Methods and apparatus relating to the formulation and trading of risk management contracts

• US 5,970,479 A
• Filed: 05/28/1993
• Issued: 10/19/1999
• Est. Priority Date: 05/29/1992
• Status: Expired due to Term

• Current Assignee: Alice Corporation Pty Limited, Swychco Infrastructure Services Pty Limited, Swychco Support Services Pty Limited
• Original Assignee: Swychco Infrastructure Services Pty Limited, Swychco Support Services Pty Limited
• Inventors: Shepherd, Ian K.
• Primary Examiner(s): Hayes, Gail O.
• Assistant Examiner(s): MACDONALD, ALLEN R
• Application Number:
  US08/070,136
• Time in Patent Office: 2,335 Days
• Field of Search: 364/408, 705/4, 705/37
• US Class Current: 705/37
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/08 Insurance

Abstract

Methods and apparatus which deal with the management of risk relating to specified, yet unknown, future events are disclosed.

`Sponsor` stakeholders specify a particular product relating to an event or phenomenon for which there is a range of possible future outcomes.

`Ordering` stakeholders then offer contracts relating to the predetermined phenomenon and corresponding range of outcomes. The offered contracts specify an entitlement or (pay-off) at the future time of maturity for each outcome, and a consideration (or premium) payable, in exchange, to a `counter-party` stakeholder.

Independently of the offered contracts, the `counter-party` stakeholders input data as to their view of the likelihood of occurrence of each outcome in the predetermined range into the future, or specifically at the predetermined date of maturity.

Each offered contract is priced by calculating counter-party premiums from the registered data, and a match attempted by a comparison of the offered premium with the calculated premiums.

Matched contracts can be further traded until maturity, and at-maturity processing handles the exchange of entitlement as between the matched parties to the contract.

Claims

1. A computer-based data processing system to enable the formulation of customized multi-party risk management contracts having a future time of maturity, the system comprising:

at least one stakeholder input means by which ordering stakeholders can input contract data representing at least one offered contract in at least one predetermined phenomenon, each said phenomenon having a range of future outcomes, and said contract data specifying entitlements due at maturity for said range of future outcomes, and a consideration due to a counter-party stakeholder;

at least one counter-party stakeholder input means by which at least one counter-party stakeholder can input registering data, independent of said stakeholder entering said contract data, as to a likelihood of each outcome in said range of future outcomes for one or more of said predetermined phenomena;

a data storage means linked with each said stakeholder input means and linked with each said counter-party stakeholder input means to store said contract data and said registering data; and

data processing means, linked with the data storage means, for pricing and matching contracts from said contract data and said registering data, said pricing including calculating a counter-consideration derived from said likelihoods and said entitlements, and said matching including comparing said consideration and said counter-consideration to match an offered contract with at least one of said counter-party stakeholders.

2. The system as in claim 1, further comprising at least one other-stakeholder input means linked with the data storage means, and by which phenomena and associated range of outcomes can be input to be stored in the data storage means to be ones of said predetermined phenomena and said range of future outcomes therefor.

3. The system as in claim 2, wherein each other-stakeholder input means is configured so that each said predetermined phenomenon and associated range of future outcomes further include a predetermined time of maturity, and said contract data and said registering data are for the time of maturity.

4. The system as in claim 2 or claim 3, wherein said registering data for each outcome represents a probability of that outcome eventuating at the time of maturity, and said counter-consideration is calculated by elemental multiplication of entitlements and the respective likelihood, all summed over the range, and adjusted at least to calculate the present day value thereof.

5. The system as in claim 4, wherein the said other-stakeholder input means is configured to receive updating data as to a present day outcome of each of the phenomena, in turn to be passed to the data storage means for recordal.

6. The system as in claim 5, wherein, on maturity of the contract, the data processing means retrieves the updated present day outcome of the respective phenomenon from the data storage means, determines an entitlement due for that outcome, and passes the entitlement to output means of the data processing system for exchange of the entitlement between the matched stakeholders.

7. The system as in claim 6, wherein said output means is linked with data communications means to remote locations where stakeholder accounts reside, and the data processing means causes transaction of the entitlement between respective stakeholder accounts.

8. The system as in claim 4, wherein said other-stakeholder input means receives qualification data which places qualification on which of the counter-party registering data can be used to price and/or match an offered contract, the said qualification data being stored in the data storage means.

9. The system as in claim 8, wherein said qualification data is input to the input means by parties including stakeholder guarantors, and financial or institutional regulators.

10. The system as in claim 4, wherein the data processing means is configured so that a match of an offered contract is made on the basis only of a counter-consideration being less than or equal to the said consideration.

