Patent Grant
7778909
1. Field of the Invention
The subject disclosure is directed to a system and method for updating valuation data necessary for determining the present worth of financial instruments, and more particularly, to a system and method for updating time-sensitive valuation data associated with pass-through securities, computing the financial outcome of transactions involving the pass-through securities and investors' portfolios and applying the computed financial outcome to the portfolios involved in the transactions.
2. Background of the Related Art
A pass-through security is a financial instrument which represents pooled debt obligations and passes income from debtors to its shareholders. The most common type is the mortgage-backed security, which represents an ownership interest in mortgage loans made by financial institutions to finance the borrower's purchase of a home or other real estate. Mortgage securities are created when these loans are pooled and “securitized” for sale to investors by agencies or corporations such as the Government National Mortgage Association (GNMA or Ginnie Mae) and Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). Investors may purchase mortgage-backed securities from the issuer, when dealt in the secondary market, or from dealers in the open market, such as the Federal National Mortgage Association (FNMA or Fannie Mae).
As the underlying mortgage loans are paid off by the homeowners, the investors receive payments of interest and principal. Mortgage-backed securities provide a pass-through coupon rate, but repayment of the principal is given in increments over the life of the security, as the underlying mortgage loans are paid off, rather than in a single lump sum at maturity. Mortgage-backed securities may pay interest and principal monthly, quarterly or semiannually, depending on the structure and terms of the issue. Typically, the timing and speed of principal repayments vary, because the cash flow on mortgage-backed securities is also irregular.
For example, if homeowners whose mortgages are in a pool sell their homes, refinance their loans to take advantage of lower interest rates, prepay their mortgages for some other reason or default on their loans, the principal is distributed on a pro rata basis to the investors. When this happens, the investors' remaining interest in the pool is reduced by the amount of prepayments. Since the principal is reduced over the life of the security, the interest income decreases in terms of absolute dollars paid to investors. Thus, the pass through coupon rate of interest changes.
Mortgage-backed securities are sold and traded in terms of their assumed average life rather than their maturity dates, in part because of the aforementioned irregularities. The prepayment speed, which is the average rate at which mortgage holders are expected to pay off their loans ahead of schedule, is used in calculating the value of mortgage backed security. However, some mortgage loans could remain outstanding for the entire life of the original loans, which is typically thirty years.
To facilitate the determination of the prepayment speed (and in turn, the buying and selling prices), a decimal value known as the remaining principal balance (RPB) factor is utilized. The RPB factor (also known as the “pool” or “pay down” factor) reflects the proportion of the outstanding principal balance of a mortgage-backed security, which changes over time, in relation to its original principal value. Certain institutions publish monthly factor reports containing a list of factors for Ginnie Mae, Fannie Mae and Freddie Mac mortgage-backed securities, among others. The remaining principal balance (RPB) is the basis for calculation of the purchase price of the securities.
The investors in the mortgage-backed security market are typically large institutions handling an extensive number of portfolios, each portfolio including a variety of amounts and types of mortgage-backed securities. These securities are often traded, sold or bought (hereinafter collectively referred to as “trades” or “transactions”). Each of these transactions must be evaluated to determine the net losses or gains to apply to the associated portfolio. Typically, the daily volume of transactions involving such securities is extremely high, making it cumbersome if not impossible to calculate the net losses of gains by hand. The procedure is further complicated by possible fluctuations of the pass through coupon rate (also referred to hereinafter as simply “coupon”) and RPB factor (also referred to hereinafter as simply “factor”) which must be updated prior to evaluating these transactions.
It would be beneficial therefore, to provide a system and method for automatically tracking trades involving pass-through securities, such as mortgage-backed securities, and updating factors and coupons for the corresponding pass-through securities, as needed, in a convenient, efficient and effective manner.
The present invention provides a system and method for updating a financial outcome of transactions involving pass-through securities. In one embodiment, a method in accordance with the present invention, includes the steps of: searching a trade database for transactions involving pass-through securities having a computable present worth based on time-sensitive valuation data; updating valuation data associated with pass-through securities found during the search of the trade database; and computing a financial outcome of the transaction involving the pass-through found during the search of the trade database based on the updated valuation data.
