System and method of margining fixed payoff products

• US 8,538,852 B2
• Filed: 11/16/2012
• Issued: 09/17/2013
• 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:
  US13/679,606
• Publication Number:
  US 20130080355A1
• Time in Patent Office: 305 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 computing a margin requirement for a portfolio, the portfolio comprising at least one product having at least one associated fixed payoff value based on at least one outcome of a finite set of outcomes of an event, the method comprising:

determining, by a computer system comprising at least a computer processor, for each of the at least one product, an associated set of non-redundant outcomes of the finite set of outcome including the at least one outcome upon which the at least one associated fixed payoff value is based;

generating, by the computer system, for each of the at least one product, a risk value for each outcome of the associated set of non-redundant outcomes, the risk value comprising one of a no change, gain or loss of a product value of the at least one product associated with the particular outcome;

adjusting, by the computer system for each of the at least one product, each of the risk values based on a likelihood that the associated outcome will occur;

determining, by the computer system, for each non-redundant outcome of the associated set of non-redundant outcomes, an aggregate risk value of each of the adjusted risk values generated for the particular outcome of each of the at least one product;

determining, by the computer system, a maximum aggregate risk value comprising the aggregate risk value representing the largest loss from among the determined aggregate risk values; and

computing, by the computer system, a margin requirement as a difference between a value of the portfolio and the maximum aggregate risk value.

2. The computer implemented method of claim 1 wherein the risk value for each outcome of the associated set of non-redundant 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 the at least one associated fixed payoff value of at least one of the at least one product comprises one or more discontinuous payoff and where in 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 the adjusting further comprises assigning, by the computer system, a probability weight to each outcome of the set of non-redundant outcomes representative of a probability of an occurrence thereof.

6. The computer implemented method of claim 5 wherein an outcome of the set of non-redundant 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.

7. The computer implemented method of claim 5 wherein a contribution to the margin requirement by an outcome of the set of non-redundant outcomes having a low probability is minimized.

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

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

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

11. A system for computing a margin requirement for a portfolio, the portfolio comprising at least one product having at least one associated fixed payoff value based on at least one outcome of a finite set of outcomes of an event, 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, for each of the at least one product, an associated set of non-redundant outcomes of the finite set of outcome including the at least one outcome upon which the at least one associated fixed payoff value is based;

a risk array value generator computer software program stored in the memory and coupled with the possible outcome generator computer software program and executable by the processor to generate, for each of the at least one product, a risk value for each outcome of the associated set of non-redundant outcomes, the risk value comprising one of a no change, gain or loss of a product value of the at least one product associated with the particular outcome;

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 adjust, for each of the at least one product, each of the risk values based on a likelihood that the associated outcome will occur;

a risk processor computer software program stored in the memory coupled with the probability generator computer software program and executable by the processor to determine, for each non-redundant outcome of the associated set of non-redundant outcomes, an aggregate risk value of each of the adjusted risk values generated for the particular outcome of each of the at least one product;

the risk processor computer software program being further executable by the processor to determine a maximum aggregate risk value comprising the aggregate risk value representing the largest loss from among the determined aggregate risk values and compute a margin requirement as a difference between a value of the portfolio and the maximum aggregate risk value.

12. The system of claim 11 wherein the risk value for each outcome of the associated set of non-redundant 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 the at least one associated fixed payoff value of at least one of the at least one product comprises one or more discontinuous payoff and where in 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 the probability computer software program is further executable by the processor to assign a probability weight to each outcome of the set of non-redundant outcomes representative of a probability of an occurrence thereof.

16. The system of claim 15 wherein an outcome of the set of non-redundant 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.

17. The system of claim 15 wherein a contribution to the margin requirement by an outcome of the set of non-redundant outcomes having a low probability is minimized.

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

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

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