Patent Application
20050114244
The present invention relates generally to methods, systems and programs for credit risk management. Still more particularly, the present invention relates to methods, systems and programs for credit risk management based on defined relationships and associated credit limits.
Dramatic changes in industry have exposed the need for new processes and tools to measure, analyze and manage credit and liquidity. For example, energy companies have been reeling from corporate scandals, increased scrutiny and disclosure, and several well-publicized bankruptcies. As a result, companies are planning for contingent liquidity requirements and managing company-wide credit by requiring near-real-time profiles of the company's credit exposure and obligations. Some companies do business with hundreds of different counterparties and, therefore, have risk associated with hundreds of different legal entities based on a myriad of different commodities. The data about these counterparties and the transactions executed with them is spread across many different specialized commodity-trading systems.
Unfortunately, the commodity-based nature of enterprise resource planning, integration, trading and risk management software currently used in most industries revolve around accounts and transactions as opposed to customer relationships or counterparties and their associated contracts. This places the relevant data scattered across multiple, disparate systems and forces company executives to manually pull together necessary information and resort to spreadsheets and calculators to obtain the information they need to assess credit risk and make critical decisions regarding their company's credit exposure and obligations. An organization's financial stability depends on a timely, accurate and authoritative picture of credit exposure and liquidity obligations, so it may identify trouble spots, move quickly to mitigate counterparty credit risk, and improve the company's liquidity. This critical information must be made available to organizations by presenting a comprehensive, detailed, real-time picture of current exposure and collateral requirements for both the company and its counterparties. Yet, no current solution provides an effective method to track and analyze credit exposure and liquidity obligations across multiple systems. In addition to data aggregation limitations, the current offerings do not take advantage of contemporary technologies that allow for simplified adaptation of changing functional requirements and near-real-time processing. Accordingly, it would be desirable to provide a method, system and program to overcome these problems in the art.
In accordance with the present invention, improved methods, systems and articles of manufacture for managing credit exposure are disclosed. In one preferred embodiment of the present invention, a hierarchical model of legally associated counterparties and associated transactions with an organization is created, wherein the hierarchical model includes one or more levels containing a plurality of nodes, wherein the plurality of nodes comprises the legally associated counterparties, transactions and master agreements between the legally associated counterparties and an organization. Financial exposure for the organization at each node of the hierarchical model is calculated. Credit limit categories are created, wherein each credit limit category comprises one or more nodes of the plurality of nodes having a common characteristic. Last, a credit limit for a credit limit category based on credit limits set for the one or more nodes comprising the credit limit category is calculated.
All objects, features, and advantages of the present invention will become apparent in the following detailed written description.
This invention is described in a preferred embodiment in the following description with reference to the drawings, in which like numbers represent the same or similar elements and one or a plurality of such elements, as follows:
With reference now to
Presentation layer components 102 contains a plurality of web-based user interfaces 103 to provide user display and interface to software system 100 and are built on Java Server Page. Application business services layer 104 includes a plurality of software applications to organize, analyze and manage an enterprise's credit risk, the modules including counterparty, credit ratings, credit limits, credit exposure and positions functionality providing various application services. Application business services 104 includes a credit exposure module 105 and a credit limits modules 107 that cooperate to provide an organization's enterprise view of their current and future financial exposure based on their credit limits. Platform services 106 contain service applications to provide general management of users and security, to issue thresholds and alerts, and to provide a workflow engine for communicating workflow between the various layers 102-108. Layers 104, 106 run on Enterprise JavaBeans (EJB). Data services 108 contains a message provider and database connection pool applications to provide data services among the other layers 102-106 and between line of business applications 112 and database 114.
With reference now to
Counterparties, contracts and credit information are collected by the credit exposure module 105 to build and store counterparty information block 208. This counterparty information 208 represents a database of information regarding the counterparties and contractual relationships created by transactions 202. Counterparty hierarchy 210 provides a plurality of structural models defining interconnected corporate identities and contractual relationships for each counterparty. Contracts and netting agreements 212 provides a database of contractual agreements with each counterparty and their related rights and obligations comprising the transactions 202.