The aforementioned method may further include the step of applying computed financial outcomes to portfolios of investments involved in the transactions found. A method in accordance with the present invention may also include the step of displaying the transactions found and computed financial outcomes on a graphical interface, and furthermore, selecting the computed financial outcomes to apply to the associated portfolios. The aforementioned embodiment of a method in accordance with the present invention may require user authorization prior to displaying the transactions found and computed financial outcomes based on the updated valuation data on a graphical interface.
The updating valuation data step of a method in accordance with the present invention may further include updating valuation data relating to the remaining principal balance and/or the rate of interest associated with the pass-through securities found during the search of the trade database, such as remaining principal balance factors and pass-through coupons.
The searching through the trade database for transactions involving pass-through securities may be limited in scope by selecting parameters relating to the transactions, such as for example, settlement dates, portfolios, or pass-through securities.
The method of the present invention may further include the step of searching a valuation data database for valuation data.
As mentioned above, the present invention is also directed to a system for updating a financial outcome of transactions involving pass-through securities. In one embodiment, a system in accordance with the present invention includes a trade database for storing data relating to transactions involving pass-through securities, a device for searching the trade database for transactions involving pass-through securities having a computable present worth based on time-sensitive valuation data, a device for updating the valuation data associated with pass-through securities found during the search of the trade database, and a device for computing the financial outcomes of the transactions found based on the updated valuation data.
The valuation data may include data relating to the remaining principal balance and or rate of interest associated with the pass-through securities involved in the transactions found in the trade database, such as remaining principal balance factors and pass-through coupons. The system of the present invention may also include a valuation database for storing current valuation data, and a device for searching the valuation database for valuation data associated with the pass-through securities involved in the transactions found by the system.
The aforementioned system may also include a portfolio database for storing data relating to portfolios of investments including pass-through securities and a device for applying computed financial outcomes to portfolios in the portfolio database associated with the transactions found.
In one embodiment of a system constructed in accordance with the present invention, the devices for searching the various databases can be search engines with graphical user interfaces permitting user-specification of search parameters.
In another embodiment of a system constructed in accordance with the present invention, a graphical user interface is provided for displaying the transactions found and computed financial outcomes. The system may further include a device for selecting the computed financial outcomes to apply to associated portfolios in a portfolio database. Furthermore, the system may include a device for restricting unauthorized users from selecting the computed financial outcomes to apply.
The present invention is also directed to a machine readable media for updating and applying a financial outcome of transactions to the portfolio associated with each transaction. The media includes data segments for storing data relating to portfolios of investments in a portfolio database, storing data relating to a transactions involving portfolios in the portfolio database and pass-through securities having a computable present worth based on time-sensitive valuation data in a trade database. The media also includes code segments for searching the trade database for transactions involving pass-through securities, updating valuation data associated with the pass-through securities found during the search of the trade database, computing the financial outcomes of the transactions found based on the updated valuation data, and applying the computed financial outcomes to portfolios associated with the transactions found.
These and other aspects of the system and method of the subject invention will become more readily apparent to those having ordinary skill in the art from the following detailed description of the invention taken in conjunction with the drawings.
So that those having ordinary skill in the art to which the present invention pertains will more readily understand how to make and use the method and system of the present disclosure, embodiments thereof will be described in detail herein below with reference to the drawings, wherein:
The subject disclosure is directed to a new and useful tool for updating data, namely the aforementioned factors and coupons, relating to certain financial instruments in the form of a computerized system preferably integrated with an analytical system having an analytical engine configured to provide intra-day and inter-day real-time relative value analyses, credit risk analyses, and value at risk analyses, and a trading system configured to execute trades and the terms of the agreements governing the collateral provided for multiple portfolios of diverse fixed income securities and derivatives. For purposes of illustrating the features of the present invention, the embodiment discussed herein is intended to be operated by a corporate entity, partnership or person that engages in transactions involving financial instruments with a counter party, which may be another corporate entity, partnership or person.
