ELECTRONIC CREDIT DEFAULT FUTURES MARKET

• US 20110087580A1
• Filed: 05/19/2010
• Published: 04/14/2011
• Est. Priority Date: 08/05/2008
• Status: Active Grant

• Current Assignee: Northwater Capital
• Original Assignee: Exchange Holdings Inc. (VTX Holdings Companyöperatief UA)
• Inventors: Patterson, David G., Rickard, John T., Theriault, Annie
• Granted Patent: US 8,321,328 B2
• Time in Patent Office: Days
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

Systems and methods are provided for providing a credit default futures market. A system providing the credit default futures market includes a processor, memory and an interface. The interface is configured to display credit default futures contracts that subscribe to a set of standard terms and conditions. The processor is configured to settle certain credit futures contracts in kind and other in cash, depending on, at least in part, the maturity date of the futures contract. A method is presented for electronically clearing and settling probability of default futures contracts.

Claims

1. A method for exchanging credit futures contracts comprising:

receiving a first trade order requesting a long position on a bond recovery rate (REC) futures contract, the REC futures having a reference entity, a maturity date and a settlement value at the maturity date based at least in part on solvency of the reference entity and on a value of a random variable such as the realized bond recovery rate of the reference entity;

receiving a second trade order requesting a short position on the REC futures;

matching the first trade order with the second trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order and the second trade order.

2. The method of claim 1, wherein receiving the first trade order includes receiving the first trade order from a first party, and the method further comprises determining whether the first party has sufficient resources to meet a margin requirement for the position requested in the first trade order.

3. The method of claim 1, wherein receiving the first trade order includes receiving the first trade order from a first party and wherein receiving the second trade order includes receiving the second trade order from a second party, and the method further comprises recording a clearing house as a counterparty to both the first party and the second party.

4. The method of claim 1, further comprising settling the REC futures to the realized bond recovery rate multiplied by 100 and by a multiplier, the multiplier being a fixed dollar amount, when the reference entity is insolvent at the maturity date.

5. The method of claim 4, wherein the fixed dollar amount is $10,000.

6. The method of claim 1, further comprising settling the REC futures to a fixed amount when the reference entity is solvent at the maturity date.

7. The method of claim 6, wherein the fixed amount is an amount selected from a group consisting of:

zero and an amount near zero.

8. The method of claim 1, further comprising settling the REC futures in kind at a time prior to the maturity date.

9. The method of claim 8, wherein settling the REC futures in kind comprises settling the REC futures in kind based at least in part on a comparison between the maturity date and an identified date.

10. The method of claim 9, wherein settling the REC futures in kind comprises settling the REC futures in kind when a difference between the maturity date and the identified date is a fixed time period longer than the difference between the current date and the maturity date of the shortest maturity offered.

11. The method of claim 8, wherein settling the REC futures in kind comprises settling the REC futures into a series of REC futures, each of the series of REC futures having a reference entity, a maturity date and a settlement value at the maturity date based at least in part on solvency of the reference entity and a value of a random variable such as the bond recovery rate in the event that the reference entity is insolvent, none of the series of REC futures sharing a common maturity date.

12. The method of claim 11, wherein settling the REC futures into the series of REC futures comprises settling the REC futures into a series of REC futures, each of the series of REC futures having a maturity date based on a shorter time interval than the original Recovery Future.

13. The method of claim 11, further comprising settling each of the series of REC futures subsequent to one of the series of REC futures when the one of the series of REC futures is settled early due to the occurrence of a default by the reference entity.

14. A method for exchanging futures contracts comprising:

recording, on a computer readable storage medium, a completed transaction including;

at least one first trade order requesting a long position on a series of REC futures contracts, each of the series of futures contact having at least one of reference entity and a settlement value at a maturity date, the settlement value at the maturity date being based at least in part on solvency of the at least one reference entity and on a value of a random variable, none of the series of futures contracts sharing a common maturity date; and

at least one second trade order requesting a short position on the series of futures contracts; and

clearing the completed transaction using a clearing house.