As will be appreciated, contracts and netting agreements 212 specify the critical rights and relationships between the parties and can be quite complex. This complexity is significantly pronounced in the energy industry to which the present embodiment has particular application. Most energy traders buy and sell commodities both in a physical sense, where actual delivery of a product will eventually take place, and in a financial sense, where only money will change hands based on future market value. They often trade these commodities with each other—exchanging different quantities of the same commodity several times during a given month, week or day. Because of this web of trading contracts, the financial exposure between two companies might be millions of dollars on any given day.
Trading companies use two simple techniques to reduce their credit risks: collateral and netting (also called set-off). Based on the financial strength of their trading partners, companies have required the posting of collateral prior to any trading. Generally, a security interest is granted in the collateral so that it can be applied to any unpaid obligations. Trading companies also have included the concept of netting in their trading agreements. Netting allows the parties to set-off any amounts they owe each other and only pay the “net” owed from one party to the other.
Master Netting, Setoff, Security and Collateral Agreements create a global view of the energy trading business, recognizing that most of the players are trading multiple commodities between multiple affiliates and subsidiaries. The master netting agreement links all underlying commodity-trading agreements between two companies into a single, integrated agreement. This integration is important because it prevents a bankrupt trading party from choosing and excluding commodity transactions based on whether or not the transactions are favorable to the bankrupt party. In addition, the agreement allows the parties to adopt a uniform definition of events that will constitute default under all trading agreements between the parties. The agreement also allows the parties to adopt a uniform method by which transactions under all trading agreements will be terminated and liquidated in the event of a default. These provisions bring consistency to this liquidation process, which might otherwise be chaotic as the non-defaulting party tries to apply different calculation provisions for different commodities. This consistency also is important because it prevents uncertainties in the liquidation process from delaying the final closeout of obligations between the parties. Further, the agreement encourages the parties to net monthly payments that they owe each other under all of the underlying trading agreements. Such “cross-product” and “cross-affiliate” netting reduces the cash demands on both parties and greatly reduces their overall credit exposure. Finally, the agreement establishes a single collateral-posting requirement between the parties to cover the total exposure under all of the underlying trading agreements. This provision reduces the total amount of collateral that each party is required to provide and in turn makes more of their “credit” available for trading activities with other companies.
Collateral and guarantees 214 represents contractual arrangements that provide collateral and guarantees against transactions 202 and contracts and netting agreements 212, whether provided by a counterparty or third party guarantor. Credit limits and ratings 216 represents credit rating information collected from various third party sources on each of the counterparties and includes credit limits set by the organization that triggers certain events if exceeded by a counterparty.
Also represented in
A calculation engine 224 receives as inputs the transactions 202, counterparty information 208 and calculation formulas 218. In particular, calculation engine 224 computes exposure formula 220 and reverse exposure formula 222 using, as inputs, the billed cash exposure components 204, unbilled cash exposure components 206, forward exposure components 208, counterparty hierarchy 210, contracts and netting agreements 212, collateral and guarantees 214 and credit limits and ratings 216. The outputs of calculation engine 224 are the calculation results 226. Calculation results 226 present an exposure and reverse exposure calculation 228, an available credit calculation 230, a collateral and posted calculation 232, a collateral due calculation 234 and a utilized guarantees determination 236.
