Non-biased, centrally-cleared financial instrument and method of clearing and settling
In accordance with the principles of the present invention, a non-biased, centrally-cleared financial instrument, and method of electronic clearing and settling such a financial instrument is provided. The non-biased, centrally-cleared financial instrument of the present invention is to be centrally cleared and can be traded or transacted either on or off an exchange or trading platform, whether traded as a future or other type of financial instrument. The non-biased, centrally-cleared financial instrument of the present invention has a terminal value such that the terminal value offsets co-movement of variation margin and investment return on the variation margin during the life of the financial instrument.
1. A computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade to address at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, comprising:
receiving at memory of the electronic trading platform an identity of a first party, an identity of a first non-biased financial future, and a buy/sell request;
receiving at memory of the electronic trading platform an identity of a second party, an identity of a second non-biased financial future, and a sell/buy request;
by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the first non-biased financial future matches the second non-biased financial future;
if the first non-biased financial future matches the second non-biased financial future, by a processor in communication with memory of the electronic trading platform electronically automatically determining if the buy/sell request matches the sell/buy request;
if the buy/sell request matches the sell/buy request, by a processor in communication with memory of the electronic trading platform, electronically automatically determining what a final settlement value of the non-biased financial future would be upon its stated expiration in accordance with;
net accumulated value of cash flow−total return on variation margin for the life of the non-biased financial future;
where,
the net accumulated value of cash flows is determined in accordance with:
net
accumulated
value
of
cash
flows
=
∑
i
=
1
N
C
i
B
(
t
c
,
i
,
T
)
-
∑
i
=
1
M
L
i
B
(
t
l
,
i
,
T
)
where,
C i is the amount of fixed leg payment payable at time t c,i ;
L i is the amount of the floating leg payment payable at time t t,i ;
T is the expiration of the non-biased financial future; and
B(t,T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate;
total return on variation margin for the life of the non-biased financial future is the sum of the interest earned on the cumulative variation margin for each day reinvested at the overnight rate to expiration of the non-biased financial future; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration in memory of the electronic central clearinghouse; and
by a processor in communication with memory of the electronic central clearinghouse, centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
2. A computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade to address at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, comprising:
receiving at memory of the electronic trading platform an identity of a first party, an identity of a first non-biased financial future, and a buy/sell request;
receiving at memory of the electronic trading platform an identity of a second party, an identity of a second non-biased financial future, and a sell/buy request;
by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the first non-biased financial future matches the second non-biased financial future;
if the first non-biased financial future matches the second non-biased financial future, by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the buy/sell request matches the sell/buy request;
if the buy/sell request matches the sell/buy request, by a processor in communication with memory of the electronic trading platform, electronically automatically determining what a final settlement value of the non-biased financial future would be upon its stated expiration in accordance with;
net accumulated value of cash flow−total return on variation margin;
where,
net accumulated value of cash flow is the accumulated value that a buyer or seller of a non-biased financial future receives minus the payments the buyer or seller makes, reinvested at the overnight rate from the date that the cash flow occurs to expiration of the non-biased financial future;
the total return on variation margin is determined in accordance with:
total
return
on
variation
margin
=
∑
t
=
1
T
-
1
P
t
R
t
B
(
t
+
1
,
T
)
,
where
P i is the settlement price of the non-biased financial future on day t,
R t is the overnight interest rate on day t; and
B(t,T) is the value of the money market account at time T with an initial deposit of one at time t and accumulated at the overnight rate; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration in memory of the electronic central clearinghouse; and
by a processor in communication with memory of the electronic central clearinghouse, centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
3. A computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade to address at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, comprising:
receiving at memory of the electronic trading platform an identity of a first party, an identity of a first non-biased financial future, and a buy/sell request;
receiving at memory of the electronic trading platform an identity of a second party, an identity of a second non-biased financial future, and a sell/buy request;
by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the first non-biased financial future matches the second non-biased financial future;
if the first non-biased financial future matches the second non-biased financial future, by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the buy/sell request matches the sell/buy request;
if the buy/sell request matches the sell/buy request, by a processor in communication with memory of the electronic trading platform, electronically automatically determining what a final settlement value of the financial future would be upon its stated expiration in accordance with:
net summation of cash flows−total return on modified variation margin,
where
net
summation
of
cash
flows
=
∑
i
=
1
N
C
i
-
∑
i
=
1
M
L
i
;
and
total
return
on
modified
variation
margin
=
∑
t
=
1
T
-
1
(
P
t
-
(
∑
i
:
(
t
c
,
i
<
t
)
C
i
-
∑
i
:
(
t
l
,
i
<
t
)
L
i
)
)
R
t
B
(
t
+
1
,
T
)
further where
P t is the settlement price of the future on day t;
C i is the amount of fixed leg payment payable at time t c,i ;
L i is the amount of the floating leg payment payable at time t l,i ;
T is the expiration of the future;
R t is the overnight interest rate on day t; and
B(t,T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate;
automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration in memory of the electronic central clearinghouse; and
by a processor in communication with memory of the electronic central clearinghouse, centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
4. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising selecting the non-biased financial future from the group consisting of interest-rate swap futures, credit default swap futures, and other interest-rate futures.
5. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising exchange trading the non-biased financial future.
6. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising not exchange trading the non-biased financial future.
7. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising having a correlation between the value of the non-biased financial future and interest rates.
8. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising having a constant added or subtracted to the price or rate applicable to the non-biased financial future.
9. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising having an expiration date being the maturity date of the non-biased financial future.
10. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising cash settling the non-biased financial future.
11. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising physically settling the non-biased financial future.
12. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising denominating the non-biased financial future in United States dollars.
13. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising trading the non-biased financial future on ERIS EXCHANGE®.
14. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising settling the non-biased financial future at a value equal to a sum of present value of remaining asset flows, plus accumulated value of past asset flows, minus accumulated return on variation margin.
15. In a computer-implemented futures back-office system used for creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of the type having memory of the electronic trading platform that receives an identity of a first party, an identity of a first financial future, and a buy/sell request; memory of the electronic trading platform that receives an identity of a second party, an identity of a second financial future, and a sell/buy request; a processor in communication with memory of the electronic trading platform electronically that automatically determines if the first financial future matches the second financial future; if the first financial future matches the second financial future, then a processor in communication with memory of the electronic trading platform electronically automatically determines if the buy/sell request matches the sell/buy request; and if the buy/sell request matches the sell/buy request the created, centrally cleared, and settled financial future contains at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, the improvement comprising:
if the buy/sell request matches the sell/buy request, a processor in communication with memory of the electronic trading platform electronically automatically determines what a final settlement value of the swap would be upon its stated expiration in accordance with;
net accumulated value of cash flow−total return on variation margin for the life of a non-biased financial future;
where
the net accumulated value of cash flow is determined in accordance with:
net
accumulated
value
of
cash
flows
=
∑
i
=
1
N
C
i
B
(
t
c
,
i
,
T
)
-
∑
i
=
1
M
L
i
B
(
t
l
,
i
,
T
)
where,
C i is the amount of fixed leg payment payable at time t c,i ;
L i is the amount of the floating leg payment payable at time t l,t ;
T is the expiration of the non-biased financial future; and
B(t,T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at overnight rate;
the total return on variation margin for the life of the non-biased financial future is the sum of the interest earned on the cumulative variation margin for each day reinvested at the overnight rate to expiration of the non-biased financial future; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
memory of the electronic central clearinghouse automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration; and
a processor in communication with memory of the electronic central clearinghouse centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
16. In a computer-implemented futures back-office system used for creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of the type having memory of the electronic trading platform that receives an identity of a first party, an identity of a first financial future, and a buy/sell request; memory of the electronic trading platform that receives an identity of a second party, an identity of a second financial future, and a sell/buy request; a processor in communication with memory of the electronic trading platform electronically that automatically determines if the first financial future matches the second financial future; if the first financial future matches the second financial future, then a processor in communication with memory of the electronic trading platform electronically automatically determines if the buy/sell request matches the sell/buy request; and if the buy/sell request matches the sell/buy request the created, centrally cleared, and settled financial future contains at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, the improvement comprising:
if the buy/sell request matches the sell/buy request, a processor in communication with memory of the electronic trading platform electronically automatically determines what a final settlement value of the swap would be upon its stated expiration in accordance with;
