Total Fair Value Swap

• US 8,650,112 B2
• Filed: 05/23/2011
• Issued: 02/11/2014
• Est. Priority Date: 09/12/2005
• Status: Active Grant

• Current Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Original Assignee: JP Morgan Chase Bank, N.A. (JP Morgan Chase & Co)
• Inventors: Oaten, David A, Wolf, Stephen J, Jhamb, Pankaj
• Primary Examiner(s): Kalinowski, Alexander
• Assistant Examiner(s): CAMPBELL, KELLIE L
• Application Number:
  US13/113,425
• Publication Number:
  US 20110258103A1
• Time in Patent Office: 995 Days
• Field of Search: 705/35, 705/36.R, 705/37
• US Class Current: 705/37
• 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

Abstract

A synthetic instrument known as a “Total Fair Value Swap” is disclosed. According to one embodiment, the Total Fair Value Swap may comprise an agreement between two counterparties, a “Fixed Rate Payer” and a “Floating Rate Payer”. According to the agreement, the Fixed Rate Payer makes a stream of payments to the Floating Rate Payer based on a fixed rate, and the Floating Rate Payer makes a second stream of payments to the Fixed Rate Payer based on a floating rate, wherein a first portion of the floating rate is based on a reference interest rate, and wherein a second portion of the floating rate is based on a credit spread associated with the Floating Rate Payer. The reference interest rate may be, for example, London Inter-Bank Offer Rate (LIBOR), prime interest rate, the US dollar swap rate, the U.S. Treasury Bond rate or any other widely traded interest rate that is reset periodically. The credit spread may be observed from the Credit Default Swap (CDS) market.

Claims

1. A computer-based financial system comprising at least one processor configured to facilitating a Total Fair Value Swap transaction between a first counterparty and a second counterparty, the system further comprising:

means for interfacing the first and second counterparties to the system;

database means for storing and maintaining records related to the Total Fair Value Swap transaction, the records reflecting the first counterparty'"'"'s obligation to make one or more fixed payments to the second counterparty and the second counterparty'"'"'s obligation to make one or more floating payments to the first counterparty, wherein the one or more fixed payments are based on a reference interest rate and the one or more floating payments are based at least in part on a credit spread associated with the second counterparty;

a rate monitoring processor, configured to derive the credit spread from a credit default swap market and to periodically determine the floating payment amount based at least in part on the credit spread, the rate monitoring processor being configured to determine the fixed payment amount by adjusting the reference interest rate on a periodic basis; and

transaction management means, operatively coupled to the means for interfacing, the database means and the rate monitoring processor, for tracking the one or more fixed payments and the one or more floating payments.

2. The system according to claim 1, wherein the reference interest rate is determined based on one or more interest rates selected from a group consisting of:

London Inter-Bank Offer Rate (LIB OR);

prime interest rate;

U.S. dollar swap rate;

U.S. Treasury Bond rate; and

federal funds rate.

3. The system according to claim 1, wherein the floating payment amount is determined based on a floating rate comprising a first portion and a second portion, wherein the first portion is determined based on an interest rate unrelated to the credit spread, and wherein the second portion is determined based on the credit spread.

4. The system according to claim 3, wherein the second portion is determined based on a predetermined percentage of the credit spread.

5. The system according to claim 4, wherein the predetermined percentage is set at a level which causes a net present value of the Total Fair Value Swap transaction to be zero at initiation of the Total Fair Value Swap transaction.

6. The system according to claim 1, wherein the transaction management means establishes a maximum amount for the one or more floating payments when the credit spread is above a predetermined level, the transaction management means being configured to stop further floating payments when the maximum floating payment amount is exceeded.

7. The system according to claim 1, wherein the transaction management means causes at least a portion of the Total Fair Value Swap transaction to terminate based upon one or more triggering events associated with the second counterparty or a third party.

8. The system according to claim 3, wherein the first portion of the floating rate is further determined based on one or more interest rates selected from a group consisting of:

London Inter-Bank Offer Rate (LIBOR);

prime interest rate;

U.S. dollar swap rate;

U.S. Treasury Bond rate; and

federal funds rate.

9. The system according to claim 1, wherein the rate monitoring means is configured to determine the floating payment amount at a time corresponding to a fixed point during a payment period.

10. The system according to claim 1, wherein the second counterparty purchases an option to enter into the Total Fair Value Swap transaction.

11. The system according to claim 1, wherein the terms of the Total Fair Value Swap transaction include a scheduled maturity date.

12. The system according to claim 11, wherein the first counterparty purchases an option contract that gives the first counterparty a right but not an obligation to terminate the Total Fair Value Swap transaction before the scheduled maturity date.

13. The system according to claim 11, wherein the second counterparty purchases an option contract that ˜

gives the second counterparty a right but not an obligation to terminate the Total Fair Value Swap transaction before the scheduled maturity date.

14. The system according to claim 1, wherein the first counterparty implements the rate monitoring means in order to monitor the second counterparty'"'"'s credit spread.

15. The system according to claim 14, wherein the first counterparty calculates the second counterparty'"'"'s floating payments.

16. The system according to claim 1, wherein the first counterparty makes the fixed payments and second counterparty makes the floating payments through an automatic electronic funds transfer.