WO2009067437A1 - Settling over-the-counter derivatives using synthetic spot benchmark rates - Google Patents
Settling over-the-counter derivatives using synthetic spot benchmark rates Download PDFInfo
- Publication number
- WO2009067437A1 WO2009067437A1 PCT/US2008/083883 US2008083883W WO2009067437A1 WO 2009067437 A1 WO2009067437 A1 WO 2009067437A1 US 2008083883 W US2008083883 W US 2008083883W WO 2009067437 A1 WO2009067437 A1 WO 2009067437A1
- Authority
- WO
- WIPO (PCT)
- Prior art keywords
- exchange
- computer
- weighted average
- computing
- volume
- Prior art date
Links
Classifications
-
- G—PHYSICS
- G06—COMPUTING; CALCULATING OR COUNTING
- G06Q—INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
- G06Q40/00—Finance; Insurance; Tax strategies; Processing of corporate or income taxes
- G06Q40/04—Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
-
- G—PHYSICS
- G06—COMPUTING; CALCULATING OR COUNTING
- G06Q—INFORMATION AND COMMUNICATION TECHNOLOGY [ICT] SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES; SYSTEMS OR METHODS SPECIALLY ADAPTED FOR ADMINISTRATIVE, COMMERCIAL, FINANCIAL, MANAGERIAL OR SUPERVISORY PURPOSES, NOT OTHERWISE PROVIDED FOR
- G06Q40/00—Finance; Insurance; Tax strategies; Processing of corporate or income taxes
Definitions
- the present invention relates generally to operating a market, and particularly to settlement of over-the-counter derivative products traded in a market using a spot rate.
- Over-the-counter (OTC) financial derivative products are generally financial instruments or investment vehicles that include custom-tailored, negotiated contracts that are bought, sold, or otherwise exchanged between parties. That is, the OTC financial derivatives are typically not exchange traded. OTC derivatives may include options, forward contracts, foreign exchange (FX) spot and forward contracts, stocks, securities, bonds and any other financial product or investment vehicle that may be traded between parties.
- OTC Over-the-counter
- the products it is desirable for the products to have a payoff that can be easily tracked or monitored using a computer model that may produce a theoretical value for closing and/or settlement purposes.
- the settlement or payoff for an OTC derivative may be determined according to conventional International Swap and Derivatives Association (ISDA) rules.
- ISDA International Swap and Derivatives Association
- the open position on a financial product may be periodically determined prior to expiry through a mark-to-market accounting process where the position is determined according to an agreed upon standard or benchmark.
- the standard or benchmark may fluctuate or vary with changes in the market.
- the final payoff may be determined for the derivative product as calculated according to the benchmark at expiration of the product.
- the foreign exchange (FX) derivatives may be settled according to an agreed upon benchmark.
- the benchmark may be a spot benchmark that indicates a spot exchange rate between two currencies for a given moment in time.
- Current benchmarks used for FX derivative products are determined through a survey of traded price information for spot FX rates that are made available from electronic trading systems.
- Other benchmark rates such as the WM/Reuters Spot Rates and the IFED FX exchange rate published daily by the Federal Reserve Bank of New York, include a buying rate between a variety of currency pairs.
- the benchmarks do not provide an optimally accurate and reliable benchmark for settling OTC derivatives, such as spot FX products.
- aspects of the invention provide a new synthetic spot FX benchmark rate derived from nearby FX futures prices and forward points.
- the new synthetic spot FX benchmark rate may be used to settle financial derivative products, such as the exercise of an OTC FX option at termination.
- the benchmark may be determined using a combined process of traded prices with a weighing of the prices by an amount of volume in each associated transaction.
- a benchmark may be calculated using the volume weighted average price (VWAP) of the FX future for the closing portion of the reporting period.
- Forward points may be applied to IMM dates to back out a spot FX benchmark rate. That is, volume-weighted FX futures price inputs may be adjusted to spot equivalents by adding or deducting forward points to the delivery dates of the price on the traded futures contracts.
- the benchmark may be calculated hourly, daily or at any other period.
- OTC derivatives such as options, may be settled to the benchmark.
- a computer-assisted method for use with settling an over-the-counter derivative product is disclosed. The method may comprise one or more of the following steps: receiving information about a plurality of completed transactions for an exchange-traded financial derivative; computing a volume-weighted average price based on the information received; applying forward points to the volume weighted average price to determine a spot exchange rate between two currencies; determining a settlement price for the over-the-counter derivative product according to the associated spot exchange rate; and publishing the settlement price.
- the volume-weighted average price may be computed using an average of a midpoint of bids and asks of orders for the exchange-traded financial derivative during the periodic interval.
- the computed average may be a time-weighted average of bids and asks of orders over a periodic interval for the exchange-traded financial derivative.
