Systems and methods for implementing the structuring, pricing, quotation, and trading of financial instruments

• US 7,574,394 B2
• Filed: 02/16/2006
• Issued: 08/11/2009
• Est. Priority Date: 02/16/2005
• Status: Expired due to Fees

• Current Assignee: Cayuga Derivatives Incorporated, Dev Capital Ventures, LLC
• Original Assignee: Cayuga Derivatives Incorporated, Sri, Inc.
• Inventors: Sankaran, Srikanth, Chorna, Douglas T.
• Primary Examiner(s): Havan; Thu Thao
• Application Number:
  US11/354,866
• Publication Number:
  US 20060271461A1
• Time in Patent Office: 1,272 Days
• Field of Search: 705 36- 37
• US Class Current: 705/36.00R
• 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

An exchange-traded financial instrument having a price that tracks an underlying benchmark, the underlying benchmark being a security or commodity that is itself traded. A contract for the financial instrument between a buyer and seller is not contingent upon the delivery of the underlying benchmark. A net carrying charge (credit or debit), defined as the difference between the investment yield of the underlying benchmark and a cost of financing ownership of the underlying benchmark using the generally accepted industry standard financing rate for that benchmark, is credited or debited, accrued, or built into the price of the derivative for both buyer and seller of the financial instrument, typically nightly. In one embodiment, the underlying benchmark is a U.S. Treasury security, and preferably a specific U.S. Treasury security such as the on the run (OTR) 10 Year Treasury note. Other single contract spread and ratio instruments are also disclosed.

Claims

1. A financial instrument tradable between a buyer and a seller comprising:

a tradable instrument having a characteristic that tracks an underlying benchmark with an identifiable value, the tradable instrument undergoing change with each change of the underlying benchmark, the underlying benchmark being one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument;

the tradable instrument requiring clearing of the tradable instrument between the buyer and seller through one of a commodities exchange, securities exchange, and an organization approved by the United States Government for clearing financial instruments and wherein the clearing of the tradable instrument is not contingent upon the delivery of the underlying benchmark; and

a net carrying charge charged to one of the buyer and the seller if the identifiable value of the underlying benchmark has increased in value and to the other of the buyer and seller if the identifiable value of the underlying benchmark has decreased in value.

2. The financial instrument of claim 1, wherein the financial instrument settles at a same price as the underlying benchmark on a predetermined date.

3. The financial instrument of claim 1, wherein the net carrying charge is charged on a daily basis.

4. The financial instrument of claim 1, wherein the net carrying charge is accrued.

5. The financial instrument of claim 1, wherein the net carrying charge is charged after a predetermined time period.

6. The financial instrument of claim 1, wherein the net carrying charge is calculated as a difference between an investment yield of the underlying benchmark and a specific industry standard financing rate assigned for the underlying benchmark.

7. The financial instrument of claim 6, wherein the specific industry standard financing rate for the benchmark comprises one of a Treasury repo rate for Treasury securities, a broker loan rate for equities, and a gold lending rate for cash gold.

8. The financial instrument of claim 1, wherein the underlying benchmark is a United States Treasury security.

9. The financial instrument of claim 8, wherein the underlying benchmark is a specific United States Treasury security.

10. The financial instrument of claim 8, wherein the underlying benchmark is a specific Treasury security that has already been auctioned by the United States Treasury.

11. The financial instrument of claim 8, wherein the underlying benchmark is an on the run (OTR) United States Treasury security.

12. The financial instrument of claim 1, traded as an exchange-traded fund.

13. The financial instrument of claim 1, wherein one of a long contract holder and a short contract holder has the option of settling the contract via one of (a) cash settlement and (b) delivering or receiving delivery of the underlying benchmark.

14. The financial instrument of claim 1, wherein the underlying benchmark is replaced by a different benchmark at a predetermined time.

15. The financial instrument of claim 1, wherein the underlying benchmark is replaced by a different underlying benchmark upon an occurrence of an exogenous event.

16. An option on a financial instrument tradable between a buyer and a seller, the financial instrument comprising:

a tradable tracking instrument that tracks an underlying benchmark with an identifiable value, the underlying benchmark being one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument;

the tracking instrument requiring clearing of the tracking instrument between the buyer and seller through one of a commodities exchange, securities exchange, and an organization approved by the United States Government for clearing financial instruments and wherein the clearing of the tracking instrument is not contingent upon the delivery of the underlying benchmark; and

the tracking instrument being converted upon clearing whereby tracking ceases and a net carrying charge is charged to one of the buyer and the seller if the identifiable value of the underlying benchmark has increased in value and to the other of the buyer and seller if the identifiable value of the underlying benchmark has decreased in value.

