System and method for hybrid spreading for risk management

• US 8,073,764 B2
• Filed: 08/08/2008
• Issued: 12/06/2011
• Est. Priority Date: 09/10/2004
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Glinberg, Dmitriy, Yoo, Tae S., Michaels, Dale A., Gogol, Edward
• Primary Examiner(s): Hammond, III, Thomas M
• Application Number:
  US12/188,601
• Publication Number:
  US 20080294573A1
• Time in Patent Office: 1,215 Days
• Field of Search: 705/37
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• 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 40/08 Insurance

Abstract

A risk management system and method is disclosed which utilizes a flexible and configurable set of spreading techniques which may be incorporated into existing risk management software to enhance functionality, flexibility and accuracy. In the disclosed embodiments, multiple different types of spreading are combined to allow for a more accurate assessment of risk. In one exemplary embodiment, a subset of the derivative products held by a futures trader are first analyzed by the scanning based spreading methodology. Typically, futures products in the same class of products (e.g. equity futures or agricultural futures) would be analyzed together by the scanning based spreading methodology. Then an average delta would be calculated for that subset. Using that delta, that subset would then be analyzed in relation to the remaining derivative products (not in the subset) using a delta based spreading methodology. The delta for the subset could be computed in a variety of ways including scaling the deltas for each product, tying the delta to a fixed time period or other methods.

Claims

1. A computer implemented method of managing risk associated with a portfolio, the portfolio comprising a plurality of positions, each of the plurality of positions being associated with at least one product traded on an exchange, the method comprising:

(a) computing, in a processor, a first spread between a first two or more positions of the plurality of positions, each of the first two or more positions being associated with a different product, the first spread being computed based on a first algorithm;

(b) computing, in the processor, a second spread based on at least one second position of the plurality of positions, the second spread being computed based on a second algorithm different from the first algorithm; and

(c) computing, in the processor, a margin requirement for the portfolio based the first and second spreads.

2. The computer implemented method of claim 1, wherein each of the first and second algorithms comprises one of a scanning based algorithm, a delta based algorithm and a tiered delta based algorithm.

3. The computer implemented method of claim 1, wherein the second algorithm comprises a scanning based algorithm, the second spread being based on the at least one second position of the plurality of positions of the portfolio and at least one other position not in the portfolio.

4. The computer implemented method of claim 1, further comprising:

(d) computing, in the processor, an average delta based on the first spread;

and

wherein (b) further comprises computing the second spread based on the at least one second position and the delta, the at least one second position being different from the first two or more positions.

5. The computer implemented method of claim 1, wherein a first product associated with a first position of the first two or more positions is traded on a first exchange and a second product associated with a second position of the first two or more positions is traded on a second exchange different from the first exchange.

6. The computer implemented method of claim 1, wherein each product associated with a position of the plurality of positions is characterized by a class comprising one of single stock futures, futures, forward contracts, security options, securities, and cash based assets.

7. A system for managing risk associated with a portfolio, the portfolio comprising a plurality of positions, each of the plurality of positions being associated with at least one product traded on an exchange, the system comprising:

a first spread processor programmed to compute a first spread between a first two or more positions of the plurality of positions, each of the first two or more positions being associated with a different product, the first spread being computed based on a first algorithm;

a second spread processor programmed to compute a second spread based on at least one second position of the plurality of positions, the second spread being computed based on a second algorithm different from the first algorithm; and

a risk assessment processor coupled with the first and second spread processors and programmed to compute a margin requirement for the portfolio based the first and second spreads.

8. The system of claim 7, wherein each of the first and second algorithms comprises one of a scanning based algorithm, a delta based algorithm and a tiered delta based algorithm.

9. The system of claim 7, wherein the second algorithm comprises a scanning based algorithm, the second spread being based on the at least one second position of the plurality of positions of the portfolio and at least one other position not in the portfolio.

10. The system of claim 7, wherein the first spread processor is further programmed to compute an average delta based on the first spread, the second spread processor being further operative to compute the second spread based on the at least one second position and the delta, the at least one second position being different from the first two or more positions.

11. The system of claim 7, wherein a first product associated with a first position of the two or more positions is traded on a first exchange and a second product associated with a second position of the two or more positions is traded on a second exchange different from the first exchange.

12. The system of claim 7, wherein each product associated with a position of the plurality of positions is characterized by a class comprising one of single stock futures, futures, forward contracts, security options, securities, and cash based assets.