Patent Application
20140172748
Aspects of the invention relate to determining risks and margin requirements. More particularly, aspects of the invention relate to determining costs associated with liquidity risks.
Exchanges are typically associated with clearing houses that are responsible for settling trading accounts, clearing trades, collecting and maintaining performance bond funds, regulating delivery and reporting trading data. Clearing is the procedure through which the clearing house becomes buyer to each seller of a contract, and seller to each buyer, and assumes responsibility for protecting buyers and sellers from financial loss by assuring performance on each contract. This is effected through the clearing process, whereby transactions are matched.
Clearing houses establish clearing level performance bonds (margins) for traded financial products and establishes minimum performance bond requirements for customers. A performance bond, also referred to as a margin, is the funds that may be required to deposited by a customer with his or her broker, by a broker with a clearing member or by a clearing member with the clearing house, for the purpose of insuring the broker or clearing house against loss on open contracts. The performance bond is not a part payment on a purchase and helps to ensure the financial integrity of brokers, clearing members and exchanges or other trading entities as a whole. A performance bond to clearing house refers to the minimum dollar deposit which is required by the clearing house from clearing members in accordance with their positions. Maintenance, or maintenance margin, refers to a sum, usually smaller than the initial performance bond, which must remain on deposit in the customer's account for any position at all times. In order to minimize risk to an exchange or other trading entity while minimizing the burden on members, it is desirable to approximate the requisite performance bond or margin requirement as closely as possible to the actual risk of the account at any given time.
Risks and margin requirements can be difficult to determine for illiquid and concentrated positions. Illiquid positions do not allow a clearing house to quickly liquidate positions, which makes it difficult to value risks. Concentrated positions can make it difficult for a clearing house or other entity to find a buyer or seller. Accordingly, there is a need in the art for systems and methods for determining risks and margin requirements for illiquid and concentrated positions.
Aspects of the invention overcomes at least some of the problems and limitations of the prior art by providing systems and methods for valuing risks and margin requirements for portfolios that are illiquid or have concentrated positions. Surveys with sample portfolios that include credit default swaps and that ask for liquidity charges are distributed to clearing members. Answers to the surveys are analyzed to develop a liquidity risk model. The model may include the higher of a concentration based liquidity charge which takes into account the effect of portfolio risk and a floor liquidity charge based on bid-ask spreads for positions in the portfolio.
In some embodiments of the invention the concentration based liquidity charge includes the sum of a concentration charge for market exposure and a concentration charge for the basis of the portfolio.
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. 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 are preferably 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 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
The concentration based liquidity charge may include or consist of the sum of a concentration charge for market exposure and a concentration charge for the basis of the portfolio. The concentration charge for market exposure may be a function of absolute SDV01. SDV01 represents a portfolio sensitivity to a 1% par spread shock. In one embodiment the concentration charge for market exposure is:
a*Abs(SDV)̂1.5 (Equation 1)
The constant “a” in Equation 1 represents the cost of neutralizing market risk through offsetting positions. Exemplary costs of neutralize market risks include the cost of hedging a portfolio. A method for assigning a value to “a” is described below.
The concentration charge for the basis of the portfolio may be a function of RSDV01. RSDV01 is the difference between the sum of absolute SDV01's of individual financial instrument positions and absolute SDV01. In one embodiment the concentration charge for the basis of the portfolio is:
b*RSDV̂1.5 (Equation 2)
The constant “b” represents the cost of liquidating a remaining portfolio. Exemplary costs of liquidating a remaining portfolio include the cost of unwinding a market neutral portfolio.
In step 204 a floor liquidity charge based on bid-ask spreads for positions is determined. Step 204 may be performed at a processor. In one embodiment, the floor liquidity charge is:
Sum of {Gross Notional*DST*Bid/Ask(OTR 5year)*PV01(OTR 5year)} across the portfolio's positions. (Equation 3)
Wherein:
In step 206 a liquidity risk value is assigned may that is the higher of the concentration based liquidity charge or the floor liquidity charge. Step 206 may also be performed by a processor. Finally, in step 208 a margin requirement may be determined that is based at least in part on the liquidity risk value. Steps 206 and 208 may also be performed by one or more processors. Those skilled in the art will appreciate that that there are many conventional models and methods that may be used to determined margin requirements.
Selecting appropriate models to quantity risks and set margin requirements can be difficult when portfolios include financial products that are illiquid or subject to concentrated ownership.
The liquidation charge may be the difference between the portfolio's mid par price valuation and the actual market bid on the portfolio. The liquidation charge may take into account the liquidity of the portfolio instruments and the size of the instrument positions. The survey is distributed in step 406. The survey may be distributed to members of an exchange, customers of a clearing house and/or to others. After the surveys are completed, they are received at in step 408. The surveys may be received at computer device, such as server connected to a computer network.
After the surveys are received, the responses may be analyzed to create or adjust a model. For example, in step 410 a regression analysis of the responses is performed to determine a formula for determining liquidity risks of portfolios that include the target financial products. The regression analysis may be performed by a processor. Other types of statistical analysis may be performed instead of or in addition to the regression analysis. In some embodiments a regression analysis is used to determine constants “a” and “b” in equations 1 and 2. The responses may also be used to determine discounts considered for the basis or curve portfolios and concentration surcharges imposed on excessively large portfolios. In some embodiments a determination of when a portfolio is concentrated may also be determined from analyzing the survey results.
The present invention has been described in terms of preferred and exemplary embodiments thereof. Numerous other embodiments, modifications and variations within the scope and spirit of the invention will occur to persons of ordinary skill in the art from a review of this disclosure. For example, aspects of the invention may be used to process and communicate data other than market data.
