Investment transaction structure in which one party may substitute one investment for another
View Patent ↗In one general aspect, the present invention is directed to methods that may comprise the step of a first party entering into at least one derivative contract with a second party. The derivative contract may provide the second party with a short position on a derivative portfolio including one or more securities. Also, the derivative contract may grant a transferable right to substitute individual securities included in the derivative portfolio. This right may be granted to either the first party or the second party, and the right to substitute may transfer between the first party and the second party under certain conditions. In various embodiments, however, only one of the first party and the second party may have the right to substitute at any one time.
1. A computer system for facilitating transactions between a first party and a second party, the computer system comprising:
an electronic memory device; and
an electronic processor in communication with the memory device, wherein the memory device comprises instructions that when executed by the processor cause the processor to:
receive an indication of a derivative portfolio indicating one or more securities on which the first party is long and the second party is short;
receive an indication of a long portfolio of securities on which the second party holds a long position, wherein the long portfolio and the derivative portfolio do not have any securities in common;
determine whether a right to substitute securities from the derivative portfolio resides with the first party or the second party;
conditioned on the right to substitute residing with the first party, substitute a first security from the derivative portfolio for an equal value of a second security in response to an instruction originated by the first party;
conditioned on the right to substitute residing with the second party, substitute a third security from the derivative portfolio for an equal value of a fourth security in response to an instruction originated by the second party.
2. The computer system of claim l, wherein the memory device further comprises instructions that when executed by the processor cause the processor to determine a first payment from the first party to the second party wherein determining the first payment comprises multiplying a predetermined interest rate by a notional value of the derivative portfolio.
3. The computer system of claim 2 , wherein the predetermined interest rate is an index rate plus a spread.
4. The computer system of claim 1 , wherein a notional position of the derivative portfolio is less than a notional position of the long portfolio by a predetermined percentage.
5. The computer system of claim 1 , wherein determining whether the right to substitute securities from the derivative portfolio resides with the first party or the second party comprises:
setting the right to substitute with the second party; and
conditioned upon the occurrence of a predetermined event, switching the right to substitute to the first party.
6. The computer system of claim 5 , wherein the memory device further comprises instructions that when executed by the processor cause the processor to calculate a benchmark index, and wherein the predetermined event occurs when the performance of the derivative portfolio exceeds the benchmark index.
7. The computer system of claim 1 , wherein the memory device further comprises instructions that when executed by the processor cause the processor to determine values of the first security and the second security based on Volume Weighted Average Prices of the respective securities.
8. The computer system of claim 1 , wherein the long portfolio comprises a restricted security and wherein the derivative portfolio does not include the restricted security.
9. A computer-implemented method for facilitating transactions between a first party and a second party, the method comprising:
receiving by a computer an indication of a derivative portfolio indicating one or more securities on which the first party is long and the second party is short, wherein the computer comprises an electronic memory device and an electronic processor in communication with the memory device;
receiving by the computer an indication of a long portfolio of securities on which the second party holds a long position, wherein the long portfolio and the derivative portfolio do not have any securities in common;
determining by the computer whether a right to substitute securities from the derivative portfolio resides with the first party or the second party;
conditioned on the right to substitute residing with the first party, substituting a first security from the derivative portfolio for an equal value of a second security by the computer in response to an instruction originated by the first party;
conditioned on the right to substitute residing with the second party, substituting a third security from the derivative portfolio for an equal value of a fourth security by the computer in response to an instruction originated by the second party.
10. The method of claim 9 , further comprising determining a first payment from the first party to the second party wherein determining the first payment comprises multiplying a predetermined interest rate by a notional value of the derivative portfolio.
11. The method of claim 10 , wherein the predetermined interest rate is an index rate plus a spread.
12. The method of claim 9 , wherein a notional position of the derivative portfolio is less than a notional position of the long portfolio by a predetermined percentage.
13. The method of claim 9 , wherein determining whether the right to substitute securities from the derivative portfolio resides with the first party or the second party comprises:
setting the right to substitute with the second party; and
conditioned upon the occurrence of a predetermined event, switching the right to substitute to the first party.
14. The method of claim 13 , further comprising calculating a benchmark index, and wherein the predetermined event occurs when the performance of the derivative portfolio exceeds the benchmark index.
15. The method of claim 9 , further comprising determining values of the first security and the second security based on Volume Weighted Average Prices of the respective securities.
16. The method of claim 9 , wherein the long portfolio comprises a restricted security and wherein the derivative portfolio does not include the restricted security.