15. The method of claim 14, wherein the random variable is the bond recovery rate of the reference entity.

16. The method of claim 14, wherein recording, on a computer readable storage medium, a completed transaction comprises recording a long position on a series of bond recovery rate index futures contracts.

17. The method of claim 14, wherein recording, on a computer readable storage medium, a completed transaction comprises recording a long position on a series of bond recovery rate index tranche futures contracts.

18. A computer readable medium comprising computer readable instructions that, as a result of being executed by a processor, instruct the processor to perform a method, the method comprising:

receiving a first trade order requesting a long position on a bond recovery rate futures, the REC futures having a reference entity, a maturity date and a settlement value at the maturity date based at least in part on solvency of the reference entity and on the value of a random variable;

receiving a second trade order requesting a short position on the REC futures;

matching the first trade order with the second trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order and the second trade order.

19. The computer readable medium of claim 18, wherein the random variable is the bond recovery rate of the reference entity.

20. A system for providing a bond recovery rate futures contract exchange comprising:

an order interface configured to receive trade requests for positions on a futures contract, the futures contact having at least one reference entity, a maturity date and a settlement value at the maturity date based at least in part on solvency of the at least one reference entity and a random variable and a portion of the trade requests being offsetting trade requests;

an auction engine configured to match the offsetting trade requests and store the offsetting trade requests as completed transactions; and

a settlement engine configured to settle at least a portion of the completed transactions.

21. The system of claim 20, wherein the random variable is the bond recovery rate of the reference entity.

22. The system of claim 20, wherein the futures contract comprises a contract selected from a group consisting of a POD™

futures, a REC futures, a probability of default index futures contract, a bond recovery index futures contract, a probability of default index tranche futures contract, and a bond recovery rate index tranche futures.

23. The system of claim 20, wherein having a POD™

futures traded on an exchange allows for the determination of a market value for the probability of default that is independent of the expected bond recovery rate.

24. The system of claim 20, wherein having a POD™

futures and a REC futures traded on an exchange allows for the determination of a market value for the expected bond recovery rate.

25. The system of claim 20, wherein having POD™

index futures and POD index tranche futures traded on an exchange allows for price discovery for systemic and idiosyncratic risks.

26. A method for exchanging an index of bond recovery rate futures contracts

comprising:

receiving a first trade order requesting a long position on the index, the index having a settlement value based at least in part on a plurality of REC futures;

receiving a second trade order requesting a short position on the index;

matching the first trade order with the second trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order and the second trade order.

27. The method of claim 26, further comprising settling the index in kind at a time prior to a maturity date of the index.

28. The method of claim 27, wherein settling the index in kind comprises settling the index in kind based at least in part on a comparison between the maturity date and an identified date.

29. The method of claim 27, wherein settling the index in kind comprises settling the index in kind when a difference between the maturity date and the identified date is a fixed time period longer than the difference between the current date and the shortest maturity offered.

30. The method of claim 27, wherein settling the index in kind comprises settling the index into a series of index contracts, each of the series of index contracts having a settlement value based at least in part on a plurality of REC futures, none of the series of index contracts sharing a common maturity date.

31. The method of claim 27, wherein settling the index in kind comprises settling the index into a series of index contracts, each of the series of index contracts having a maturity date shorter than the time to maturity of the original index.

32. The method of claim 28, wherein the shorter maturity date is a quarterly maturity date.

33. The method of claim 27, further comprising settling each of the series of index contracts subsequent to one of the series of index contracts when the one of the series of index contracts settles to one of the series of index contracts when the one of the series of index contracts settles to the realized recovery rate for REC index futures.

34. A method for exchanging a tranche in a tranche in an index of bond recovery rate futures contracts comprising:

receiving a first trade order requesting a long position on the tranche, the tranche having a settlement value based at least in part on a settlement value of the index;

receiving a second trade order requesting a short position on the tranche;

matching the first trade order with the second trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order and the second trade order.

35. The method of claim 34, further comprising settling the tranche in kind at a time prior to a maturity date of the tranche.

