SYSTEM AND METHOD FOR MULTI-FACTOR MODELING, ANALYSIS AND MARGINING OF CREDIT DEFAULT SWAPS FOR RISK OFFSET

• US 20100017345A1
• Filed: 09/15/2009
• Published: 01/21/2010
• Est. Priority Date: 01/07/2005
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: HADI, MOHAMMED, Patel, Ketan B., Koblas, Michal, Glinberg, Dmitriy
• Granted Patent: US 8,103,578 B2
• Time in Patent Office: Days
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• 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

A system and method for determining a margin requirement associated with a plurality of financial instruments within a portfolio is disclosed. The system and method include receiving a plurality of data associated with the plurality of financial instruments within the portfolio, determining a systematic risk margin based on at least a portion of the received plurality of data, determining a curve risk margin based on at least a second portion of the received plurality of data, determining a convergence and divergence risk margin based on at least a third portion of the received plurality of data, determining a sector risk margin based on at least a fourth portion of the received plurality of data, determining an idiosyncratic risk margin based on at least a fifth portion of the received plurality of data, determining a liquidity risk margin based on at least a sixth portion of the received plurality of data, determining a basis risk margin based on at least a seventh portion of the received plurality of data, and calculating a multi-factor risk margin based on one more of the determined risk factors.

Claims

1. A method for determining a margin requirement associated with a plurality of financial instruments within a portfolio, the method comprising:

receiving a plurality of data associated with the plurality of financial instruments within the portfolio;

determining a systematic risk margin based on at least a portion of the received plurality of data;

determining a curve risk margin based on at least a second portion of the received plurality of data;

determining a convergence and divergence risk margin based on at least a third portion of the received plurality of data;

determining a sector risk margin based on at least a fourth portion of the received plurality of data;

determining an idiosyncratic risk margin based on at least a fifth portion of the received plurality of data;

determining a liquidity risk margin based on at least a sixth portion of the received plurality of data;

determining a basis risk margin based on at least a seventh portion of the received plurality of data; and

calculating a multi-factor risk margin based on one more of the determined risk factors.

2. The method of claim 1, wherein at least one of the plurality of financial product comprises a credit derivative.

3. The method of claim 2, wherein the credit derivative comprises a credit default swap.

4. The method of claim 1, wherein calculating a multi-factor risk margin including summing a systematic risk margin, a curve risk margin, a convergence and divergence risk margin, a sector risk margin, an idiosyncratic risk margin, a liquidity risk margin, and a basis risk margin.

5. A method for determining a margin requirement associated with a plurality of financial instruments within a portfolio, the method comprising:

receiving a plurality of data associated with the plurality of financial instruments within the portfolio;

determining a systematic risk margin based on at least a portion of the received plurality of data;

determining a sector risk margin based on at least a fourth portion of the received plurality of data; and

calculating a multi-factor risk margin based on one more of the determined risk factors.

6. The method of claim 5 further comprising:

determining a curve risk margin based on at least a second portion of the received plurality of data.

7. The method of claim 5 further comprising:

determining a convergence and divergence risk margin based on at least a third portion of the received plurality of data.

8. The method of claim 5 further comprising:

determining an idiosyncratic risk margin based on at least a fifth portion of the received plurality of data.

9. The method of claim 5 further comprising:

determining a liquidity risk margin based on at least a sixth portion of the received plurality of data;

determining a basis risk margin based on at least a seventh portion of the received plurality of data; and

10. The method of claim 5, wherein at least one of the plurality of financial product comprises a credit derivative.

11. The method of claim 10, wherein the credit derivative comprises a credit default swap.

12. The method of claim 5, wherein calculating a multi-factor risk margin including summing a systematic risk margin, a curve risk margin, a convergence and divergence risk margin, a sector risk margin, an idiosyncratic risk margin, a liquidity risk margin, and a basis risk margin.

13. A system for managing risk associated with a portfolio of financial instruments traded on an exchange, the system comprising:

a processor;

a memory in communication with the processor, the memory configured to store a program logic, wherein the program logic is executable on the processor and is configured to;

receive a plurality of data associated with the plurality of financial instruments within the portfolio;

determine a systematic risk margin based on at least a portion of the received plurality of data;

determine a sector risk margin based on at least a fourth portion of the received plurality of data; and

calculate a multi-factor risk margin based on one more of the determined risk factors.

14. The system of claim 13, wherein program logic is further configured to:

determine a curve risk margin based on at least a second portion of the received plurality of data.

15. The system of claim 13, wherein program logic is further configured to:

determine a convergence and divergence risk margin based on at least a third portion of the received plurality of data.

16. The system of claim 13, wherein program logic is further configured to:

determine an idiosyncratic risk margin based on at least a fifth portion of the received plurality of data.

17. The system of claim 13, wherein program logic is further configured to:

determine a liquidity risk margin based on at least a sixth portion of the received plurality of data;

determine a basis risk margin based on at least a seventh portion of the received plurality of data; and

18. The system of claim 13, wherein at least one of the plurality of financial product comprises a credit derivative.

19. The system of claim 18, wherein the credit derivative comprises a credit default swap.

20. The system of claim 13, wherein calculating a multi-factor risk margin including summing a systematic risk margin, a curve risk margin, a convergence and divergence risk margin, a sector risk margin, an idiosyncratic risk margin, a liquidity risk margin, and a basis risk margin.