Electronic credit default futures market

• US 7,970,670 B2
• Filed: 08/05/2008
• Issued: 06/28/2011
• 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
• Primary Examiner(s): Frenel; Vanel
• Application Number:
  US12/186,321
• Publication Number:
  US 20100036757A1
• Time in Patent Office: 1,057 Days
• Field of Search: 705 36- 37
• US Class Current: 705/30
• CPC Class Codes: G06Q 30/04 Billing or invoicing
• 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
• CPC Class Codes: G06Q 40/12 Accounting

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, by a computer, a first trade order from a first party requesting a long position on a probability of default futures contract (POD), the POD having a reference entity and a maturity date, the POD having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD;

receiving, by the computer, a second trade order from a second party requesting a short position on the POD;

matching, by the computer, the first trade order with the second trade order;

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

determining, by the computer, a daily settlement price for the POD for each day of trading of the POD;

determining, by the computer, a daily settlement payment between the first party and the second party based on the daily settlement price;

selecting one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity;

determining, by the computer, a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, the final settlement payment being paid by the first party to the second party if the reference entity is insolvent at the maturity date and the final settlement payment being paid by the second party to the first party if the reference entity is solvent at the maturity date; and

recording on a computer readable storage medium, settlement of the POD at the final settlement price.

2. The method according to claim 1, wherein 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 according to claim 1, the method further comprises recording a clearing house as a counterparty to both the first party and the second party.

4. The method according to claim 1, further comprising settling the POD to 0 when the reference entity is insolvent at the maturity date.

5. The method according to claim 1, further comprising settling the POD to face value when the reference entity is solvent at the maturity date.

6. The method according to claim 1, further comprising settling the POD in kind at a time prior to the maturity date.

7. The method according to claim 6, wherein settling the POD in kind comprises settling the POD in kind based at least in part on a comparison between the maturity date and an identified date.

8. The method according to claim 7, wherein settling the POD in kind comprises settling the POD in kind when a difference between the maturity date and the identified date is 3 years.

9. The method according to claim 6, wherein settling the POD in kind comprises settling the POD into a series of PODs, each of the series of PODs having a reference entity, a maturity date and a final settlement price at the maturity date based at least in part on solvency of the reference entity, none of the series of PODs sharing a common maturity date.

10. The method according to claim 9, wherein settling the POD into the series of PODs comprises settling the POD into a series of PODs, each of the series of PODs having a quarterly maturity date.

11. The method according to claim 9, further compromising settling each of the series of PODs subsequent to one of the series of PODs when the one of the series of PODs settles to 0.

12. The method according to claim 1, wherein the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date and is determined to be a face value of the POD if the reference entity is solvent at the maturity date.

13. The method according to claim 1, wherein the traded price is (1-(probability of default of the reference entity)) multiplied by a face value of the contract.

14. A method for exchanging futures contracts comprising:

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

at least one first trade order from a first party requesting a long position on at least one of a series of probability of default futures contracts (PODs), the series of PODs having a reference entity, each of the PODs specifying a time period that concludes at a maturity date, each of the PODs having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD, none of the series of futures contracts sharing a common maturity date;

at least one second trade order from a second party requesting a short position on the at least one of the series of PODs; and

a traded price for each of the PODs;

determining, by the computer, for each of the PODs, a daily settlement price for the POD for each day of trading of the POD;

determining, by the computer, for the at least one of the PODs, a daily settlement payment between the first party and the second party based on the daily settlement price;

selecting, for each of the PODs, one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity;

determining, by the computer, for the at least one of the PODs, a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, wherein (1) the final settlement payment is paid by the first party to the second party if the reference entity becomes insolvent during the time period specified in the POD, and (2) the final settlement payment is paid by the second party to the first party if the reference entity remains solvent during the time period specified in the POD or if the reference entity became insolvent during a time period preceding the time period specified in the POD; and

recording on a computer readable storage medium, for each of the PODs, settlement of the POD at the final settlement price.

15. The method according to claim 14, wherein recording, on a computer readable storage medium, a completed transaction comprises recording at least one first trade order requesting a long position on a series of PODs and at least one second trade order requesting a short position on the series of PODs.

16. The method according to claim 14, wherein recording, on a computer readable storage medium, a completed transaction comprises recording a long position on a series of probability of default index futures contracts and recording a short position on the series of probability of default index futures contracts.

