Calculating Liquidity Margin Requirements

• US 20150332403A1
• Filed: 05/07/2015
• Published: 11/19/2015
• Est. Priority Date: 05/16/2014
• Status: Abandoned Application

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Baysal, Evren, Ding, Kailin, Li, Nick, Xythalis, Panos, Yang, Alice
• Application Number:
  US14/706,648
• Publication Number:
  US 20150332403A1
• Time in Patent Office: Days
• US Class Current: 1/1
• 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

Systems and methods are provided for calculating margin requirements and stress testing exposures of cleared credit portfolios. These margin requirements are calculated using the following components: spread risk, idiosyncratic risk, interest rate, and liquidity risk. The calculation of these risk components is accomplished with a detailed statistical analysis of the risk factors underlying instruments, such as a credit default swap instrument.

Claims

1. A system comprising:

a data repository storing portfolio information;

a liquidity margin computing device communicatively coupled to the data repository, the liquidity margin computing device comprising;

a processor; and

a non-transitory memory device storing instructions that, when executed by the processor, cause the liquidity margin computing device to;

calculate a hedge cost associated with a credit default swap (CDS) portfolio;

calculate a liquidation cost associated with the CDS portfolio; and

calculate an aggregate liquidity charge for the CDS portfolio based on the hedge cost and the liquidation cost.

2. The system of claim 1, wherein the non-transitory memory device stores further instructions that, when executed by the processor, cause the liquidity margin computing device to:

calculate a cost of a dollar value of a 1 basis point change in spread (SDV01) hedge associated with the CDS portfolio.

3. The system of claim 2, wherein the cost of the SDV01 hedge associated with the CDS portfolio comprises at least one of a cost of a SDV01 hedge for an investment grade CDS sub-portfolio and a cost of a SDV01 hedge for a high-yield CDS sub-portfolio.

4. The system of claim 1, wherein the non-transitory memory device stores further instructions that, when executed by the processor, cause the liquidity margin computing device to:

retrieve, via a network, first information associated with an investment grade (IG) sub-portfolio of the CDS portfolio and second information associated with a high-yield (HY) sub-portfolio of the CDS portfolio from the data repository;

calculate a hedge cost of a dollar value of a 1 basis point change in spread (SDV01) hedge of the IG sub-portfolio based on the first information and a hedge cost of the SDV01 hedge of the HY sub-portfolio.

5. The system of claim 1, wherein the hedge cost corresponds to:

a cost of hedging an aggregate dollar value of a 1 basis point change in spread (SDV01) exposure of investment-grade (IG) indices and IG single names; and

a cost of hedging an SDV01 exposure of high-yield (HY) indices and HY single names

6. The system of claim 1, wherein the non-transitory memory device stores further instructions that, when executed by the processor, cause the liquidity margin computing device to:

calculate a cost associated with liquidating hedged index positions of the CDS portfolio.

7. The system of claim 1, wherein the non-transitory memory device stores further instructions that, when executed by the processor, cause the liquidity margin computing device to:

calculate a cost associated with liquidating hedged single-name positions of the CDS portfolio.

8. The system of claim 1, wherein the non-transitory memory device stores further instructions that, when executed by the processor, cause the liquidity margin computing device to:

calculate a cost associated with liquidating hedged index positions of the CDS portfolio; and

calculate a cost associated with liquidating hedged single-name positions of the CDS portfolio.

9. The system of claim 8, wherein the cost associated with liquidating hedged index positions of the CDS portfolio corresponds to a function of the SDV01 of each off-the-run or non-5 year index series position of the CDS portfolio and the cost associated with liquidating hedged single-name positions corresponds to a function of the SDV01 of each single name position.

10. The system of claim 1, wherein the liquidation cost of the CDS portfolio scales super linearly when the position of a notional is greater than a criterion.

11. The system of claim 10, wherein the criterion corresponds to a proportion of a median weekly trading volume of an index series an tenor combination of a hedged index position or a proportion of the median weekly trading volume of a reference entity and tenor combination of a hedged single name position.

12. A non-transitory computer readable medium storing instructions that, when executed by a processor, cause the processor to:

calculate a hedge cost associated with at least one of an investment grade (IG) sub-portfolio and a high-yield (HY) sub-portfolio of a credit default swap (CDS) portfolio;

calculate a liquidation cost associated with hedging at least one of an index position and a single-name position held in the CDS portfolio; and

calculate an aggregate liquidity charge for the CDS portfolio by combining the hedge cost and the liquidation cost.

13. The non-transitory computer readable medium of claim 12, further storing instructions that, when executed by the processor, cause the processor to:

retrieve, via a network, first information associated with the IG sub-portfolio of the CDS portfolio and second information associated with a high-yield HY sub-portfolio of the CDS portfolio from a data repository;

14. The non-transitory computer readable medium of claim 12, further comprising instructions that, when executed by a processor, cause the processor to:

receive, from a financial market computing system, pricing information corresponding to the CDS portfolio; and

calculate the aggregate liquidity charge based, at least in part, on the pricing information across tenors.

15. The non-transitory computer readable medium of claim 14, further comprising instructions that, when executed by the processor, cause the processor to:

receive, from the financial market computing system, trading volume information; and

calculate the aggregate liquidity charge based, at least in part, on the trading volume information.

16. A method comprising:

calculating, by an outright exposure calculator, an outright exposure to an investment grade (IG) sub-portfolio of a credit default swap (CDS) portfolio;

calculating, by the exposure calculator, an outright exposure to a high yield (HY) sub-portfolio of the CDS portfolio;

calculating, by a basis exposure calculator, at least one of a basis exposure to an index-based CDS sub-portfolio and a single name CDS sub-portfolio of the CDS portfolio;

calculating, by a liquidity charge calculator, a liquidity charge corresponding to the CDS portfolio based on the outright exposure of the IG sub-portfolio, the outright exposure of the HY sub-portfolio and the basis exposure of the CDS portfolio.

17. The method of claim 16, comprising:

receiving, via a network, market information associated with the CDS portfolio;

adjusting, by the basis exposure calculator, the basis exposure based on the market information.

18. The method of claim 16, comprising:

calculating, by a tenor calibrator, a tenor scalar based on a ratio of Bid/Ask spreads across tenors associated with the CDS portfolio;

calculating, by the tenor calibrator, a tenor adjustor associated with weekly volume of swaps associated with the CDS portfolio based on the market information.

19. The method of claim 18, comprising:

calculating, by the tenor calibrator, the tenor scalar based on Bid/Ask spreads for IG and HY CDS across different series.

20. The method of claim 19, wherein the Bid/Ask spreads are associated with 3-year, 5-year, 7-year, and 10-year tenor IG credit default swaps and 5-year tenor HY credit default swaps associated with the CDS portfolio.