Patent Application
20140372273
The present invention relates to the processing of deliverable swap futures contracts, in particular, to methods and systems for liquidating deliverable swap futures contracts.
Swaps are often used to hedge certain risks, for instance, interest rate risk, but can also be used for speculative purposes. An interest rate swap (IRS) is an example of a type of swap product where the parties agree to exchange streams of future interest payments based on a specified principal or notional amount. Each stream may be referred to as a leg. When an IRS occurs at “par value,” no money changes hands between the counterparties, at the inception of the swap transaction, because the net present value (NPV) of the fixed and floating rates are equal at the time of the trade.
An example of a swap includes a plain fixed versus floating, or “vanilla,” interest rate swap. The vanilla swap includes an exchange of interest streams where one stream is based on a floating rate and the other interest stream is based on a fixed rate. In a vanilla swap, one party makes periodic interest payments to the other based on a variable interest rate, subject to periodic resets. The variable rate may be linked to a periodically known or agreed upon rate for the term of the swap such as the London Interbank Offered Rate (LIBOR) or the British Banker's Association (BBA) 3-month time deposit rate.
In return for the stream of payments based on the variable rate, the other party may receive periodic interest payments based on a fixed rate. The payments are calculated based on a designated notional amount. The first rate is called variable, because it is reset at the beginning of each interest calculation period to the then current reference rate, such as the LIBOR published rate. The counterparties may use an IRS to limit, or manage, exposure to fluctuations in interest rates, and/or to obtain lower interest rates than are otherwise available. Other examples of swaps include total return swaps, and equity swaps.
It is common for swaps, such as interest rate swaps, to have unique terms specified by the parties. While providing flexibility, unique terms can complicate valuation determinations and contribute to reducing liquidity of the swaps.
Therefore, there is a need in the art for improved systems and methods for improving the liquidity of swaps.
Embodiments of the present invention overcomes problems and limitations of the prior art by providing systems and methods for liquidating existing deliverable swap futures contracts. An exchange or other entity determines non-par prices for existing deliverable swap futures contracts. The existing deliverable swap futures contracts may include deliverable interest rate swap futures contracts. The prices may be determined using a floating interest rate selected by an exchange and determined to be fair to both parties. The prices are listed and traders may submit notices of intention to liquidate existing deliverable swap futures contracts. An exchange may match notices and clear matched notices.
In other embodiments, embodiments of the present invention can be partially or wholly implemented on a computer-readable medium, for example, by storing computer-executable instructions or modules, or by utilizing computer-readable data structures.
Of course, the methods and systems of the above-referenced embodiments may also include other additional elements, steps, computer-executable instructions, or computer-readable data structures. In this regard, other embodiments are disclosed and claimed herein as well.
The details of these and other embodiments of the present invention are set forth in the accompanying drawings and the description below. Other features and advantages of the invention will be apparent from the description and drawings, and from the claims.
The present invention may take physical form in certain parts and steps, embodiments of which will be described in detail in the following description and illustrated in the accompanying drawings that form a part hereof, wherein:
Aspects of the present invention may be implemented with computer devices and computer networks that allow users to exchange trading information. An exemplary trading network environment for implementing trading systems and methods is shown in
The trading network environment shown in
Computer device 114 is shown directly connected to exchange computer system 100.
Exchange computer system 100 and computer device 114 may be connected via a T1 line, a common local area network (LAN) or other mechanism for connecting computer devices. Computer device 114 is shown connected to a radio 132. The user of radio 132 may be a trader or exchange employee. The radio user may transmit orders or other information to a user of computer device 114. The user of computer device 114 may then transmit the trade or other information to exchange computer system 100.
Computer devices 116 and 118 are coupled to a LAN 124. LAN 124 may have one or more of the well-known LAN topologies and may use a variety of different protocols, such as Ethernet. Computers 116 and 118 may communicate with each other and other computers and devices connected to LAN 124. Computers and other devices may be connected to LAN 124 via twisted pair wires, coaxial cable, fiber optics or other media. Alternatively, a wireless personal digital assistant device (PDA) 122 may communicate with LAN 124 or the Internet 126 via radio waves. PDA 122 may also communicate with exchange computer system 100 via a conventional wireless hub 128. As used herein, a PDA includes mobile telephones and other wireless devices that communicate with a network via radio waves.
One or more market makers 130 may maintain a market by providing bid and offer prices for a derivative or security to exchange computer system 100. Exchange computer system 100 may also exchange information with other trade engines, such as trade engine 138. One skilled in the art will appreciate that numerous additional computers and systems may be coupled to exchange computer system 100. Such computers and systems may include clearing, regulatory and fee systems. Coupling can be direct as described or any other method described herein.
The operations of computer devices and systems shown in
Of course, numerous additional servers, computers, handheld devices, personal digital assistants, telephones and other devices may also be connected to exchange computer system 100. Moreover, one skilled in the art will appreciate that the topology shown in
Non-Par Value=PV(Fixed Rate Payments)−PV(Floating rate Payments) (equation 1)
Upon delivery, an invoice amount is paid in cash between buyer (fixed rate receiver or floating rate payer) and seller (fixed rate payer or floating rate receiver) of the futures contract. The invoice amount or cash adjustment reflects the NPV of the underlying swap instrument and may be identified by reference to a final settlement price of the DSF contract on the final trading day.
The system shown in
In various embodiments pricing module 206 may be configured to determine a non-par price by determining a difference between present value of the stream of fixed rate payments minus the present value of the anticipated stream of floating rate payments while using floating interest rate values set at fair values established by an exchange or other entity. Floating interest rate values may be set in accordance with prevailing market conditions and may be based on prevailing yields and forward yield curves. In one particular embodiment floating rate values correspond to published Eurodollar forward yield curves, such as the Bloomberg Eurodollar forward curve.
Fixed payments for payments beginning at Sep. 22, 2014 would also use the fixed interest rate identified in the deliverable interest rate swap futures contract. Floating payments may be calculated using a floating interest rate selected by an exchange or other entity. As described above, the floating rate may correspond to the published Eurodollar forward yield curve. Once any future floating rates are selected, floating payments, net payments and present values may be calculated. In the example shown the non-par value determined by pricing module 206 is $154.40. The non-par value may represent a value considered fair to both sides by an exchange or other entity.
After prices are calculated by pricing module 206, exchange computer system 202 may publish or otherwise distribute non-par prices for deliverable swap futures contracts 208. Traders 208, 210 and 212 may review the published information and transmit notices of intention to liquidate existing deliverable swap future contracts 214, 216 and 218. Some notices may include an identification of additional monetary consideration. For example, exchange computer system 202 may determine that a fair non-par for a given deliverable swap futures contract is $150 and trader 208 may be willing to liquidate his or her contract by paying $180. Notice 214 may correspondingly identify additional monetary consideration of $30.
Exchange computer system 202 may include a match engine module 220 configured to match notices received from traders. Exchange computer system 202 may also include a clearing module 222 configured to clear trades and a market data module 224 configured to generate and distribute market data. Exchange computer system may also include other modules shown in
In alternative embodiments of the invention, traders may use a request for quote process for liquidating existing deliverable swap futures contracts. Traders may review prices published by an exchange or other entity and submit notices of intention to liquidate in the form of requests for quote.
The present invention has been described herein with reference to specific exemplary embodiments thereof. It will be apparent to those skilled in the art, that a person understanding this invention may conceive of changes or other embodiments or variations, which utilize the principles of this invention without departing from the broader spirit and scope of the invention as set forth in the appended claims. All are considered within the sphere, spirit, and scope of the invention.