17. The method according to claim 14, wherein recording, on a computer readable storage medium, a completed transaction comprises recording a long position on a series of probability of default index tranche futures contracts and recording a short position on the series of probability of default index tranche futures contracts.

18. The method according to claim 14, wherein, for each of the PODs, the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date and is determined to be a face value of the POD if the reference entity is solvent at the maturity date.

19. The method according to claim 14, wherein the traded price is (1-(average probability of default of the reference entities in the index)) multiplied by a face value of the contract.

20. 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, by a computer, a first trade order requesting a long position on a probability of default futures contract (POD), the POD having a reference entity and a maturity date, the POD having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD;

receiving, by the computer, a second trade order from a second party requesting a short position on the POD;

matching, the computer, the first trade order with the second trade order;

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

determining, by the computer, a daily settlement price for the POD for each day of trading of the POD;

determining, by the computer, a daily settlement payment between the first party and the second party based on the daily settlement price;

selecting one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity;

determining, by the computer, a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, the final settlement payment being paid by the first party to the second party if the reference entity is insolvent at the maturity date and the final settlement payment being paid by the second party to the first party if the reference entity is solvent at the maturity date; and

recording on a computer readable storage medium, settlement of the POD at the final settlement price.

21. The computer readable medium according to claim 20, wherein the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date and is determined to be a face value of the POD if the reference entity is solvent at the maturity date.

22. The computer readable medium according to claim 20, wherein the traded price is (1-(probability of default of the reference entity)) multiplied by a face value of the contract.

23. A system for providing a credit futures contract exchange comprising:

a computer;

the computer having computer readable media with instructions stored therein that when executed by the computer cause the computer to implement;

an order interface configured to receive a first trade order from a first party and a second trade order from a second party, the first trade order requesting a long position on a probability of default futures contract (POD), the POD having at least one reference entity and a maturity date, the POD having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD;

an auction engine configured to match the first and second trade orders and store the first and second trade orders as a completed transaction; and

a settlement engine configured to

determine a daily settlement price for the POD for each day of trading of the POD;

determine a daily settlement payment between the first party and the second party based on the daily settlement price;

select one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity;

determine a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, the final settlement payment being paid by the first party to the second party if the reference entity is insolvent at the maturity date and the final settlement payment being paid by the second party to the first party if the reference entity is solvent at the maturity date; and

record, on the computer readable medium, settlement of the POD at the final settlement price.

24. The system according to claim 23, wherein the futures contract comprises at least one of a POD, a probability of default index futures contract and a probability of default index tranche futures contract.

25. The system according to claim 23, wherein the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date and is determined to be a face value of the POD if the reference entity is solvent at the maturity date.

26. The system according to claim 23, wherein the traded price is (1-(probability of default of the reference entity)) multiplied by a face value of the contract.

27. A method for exchanging an index of credit futures contracts comprising:

receiving, by a computer, a first trade order requesting a long position on the index, the index having an index settlement price based at least in part on a plurality of probability of default futures components (PODs), each of the PODs having a reference entity and a maturity date, each of the PODs having first and second potential POD settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD;

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

matching, by the computer, 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, the second trade order, and a traded price;

selecting, for each of the PODs, one of the first and second potential settlement prices to be a final settlement price of the POD, wherein, the first potential settlement price is selected if the reference entity is solvent, and the second potential settlement price is selected if the reference entity is insolvent, the first settlement price being greater than the second settlement price;

determining, by the computer, the index settlement price, the index settlement price being based on the final settlement prices of each of the PODs at the maturity date;

determining, by the computer, a final index settlement payment between the first party and the second party based on the index settlement price, the first party and the second party both being obligated to settle the index at the index settlement price via a payment of the final index settlement payment, wherein (1) the final index settlement payment is owed by the first party to the second party if all of the reference entities are insolvent at the maturity date, (2) the final index settlement payment is owed by the second party to the first party if all of the reference entities are solvent at the maturity date, and (3) if some of the reference entities are solvent and some of the reference entities are insolvent at the maturity date, the final index settlement payment is owed either the first party to the second party or by the second party to the first party, depending on how many of the reference entities are solvent and how many of the reference entities are insolvent; and

recording on a computer readable storage medium, settlement of the index at the index settlement price.