36. The method of claim 35, wherein settling the tranche in kind comprises settling the tranche in kind based at least in part on a comparison between the maturity date and an identified date.

37. The method of claim 36, wherein settling the tranche in kind comprises settling the tranche in kind when a difference between the maturity date and the identified date is a fixed time period longer than the difference between the current date and the maturity date of the shortest maturity offered.

38. The method of claim 36, wherein settling the tranche in kind comprises settling the tranche into a series of tranche contracts, each of the series of tranche contracts having a settlement value based at least in part on the settlement value of the index, none of the series of tranche contracts sharing a common maturity date.

39. The method of claim 36, wherein settling the tranche in kind comprises settling the tranche into a series of tranche contracts, each of the series of tranche contracts having a maturity date shorter than the time to maturity of the original tranche.

40. The method of claim 34, wherein the shorter maturity date is a quarterly maturity date.

41. The method of claim 39, further comprising settling each of the series of tranche contracts subsequent to one of the series of tranche contracts when the one of the series of tranche contracts settles to an average recovery rate for REC futures.

42. A method for exchanging a series of futures contracts comprising:

receiving a first trade order requesting a long position on at least one of the series of futures contracts, the series of futures contracts having a risk period substantially equivalent to a risk period of a previously traded futures contract, each of the series of futures contracts having a maturity date, none of the series of futures contracts sharing a common maturity date;

receiving a second trade order requesting a short position on the at least one of the series of futures contracts;

matching the first trade order with the second trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order and the second trade order.

43. The method of claim 42, wherein receiving a first trade order comprises receiving a first trade order requesting a long position on at least one of the series of futures contracts, each of the series of futures contracts having a quarterly maturity date.

44. A method of creating a financial position comprising:

receiving a first trade order from a user, the first order requesting a short position on a POD™

futures, the POD™

futures having a reference entity, a maturity date and a settlement value at the maturity date based at least in part on the solvency of the reference entity, the order received from a user holding a financial instrument in the reference entity;

receiving a second trade order from the user, the second order requesting a short position on REC futures with a notional amount equal to the financial instrument exposure, the REC futures having the same reference entity and a settlement value at the maturity date based at least in part on solvency of the reference entity and on a random variable receiving a third trade order requesting a long position on the POD™

futures;

receiving a fourth trade order requesting a long position on the REC futures;

matching the first trade order and the third trade order;

matching the second trade order and the fourth trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order, the second trade order, the third trade order, and the fourth trade order.

45. The method of claim 44, wherein the random variable is the realized bond recovery rate of a funded bond of the reference entity.

46. The method of claim 44, wherein the financial instrument is an instrument selected from a group consisting of a bond and a short position in a credit default swap.

47. The method of claim 46, wherein the short position on a POD™

futures is a short position on an index of POD™

futures, the short position on REC futures is a short position on an index of REC futures, and the financial instrument is a plurality of financial instruments.

48. The method of claim 47, wherein the plurality of financial instruments is a plurality selected from a group consisting of a portfolio of bonds and a portfolio of short positions in credit default swaps.

49. A method of creating a financial position comprising

receiving a first trade order from a user, the first order requesting a long position on a POD™

futures, the POD™

futures having a reference entity, a maturity date and a settlement value at the maturity date based at least in part on the solvency of the reference entity;

receiving a second trade order from the user, the second order requesting a long position on REC futures, the REC futures having the same reference entity and a settlement value at the maturity date based at least in part on solvency of the reference entity and on a random variable such as the realized bond recovery rate of a funded bond of the reference entity;

receiving a third trade order requesting a short position on the POD™

futures;

receiving a fourth trade order requesting a short position on the REC futures;

matching the first trade order and the third trade order;

matching the second trade order and the fourth trade order; and

recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order, the second trade order, the third trade order, and the fourth trade order;

whereby the combination of the completed transaction and a government bond provide the user with the returns of a synthetic corporate bond.

50. The method of claim 49, wherein the long position on a POD™

futures is a long position on an index of POD™

futures and the long position on REC futures is a long position on an index of REC futures.