17. A method of trading a financial instrument between a buyer and a seller on one of a commodities exchange, securities exchange, electronic communication network (ECN), alternative trading system (ATS), and an organization approved by the United States Government for clearing financial instruments, the method comprising:

providing a tradable instrument that has a characteristic that tracks an underlying benchmark with an identifiable value;

clearing the tradable instrument wherein the clearing of the tradable instrument between the buyer and the seller is not contingent upon the delivery of the underlying benchmark, the underlying benchmark being one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument; and

applying a net carrying charge that is charged to one of the buyer and the seller if the identifiable value of the underlying benchmark increases in value and to the other of the buyer and seller if the identifiable value of the underlying benchmark decreases.

18. The method of claim 17 wherein the underlying benchmark is one of an on-the-run (OTR) United States Treasury, a specific Treasury different from the on-the-run United States Treasury, an equity listed on a securities exchange, an index listed on a commodity or securities exchange, a hypothetical security, and a derivative instrument.

19. The method of claim 17, wherein applying the net carrying charge occurs after a predetermined period of time.

20. The method of claim 17, wherein the clearing includes settling the financial instrument as between the buyer and seller at a same price as the underlying benchmark on a predetermined date.

21. The method of claim 17, further comprising exchanging the financial instrument for the underlying benchmark at the option of one of the buyer and seller.

22. The method of claim 17, further comprising exchanging the financial instrument for the underlying benchmark according to predetermined rules.

23. The method of claim 17, further comprising calculating the net carry charge as a difference between an investment yield of the underlying benchmark and a specific generally accepted industry standard financing rate appropriate for the underlying benchmark.

24. The method of claim 17, further comprising replacing of the underlying benchmark with a different underlying benchmark upon an occurrence of an exogenous event.

25. The method of claim 17 further comprising replacing the underlying benchmark with a different underlying benchmark according to predetermined rules upon an occurrence of an exogenous event occurs at the option of one of the buyer and seller.

26. The method of claim 17 further comprising automatic replacing of the underlying benchmark with a different underlying benchmark according to predetermined rules upon an occurrence of an exogenous event.

27. The method of claim 24 wherein the exogenous event includes one of the following:

a) bankruptcy;

b) credit downgrade;

c) restructuring of debt;

d) recall of a loan;

e) acceleration of a loan;

f) price of some specified financial instrument reaching a target level;

g) change of political party in control; and

h) change in control of party controlling either or both Houses of Congress.

28. A method of trading an option on a financial instrument between a buyer and a seller on at least a commodities exchange, securities exchange, electronic communication network (ECN), alternative trading system (ATS), and an organization approved by the United States Government for clearing financial instruments, the method comprising:

providing a tradable instrument that has a characteristic that tracks an underlying benchmark with an identifiable value,

clearing the tradable instrument wherein the clearing of the tradable instrument between the buyer and the seller is not contingent upon the delivery of the underlying benchmark, the underlying benchmark being one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument; and

applying a net carrying charge that is charged to one of the buyer and the seller if the identifiable value of the underlying benchmark increases in value and to the other of the buyer and seller if the identifiable value of the underlying benchmark decreases.

29. A financial instrument tradable between a buyer and a seller comprising:

a tradable instrument having a characteristic that tracks an underlying benchmark with an identifiable value, the tradable instrument being transformed to cease tracking of the underlying benchmark and to track another benchmark upon the occurrence of one or more predetermined first exogenous events, the underlying benchmark being one of;

a debt, equity, security, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument;

the tradable instrument requiring clearing of the tradable instrument between the buyer and seller through at least one of a commodities exchange, securities exchange, or an organization approved by the United States Government for clearing financial instruments and wherein the clearing of the tradable instrument is not contingent upon the delivery of the underlying benchmark; and

an option that can be exercised.

30. The financial instrument of claim 29 wherein the option can be exercised only upon the occurrence of one or more predetermined second exogenous events.

31. The financial instrument of claim 30 wherein the one or more predetermined first exogenous events are different from the one or more predetermined second exogenous events.

32. The financial instrument of claim 30 wherein one of the first and second exogenous events includes at least one of the following:

a) bankruptcy;

b) credit downgrade;

c) restructuring of debt;

d) recall of a loan;

e) acceleration of a loan;

f) price of some specified financial instrument reaching a target level;

g) change of political party in control; and

h) change in control of party controlling either or both Houses of Congress.

50. The financial instrument of claim 29, further comprising a computer based system for computation and dissemination of prices for the financial instrument.