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

29. The method according to claim 28, wherein settling the index in kind comprises settling the index in kind based at least in part on a comparison between the maturing date and an identified date.

30. The method according to claim 29, wherein settling the index in kind comprises settling the index in kind when a difference between the maturity date and the identified date is 3 years.

31. The method according to 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 PODs, none of the series of index contracts sharing a common maturity date.

32. The method of claim 31, wherein settling the index into the series of index contracts comprises settling the index into a series of index contracts, each of the series of index contracts having a quarterly maturity date.

33. The method according to claim 31, 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 0.

34. The method according to claim 27, wherein the traded price is (1-(average probability of default of the reference entities in the index)) multiplied by a face value of the contract.

35. A method for exchanging a tranche in an index of credit futures contracts comprising:

receiving, by a computer, a first trade order requesting a long position on the tranche, the tranche having a tranche settlement price based at least in part on an index settlement price of the index, the index settlement price being based at least in part on a plurality of probability of default futures components (PODs), each of the PODs having a reference entity and a maturity date, each of the PODs having first and second potential POD settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD;

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

matching, by the computer, the first trade order with the second trade order; and

recording, on a computer readable storage medium, a complete transaction, the completed transaction indicating the first trade order, the second trade order, and a traded price;

selecting, for each of the PODs, one of the first and second potential settlement prices to be a final settlement price of the POD, wherein, the first potential settlement price is selected if the reference entity is solvent, and the second potential settlement price is selected if the reference entity is insolvent, the first settlement price being greater than the second settlement price;

determining, by the computer, the index settlement price, the index settlement price being based on the final settlement prices of each of the PODs at the maturity date;

determining, by the computer, the tranche settlement price, the tranche settlement price being based on the index settlement price;

determining, by the computer, a final tranche settlement payment between the first party and the second party based on the tranche settlement price, the first party and the second party both being obligated to settle the tranche at the tranche settlement price via a payment of the final tranche settlement payment, wherein (1) the final tranche settlement payment is owed by the first party to the second party if all of the reference entities are insolvent at the maturity date, (2) the final tranche settlement payment is owed by the second party to the first party if all of the reference entities are solvent at the maturity date, and (3) if some of the reference entities are solvent and some of the reference entities are insolvent at the maturity date, the final tranche settlement payment is owed either the first party to the second party or by the second party to the first party, depending on the configuration of the tranche and depending on how many of the reference entities are solvent and how many of the reference entities are insolvent;

recording on a computer readable storage medium, settlement of the tranche at the tranche settlement price.

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

37. The method according to claim 36, 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.

38. The method according to claim 37, wherein settling the tranche in kind comprises settling the tranche in kind when a difference between the maturity date and the identified date is 3 year.

39. The method according to claim 35, 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.

40. The method according to claim 39, wherein settling the tranche into the series of tranche contracts comprises settling the tranche into a series of tranche contracts, each of the series of tranche contracts having 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 0.

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

receiving, by a computer, a first trade order from a first party requesting a long position on at least one of the series of probability of default futures contracts (PODS), the series of PODs having a duration substantially equivalent to a duration of a previously traded futures contract, each of the PODs specifying a time period that concludes at a maturity date, each of the PODs having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD, none of the series of futures contracts sharing a common maturity date;

receiving, by the computer, a second trade order requesting a short position on the at least one of the series of PODs;

matching, by the computer, the first trade order with the second trade order; and

recording, on a computer readable storage medium, a competed transaction, the completed transaction indicating the first trade order, the second trade order, and a traded price;

determining, by the computer, for each of the PODs, a daily settlement price for the POD for each day of trading of the POD;

determining, by the computer, for the at least one of the PODs, a daily settlement payment between the first party and the second party based on the daily settlement price;

selecting, for each of the PODs, one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity;

determining, by the computer, for the at least one of the PODs, a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, wherein (1) the final settlement payment is paid by the first party to the second party if the reference entity becomes insolvent during the time period specified in the POD, and (2) the final settlement payment is paid by the second party to the first party if the reference entity remains solvent during the time period specified in the POD or if the reference entity became insolvent during a time period preceding the time period specified in the POD; and

recording on a computer readable storage medium, for each of the PODs, settlement of the POD at the final settlement price.

43. The method according to 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. The method according to claim 42, wherein, for each of the PODs, the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date and is determined to be a face value of the POD if the reference entity is solvent at the maturity date.