With reference now to
Parent counterparty corporation 302 and/or North America subsidiary 304 and European subsidiary 306 has entered into four master agreements 308-314 at master agreements level 334 with the organization or one of its legal entities. The power west master agreement 308 and power east master agreement 310 have been entered into with the North American subsidiary 304, while the gas master agreement 312 and power master agreement 314 have been entered into with the European subsidiary 306 of the parent corporation 302. As will be appreciated, while only a single level of master agreements 334 are shown in the example of
Last, the hierarchical tree structure 300 has a transaction level 336 that indicates the specific transactions 316-328, which have been entered into with each of the legal entity counterparties 304, 306 under the master agreements 308-314. Thus, the organizational structure 300 presents the diagram of the legal relationships between the transactions in which the organization has entered into with the parent counterparty corporation and/or each of its legal entity subsidiaries. As will be appreciated, transactions 316-328 can also be directly connected to parent counterparty 302 without being covered in a master agreement. Also shown in
With reference now to
In this example, the organization and parent counterparty or legal entity counterparties have entered into a master netting and closeout setoff agreements 404, 402 to allow the parties to net collateral obligations and set off rights across transactions to achieve a single amount owed between the parties to the master agreements. When master netting agreements are utilized across affiliates, they permit affiliates to net their obligations to post collateral and thereby decrease the net amount each family of companies post to the other. Master netting agreements can provide similarly valuable rights in the context of closeout setoff. When a family of companies suffers an event of default, companies can net closeout amounts owed to the defaulting parties and their affiliates against closeout amounts owed by the non-defaulting parties and their affiliates. Moreover, master netting agreements enable entities to provide that all contracts share the same events of default, early termination and liquidation rights, and set off provisions.
In the example shown in
Credit exposure module 105 calculates the impact to the organization of a default on one or more of the transactions 316-328. For this example, it is assumed that the legal entity counterparties 304 and 306 default on a total of $12 M in obligations in transactions 324 and 328. As can been seen, the net exposure to North American subsidiary 304 was a reverse exposure of −$1 M due to the closeout setoff 402 of the master agreements 308 and 310 (at a minus $10 M and plus $9M, respectively). The settlement amount netting arrangement 404 results in a net exposure of +$1 M from the gas master agreement 312. Also shown is a $3 M guarantee agreement between the European subsidiary 306 and the non-trading guarantor 330. Thus, where the European subsidiary 306 defaults on $12 M of obligations transactions 324 and 328, the credit limits module 107 shows exposure of +$4 M as a net exposure to the counterparty 306. This results because of the settlement amount netting 404 producing a net exposure of $1 M from the gas master agreement 312 and the full exposure of $6 M from power master agreement 314 because of a lack of a settlement amount netting agreement for that master agreement. The cumulative $7 M in exposure from master agreements 312, 314 is offset by the offsetting protection of $3 M from the non-trading guarantor 330, leaving an exposure calculation of $4 M at the European subsidiary 306. Because the closeout setoff agreement insulates the reverse exposure from the North American subsidiary, the entire exposure at parent counterparty corporation 302 is $4 M.
With reference now to
At step 504, the exposure on Master Purchase and Sale Agreements (MPSAs) is calculated across all legal entity counterparties within the hierarchy of the parent counterparty hierarchy. The calculation at step 504 applies the netting and setoff rules within the MPSA level with respect to all deals that apply to a particular MPSA. This “rolls up” the exposure calculation from all deals to the MPSA level. This can be seen in
At step 506, the exposure numbers are modified based on the master netting and setoff agreements (MNSAs) with the counterparty. At this step, the netting and setoff rules resulting from the MNSA are applied when summing up exposures from the plurality of MPSA's with the counterparty. In addition, collateral terms are applied to the exposure calculation to determine collateral due of the MNSA governs collateral. The impact of guarantees on the exposure levels calculated based on MPSA and MNSA level results is calculated at step 508. At step 510, a counterparty “rollup” is created across the entire hierarchy of the counterparty by summing all calculated exposures at all levels of the counterparty hierarchy.
At step 512, credit limits for each credit limit category is determined by user input or accessing a database of credit limits. At step 514, the available credit for the applicable counterparty in each category is calculated by subtracting the credit limit for a given category from the exposure calculated for that credit limit category. For example, exposure and credit limit calculations can be categorized into an overall calculation for the counterparty or into physical or financial transaction categories. At step 516, a determination is made whether available credit for a given counterparty or category is negative. If so, the process proceeds to step 51, where an alert or notification is sent through web-based user interfaces 103, for example. Thereafter, the process ends at step 520.
