System and method for centralized clearing of over the counter foreign exchange instruments

• US 10,726,479 B2
• Filed: 10/31/2006
• Issued: 07/28/2020
• Est. Priority Date: 11/18/2005
• Status: Active Grant

• Current Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Original Assignee: Chicago Mercantile Exchange, Inc. (CME Group Incorporated)
• Inventors: Bauerschmidt, Paul Andrew, Glinberg, Dmitriy, Gogol, Edward M., Goldman, Stephen M., Lichter, Paul I., Mitchell, Jeffrey Robert, Studnitzer, Ari L., Yoo, Tae Seok C.
• Primary Examiner(s): Borlinghaus, Jason
• Application Number:
  US11/590,540
• Publication Number:
  US 20070118459A1
• Time in Patent Office: 5,019 Days
• Field of Search: None
• 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

Abstract

The disclosed systems and methods relate to allowing trading of over the counter (“OTC”) foreign exchange (“FX”) contracts on a centralized matching and clearing mechanism, such as that of the Chicago Mercantile Exchange'"'"'s (“CME”'"'"'s) futures exchange system (the “Exchange”). The disclosed systems and methods allow for anonymous transactions, centralized clearing, efficient settlement and the provision of risk management/credit screening mechanisms to lower risk, reduce transaction costs and improve the liquidity in the FX market place. In particular, the disclosed embodiments increase speed of execution facilitating growing demand for algorithmic trading, increased price transparency, lower cost of trading, customer to customer trading, and automated asset allocations, recurring trades as well as clearing and settlement efficiencies.

Claims

1. A computer implemented method of trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments, the method comprising:

receiving via an electronic communications network by a match processor of an intermediary electronic trading system from a first entity of the plurality of entities a first request for a first transaction in a particular foreign exchange instrument;

identifying, by the match processor, a second request received via the electronic communications network by the intermediary electronic trading system from a second entity of the plurality of entities for a second transaction in the particular foreign exchange instrument where the second transaction is at least partially counter to the first transaction, wherein the second request is characterized by a time period within which a suitable counter transaction will be accepted;

evaluating, by evaluation logic of the match processor, the first request to determine the time of transmission of the first request so as to compensate for any network transmission latency of the electronic communications network and comparing the determined time of transmission with the time period of the second request and further determining that the first request was transmitted to the match processor prior to expiration of the time period regardless of whether the first request was received thereafter; and

matching, by the match processor, the first request with the second request based on the determination that the first request was transmitted prior to the expiration of the time period and subsequently facilitating the first and second transactions without the intermediary electronic trading system communicating data identifying the first and second entities to each other;

wherein the facilitating further comprises;

initiating, by the intermediary electronic trading system, performance of the first transaction between the first entity and the intermediary electronic trading system and initiating performance of the second transaction between the second entity and the intermediary electronic trading system wherein if it is determined that one of the first and second transactions matched by the match processor is incapable of being completed, performance of the other of the first and second transactions proceeds unaffected;

recording, by the intermediary electronic trading system in a first account stored in a database coupled with the intermediary electronic trading system and associated with the first entity, data indicative of a first position resulting from at least the initiation of the first transaction and indicating that the first transaction is yet to be completed, the first position being one of a plurality of positions for which data indicative thereof is recorded in the first account as a result of at least initiation of performance of a plurality of other transactions received from the first entity each of which is yet to be completed, wherein each of the plurality of other transactions is subject to subsequent completion between the intermediary electronic trading system and the first entity, each of the plurality of other transactions being associated with a counter-transaction matched with the other transaction by the intermediary electronic trading system;

recognizing, by a netting processor, the first position of the plurality of positions in the first account at least partially correlates with a second position of the plurality of positions in the first account, the correlation being independent of them being recorded in the same account and independent of the counter-transaction associated with the at least one transaction from which the first and second positions resulted;

combining, by netting processor, the recognized first position with the second position to create a net position and recording the net position in the first account, wherein at least one of the recognized first position, the second position or combinations thereof are nullified by the combining; and

eliminating, by the netting processor, the recognized first position, the second position or combinations thereof, along with the associated transactions and data indicative thereof stored in the database, that are nullified by the combining;

whereby fewer positions, as well as the data indicative thereof, remain in the first account and database for subsequent completion of the associated transactions.

2. The computer implemented method of claim 1 further comprising:

collateralizing a monetized risk value of the completed transaction and receiving from the entity, from which the completed transaction request was received, at least a portion thereof as a pledge against a margin requirement.

3. The computer implemented method of claim 1, wherein the matching further comprises substituting the intermediary for the second entity in the first transaction and substituting the intermediary for the first entity in the second transaction.

