Derivative products

• US 8,423,446 B2
• Filed: 08/08/2012
• Issued: 04/16/2013
• 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:
  US13/569,916
• Publication Number:
  US 20120303510A1
• Time in Patent Office: 251 Days
• Field of Search: 705 35- 40
• US Class Current: 705/36.R
• 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. An apparatus for trading an exchange traded derivative product using an exchange computer system, comprising:

a processing unit;

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

a memory unit storing computer-executable instructions, which when executed by the processing unit, cause the computer system to perform a method comprising;

receiving, through the interface of the exchange computer system, 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;

updating, by the processing unit, a price of the derivative product through a mark-to-market process, including transferring at an interval a cash flow between the protection buyer and a protection seller based on the price of the derivative product;

adjusting, by the processing unit, 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; and

for each of the predetermined number of constituents that experience a predetermined triggering event before an expiration date, applying, by the processing unit, a percentage of a final settlement price of the derivative product.

2. The apparatus of claim 1, wherein the memory unit further stores computer-executable instructions, which when executed by the processing unit, cause the computer system to perform a method comprising:

terminating the derivative product at the earlier of;

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

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

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

5. The apparatus of claim 1, wherein the final settlement price of the derivative product is determined based on a predetermined fixed amount that 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.

6. The apparatus of claim 1, wherein the final settlement price of the derivative product is determined based on a variable amount calculated using a predetermined formula with a variable damage recovery rate.

7. The apparatus of claim 1, wherein the price of the derivative product is based on a total remaining time until expiration of the derivative product, wherein the updating the price of the derivative product is performed daily through a mark-to-market process, and wherein the price of the derivative product is zero at a time of expiration of the derivative product.

8. The apparatus of claim 1, wherein the predetermined triggering event is a credit event based on at least one of the following:

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

9. The apparatus of claim 1, wherein the predetermined triggering event is a weather event based on at least one of the following:

temperature, precipitation, and windspeed.

10. The apparatus 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.

11. The apparatus of claim 1, wherein the derivative product is a credit default swap, and a clearinghouse acts as a guarantor of the derivative product.

12. The apparatus of claim 1, wherein the derivative product is based on a single reference entity.

13. The apparatus of claim 1, wherein the derivative product is a credit default option, and a clearinghouse acts as a guarantor of the derivative product.

14. The apparatus of claim 1, wherein the memory unit further stores computer-executable instructions, which when executed by the processing unit, cause the computer system to perform a method comprising:

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

15. A non-transitory computer-readable medium storing computer-executable instructions configured to cause a computer executing the computer-executable instructions to perform a method comprising:

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;

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

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

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

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, wherein a total fee for the derivative product is not received until an expiration date of the derivative product; and

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

16. The non-transitory computer-readable medium of claim 15, further storing computer-executable instructions configured to cause the computer to perform a method comprising:

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, wherein the derivative product is a credit default swap with 125 constituents.

17. The non-transitory computer-readable medium of claim 15, wherein the final settlement of the derivative product is based on a variable amount calculated using a predetermined formula with a variable damage recovery rate.

18. A method comprising:

receiving an initial performance bond for an exchange-traded derivative product by an exchange 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;

adjusting, by a processor of the computer system, 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; and

performing one of the following;

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

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

19. The method of claim 18, further comprising:

receiving, using the computer system, an adjusted performance bond for the derivative product.

20. The method of claim 18, wherein the exchanged traded derivative product is a credit default swap with a predetermined number of constituents.