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

• US 20120095938A1
• Filed: 12/16/2011
• Published: 04/19/2012
• 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, Dmitiry
• Granted Patent: US 8,484,123 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, using a processor, a systematic risk margin based on at least a portion of the received plurality of data;

determining, using a processor, a macro risk margin based on at least a portion of the received plurality of data;

calculating, using the processor, a multi-factor risk margin based on at least the systematic risk margin and the macro risk margin.

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, further comprising:

calculating a convergence risk value of the plurality of financial instruments.

5. The method of claim 1, further comprising:

calculating a divergence risk value of the plurality of financial instruments.

6. The method of claim 1, wherein the macro risk quantifies the overall credit market risk and includes at least one of a systemic risk and a curve risk.

7. The method of claim 1, further comprising:

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

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

8. The method of claim 1, further comprising:

determining, using the processor, a liquidity risk margin based on at least a portion of the received plurality of data; and

determining, using the processor, a basis risk margin based on at least a portion of the received plurality of data.

9. A system for determining margin requirements for a portfolio of positions on products traded on an exchange, the system comprising a processor wherein the processor comprises:

an activity monitor coupled with the exchange to monitor the portfolio of positions on the exchange for a present time period;

an activity risk assessor coupled with the activity monitor wherein the activity risk assessor correlates the monitored activity with an assessment a systematic risk margin and a macro risk margin; and

a risk processor coupled with the activity risk assessor wherein the risk processor computes the margin requirement based on the portfolio of products and the assessed systematic risk margin and the assessed macro risk margin.

10. The system of claim 9, at least one of the plurality of financial product comprises a credit derivative.

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

12. The system of claim 9, wherein the risk processor is configured to calculate a convergence risk value of the plurality of financial instruments.

13. The system of claim 9, wherein the risk processor is configured to calculate a divergence risk value of the plurality of financial instruments.

14. The system of claim 9, wherein the macro risk includes at least one of a systemic risk and a curve risk.

15. A method for determining a margin, the method comprising:

receiving a plurality of data associated with a plurality of financial instruments;

determining, using a processor, a macro risk margin based on at least a portion of the received plurality of data;

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

calculating, using the processor, a macro risk margin based on one more of the determined risk factors.

16. The method of claim 15, wherein at least one of the plurality of financial product comprises a credit default swap.

17. The method of claim 15, wherein the sector risk margin quantifies the risk associated with a specific business, and the macro risk quantifies the overall credit market risk.

18. The method of claim 15, further comprising:

calculating a convergence risk value and a divergence risk value of the plurality of financial instruments.

19. The method of claim 15, wherein the macro risk includes at least one of a systemic risk and a curve risk.

20. The method of claim 15, further comprising:

determining, using the processor, a liquidity risk margin based on at least a portion of the received plurality of data; and

determining, using the processor, a basis risk margin based on at least a portion of the received plurality of data.