11. The system as in claim 10, wherein the data processing means is configured so that a match of an offered contract is made with a preferred one of a counter-consideration being less than or equal to the said consideration.

12. The system as in claim 4, further comprising a credit record and a debit record for each stakeholder held with an exchange Institution, the credit records and debit records for exchange of entitlements;

and the data storage means of the data processing apparatus being configured to include a shadow credit record and a shadow debit record for each stakeholder, the data processing means being configured to obtain a start-of-day balance for each shadow credit record and shadow debit record, and for every transaction resulting in an exchange obligation, adjusting the respective shadow credit record or shadow debit record, allowing only those transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order, and the data processing means further being configured to, at the end-of-day, instruct ones of the exchange institutions to exchange transacted credits or debits to the credit record and debit record of the respective stakeholders in accordance with the adjustments of the said permitted transactions, the credits and debits be Irrevocable, time invariant obligations placed on the exchange institutions.

13. The system as in claim 1, wherein, on a match of an offered contract, the data processing means passes the matched contract to the data storage means for recordal.

14. The system as in claim 13, wherein the output means generates confirmatory documentation for each stakeholder to a matched contract.

15. The computer-based data processing system of claim 1, further includes a second counter party stakeholder input means by which a second counter-party stakeholder can input registering data.

16. A system to enable the formulation of customized multi-party risk management contracts, the system comprising:

a plurality of main data processing devices interconnected by at least one data communications link, each said data processing device running an operating system and applications software;

one or more data storage devices to which each data processing device has access;

a plurality of data input/output channels providing connection to a plurality of stakeholder locations, each said location having data processing means, and the system being programmed for;

regulating input of data, specifying a risk phenomenon, a range of outcomes for the phenomenon, and a time of maturity;

stakeholders inputting to a said data storage device by ones of the stakeholder data processing locations contract data for an offered contract, specifying an entitlement due at maturity for each outcome in the range of outcomes for a one of the predetermined phenomena, and an amount payable to a seller;

counter-party stakeholders inputting to a data storage device by ones of the stakeholder data processing locations registering data, independent of contract data entered by stakeholders, as to a likelihood of occurrence of each outcome in the range of outcomes for at least one of the predetermined phenomena;

pricing and matching a contract by the main data processing devices for at least one of the offered contracts from the seller registered data by;

for an offered contract, selecting the registering data for the respective phenomenon and, in response to entitlements specified for each outcome in the range of outcomes for the phenomenon, calculating a counter-consideration, and, by comparison of the calculated counter-consideration with the consideration, matching an offered contract with at least one counter-party stakeholder.

17. The system as in claim 16, further comprising output means for each distributed data processing location whereby, on a match of a contract, confirmation is output in the form of data or documentation to respective output means for the matched stakeholders.

18. A method to enable the formulation of customized multi-party risk management contracts having a future time of maturity, the method comprising the steps of:

(a) inputting into data processing apparatus, by at least one ordering stakeholder input means thereof, contract data representing at least one offered contract in at least one predetermined phenomenon having a range of future outcomes, and said contract data specifying entitlements due at maturity for the range of future outcomes, and consideration due to a counter-party stakeholder;

(b) inputting into said data processing apparatus, by at least one counter-party stakeholder input means thereof, counter-party registering data, independent of at least one ordering stakeholder entering contract data, as to a likelihood of each outcome in said range of future outcomes for one or more of said predetermined phenomena;

(c) storing, in a data storage means of said data processing apparatus linked with each said stakeholder input means and linked with each said counter-party stakeholder input means, said contract data and said registering data; and

(d) pricing and matching at least one of the offered contracts by data processing means of the data processing apparatus linked with said data storage means, said pricing and matching comprising the steps, for each offered contract, of;

(i) calculating a counter-consideration derived from said likelihoods and said entitlements;

(ii) comparing said consideration and said counter-consideration; and

(iii) matching a contract on the basis of said comparison.

19. The method as in claim 18, comprising the further step, before step (a), of:

(aa) inputting into said data processing apparatus, by at least one other other-stakeholder Input means thereof, predetermining data of a said phenomenon and an associated range of outcomes.

20. The method as in claim 19, wherein the step (at) further comprises inputting a predetermined time of maturity for each predetermined phenomenon and associated range of outcomes.

21. The method as in claim 20, wherein the registering data for each outcome represents a likelihood of that outcome eventuating at the time of maturity, and the step (d)(i) is performed by

multiplying elemental entitlements for each outcome with the respective likelihood;

summing the products for the range of outcomes; and

adjusting the sum at least to calculate a present day value thereof to give the counter-party consideration.

