Patent Application
20150112844
The present invention relates to the processing of financial product orders, in particular, to methods and systems for processing futures contracts as settlement dates approach.
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. 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 to a specific location or a currency payment 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 the optimal option for settlement of futures contracts. One common issue relates to contract size. Futures exchanges and other entities that match orders for futures contracts often desire to preserve the flexibility and precision available with a relatively small contract size. In contrast, delivery contract sizes are generally larger and constructed to appeal to large institutional or commercial traders. For example, a CBOT 10-year U.S. Treasury futures contract traded at an exchange may be based upon the delivery of a $100,000 face value unit of U.S. Treasury securities whose value may fluctuate somewhat above or below $100,000 in monetary value. At the same time, a “round lot” of Treasury securities as traded in commercial institutional Treasury markets is considered a $1 million face value unit.
Futures contracts have a limited duration. For example, E-mini S&P 500 futures contracts terminate on the 3rd Friday of the contract months of March, June, September and December, at which date they are “cash-settled” at the Special Opening Quotation of the S&P 500 index. Certain trading strategies require the holding of futures contracts. For example, “portable alpha” asset management strategies require that the asset manager consistently hold a long position in a futures contract, such as the S&P 500, to replicate the “core” or “benchmark” returns associated with the index. When a futures contract expires, the ability to roll forward the position at a favorable price may impact the success of the strategy. Traders may be subjected to unexpected price changes.
Therefore, there is a need in the art for improved systems and methods for processing futures contracts as settlement dates approach.
Embodiments of the present invention overcome problems and limitations of the prior art by providing systems and methods for requiring minimum position limits or thresholds as a settlement date approaches. Futures contracts may be listed with quantities that are multiples of a trading unit. A minimum position limit or a threshold that exceeds the trading unit may be required as the settlement date approaches. The limit or threshold may be enforced by imposing a fee for non-compliance, forcing cash settlement or requiring a mandatory roll forward of at least some of the positions. The roll forward may include a spread product that includes a first derivative financial instrument having a first settlement date and a second derivative financial instrument having a second settlement date that is different from the first settlement date. The price of the spread product is based on daily settlement values associated with the first and second derivative financial instruments.
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
Chart 202 shows that the minimum position requirements may be increased in multiple steps. In some embodiments the minimum position quality may be increased from the trading unit quantity to the final quantity in one, two, three, four or more steps. The step sizes may be uniform or non-uniform. As will be described in detail below, an exchange or other entity may use various procedures to enforce minimum position limits.
Finally, in step 310 positions for the derivative financial instrument are settled. Settlement may be by physical delivery. Alternatively, settlement may be a cash settlement and may be performed by a clearinghouse computer device, another device that includes a processor or some other device.
Position thresholds and minimum position requirements may be enforced by imposing a fee for noncompliance or by imposing other disciplinary action as appropriate to compel compliance with the policy. Alternatively, for settlement purposes positions may be matched to the extent possible and cash settled otherwise. For example, if deliverable position minimum consists of a multiple of ten times a trading unit and a first trader is long ten (10) trading units and a second trader is short ten (10) trading units, those ten contracts could be matched for purposes of delivery. When matching for delivering, priority may be assigned randomly or assigned based on the age or seasoning of the positions. Priority may also be assigned to positions that have remained unmatched after an attempt to match. If traders hold “odd” or non-deliverable units less than the 10 trading units and the positions cannot be matched in integral multiples of the delivery unit, other provisions may be applied. For example, deliverable units may be matched to the extent possible and any remaining non-deliverable odd lots may be cash settled.
Contracts may also be structured so that positions that are not matched at settlement are subject to a roll forward. Rolling forward may be accomplished by liquidating a current position in a derivative financial instrument having a first settlement date and acquiring another position in derivative financial instrument having a second later settlement date. For example, a roll forward may include selling out of long, or buying back short, positions in in the nearby month and simultaneously buying (going long) or selling (going short) positions in a deferred contract month.
Roll forwards may also be used when traders are trying to implement various strategies, such as “portable alpha” asset management strategies.
In step 606 an attempt is made to match the received orders at the settlement prices determined in step 604. Step 606 may be performed at a match engine module, another computer device that includes a processor or at some other device. Finally, a priority may be assigned to any unmatched orders in step 608. Priority may be assigned randomly or assigned based on the age or seasoning of the orders or some other established priority criteria.
A roll may occur on the day that a derivative financial instrument expires or at other times, such as one or two days before the expiration, a month before expiration or any other time before expiration. When a trader enters an order, the trader may also indicate a time relative to the expiration date that the trader desires the roll to occur.
The process shown in
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.
