Derivative products

• US 8,447,679 B2
• Filed: 08/13/2012
• Issued: 05/21/2013
• 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, Peterson, Paul, Nyhoff, John, Srinivasan, Sayee
• Primary Examiner(s): Borlinghaus, Jason M
• Assistant Examiner(s): Fu, Hao
• Application Number:
  US13/572,828
• Publication Number:
  US 20130041802A1
• Time in Patent Office: 281 Days
• Field of Search: 705/4, 705/35, 705/37
• US Class Current: 705/35
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange

Abstract

Systems and methods are described for processing and clearing derivatives products with a binary outcome and having a final settlement based on a triggering event. 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., the credit rating of a reference entity. As a result of price adjustments, cash flow may be generated between buyers and sellers. The derivative product may pay a predetermined final settlement amount or percentage upon the triggering of a predetermined event. 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 an initial performance bond of a protection buyer of a derivative product, wherein the derivative product has a binary outcome;

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

adjusting the cash flow including a part of a total fixed 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;

determining, by the processing unit of the exchange computer system, the occurrence of a predetermined triggering event before an expiration date; and

applying, by the processing unit of the exchange computer system, a final settlement price of the derivative product.

2. The apparatus of claim 1, wherein updating the price of the derivative product comprises:

analyzing a probability that a triggering event will occur; and

determining a final settlement price commensurate of the risks associated with said triggering event.

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

4. The apparatus of claim 1, wherein the final settlement of the derivative product is applied at a predetermined fixed amount that is a percentage of a notional value of the derivative product.

5. The apparatus of claim 1, wherein the final settlement of the derivative product is applied at a variable amount calculated using a predetermined formula.

6. 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, and wherein the price of the derivative product is zero at a time of expiration of the derivative product.

7. The apparatus of claim 1, wherein updating the price of the derivative product at an interval is performed daily through a mark-to-market process.

8. The apparatus of claim 1, wherein the predetermined triggering event is a credit event.

9. The apparatus of claim 8, 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.

10. 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.

11. 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.

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

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

14. 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.

15. A non-transitory computer-readable medium storing computer-executable instructions which are 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 binary outcome;

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 fixed 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;

determining occurrence of a predetermined triggering event before an expiration date; and

applying a final settlement price of the agreement and terminating the agreement.

16. The computer-readable medium of claim 15, containing computer-executable instructions for performing a method comprising:

analyzing a probability that a triggering event will occur;

determining a final settlement price commensurate of the risks associated with said triggering event; and

terminating the agreement upon the expiration date before a predetermined triggering event occurs, wherein the derivative product is a credit default swap.