3. The method of claim 2, further comprising providing a user interface that allows prospective traders to access said contract trading system includes providing a world-wide-web user interface.

4. The method of claim 3, wherein said user interface allows only predetermined computer-network users to view information about contracts and contracts for sale on said trading system.

5. The method of claim 1, wherein the variable pay-out contract is based on an indicator that may vary over a range of values, and the pay-out is based on a difference between the value of the indicator and a predetermined target value.

6. The method of claim 5, wherein the difference is determined upon the occurrence of a predefined event.

7. The method of claim 6, wherein the predefined event is a predetermined date and time.

8. The method of claim 6, wherein the variable pay-out contract includes a predefined upper and lower limit for the indicator and the predefined event is the indicator violating either the upper or lower limit.

9. In a computer-based contract trading system to enable the formation, sale, resale and settlement of risk management contracts, the system comprising:

a communications interface for sending and receiving data;

processor apparatus for executing processing modules;

a first processing module for receiving data to define a desired contract for a predetermined phenomenon, the phenomenon having an outcome at a time of maturity;

a second processing module, responsive to said first processing module, for generating a specific contract based on said received data, said contract comprising a contract that pays-out a value responsive to a difference between a value of a predetermined indicator at maturity and a predetermined target value of said indicator;

a third processing module for offering for sale and for selling said specific contract to a trader;

a fourth processing module for accepting for resale from a trader and for reselling on behalf of said trader said previously sold contracts;

a fifth processing module for accepting contracts for settlement thereof; and

a sixth processing module for assessing a fee therefore.

10. The computer-based contract trading system of claim 9, further comprising a seventh module for matching offers for the sale of a contract with offers to purchase a contract.

11. The computer-based contract trading system of claim 10, further comprising an eighth module that determines whether a trader of a matched offer to buy or sell a contract has sufficient assets for the sale or purchase.

12. The computer-based contract trading system of claim 11, wherein the eighth module makes the determination when an order to purchase or sell a contract is submitted to the computer-based contract trading system.

13. The computer-based contract trading system of claim 11, wherein the eighth module makes the determination when said seventh module identifies a possible match.

14. A computer-based contract trading system for the formation, sale, resale and settlement of variable pay-out hedging contracts, the system comprising:

a communications interface for sending and receiving data, including trading instructions from traders;

a processor system for executing processing modules;

a first processing module for receiving data to define a desired contract having a value at a time of maturity determined by a difference between a value of an predefined indicator at the time of maturing and a target value selected at contract formation;

a second processing module, responsive to said first processing module, for defining a contract based on said received data;

a third processing module for offering for sale and for selling a plurality of said contracts to traders;

a fourth processing module for accepting orders to trade one or more of said contracts;

a fifth processing module for determining whether an originator of an order to trade one or more of said contracts is able to perform the order;

a sixth processing module for matching an order to sell said contracts with orders to purchase said contracts; and

a seventh processing module for settling contracts at maturity thereof.

15. The computer-based contract trading system in accordance with claim 14, wherein the fifth processing module makes the determination when an order is submitted to the computer-based contract trading system.

16. The computer-based contract trading system in accordance with claim 15, wherein the assets of an originator of an order are frozen at the time the determination is made so as to ensure the assets are available to satisfy the order should it be matched with a corresponding order by the sixth processing module.

17. The computer-based contract trading system in accordance with claim 16, wherein the difference between the value of an predefined indicator and the target value are capped and the assets frozen such that their value is equal to a maximum exposure determined by said capped difference.

18. The computer-based contract trading system in accordance with claim 14, wherein the fifth processing module makes the determination when the sixth processing module has identified a possible match between an order to sell a contract and an order to buy a contract.

19. The computer-based contract trading system in accordance with claim 18, wherein the sixth processing module submits matched orders to buy and sell said contracts to the seventh processing module responsive to the determination of the fifth processing module.

20. The computer-based contract trading system in accordance with claim 19, wherein the sixth processing module cancels orders if the fifth processing module determines that an originator of the order does not have sufficient assets to complete the order.

21. The computer-based contract trading system in accordance with claim 18, wherein the originator of an order canceled because of insufficient assets is charged a penalty.