It should be understood that incorporating the present disclosure in an integrated system as described above is exemplary of the type of setting for which a system and method in accordance with the present disclosure is well-suited. Those skilled in the art will readily appreciate that a system and method in accordance with the present disclosure may be used in conjunction with other settings as well. Furthermore, it should be understood that a system and method in accordance with the present invention may be used to provide updated data other than factors and coupons.
Those skilled in the art will also readily appreciate that a system in accordance with the present disclosure includes the various computer and network related software and hardware that may be used in a distributed computing network, that is, programs, operating systems, memory storage devices, input/output devices, data processors, servers with links to data communication systems, wireless or otherwise, such as those which take the form of a local or wide area network, and a plurality of data transceiving terminals within the network, such as personal computers. Those skilled in the art will further appreciate that, so long as its users are provided with access to a system and method constructed in accordance with the present disclosure, the type of network, software or hardware is not vital to its full implementation.
Referring now to the drawings wherein there is a schematic representation illustrated in
Preferably, the graphical user interfaces (also referred to herein as “screens”) used by system 10 incorporate user-friendly features and fit seamlessly with other operating system interfaces, that is, in a framed form having borders, multiple folders, toolbars with pull-down menus, embedded links to other screens and various other selectable features associated with animated graphical representations of depressible buttons. These features can be selected (i.e., “clicked on”) by the user via connected mouse, keyboard, voice command or other commonly used tool for indicating a preference in a computerized graphical interface.
System 10 includes a data storage device or memory 12 and an analytical server 14 having a processor 16 which is operatively associated with the memory 12 via control program 18 for managing the flow of data throughput. Alternatively, and as shown in the embodiment of the present invention depicted in
Memory 12 may contain a plurality of cooperative relational databases. For example, this embodiment has a factor/coupon database 22 for storing data relating to factor/coupon updates, a trade database 24 for storing information relating to transactions of securities and a portfolio database 26 for storing information relating to the portfolios of securities. The databases may also be shared by the integrated analytical and trading systems.
Referring now to
Generally, process 50 is actuated as part of an automated routine or by a user through graphical interface 20. At step 52, server 14, processor 16 and control program 18 operatively cooperate to perform a search in trade database 24 for any trades involving securities that require factor and/or coupon updates. If no such trades are found in step 56, then system 10 proceeds to step 56 and idles until further initiation. After reaching step 56, the process 50 returns to searching the trade database at step 52 when actuated again. Preferably, if process 50 was initiated by a user, then a message indicating that no trades were found is communicated through graphical interface 20. If process 50 was actuated as an automated routine, then preferably a summary of the results is stored as an activity log in a database, such as trade database 24.
Returning to the inquiry in step 54, when one or more trades involving securities which may require updated factor or coupon information are discovered in trade database 24, then system 10 will conduct a search for the latest factor and/or coupon update data in step 58. This data may be stored in database 22. Database 22 may receive and store information from a variety of sources, including the issuer of the financial instrument, or it may be the same database utilized by the analytical components within the integrated system. Alternatively, system 10 may be linked via the World Wide Web or otherwise to a site or sites which provide such updated coupon or factor data.
As shown in inquiry step 60, if system 10 does not locate updated factor or coupon data relating to the securities involved in the trade or trades found, then system 10 proceeds to step 56 where it idles until being actuated thereafter. If system 10 locates updated factor or coupon data for the securities involved in any of the trades found, then system 10 proceeds from step 60 to step 62 where the old information is replaced by the update and stored in trade database 24. Preferably, the date of the update is also recorded. System 10 will then proceed to step 56 and idle until returning to step 52 upon being actuated thereafter.