22. The method as in claim 21, comprising the further steps, following step (d), of:

(h) inputting, by the other-stakeholder input means, qualification data on which of the counter-party registering data can be used to price an offered contract.

23. The method as in claim 21, wherein the step (d)(iii) is performed by considering those counter-considerations being only less than or equal to said consideration.

24. The method as in claim 23, wherein the step (d)(iv) is performed by matching a preferred one of the counter-considerations being less than or equal to the said consideration.

25. The method as in claim 19, comprising the further step following step (d) of:

(e) inputting, by the other-stakeholder input means, data representing a present day outcome of each phenomenon.

26. The method as in claim 25, comprising the further steps, following step (e) of, at the time of maturity:

(f) calculating the entitlement for the updated present day outcome; and

(g) exchanging the entitlement between matched stakeholders.

27. The method as in claim 18 or claim 19 comprising the further step, following step (d), and before the time of maturity, of:

(m) a party to a matched contract offering a stake in the contract to other parties in exchange for a consideration, and, on acceptance of the stake and exchange of the consideration by another party, that other party becoming a stakeholder to the contract.

28. The method as in claim 18, wherein each stakeholder holds a credit record and a debit record with an exchange institution, the credit record and debit record for exchange of entitlements, the method comprising the further steps, following step (d), of:

(i) creating a shadow credit record and a shadow debit record for each stakeholder to be held independently by the data processing apparatus from the exchange institutions;

(j) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

(k) for every translation resulting In an exchange obligation, the supervisory institution adjusting each respective shadow credit record or shadow debit record, allowing only those transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and

(l) at the end-of-day, the data processing apparatus instructing ones of the exchange institutions to exchange transacted credits or debits to the credit record and debit record of the respective stakeholders in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions.

29. The method as in claim 28, wherein the end-of-day instructions represent credits and debits netted throughout the day for each stakeholder in respect of all the transactions of that day.

30. The method as in claim 18, comprising the further step following step (d) of:

(n) passing matched contracts to the data storage means for recordal.

31. The method as in claim 30, comprising the further step following step (n) of:

(o) generating confirmatory documentation for each stakeholder for each matched contract.

32. A method of making a computer system, the method comprising the steps of:

(a) interconnecting at least one stakeholder data input means and at least one counter-stakeholder data input means to data storage means;

(b) interconnecting the data storage means with data processing means;

(c) interconnecting the data processing means with output means; and

(d) programming the data processing means to;

(i) accept stakeholder input data of contract data representing at least one offered contract, each offered contract specifying a predetermined phenomenon, each phenomenon having a range of future outcomes, and each said contract data having a future time of maturity, an entitlement due for each outcome in said range of outcomes, and a consideration payable to a counter-party stakeholder;

(ii) accept counter-stakeholder registering data, independent of said stakeholder input data being accepted, as to a likelihood of each outcome in said range of future outcomes for each one or more of said phenomena;

(iii) process the contract data and the registering data to price and match a contract, said pricing including;

selecting the registering data corresponding to the time of maturity for each predetermined phenomenon, and calculating a counter-consideration derived from said entitlements and said likelihoods; and

said matching including comparing said consideration and said counter-consideration to match an offered contract with at least one of said counter-party stakeholders; and

(iv) output confirmatory data or documentation for each matched contract.

33. A method of exchanging obligations as between parties, each party holding a credit record and a debit record with an exchange institution, the credit records and debit records for exchange of predetermined obligations, the method comprising the steps of:

(a) creating a shadow credit record and a shadow debit record for each stakeholder party to be held independently by a supervisory institution from the exchange institutions;

(b) obtaining from each exchange institution a start-of-day balance for each shadow credit record and shadow debit record;

(c) for every transaction resulting in an exchange obligation, the supervisory institution adjusting each respective party'"'"'s shadow credit record or shadow debit record, allowing only these transactions that do not result in the value of the shadow debit record being less than the value of the shadow credit record at any time, each said adjustment taking place in chronological order; and

(d) at the end-of-day, the supervisory institution instructing ones of the exchange institutions to exchange credits or debits to the credit record and debit record of the respective parties in accordance with the adjustments of the said permitted transactions, the credits and debits being irrevocable, time invariant obligations placed on the exchange institutions.

34. The method as in claim 33, wherein the end-of-day instructions represent credits and debits netted throughout the day for each party in respect of all the transactions of that day.