net accumulated value of cash flow−total return on variation margin;
where,
net accumulated value of cash flow is the accumulated value that a buyer or seller of a non-biased financial future receives minus the payments the buyer or seller makes, reinvested at the overnight rate from the date that the cash flow occurs to expiration of the non-biased financial future;
the total return on variation margin is determined as:
total
return
on
variation
margin
=
∑
t
=
1
T
-
1
P
t
R
t
B
(
t
+
1
,
T
)
,
where
P t is the settlement price of the non-biased financial future on day t, and
R i is the overnight interest rate on day t; and
B(t,T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
memory of the electronic central clearinghouse automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration; and
a processor in communication with memory of the electronic central clearinghouse centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
17. In a computer-implemented futures back-office system used for creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of the type having memory of the electronic trading platform that receives an identity of a first party, an identity of a first financial future, and a buy/sell request; memory of the electronic trading platform that receives an identity of a second party, an identity of a second financial future, and a sell/buy request; a processor in communication with memory of the electronic trading platform electronically that automatically determines if the first financial future matches the second financial future; if the first financial future matches the second financial future, then a processor in communication with memory of the electronic trading platform electronically automatically determines if the buy/sell request matches the sell/buy request; and if the buy/sell request matches the sell/buy request the created, centrally cleared, and settled financial future contains at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, the improvement comprising:
if the buy/sell request matches the sell/buy request, a processor in communication with memory of the electronic trading platform electronically automatically determines what a final settlement value of the swap would be upon its stated expiration in accordance with:
net summation of cash flows−total return on modified variation margin,
where
net
summation
of
cash
flows
=
∑
i
=
1
N
C
i
-
∑
i
=
1
M
L
i
;
and
total
return
on
modified
variation
margin
=
∑
t
=
1
T
-
1
(
P
t
-
(
∑
i
:
(
t
c
,
i
<
t
)
C
i
-
∑
i
:
(
t
l
,
i
<
t
)
L
i
)
)
R
t
B
(
t
+
1
,
T
)
further where
P t is the settlement price of the future on day t,
C i is the amount of fixed leg payment payable at time t c,i ;
L i is the amount of the floating leg payment payable at time t l,i ;
T is the expiration of the swap; and
R t is the overnight interest rate on day t; and
B(t,T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate;
memory of the electronic central clearinghouse automatically electronically storing the final settlement value of a non-biased financial future upon its stated expiration; and
a processor in communication with memory of the electronic central clearinghouse centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
18. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 1 further wherein the non-biased financial future is selected from the group consisting of interest-rate swap futures, credit default swap futures, and other interest-rate futures.
19. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 2 further comprising selecting the non-biased financial future from the group consisting of interest-rate swap futures, credit default swap futures, and other interest-rate futures.
20. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 1 further comprising settling the non-biased financial future at a value equal to a sum of present value of remaining asset flows, plus accumulated value of past asset flows, minus accumulated return on variation margin.
21. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 2 further comprising settling the non-biased financial future at a value equal to a sum of present value of remaining asset flows, plus accumulated value of past asset flows, minus accumulated return on variation margin.
22. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 2 further wherein P t =A+B−C, where:
A is expected future cash flow;
B is the historical cash flow; and
C is the Price Alignment Interest.
23. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 22 further wherein at P t , B=0 and C=0.
24. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further wherein P t =A+B−C, where:
A is expected future cash flow;
B is the historical cash flow; and
C is the Price Alignment Interest.
25. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 16 further wherein P t =A+B−C, where:
A is expected future cash flow;
B is the historical cash flow; and
C is the Price Alignment Interest.
26. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 25 further wherein at Pt, B=0 and C=0.
27. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 17 further wherein P t =A+B−C, where:
A is expected future cash flow;
B is the historical cash flow; and
C is the Price Alignment Interest.