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

• US 20070118459A1
• Filed: 10/31/2006
• Published: 05/24/2007
• 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: Studnitzer, Ari, Glinberg, Dmitriy, Gogol, Edward, Mitchell, Jeffrey, Yoo, Tae Seok, Lichter, Paul, Goldman, Stephen, Bauerschmidt, Paul
• Granted Patent: US 10,726,479 B2
• Time in Patent Office: Days
• 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

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 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 from a first entity of the plurality of entities a first request for a first transaction in a particular foreign exchange instrument;

identifying a second request received 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; and

matching the first request with the second request and facilitating the first and second transactions without identifying the first and second entities to each other;

wherein the facilitating further comprises;

attempting to perform the first transaction between the first entity and an intermediary and attempting to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

2. The method of claim 1 further comprising:

collateralizing a monetized risk value of the first transaction and allowing the first entity to pledge at least a portion thereof against a margin requirement.

3. The method of claim 1 wherein performance of the first transaction results in a first position, the method further comprising:

correlating a first position resulting from the first transaction against a second position resulting from a prior transaction of the first entity and netting the first and second positions.

4. The 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.

5. The method of claim 4, wherein the substituting further comprises creating a novation.

6. The method of claim 1, wherein the financial instruments further comprise futures instruments, the method further comprising

recording, in a first account associated with the first entity, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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;

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.

7. The method of claim 6 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.

8. The method of claim 1 further comprising:

recording, in a first account associated with the first entity, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between the intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary;

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

combining the recognized first position with the second position to create a net position and recording the net position in the first account; and

eliminating any of the recognized first position, the second position or combinations thereof, that are nullified by the combining;

whereby fewer positions may remain in the first account for subsequent settlement.

9. A method of trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments and futures instruments, the method comprising:

recording, in a first account associated with a first entity of the plurality of entities, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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;

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.

10. The method of claim 9 further comprising:

receiving from the first entity a first request for a first transaction in a particular foreign exchange instrument;

identifying a second request received 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; and

matching the first request with the second request and facilitating the first and second transactions without identifying the first and second entities to each other;

wherein the facilitating further comprises;

attempting to perform the first transaction between the first entity and an intermediary and attempting to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

11. The method of claim 10 wherein performance of the first transaction results in a first position, the method further comprising:

correlating a first position resulting from the first transaction against a second position resulting from a prior transaction of the first entity and netting the first and second positions.

12. The method of claim 10, 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.

13. The method of claim 12, wherein the substituting further comprises creating a novation.

14. The method of claim 9 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.

15. The method of claim 9 further comprising:

recording, in the first account associated with the first entity, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between an intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary;

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

combining the recognized first position with the second position to create a net position and recording the net position in the first account; and

eliminating any of the recognized first position, the second position or combinations thereof, that are nullified by the combining;

whereby fewer positions may remain in the first account for subsequent settlement.

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

recording, in a first account associated with a first entity of the plurality of entities, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between an intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary;

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

combining the recognized first position with the second position to create a net position and recording the net position in the first account; and

eliminating any of the recognized first position, the second position or combinations thereof, that are nullified by the combining;

whereby fewer positions may remain in the first account for subsequent settlement.

17. The method of claim 16 further comprising:

receiving from the first entity a first request for a first transaction in a particular foreign exchange instrument;

identifying a second request received 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; and

matching the first request with the second request and facilitating the first and second transactions without identifying the first and second entities to each other;

wherein the facilitating further comprises;

attempting to perform the first transaction between the first entity and the intermediary and attempting to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

18. The method of claim 17, 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.

19. The method of claim 18, wherein the substituting further comprises creating a novation.

20. The method of claim 16 further comprising:

collateralizing a monetized risk value of the first transaction and allowing the first entity to pledge at least a portion thereof against a margin requirement.

21. The method of claim 16, wherein the financial instruments further comprise futures instruments, the method further comprising

recording, in the first account associated with the first entity, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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;

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.

22. The method of claim 21 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.

23. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments, the method comprising:

a request receiver operative to receive 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 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; and

a match processor coupled with the match identifier and operative to match the first request with the second request and facilitate the first and second transactions without identifying the first and second entities to each other;

wherein the match processor is further coupled with a settlement processor operative to attempt to perform the first transaction between the first entity and an intermediary and attempt to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

24. The system of claim 23 further comprising:

a collateral processor operative to collateralize a monetized risk value of the first transaction and allowing the first entity to pledge at least a portion thereof against a margin requirement.

25. The system of claim 23 wherein performance of the first transaction results in a first position, the system further comprising:

a netting processor operative to correlate a first position resulting from the first transaction against a second position resulting from a prior transaction of the first entity and net the first and second positions.

26. The system of claim 23, 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.

27. The system of claim 26, wherein the substitution of the intermediary for the first and second entities creates a novation.