With reference now to
Global business rules 602 are a set of parameters that define how the credit limits module 107 should function at a high level, and set constraints for all of the credit limit templates and credit limit functions to be utilized by the credit limits module 107. Global business rules 602 define a coarse set of high-level business rules to be used in the database accessed by credit limits module 107. These business rules govern the inter-workings of the rest of the system and define the basic “ground rules” for how credit limits are handled. Global business rules 602 govern the accounting rules, credit limit categories, security instruments, threshold levels and alert types, in the credit check schedule used by credit limits module 107. The credit limit categories to be utilized include commodity types, commodity grades, transaction types (physical/financial), netting rules (netted, non-netted), deal durations and custom-defined fields.
Credit limit templates 604-610 are a more specific set of business rules that define how a given type of credit limit will function within the credit limits module 107. These templates 604-610 allow many counterparties to share the same “type” of credit limits, but to each have different values for that credit limit. Credit limit template 604-610 provides the basic framework for later credit limits to be defined at a specific counterparty level. The credit limit template 604-610 include a template name and ID, template scope, which defines the counterparties using this template, a template structure as defined by the credit limit categories, start and end dates and time bands.
Credit limits 612-626 are the specific values for the credit limits set for a given type of counterparty. Credit limits 612-626 are defined by the system user to specify the actual credit limit values (numbers) for a given counterparty in the system.
As seen in this credit limit view in display field 702, a time band 706 is set to identify the period over which the credit limits are effective. A limit allocation 708 indicates the identified category to which a credit limit has been set. Each of a Green Light (GL) credit limit and a Red Light (RL) credit limit is specified for the “overall” counterparty, and each of the “physical” and “financial” categories for the selected counterparty. A GL credit limit is a low credit limit and a RL is a high credit limit for the counterparty. Further, as shown in the example of
With reference now to
As shown in
The available credit 924 specifies the available credit that the counterparty has within the applicable category based in the difference between a selected exposure 914-918 and the credit limit 922. Available credit 924 in display filed 904 for this example was calculated by subtracting the credit limit 922 from the total high exposure 918. For example, the available credit for the “overall category” shows a negative number, indicating that the organization is already overexposed to the counterparty and does not have any available credit to extend to that counterparty for additional transactions. Additionally, an alert or notification can be sent through web-based user interfaces 103, for example, when the available credit 924 for a given counterparty and category becomes negative, making it easy for system users to identify trouble spots by counterparty, geography, industry, and credit rating and to manage the company's liquidity.
A computer system, for example computer system 10, can be considered as three major components: (1) the application programs, such as a spreadsheet or word processing or graphics presentation application, which are used by the user; (2) the operating system that transparently manages the application's interactions with other applications and the computer hardware; and (3) the computer hardware comprising the processor, the random access memories, the actual electronic components which manage the digital bits. The operating system has a kernel which, inter alia, controls the execution of applications, processes, and/or objects by allowing their creation, termination or suspension, and communication; schedules processes/objects of the same or different applications on the hardware, allocates memory for those objects, administers free space, controls access and retrieves programs and data for the user.
As seen in
Communication bus 22 supports transfer of data, commands and other information between different devices within computer system 10; while shown in simplified form as a single bus, it may be structured as multiple buses, and may be arranged in a hierarchical form. Further, multiple peripheral components may be attached to computer system 10 via communication bus 22. A display 24 such as a cathode-ray tube display, a flat panel display, or a touch panel is also attached to bus 22 for providing visual, tactile or other graphical representation formats. A keyboard 26 and cursor control device 30, such as a mouse, trackball, or cursor direction keys, are coupled to bus 22 as interfaces for user inputs to computer system 10. In alternate embodiments of the present invention, additional input and output peripheral components may be added. Communication bus 22 may connect a wide variety of other devices (not shown) to computer system 10 and to other adapters connected to other devices such as, but not limited to, audio and visual equipment, tape drives, optical drives, printers, disk controllers, other bus adapters, PCI adapters, workstations using one or more protocols including, but not limited to, Token Ring, Gigabyte Ethernet, Ethernet, Fibre Channel, SSA, Fiber Channel Arbitrated Loop (FCAL), Ultra3 SCSI, Infiniband, FDDI, ATM, ESCON, wireless relays, USB, Twinax, LAN connections, WAN connections, high performance graphics, etc., as is known in the art.
