System and method of margining fixed payoff products

• US 8,825,541 B2
• Filed: 08/15/2013
• Issued: 09/02/2014
• 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:
  US13/967,815
• Publication Number:
  US 20130332392A1
• Time in Patent Office: 383 Days
• Field of Search: 705/36.R
• 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 comprising at least one product having an associated fixed payoff value based on an occurrence of one of a finite set of at least two outcomes of an event, the method comprising:

determining, by a computer processor, a subset of outcomes, out of the 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 processor, a probability weight to each outcome of the subset of outcomes representative of a probability of an occurrence thereof, wherein determination of the probability weight is based at least in part on one or more parameters reflecting a desired degree of risk coverage and/or one or more types of market data; and

computing, by the computer processor, 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 parameters are selected from the group consisting of price scan range, volatility scan range, intra-commodity spread charge, short option minimum, spot charge, inter-commodity spread credit, interexchange spread credit, and combinations thereof.

3. The computer-implemented method of claim 1 wherein the market data is selected from the group consisting of real time market data, historical market data, and a combination thereof.

4. 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.

5. 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.

6. 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.

7. 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.

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

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

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

11. A system for computing a margin requirement for a portfolio comprising at least one product having an associated fixed payoff value based on an occurrence of one of a finite set of at least two outcomes of an event, the system comprising:

a computer processor;

a non-transitory memory coupled to the computer processor;

first logic stored in the memory and executable by the computer processor to cause the computer 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;

second logic stored in the memory and executable by the computer processor to cause the computer processor to assign a probability weight to each outcome of the subset of outcomes representative of a probability of an occurrence thereof, wherein determination of the probability weight is based at least in part on one or more parameters reflective of a desired degree of risk coverage and/or one or more types of market data; and

third logic stored in the memory and executable by the computer processor to cause the computer 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 parameters are selected from the group consisting of price scan range, volatility scan range, intra-commodity spread charge, short option minimum, spot charge, inter-commodity spread credit, interexchange spread credit, and combinations thereof.

13. The system of claim 11 wherein the market data is selected from the group consisting of real time market data, historical market data, and a combination thereof.

14. 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.

15. 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.

16. 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.

17. 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.

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

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