System and method for using diversification spreading for risk offset

• US 8,266,046 B2
• Filed: 10/24/2011
• Issued: 09/11/2012
• 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: Glinberg, Dmitriy, Gogol, Edward, Michaels, Dale A.
• Primary Examiner(s): Havan, Thu Thao
• Application Number:
  US13/279,616
• Publication Number:
  US 20120041893A1
• Time in Patent Office: 323 Days
• Field of Search: 705 35- 38
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/03 Credit; Loans; Processing thereof
• 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

A computer-implemented method for analyzing a risk offset associated with a portfolio including a plurality of products traded on an exchange is disclosed. The method includes comparing a first market response of a first product in the portfolio with a second market response of a second product in the portfolio where the first and second market responses result from a change in market data, calculating an offsetting effect between the first market response and the second market response where the first and second market responses are substantially different responses to the same change in the market data, determining a diversification spread based on the offsetting effect derived between the first product and the second product, calculating a diversification spread credit based on the determined diversification spread, and adjusting a margin requirement for the portfolio based on the diversification spread credit.

Claims

1. A computer-implemented method for analyzing a risk offset associated with a portfolio including a plurality of products traded on an exchange, the method comprising:

comparing a first market response of a first product in the portfolio with a second market response of a second product in the portfolio, wherein the first and second market responses result from a change in market data;

calculating an offsetting effect between the first market response and the second market response, wherein the first and second market responses are different responses to the same change in the market data;

determining a diversification spread based on the offsetting effect derived between the first product and the second product;

calculating a diversification spread credit based on the determined diversification spread; and

adjusting a margin requirement for the portfolio based on the diversification spread credit.

2. The method of claim 1 further comprising:

establishing a diversification group, wherein the diversification group within the portfolio is defined between a third product which is correlated to the first product.

3. The method of claim 2 further comprising:

determining a market condition, wherein the market condition effects the first product in the portfolio and the second product is unchanged by the market condition.

4. The method of claim 1 further comprising:

assigning a diversification class based on a product sector represented by the first product.

5. The method of claim 1, wherein the portfolio includes at least one credit-event future such as a credit default swap.

6. The method of claim 1 further comprising:

calculating a delta-based spread on the first product and the second product.

7. A computer-implemented method of determining the risk associated with a portfolio of products traded on an exchange, the method comprising:

analyzing a portfolio including a plurality of products where each of the plurality of products is associated with market data;

calculating an initial margin for the portfolio;

determining a first group within the plurality of products, wherein the first group includes interdependent products having a first market response in response to a change in the market data;

determining a second group within the plurality of products, wherein the second group includes interdependent products having a second market response in response to the change in the market data;

calculating a first diversification spread for the first group and a second diversification spread for the second group;

calculating a diversification spread credit for each of the first and second groups; and

adjusting the initial margin as a function of the first diversification spread credit and the second diversification credit.

8. The method of claim 7, wherein the portfolio further includes a third product having a third market response in response to the change in market data, and wherein at least the first and third products are correlated products.

9. The method of claim 8 further comprising:

associating the third product to the first group based on the similarity of the third market response to the first market response.

10. The method of claim 9 further comprising:

defining a first diversification class to a first product sector within the first group;

defining a second diversification class to a second product sector within the first group; and

calculating a first sector spread for the first diversification class and a second sector spread for the second diversification class.

11. The method of claim 7, wherein the plurality of products includes at least one credit default swap product.

12. The method of claim 8, wherein calculating the initial margin includes calculating a delta-based spread between the first group and the second group.

13. A system for managing risk associated with a portfolio of products traded on an exchange, the system comprising:

a memory;

a program logic stored on the memory and configured to execute in conjunction with at least one processor;

a diversification spread processor communicatively coupled to the memory and the program logic, the diversification spread processor configured to;

compare a first market response of a first product in the portfolio with a second market response of a second product in the portfolio, wherein the first and second market responses result from a change in market data;

calculate an offsetting effect based between the first market response and the second market response, wherein the first and second market responses are different responses to the same change in the market data;

determine a diversification spread the offsetting effect between the first product and the second product;

a diversification spread credit processor communicatively coupled to the memory and the program logic, the diversification spread credit processor configured to calculate a diversification spread credit based on the determined diversification spread; and

a margin adjustment processor communicatively coupled to the memory and the program logic and configured to adjusting a margin requirement for the portfolio based on the diversification spread credit.

14. The system of claim 13, wherein the diversification spread processor is configured to determine a first diversification factor associated with the first product and a second diversification factor associated with second first product.

15. The system of claim 14, wherein the first and second diversification factors spread are selected from the group consisting of a diversification group and a diversification class.

16. The system of claim 13, wherein the first product is a credit default swap.

17. The system of claim 15 further comprising:

a delta-based spread processor configured to determine a delta-based spread between the first product and the second product.