Derivative products

• US 8,265,965 B2
• Filed: 12/15/2006
• Issued: 09/11/2012
• Est. Priority Date: 09/29/2006
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Co, Richard, Labuszewski, John, Nyhoff, John
• Primary Examiner(s): Borlinghaus, Jason M
• Assistant Examiner(s): Fu, Hao
• Application Number:
  US11/611,433
• Publication Number:
  US 20080010221A1
• Time in Patent Office: 2,097 Days
• Field of Search: 705 35- 38
• US Class Current: 705/5
• 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

Methods, systems and apparatuses are described for processing and clearing derivatives products with a digital outcome and a plurality of constituents. A computer system configured to process and clear derivative products can accept initial and adjusted performance bonds from buyers and sellers, and adjust the market price of the derivative product at intervals. The market price may be adjusted on a mark-to-market basis and through analysis of other information, e.g., a change in credit rating of reference entities of the derivative product. As a result of price adjustments, cash flow may be generated between buyers and sellers (e.g., credit and debit to accounts). The derivative product may pay a percentage of a predetermined final settlement amount upon the triggering of a predetermined event in each of the constituents of the derivative product. However, upon expiration of the derivative product, the derivative'"'"'s market price is settled to zero and the agreement is terminated.

Claims

1. A computer-implemented method of processing and clearing an agreement for a derivative product, comprising:

a) receiving, at an electronic interface comprising at least one of an input device and a network interface, an initial performance bond of a protection buyer of the derivative product, wherein the derivative product has a digital outcome and comprises a predetermined number of constituents;

b) updating a price of the derivative product through a mark-to-market process using a processing unit in communication with the interface, including transferring at an interval a cash flow between the protection buyer and a protection seller based on the price of the derivative product;

c) adjusting the cash flow including a part of a total fee for the derivative product based on the price of the derivative product such that the fee component of the cash flow of a first interval, a second interval, and a third interval are each different;

d) for each of the predetermined number of constituents that experience a predetermined triggering event before an expiration date, requiring sufficient funds to cover a percentage of a final settlement price of the agreement; and

e) terminating the agreement.

2. The method of claim 1, wherein terminating the agreement occurs at the earlier of:

the expiration date of the agreement, or an occurrence of the predetermined triggering event for all constituents in the derivative product.

3. The method of claim 2, wherein the derivative product is a credit default swap.

4. The method of claim 1, wherein the percentage of the final settlement price applied is based on weight attributed to each constituent in the derivative product.

5. The method of claim 1, wherein the initial performance bond price is less than the final settlement price.

6. The method of claim 1, wherein the final settlement of the agreement is applied at a predetermined fixed amount.

7. The method of claim 6, wherein the predetermined fixed amount is a percentage of a notional value of the derivative product, wherein the notional value of the derivative product is the sum of notional values of obligations of each of the predetermined number of constituents.

8. The method of claim 1, wherein the final settlement of the agreement is applied at a variable amount calculated using a predetermined formula with a variable damage recovery rate.

9. The method of claim 1, wherein the price of the derivative product is based on a total remaining time until expiration of the derivative product.

10. The method of claim 9, wherein the price of the derivative product is zero at a time of expiration of the derivative product.

11. The method of claim 1, wherein updating the price of the derivative product is performed daily through a mark-to-market process.

12. The method of claim 1, wherein the predetermined triggering event is a credit event.

13. The method of claim 12, wherein the credit event is based on at least one of the following:

bankruptcy, obligation acceleration, obligation default, failure to pay, debt repudiation, moratorium, and restructuring.

14. The method of claim 1, wherein the predetermined triggering event is a weather event.

15. The method of claim 14, wherein the weather event is based on at least one of the following:

temperature, precipitation, and windspeed.

16. The method of claim 1, wherein the predetermined triggering event is based on at least one of the following:

economic factor, agricultural factor, financial instruments, security, commodity, housing index, and real estate index.

17. The method of claim 1, wherein the agreement for a derivative product is an agreement for a credit default swap, and a clearinghouse acts as a guarantor of the agreement for the derivative product.

18. The method of claim 1, wherein the agreement for a derivative product is based on a single reference entity.

19. The method of claim 1, wherein the agreement for a derivative product is an agreement for a credit default option, and a clearinghouse acts as a guarantor of the agreement for the derivative product.

20. The method of claim 1, further comprising:

receiving a second initial performance bond of a protection seller of derivative product.

21. A non-transitory computer-readable medium containing computer-executable instructions for performing a method comprising:

a) receiving an initial performance bond of a protection buyer of a derivative product, wherein the derivative product has a digital outcome and comprises a predetermined number of constituents;

b) receiving an adjusted performance bond of a protection buyer of the derivative product;

c) updating a price of the derivative product at an interval through a mark-to-market process;

d) transferring a cash flow between the protection buyer and a protection seller based on the price of the derivative product;

e) adjustinq the cash flow including a part of a total fee for the derivative product based on the price of the derivative product, such that the fee component of the cash flow of a first interval, a second interval, and a third interval are each different;

f) for each of the predetermined number of constituents that experience a predetermined triggering event before an expiration date, requiring sufficient funds to cover a percentage of a final settlement price of the derivative product; and

g) terminating the derivative product at the earlier of;

the expiration date, or an occurrence of the predetermined triggering event for all constituents in the derivative product.

22. The non-transitory computer-readable medium of claim 21, containing computer-executable instructions for performing a method, wherein the derivative product is a credit default swap with 125 constituents.

23. An apparatus for purchasing an exchange traded derivative product using a computer system, comprising:

a processing unit;

an interface comprising at least one of an input device, output device, and network interface;

a memory unit storing computer-executable instructions configured to cause the processing unit to perform a method comprising;

a) submitting, using the interface, an initial performance bond for the derivative product for receipt by a computer system that processes and clears an agreement for the derivative product, wherein the derivative product has a digital outcome and a price, and wherein the computer system updates the price of the derivative product at an interval through a mark-to-market process, including transferring a cash flow between a protection buyer of the derivative product and a protection seller of the derivative product based on the price of the derivative product,

b) adjusting the cash flow including a part of a total fee for the derivative product based on the price of the derivative product such that the fee component of the cash flow of a first interval, a second interval, and a third interval are each different;

c) if a predetermined triggering event occurs for any of the predetermined number of constituents before an expiration date, then requiring sufficient payment to cover an appropriate percentage of the final settlement price of the derivative product; and

d) if no predetermined triggering event occurs before the expiration date, then terminating the agreement at a zero final settlement price.

24. The apparatus of claim 23, the method further comprising:

a) submitting, using the interface, an adjusted performance bond for the derivative product for receipt by the computer system.

25. The apparatus of claim 23, wherein the exchanged traded derivative product is a credit default swap with a predetermined number of constituents.