Patent Application
20140019324
The present invention relates to trading systems and methods. More particularly, embodiments of the invention relate to settlement mechanisms for the settlement of futures contracts.
Futures contracts generally obligate buyers and sellers to purchase and sell an asset at a predetermined time and at a predetermined price. Assets may include physical commodities and financial instruments. Currency futures contracts are exemplary financial instruments. A currency futures contract obligates parties to different currencies at a predetermined price on a predetermined date.
Futures contracts can specify settlement by physical delivery or by cash. Settling a futures contract with physical delivery involves delivering the asset. For example, a quantity of corn may be delivered by transfer of a receipt evidencing ownership of corn stored in a specified grain elevator or reciprocal payments of a specified quantity of one or more currency for an equivalent quantity of another currency may be made to settle the futures contract. Alternatively, some futures contracts specify that they will be cash settled. Cash settlement may include a cash payment that is the difference between a spot price and the price specified by the futures contract.
Cash settlement is convenient for parties not wishing to take or transfer actual possession of underlying assets. For example, a party may wish to hedge risks associated with the price of oil by purchasing an oil futures contract and the party may have no desire or ability to take possession of oil at the end of the contract. Physical delivery may be preferred by some traders and for some futures contracts. For example, some traders prefer physical delivery of currencies associated with currency futures contracts.
Physical delivery is not always a practical option for settlement of futures contracts because of government regulations and other sources that restrict the free flow of assets. There is a need in the art for systems and methods that increase settlement options available to traders.
Embodiments of the present invention overcomes the problems and limitations of the prior art by providing systems and methods for processing orders for and settling futures contracts that have multiple settlement provisions. A single futures contract may include both a physical delivery settlement provision and a cash settlement provision.
Various embodiments of the invention may include or process futures contracts based on multiple currencies. Portions of the futures contract based on inconvertible currencies may be cash settled while other portions may be settled with physical delivery.
In other embodiments, 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. 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. 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 constant 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.
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
Exemplary futures contracts may include currency futures contracts. Some futures contracts may include a basket of currencies.
One exemplary futures contract may include an index futures contract based on the U.S. dollar (USD), Euro (EUR), Japanese yen (JPY), British pound (GBP), a carry index, a commodity country index and a BRIC index. A carry index is designed to reflect the total return of an “Intelligent Carry Strategy,” which through an objective and systematic methodology, seeks to capture the returns that are potentially available from a strategy of investing in high-yielding currencies with the exposure financed by borrowings in low-yielding currencies sometimes referred to as the “carry trade.” An exemplary carry index is the CME Carry Index and represents a basket of equally weighted positions (as of Dec. 31, 2010) which is effectively long a basket including the Australian dollar (AUD), Brazilian real (BRL), Mexican peso (MXN), New Zealand dollar (NZD), South African rand (ZAR) and Turkish lira (TRY) vs. short positions in the USD and EUR. A commodity country index may include currencies for countries whose national income is tied heavily to commodity production. An exemplary commodity country index is the CME Commodity Country Index and is constructed to be effectively long AUD, BRL, CAD, Norwegian krone (NOK), NZD and ZAR vs. a short position in USD. A BRIC index may include currencies for countries that have experienced rapid growth over the past decade or two, generally outperforming the so-called developed market economies by a wide margin. Countries currently include Brazil, Russia, India and China. An exemplary BRIC index is the CME BRIC Index and is constructed of equal weightings of long Brazilian real (BRL), Russian ruble (RUB), Indian rupee (INR) and Chinese yuan (CNY) vs. a short position in the USD.
The futures contract may be nominally valued at $50×Index value. Thus, if Index value=995.67, this implies a nominal value of $49,783.62 (=$50×995.67). Minimum price increment or “tick” size may equal to 0.10 Index points or $5.00 (=$50×0.10). These futures contracts may be settled using a hybrid physical delivery and cash settlement process. Physical delivery may be used for currency pairs involving readily obtainable or convertible currencies, e.g., EUR vs. USD, JPY vs. USD, GBP vs. USD, etc. Cash settlement may be used for inconvertible currencies, such as CNY, INR, BRL, etc. During settlement, the convertible currencies may be delivered, i.e., the foreign currency is delivered vs. a payment denominated in USD, upon final settlement. These payments may be based on the respective spot values of the currency pairs proportionate to their weighting in the index. As an example, if the index futures contract is calculated at 995.67 on a particular day, the futures contract is nominally valued at $49,783.62 (=$50×995.67). The USD vs. EUR component of the Index represented 14.82% of the Index by weight and the currency pair is quoted at 0.7715. Thus, the seller is required to pay the buyer the sum of $7,375.97 upon delivery (=14.82%×$49,793.62). The buyer is required to pay the seller the sum of 5,690.90 Euros (=0.7715×$7,375.97). The USDJPY, USDGBP, USDCHF, USDCAD and USDAUD components of the Index are similarly settled through the delivery process.
The USDCNY component of the index futures contract may be settled in cash based upon the change in the spot value of the index component on the business day prior to final settlement to the final settlement date. For example, if the USDCNY rate fell from 6.3163 to 6.3004 from the day prior to final settlement to the final settlement date. The “calibrated” value of this index component similarly fell from 136.703 to 136.359, noting that all Index components are calibrated such that the Index is valued nominally at 1,000.00 as of Dec. 31, 2010. If we take $50 times these calibrated valued, the USDCNY Index component fell from $6,835.16 to $6,917.94 from the day prior to final settlement to the final settlement date. Thus, the buyer is marked-to-market at a debit of $17.23 (46,917.94−$6,835.16) while the seller is marked-to-market with a credit of $17.23.
In step 406 a value of the cash settlement portion of the futures contract is determined. Step 406 may be performed at a computer device and may include determining cash settlement values of one or more components that include inconvertible currencies. Next, the cash settlement portion of the financial instrument may be settled in step 408. In some embodiments, settlement of the physical delivery portion of the financial instrument may be performed in step 410.
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.