In the embodiment of the present invention shown in
The current value of a financial instrument subject to a factor update may be obtained by multiplying the original face value by the most recent factor. A formula for calculating the capital gain or loss from a particular trade involving a financial instrument subject to a factor update is shown below:
For example, assume $1,000,000 worth of BFK was sold for Portfolio A, the newly updated factor is 0.9941970 and there is no accrued interest owed. If the market price as determined on the secondary market for this $1,000,000 block of BFK is $97.75, substituting the numbers in the above formula yields the following:
The above example illustrates a sale of BFK at a discount, which provides Portfolio A with a capital loss position. If the market price was $102.35 instead of $97.75, the sale of BFK would be at a premium ($1,017,560.63) and Portfolio A would realize a capital gain. In step 166, the portfolio in portfolio database 26 involved in the transaction associated with the updated information is also updated in accordance with the outcome of the computation performed in step 164.
In the case of a coupon update, the updated coupon interest rate can be multiplied by the par or face value of the instrument to determine the amount of income owed to the portfolio in database 26 which owns the instrument. In step 166, this portfolio is also updated in accordance with the outcome of the computation performed in step 164.
The portfolio group field 204 permits the user to limit the scope of the search to the input identifier, which includes groupings and fund types such as those listed in the drop-down menu 206 shown in
A specific security group or type may be selected in field 208 to narrow the search results to only those identified in field 208. Security groups or types may be highlighted in field 208 and included or excluded in the subsequent search by indicating the desired choice in the include and exclude option bar 210. Thus, if a certain security group or type is highlighted and the include option in bar 210 is also selected, system 10 will then focus the search on trades in database 24 to update that involve only those security groups or types. Alternatively, the exclude option in bar 210 can be used to single out highlighted security groups or types so that system 10 does not spend excess time and resources searching through all trades in database 24. The default setting in option bar 210 is include, which will either direct system 10 to search for trades involving the security groups highlighted in field 208, or direct system 10 to search for all trades of the security groups and types if none are highlighted in field 208.
The search may also be directed to trades that settled within a specified date range by entering the period of time sought in fields 212 (which includes both “from” and “to” input fields shown in screen 200). The default is no entry, that is, no time restrictions on the search. The parameter affected (i.e., factor only, coupon only, or factor or coupon) may be selected in option bar 214 to further focus the search in accordance with the selected parameter. The default option in bar 214 is factor or coupon, which results in a search for trades that need factor updates, coupon updates, or factor and coupon updates. Once the search criteria have been specified, the retrieve button 216 may be pressed to begin the search. Alternatively, the criteria may be returned to the default values by pressing reset button 218.
Screen 250 includes a truncated portion of a table 252 which contains information retrieved from the search. As shown in the “settle date” column of table 252, the listed trades have settlement dates between the specified date range. The affected parameter which requires an update is also specified for each trade found in table 252, as well as other information about the trade including, for example, the fund name, invoice number, trade number, version, transaction type, asset ID, CUSIP number, trade date, broker, broker desk and original face value of the fund, among other things, such as data used with or relating to the integrated analytical and trading systems. Table 252 also includes the newly computed values, such as the net money lost or gained from the trades found, based on the updated information obtained from factor/coupon update database 22 or otherwise.
Preferably, restrictions are incorporated into system 10 to prevent unauthorized users from updating information. As shown in screen 350, trades in the top four rows of table 252, with “ALLC” in the “Tran Type” column, do not have checkboxes 352 in the “Post Correction?” column. In this way, these trades without boxes 352 are not available for updating and are safeguarded from being changed. These restrictions may be in place depending on the level of authority permitted to the particular user, or based on the type of transaction, such as for example, a trade involving a financial instrument having locked interest. The restriction on user access may also be portfolio group specific, in which case a screen such as screen 450 in
Although exemplary and preferred aspects and embodiments of the present disclosure have been described with a full set of features, it is to be understood that the disclosed system and method may be practiced successfully without the incorporation of each of those features. It is to be further understood that modifications and variations may be utilized without departure from the spirit and scope of this inventive system and method, as those skilled in the art will readily understand. Such modifications and variations are considered to be within the purview and scope of the appended claims and their equivalents.
The subject application claims priority to commonly owned, U.S. Provisional Application Ser. No. 60/356,064, filed Feb. 11, 2002, the disclosure of which is herein incorporated by reference in its entirety.
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