Communication interface 32 provides a physical interface to a network, such as the Internet 38, or to another network server via a local area network using an Ethernet, Token Ring, or other protocol, the second network server in turn being connected to the Internet or Local Area Network. Internet 38 may refer to the worldwide collection of networks and gateways that use a particular protocol, such as Transmission Control Protocol (TCP) and Internet Protocol (IP), to communicate with one another. The representation of
The present invention may be provided as a computer program product, included on a machine-readable medium having stored thereon the machine executable instructions used to program computer system 10 and/or to a peripheral device for installation on a connected adapter to perform a process according to the present invention. The term “machine-readable medium” as used herein includes any medium, signal-bearing media or computer readable storage media that participates in providing instructions to processor 12 or other components of computer system 10 for execution. Such a medium may take many forms including, but not limited to, non-volatile media, volatile media, and transmission media. Common forms of non-volatile media include, for example, a floppy disk, a flexible disk, a hard disk, magnetic tape or any other magnetic medium, a compact disc ROM (CD-ROM) or any other optical medium, punch cards or any other physical medium with patters of holes, a programmable ROM (PROM), an erasable PROM (EPROM), electrically EPROM (EEPROM), a flash memory, any other memory chip or cartridge, or any other medium from which computer system 10 can read and which is suitable for storing instructions. In the present embodiment, an example of nonvolatile media is storage device 18. Volatile media includes dynamic memory such as RAM 14. Transmission media includes coaxial cables, copper wire or fiber optics, including the wires that comprise bus 22. Transmission media can also take the form of electromagnetic, acoustic or light waves, such as those generated during radio wave or infrared wireless data communications. Thus, the programs defining the functions of the preferred embodiment can be delivered to the data processing system 10 information on any machine-readable medium, which include, but are not limited to: (a) information permanently stored on non-write storage media, e.g., read only memory devices within either computer such as CD-ROM disks readable by CD-ROM; (b) alterable information stored on write-able storage media, e.g., floppy disks within a diskette drive or a hard-disk drive; or (c) information conveyed to a computer by a telephone or a cable media network, including wireless communications. Such signal-bearing media, when carrying instructions that may be read by an adapter or a computer to direct the functions of the present invention, represent alternative embodiments.
While the invention has been particularly shown and described with reference to a preferred embodiment, it will be understood by those skilled in the art that various changes in form and detail may be made therein without departing from the spirit and scope of the invention. For example, the present invention may be implemented using any combination of computer programming software, firmware or hardware. As a preparatory step to practicing the invention or constructing an apparatus according to the invention, the computer programming code (whether software or firmware) according to the invention will typically be stored in one or more machine readable storage mediums such as fixed (hard) drives, diskettes, optical disks, magnetic tape, semiconductor memories such as ROMs, PROMs, etc., thereby making an article of manufacture in accordance with the invention. The article of manufacture containing the computer programming code is used by either executing the code directly from the storage device, by copying the code from the storage device into another storage device such as a hard disk, RAM, etc. or by transmitting the code for remote execution. The method form of the invention may be practiced by combining one or more machine-readable storage devices containing the code according to the present invention with appropriate standard computer hardware to execute the code contained therein. An apparatus for practicing the invention could be one or more computers and storage systems containing or having network access to computer program(s) coded in accordance with the invention.
The application claims the benefit of priority under 35 U.S.C. §119(e) from U.S. Provisional Application No. 60/503,429, entitled, “Method, System and Program for Credit Risk Management Utilizing Credit Exposure,” filed on Sep. 16, 2003, and U.S. Provisional Application No. 60/503,422, entitled, “Method, System and Program for Credit Risk Management Utilizing Credit Limits,” filed on Sep. 16, 2003, which disclosures are incorporated herein by reference. The present application is related to co-pending U.S. patent application Ser. No. ______ (ROME001US1), filed on even date herewith and assigned to the assignee hereof, and incorporated herein by reference in its entirety.
| Number | Date | Country | |
|---|---|---|---|
| 60503429 | Sep 2003 | US | |
| 60503422 | Sep 2003 | US |