28. The system of claim 23, wherein the financial instruments further comprise futures instruments, the system further comprising

a first account database operative to record, in a first account associated with the first entity, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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;

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.

29. The system of claim 28 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.

30. The system of claim 23 further comprising:

a first account database operative to record, in a first account associated with the first entity, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between the intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary;

a netting processor coupled with the first account database and operative to recognize a first position of the plurality of positions in the first account which at least partially correlates with a second position of the plurality of positions in the first account, the correlation being 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 any of the recognized first position, the second position or combinations thereof, that are nullified by the combination;

whereby fewer positions may remain in the first account for subsequent settlement.

31. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments and futures instruments, the method comprising:

a first account database operative to record, in a first account associated with a first entity of the plurality of entities, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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;

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.

32. The system of claim 31 further comprising:

request receiver operative to receive from the first entity a first request 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 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; and

a match processor coupled with matching identifier and operative to match the first request with the second request and facilitate the first and second transactions without identifying the first and second entities to each other wherein the match processor is further coupled with a settlement processor operative to attempting to perform the first transaction between the first entity and an intermediary and attempt to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

33. The system of claim 32, wherein performance of the first transaction results in a first position, the system further comprising:

a netting processor operative to correlate a first position resulting from the first transaction against a second position resulting from a prior transaction of the first entity and net the first and second positions.

34. The system of claim 32, 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.

35. The system of claim 34, wherein the substitution of the intermediary for the first and second entities creates a novation.

36. The system of claim 31 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.

37. The system of claim 31 wherein the first account database is further operative to record, in the first account associated with the first entity, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between an intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary, the system further comprising:

a netting processor coupled with the first account database and operative to recognize a first position of the plurality of positions in the first account which at least partially correlates with a second position of the plurality of positions in the first account, the correlation being 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 any of the recognized first position, the second position or combinations thereof, that are nullified by the combination;

whereby fewer positions may remain in the first account for subsequent settlement.

38. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments, the method comprising:

a first account database operative to record, in a first account associated with a first entity of the plurality of entities, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between an intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary;

a netting processor coupled with the first account database and operative to recognize a first position of the plurality of positions in the first account which at least partially correlates with a second position of the plurality of positions in the first account, the correlation being 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 recording the net position in the first account and eliminate any of the recognized first position, the second position or combinations thereof, that are nullified by the combination;

whereby fewer positions may remain in the first account for subsequent settlement.

39. The system of claim 38 further comprising:

a request receiver operative to receive from the first entity a first request 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 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; and

a match processor coupled with the match identifier and operative to match the first request with the second request and facilitate the first and second transactions without identifying the first and second entities to each other wherein the match processor is further coupled with a settlement processor operative to attempt to perform the first transaction between the first entity and the intermediary and attempt to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

40. The system of claim 39, 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.

41. The system of claim 40, wherein the substitution of the intermediary for the first and second entities creates a novation.

42. The system of claim 38 further comprising:

a collateral processor operative to collateralize a monetized risk value of the first transaction and allowing the first entity to pledge at least a portion thereof against a margin requirement.

43. The system of claim 38, wherein the financial instruments further comprise futures instruments, the first account database being further operative to record in the first account associated with the first entity, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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.

44. The system of claim 43 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.

45. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments, the method comprising:

means for receiving from a first entity of the plurality of entities a first request for a first transaction in a particular foreign exchange instrument;

means for identifying a second request received 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, the means for identifying being coupled with the means for receiving; and

means for matching, coupled with the means for identifying, the first request with the second request and facilitating the first and second transactions without identifying the first and second entities to each other wherein the means for matching is further coupled with means for attempting to perform the first transaction between the first entity and an intermediary and attempting to perform the second transaction between the second entity and the intermediary, whereby the performance of the first transaction is independent of the performance of the second transaction.

46. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments and futures instruments, the method comprising:

means for recording, in a first account associated with a first entity of the plurality of entities, at least one position resulting from at least one transaction related to at least one of the foreign exchange instruments, the first account being 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;

means for 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;

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

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

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

47. A system for trading financial instruments among a plurality of entities participating in a market, the financial instruments comprising foreign exchange instruments, the method comprising:

means for recording, in a first account associated with a first entity of the plurality of entities, a plurality of positions each resulting from at least one transaction related to at least one of the foreign exchange instruments, wherein each of the plurality of positions is subject to subsequent settlement between an intermediary and the first entity, each of the at least one transaction being associated with a counter-transaction matched with the at least one transaction by the intermediary;

means for recognizing a first position of the plurality of positions in the first account which at least partially correlates with a second position of the plurality of positions in the first account, the correlation being independent of the counter-transaction associated with the at least one transaction from which the first and second positions resulted;

means for combining the recognized first position with the second position to create a net position and recording the net position in the first account; and

means for eliminating any of the recognized first position, the second position or combinations thereof, that are nullified by the combining;

whereby fewer positions may remain in the first account for subsequent settlement.