System and method for multi-factor modeling, analysis and margining of credit default swaps for risk offset

• US 8,108,281 B2
• Filed: 07/21/2010
• Issued: 01/31/2012
• 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: Koblas, Michal, Hadi, Muhammed, Patel, Ketan B., Dehdia, Ankeet, Wang, Mu
• Primary Examiner(s): Havan, Thu Thao
• Application Number:
  US12/840,885
• Publication Number:
  US 20110035342A1
• Time in Patent Office: 559 Days
• Field of Search: 705 37- 38, 705 35- 36 R
• US Class Current: 705/35
• 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 99/00 Subject matter not provided for in other groups of this subclass

Abstract

A method for determining a margin requirement associated with a plurality of financial instruments within a portfolio is disclosed. The method includes receiving a plurality of data associated with the plurality of financial instruments within the portfolio, determining a shock value for each of a plurality of risk factors within a multi-factor risk model, such that the shock factor is determined based on the received plurality of data, calculating a maximum risk margin for each of the plurality of risk factors, and calculating a total multi-factor risk margin based on maximum risk margin for each of the plurality of 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 shock value for each of a plurality of risk factors within a multi-factor risk model, wherein the shock factor is determined based on the received plurality of data;

calculating, using the processor, a maximum risk margin for each of the plurality of risk factors, wherein the maximum risk is a function of the shock value associated with each of the plurality of risk factors;

calculating, using the processor, a total multi-factor risk margin based on maximum risk margin for each of the plurality of risk factors; and

sending data indicative of the total multi-factor risk margin to a device.

2. The method of claim 1, wherein calculating, using the processor, a maximum risk margin for each of the plurality of risk factors comprises:

determining a maximum systematic risk margin based on at least a portion of the received plurality of data;

determining a maximum curve risk margin based on at least a second portion of the received plurality of data;

determining a maximum convergence and divergence risk margin based on at least a third portion of the received plurality of data;

determining a maximum sector risk margin based on at least a fourth portion of the received plurality of data;

determining a maximum idiosyncratic risk margin based on at least a fifth portion of the received plurality of data;

determining a maximum liquidity risk margin based on at least a sixth portion of the received plurality of data; and

determining a maximum basis risk margin based on at least a seventh portion of the received plurality of data.

3. The method of claim 2, wherein calculating a multi-factor risk margin including summing a systematic risk margin, a curve risk margin, a convergence and divergence risk margin, a sector risk margin, an idiosyncratic risk margin, a liquidity risk margin, and a basis risk margin.

4. The method of claim 1, wherein at least one of the plurality of financial product comprises a credit derivative.

5. The method of claim 4, wherein the credit derivative comprises a credit default swap.

6. A method for determining a margin requirement associated with a plurality of financial instruments within a portfolio, the method comprising:

receiving, using a processor, a plurality of data associated with the plurality of financial instruments within the portfolio;

calculating, using the processor, a maximum systematic risk margin based on at least a portion of the received plurality of data;

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

calculating, using the processor, a total multi-factor risk margin based on one more of the determined risk factors; and

sending data indicative of the total multi-factor risk margin to a device.

7. The method of claim 6 further comprising:

calculating a maximum convergence and divergence risk margin based on at least a third portion of the received plurality of data.

8. The method of claim 6 further comprising:

calculating a maximum sector risk margin based on at least a fourth portion of the received plurality of data.

9. The method of claim 6 further comprising:

calculating a maximum idiosyncratic risk margin based on at least a fifth portion of the received plurality of data.

10. The method of claim 6 further comprising:

calculating a maximum liquidity risk margin based on at least a sixth portion of the received plurality of data; and

calculating a maximum basis risk margin based on at least a seventh portion of the received plurality of data.

11. The method of claim 6, wherein at least one of the plurality of financial product comprises a credit derivative.

12. The method of claim 11, wherein the credit derivative comprises a credit default swap.

13. The method of claim 6, wherein calculating a multi-factor risk margin including summing a systematic risk margin, a curve risk margin, a convergence and divergence risk margin, a sector risk margin, an idiosyncratic risk margin, a liquidity risk margin, and a basis risk margin.