System and method of margining fixed payoff products

• US 8,341,062 B2
• Filed: 11/21/2011
• Issued: 12/25/2012
• 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:
  US13/300,881
• Publication Number:
  US 20120072373A1
• Time in Patent Office: 400 Days
• Field of Search: 705 35- 45
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 20/102 Bill distribution or payments
• 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 system and method is disclosed for determining performance bonds for fixed payoff products, i.e. contracts which payoff a fixed amount based on the outcome of an underlying event regardless of the value thereof. The worst outcome of the overall portfolio, which may contain more multiple instruments, is calculated, allowing the portfolio to have both long and short positions on the same underlying event and offsets among instruments within the portfolio. A universe of outcomes is constructed including single events with single outcomes, and the probability thereof, and single events with multiple outcomes, each with a probability thereof. Each outcome has an associated price and probability. Low probability events will have low values, resulting in a lower margin requirement. The margin requirement is then the amount of the maximum loss that the portfolio can sustain for any possible outcome of the underlying event, adjusted for the probability thereof.

Claims

1. A computer implemented method of minimizing a margin requirement for a portfolio comprising at least one product, each product of the at least one product having one or more discontinuous payoffs associated therewith, each of the one or more discontinuous payoffs being based on an outcome of an associated event at which the product may settle, the method comprising:

determining, by a computer system comprising at least a computer processor, a subset of outcomes, out of a finite set of all possible outcomes, at which each of the at least one product may settle and a resultant change in value thereof;

assigning, by the computer system, a probability weight to each outcome of the subset of outcomes representative of a probability an occurrence thereof; and

computing, by the computer system, the margin requirement based on the resultant change in value resulting from each of the subset of outcomes and the probability weight assigned thereto.

2. The computer implemented method of claim 1 wherein the resultant change in value of a particular product of the at least one product resulting from a particular outcome of the subset of outcomes is zero, positive or negative.

3. The computer implemented method of claim 1 wherein the at least one product comprises a first product having a first payoff based on a first outcome of a first event and a second product having a second payoff based on a second outcome of the first event, the second outcome being different from the first outcome, a contribution to the margin requirement based on the first product being at least partially offset by a contribution to the margin requirement based the second product.

4. The computer implemented method of claim 1 wherein an amount of each of the one or more discontinuous payoffs is independent of the value of the underlying event

5. The computer implemented method of claim 1 wherein an outcome of the subset of outcomes having assigned thereto a probability weight lower than a probability weight assigned to another outcome of the subset of outcomes contributes less to the margin requirement.

6. The computer implemented method of claim 1 wherein a contribution to the margin requirement by an outcome of the subset of outcomes having a low probability is minimized.

7. The computer implemented method of claim 1 wherein the associated event has a single outcome.

8. The computer implemented method of claim 1 wherein the associated event has multiple outcomes.

9. The computer implemented method of claim 1 wherein the associated event comprises a binary event, the outcome comprising an occurrence outcome and non-occurrence outcome of the event.

10. The computer implemented method of claim 1 wherein the subset of outcomes comprises non-redundant outcomes.

11. A system for computing a minimized a margin requirement for a portfolio comprising at least one product, each product of the at least one product having one or more discontinuous payoffs associated therewith, each of the one or more discontinuous payoffs being based on an outcome of an associated event at which the product may settle, the system comprising a processor and a memory coupled therewith, the system further comprising:

a possible outcome generator computer software program stored in the memory and executable by the processor to determine a subset of outcomes, out of a finite set of all possible outcomes, at which each of the at least one product may settle and a resultant change in value thereof;

a probability generator computer software program stored in the memory and coupled with the possible outcome generator computer software program and executable by the processor to assign a probability weight to each outcome of the subset of outcomes representative of a probability an occurrence thereof; and

a risk processor computer software program stored in the memory and coupled with the possible outcome generator computer software program and the probability generator computer software program and executable by the processor to compute the margin requirement based on the resultant change in value resulting from each of the subset of outcomes and the probability weight assigned thereto.

12. The system of claim 11 wherein the resultant change in value of a particular product of the at least one product resulting from a particular outcome of the subset of outcomes is zero, positive or negative.

13. The system of claim 11 wherein the at least one product comprises a first product having a first payoff based on a first outcome of a first event and a second product having a second payoff based on a second outcome of the first event, the second outcome being different from the first outcome, a contribution to the margin requirement based on the first product being at least partially offset by a contribution to the margin requirement based the second product.

14. The system of claim 11 wherein an amount of each of the one or more discontinuous payoffs is independent of the value of the underlying event.

15. The system of claim 11 wherein an outcome of the subset of outcomes having assigned thereto a probability weight lower than a probability weight assigned to another outcome of the subset of outcomes contributes less to the margin requirement.

16. The system of claim 11 wherein a contribution to the margin requirement by an outcome of the subset of outcomes having a low probability is minimized.

17. The system of claim 11 wherein the associated event has a single outcome.

18. The system of claim 11 wherein the associated event has multiple outcomes.

19. The system of claim 11 wherein the associated event comprises a binary event, the outcome comprising an occurrence outcome and non-occurrence outcome of the event.