4. The computer implemented method of claim 3, wherein the substituting further comprises creating a novation.

5. The computer implemented method of claim 1, wherein the financial instruments further comprise futures instruments, and wherein the first account is characterized by a monetized risk value representative of the at least one position and a collateral value representative of the monetized risk value less any collateral value pledged as collateral, the method further comprising:

recording, in a second account associated with the first entity, at least one position resulting from at least one transaction related to one or more of the futures instruments;

computing a margin requirement for the second account based on the at least one position of the second account;

receiving a pledge of a portion of the collateral value of the first account to cover the margin requirement of the second account; and

reducing the collateral value of the first account and the margin requirement of the second account based on the pledge.

6. The computer implemented method of claim 5 further comprising issuing a margin call to the first entity to fulfill the remaining margin requirement when the margin requirement is not satisfied by the pledged portion of the collateral value.

7. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments, the system comprising a processor and a memory coupled therewith, the system further comprising:

computer executable program code stored in the memory and executable by the processor to implement;

a request receiver operative to receive, via a communications network coupled with the processor, a first request from a first entity of the plurality of entities for a first transaction in a particular foreign exchange instrument;

a match identifier coupled with the request receiver and operative to identify a second request received via the communications network from a second entity of the plurality of entities for a second transaction in the particular foreign exchange instrument where the second transaction is at least partially counter to the first transaction, wherein the second request is characterized by a time period within which a suitable counter transaction will be accepted;

evaluation logic operative to evaluate the first request to determine the time of transmission of the first request so as to compensate for any network transmission latency of the electronic communications network and compare the determined time of transmission with the time period of the second request and further determine that the first request was transmitted to the match processor prior to expiration of the time period regardless of whether the first request was received thereafter;

a match processor coupled with the match identifier and operative to match the first request with the second request based on the determination that the first request was transmitted prior to the expiration of the time period and subsequently facilitate the first and second transactions without an intermediary electronic trading system communicating data identifying the first and second entities to each other;

a settlement processor operative to initiate performance of the first transaction between the first entity and the intermediary electronic trading system and initiate performance of the second transaction between the second entity and the intermediary electronic trading system, wherein the settlement processor is operative to determine when one of the first and second transactions matched by the match processor is incapable of being completed, and, upon that occurrence, operative to complete performance of the other of the first and second transactions;

a first account database coupled with the settlement processor and operative to record, in a first account associated with the first entity, data indicative of a first position resulting from at least the initiation of the first transaction and indicating that the first transaction is yet to be completed, the first position being one of a plurality of positions for which data indicative thereof is recorded in the first account as a result of at least initiation of performance of a plurality of other transactions received from the first entity each of which is yet to be completed, wherein each of the plurality of other transactions is subject to subsequent completion between the intermediary electronic trading system and the first entity, each of the plurality of other transactions being associated with a counter-transaction matched with the other transaction by the intermediary electronic trading system;

a netting processor coupled with the first account database and operative to recognize the first position of the plurality of positions in the first account at least partially correlates with a second position of the plurality of positions in the first account, the correlation being independent of them being recorded in the same account and independent of the counter-transaction associated with the at least one transaction from which the first and second positions resulted; and

wherein the netting processor is further operative to combine the recognized first position with the second position to create a net position and record the net position in the first account and eliminate the recognized first position, the second position or combinations thereof, along with the associated transactions and data indicative thereof stored in the first account database, that are nullified by the combination;

whereby fewer positions, as well as the data indicative thereof, remain in the first account and first account database for subsequent completion of the associated transactions.

8. The system of claim 7 further comprising:

a collateral processor operative to collateralize a monetized risk value of the completed transaction and allowing the entity, from which the completed transaction request was received, to pledge at least a portion thereof against a margin requirement.

9. The system of claim 7, wherein the settlement processor is further operative to substitute the intermediary for the second entity in the first transaction and substitute the intermediary for the first entity in the second transaction.

10. The system of claim 9, wherein the substitution of the intermediary for the first and second entities creates a novation.

11. The system of claim 7, wherein the financial instruments further comprise futures instruments, and wherein the first account is characterized by a monetized risk value representative of the at least one position and a collateral value representative of the monetized risk value less any collateral value pledged as collateral, the system further comprising:

a second account database operative to record, in a second account associated with the first entity, at least one position resulting from at least one transaction related to one or more of the futures instruments;

a risk processor coupled with the second account database and operative to compute a margin requirement for the second account based on the at least one position of the second account;

a collateral processor coupled with the first account database and the risk processor and operative to receive a pledge of a portion of the collateral value of the first account to cover the margin requirement of the second account; and

wherein the risk processor is further operative to reduce the collateral value of the first account and the margin requirement of the second account based on the pledge.

12. The system of claim 11 wherein the risk processor is further operative to issue a margin call to the first entity to fulfill the remaining margin requirement when the margin requirement is not satisfied by the pledged portion of the collateral value.