33. A method of trading a financial instrument tradable between a buyer and a seller on one of a commodities exchange, securities exchange, electronic communication network (ECN), alternative trading system (ATS), and an organization approved by the United States Government for clearing financial instruments, the method comprising:

providing a tradable instrument whose price or return tracks an underlying benchmark with an identifiable value;

clearing the tradable instrument whose price or return tracks an underlying benchmark with an identifiable value, wherein the clearing of the

tradable instrument between the buyer and the seller is not contingent upon the delivery of the underlying benchmark and wherein the underlying benchmark can change to another underlying benchmark upon the occurrence of one or more predetermined first exogenous events, the underlying benchmark being one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument; and

derivative on a debt, equity, currency, or commodity instrument; and

offering an option that can be exercised.

34. The method of trading a financial instrument of claim 33 wherein the option can be exercised only upon the occurrence of one or more predetermined second exogenous events.

35. The method of claim 33 wherein the underlying benchmark is one of an on-the-run (OTR) United States Treasury, a specific Treasury different from the on-the-run United States Treasury, an equity listed on a securities exchange, an index listed on a commodity or securities exchange, a hypothetical security, and a derivative instrument.

36. The method of claim 33, further comprising applying a net carrying charge that is charged to one of the buyer and the seller if the identifiable value of the underlying benchmark increases in value and to the other of the buyer and seller if the identifiable value of the underlying benchmark decreases.

37. The method of claim 36, wherein applying the net carrying charge occurs after a predetermined period of time.

38. The method of claim 36, further comprising calculating the net carrying charge as a difference between an investment yield of the underlying benchmark and a specific generally accepted industry standard financing rate appropriate for the underlying benchmark.

39. The method of claim 33, wherein the clearing includes settling the financial instrument as between the buyer and seller at a same price as the underlying benchmark on a predetermined date.

40. The method of claim 35 wherein one of the first and second exogenous events includes one of the following:

a) bankruptcy;

b) credit downgrade;

c) restructuring of debt;

d) recall of a loan;

e) acceleration of a loan;

f) price of some specified financial instrument reaching a target level;

g) change of political party in control; and

h) change in control of party controlling either or both Houses of Congress.

41. The method of claim 33 wherein the change to another underlying benchmark upon the occurrence of one or more predetermined first exogenous events is determined by one of either the buyer or seller according to predetermined rules.

42. The method of claim 33 wherein the change to another underlying benchmark upon the occurrence of one or more predetermined first exogenous events occurs automatically according to rules.

43. A method of trading an option on a financial instrument tradable between a buyer and a seller on one of a commodities exchange, securities exchange, electronic communication network (ECN), alternative trading system (ATS), and an organization approved by the United States Government for clearing financial instruments, the method comprising:

providing an instrument whose price or return tracks an underlying benchmark with an identifiable value;

clearing the instrument whose price or return tracks an underlying benchmark with an identifiable value, wherein the clearing of the instrument between the buyer and the seller is not contingent upon the delivery of the underlying benchmark and wherein the underlying benchmark can change to another underlying benchmark upon the occurrence of one or more predetermined first exogenous events, the underlying benchmark being at least one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument; and

offering an option that can be exercised upon the occurrence of one or more predetermined second exogenous events.

44. A financial instrument tradable between a buyer and a seller comprising:

a tradable futures instrument having a characteristic that tracks an underlying benchmark with an identifiable value, the underlying benchmark being at least one of;

a debt, equity, commodity, or currency instrument;

index containing a debt, equity, currency, or commodity instrument;

and derivative on a debt, equity, currency, or commodity instrument;

wherein a clearing of the tradable futures instrument between the buyer and seller is through at least one of a commodities exchange, securities exchange, and an organization approved by the United States Government for clearing financial instruments and wherein the clearing of the tradable futures instrument is not contingent upon the delivery of the underlying benchmark; and

a net carrying charge that is charged to one of the buyer and the seller if the identifiable value of the underlying benchmark increases in value and to the other of the buyer and seller if the identifiable value of the underlying benchmark decreases in value.

45. The futures contract of claim 44 further comprising a final settlement procedure of the futures contract that does not require the use of any conversion factor or coupon adjustment to determine a final settlement price.

46. The futures contract of claim 44, wherein the underlying benchmark is an on the run (OTR) Untied States Treasury security.

47. The futures contract of claim 44, wherein the underlying benchmark is a specific instrument issued by the Government of Canada.

48. The futures contract of claim 44, wherein the underlying benchmark is a coupon bearing instrument issued or guaranteed by the United States of America.

49. The futures contract of claim 44,wherein the underlying benchmark is a bond or note issued or guaranteed by the United States of America.