35. A data processing system to enable the formulation of customized multi-party risk management contracts, the system comprising:

at least one stakeholder input means by which ordering stakeholders can input contract data representing at least one offered contract in at least one predetermined phenomenon, each said phenomenon having a future outcome at a time of maturity, and said contract data specifying an entitlement due at maturity for each outcome in a range of future outcomes;

at least one counter-party stakeholder input means by which at least one counter-party stakeholder can input registering data, independent of said stakeholders inputting said contract data, for one or more of said predetermined phenomena;

a data storage means linked with each said stakeholder input means and linked with each said counter-party stakeholder input means to store said contract data and said registering data; and

data processing means, linked with the data storage means, for pricing and matching contracts from said contract data and said registering data, said pricing including calculating counter-considerations derived from said registering data relating to the phenomenon of the contract data, and said matching including comparing said counter-considerations to match an offered contract with at least one of said counter-party stakeholders.

36. A data processing system to enable the formulation of customized potential multi-party risk management contracts, the system comprising:

at least one stakeholder input means by which ordering stakeholders can input contract data representing at least one offered contract in at least one predetermined phenomenon, each said phenomenon having a future outcome at a time of maturity, and said contract data specifying an entitlement due at maturity for each outcome in a range of future outcomes;

at least one counter-party stakeholder input means by which at least one counter-party stakeholder can input registering data, independent of said stakeholders inputting said contract data, for one or more of said predetermined phenomena;

a data storage means linked with each said stakeholder input means and linked with each s aid counter-party stakeholder input means to store said contract data and said registering data; and

data processing means, linked with the data storage means, for pricing contracts from said contract data and said registering data, said pricing including calculating counter-considerations derived from said registering data relating to the phenomenon of the contract data.

37. A data-processing system to enable the formulation of customized multi-party risk management contracts, the system comprising:

at least one stakeholder input means by which ordering stakeholders can input contract data representing at least one offered contract in at least one predetermined phenomenon, each said phenomenon having a future outcome at a time of maturity, and said contract data specifying an entitlement due at maturity for each outcome in a range of future outcomes;

at least one counter-party stakeholder input means by which at least one counter-party stakeholder can input registering data, independent of said stakeholders inputting said contract data, for one or more of said predetermined phenomena;

a data storage means linked with each said stakeholder input means and linked with each said counter-party stakeholder input means to store said contract data and said registering data; and

data processing means, linked with the data storage means, for pricing and matching contracts from said contract data and said registering data, said pricing including calculating counter-considerations for each outcome in said range derived from said registering data relating to the phenomenon of the contract data, and said matching including comparing said counter-considerations for each outcome in said range and over said range to match an offered contract with at least one of said counter-party stakeholders.

38. A data processing system to enable the formulation of customized multi-party risk management contracts, the system comprising:

at least one stakeholder input means by which ordering stakeholders can input contract data representing at least one offered contract in at least one predetermined phenomenon, each said phenomenon having a future outcome at a time of maturity, and said contract data specifying an entitlement due at maturity for each outcome in a range of future outcomes;

at least one counter-party stakeholder input means by which at least one counter-party stakeholder can input registering data, independent of said stakeholders inputting said contract data, for one or more of said predetermined phenomena;

a data storage means linked with each said stakeholder input means and linked with each said counter-party stakeholder input means to store said contract data and said registering data; and

data processing means, linked with the data storage means, for pricing and matching contracts from said contract data and said registering data, said pricing including dividing the entitlement into integer components, and, for each component, calculating counter-considerations derived from said registering data relating to the phenomenon of the contract data, and said matching including comparing each component said counter-considerations to match an offered contract with at least one of said counter-party stakeholders.

39. A data processing system to enable the formulation of customized multi-party risk management contracts, the system comprising:

at least one stakeholder input means by which ordering stakeholders can input contract data representing at least one offered contract in at least one predetermined phenomenon, each said phenomenon having a future outcome at a time of maturity, and said contract data specifying an entitlement due at maturity for each outcome in a range of future outcomes;

at least one counter-party stakeholder input means by which at least one counter-party stakeholder can input registering data, independent of said stakeholders inputting said contract data, for one or more of said predetermined phenomena;

a data storage means linked with each said stakeholder input means and linked with each said counter-party stakeholder input means to store said contract data and said registering data; and

data processing means, linked with the data storage means, for pricing and matching contracts from said contract data and said registering data, said pricing including calculating counter-considerations derived from said registering data relating to the phenomenon of the contract data, and said matching including comparing said counter-considerations to match an offered contract with at least one of said counter-party stakeholders, and further for periodically repricing the ordering data of matched contracts, said repricing including calculating counter-considerations derived from at least some of said registering data relating to the phenomenon of the contract.