- Figure 1 depicts an illustrative computer network system that may be used to implement various aspects of the invention.
- Figure 2 illustrates an example of a method for generating a settlement price in accordance with aspects of the invention.
- Exemplary embodiments of methods, apparatuses, and systems that provide for settling OTC derivatives, such as foreign exchange (FX) derivative products, using synthetic spot benchmark rates are disclosed and discussed below.
- An example of an FX derivative product includes an FX futures product.
- An FX futures product may be considered a transferable futures contract that specifies the price at which a specified currency can be received or delivered at a specified future date. The date on which the currency is received or delivered generally follows the International Monetary Market (IMM) dates.
- FX future contracts may be used by investors to hedge against foreign exchange risk. The contracts are generally exchanged-traded and delivery or execution of the contract is guaranteed by a central counterparty, such as a clearing house. Traders in an FX Futures contract typically have an open position, or open interest, until the trader exits the position or the delivery date specified by the contract.
- the value, or profits and losses associated with the open position in the FX futures contracts are generally accounted for through a marked-to-market accounting basis.
- the trader may exit the position by entering a new FX Future contract with an opposite position to the trader's current position prior to the contract's delivery date.
- Another example of an FX derivative product is an FX option, which is discussed in additional detail below.
- Disclosed are embodiments for settling OTC derivatives using synthetic spot benchmark rates provide for an accurate, reliable and transparent benchmark rate for settling OTC derivative products.
- Methods for settling FX derivatives using synthetic spot benchmark rates use FX futures trade prices and associated volumes for average price weightings plus vendor or GFX-supplied forward points to derive synthetic spot FX rates at selected times.
- FX future trade prices and/or volumes are not available, then the midpoints of FX futures bid/ask spreads from an electronic trading platform, such as the CME Group Globex electronic trading platform, may be used. This conversion may provide buyers and sellers of derivative product a reliable benchmark to which an FX derivative product may be settled at expiration.
- Figure 1 depicts an illustrative computer network system that may be used to implement various aspects of the invention. Aspects of the invention are preferably implemented with computer devices and computer networks that allow users to exchange/receive information including, but not limited to synthetic spot FX benchmark rates and trading information.
- a computer system 100 receives market data and other information, calculates various values in accordance with aspects of the invention, and transmits synthetic spot rates to users.
- a user database 102 includes information identifying traders and other users of computer system 100. Data may include user names and passwords.
- Computer system 100 may be implemented with one or more mainframe, desktop or other computers. [0015] Referring to the exemplary trading network environment of Figure 1, the computer system 100 may comprise various modules for performing functions in accordance with various aspects of the invention.
- An account data module 104 may process account information that may be used during trades.
- a match engine module 106 is included to match bid and offer prices. Match engine module 106 may be implemented with software that executes one or more algorithms for matching bids and offers.
- a trade database 108 may be included to store information identifying trades and descriptions of trades. In particular, a trade database may store information identifying the time that a trade took place and the contract price.
- An order book module 110 may be included to compute or otherwise determine current bid and offer prices.
- a market data module 112 may be included to collect market data and prepare the data for transmission or use.
- the trading network environment shown in figure 1 includes computer devices 114, 116, 118, 120 and 122.
- Each computer device may include a central processor that controls the overall operation of the computer and a system bus that connects the central processor to one or more conventional components, such as a network card or modem.
- Each computer device may also include a variety of interface units and drives for reading and writing data or files.
- a user can interact with the computer with a keyboard, pointing device, microphone, pen device or other input device.
- Computer device 114 is shown directly connected to computer system 100.
- Computer system 100 and computer device 114 may be connected via a Tl line, a common local area network (LAN), wirelessly, or any other mechanism for allowing computer devices to communicate.
- the user of computer device 114 may transmit/receive the trade or other information to/from 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.
- 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 computer system 100 via a conventional wireless hub 128.
- a PDA includes mobile telephones and other wireless devices that communicate with a network via radio waves.
- Figure 1 also shows LAN 124 connected to the Internet 126.
- LAN 124 may include a router to connect LAN 124 to the Internet 126.
- Computer device 120 is shown connected directly to the Internet 126. The connection may be via a modem, DSL line, satellite dish or any other device for connecting a computer device to the Internet.
- One or more broker/agent 130 may function as a neutral party to regulate the settlement of over-the-counter financial products between counterparties using a synthetic spot benchmark rate from computer system 100.
- One skilled in the art will appreciate that numerous additional computers and systems may be coupled to computer system 100. Such computers and systems may include, but are limited to, clearing, regulatory, and/or fee systems.
- the operations of computer devices and systems shown in figure 1 may be controlled by computer-executable instructions stored on computer-readable storage medium.
- computer device 116 may include computer-executable instructions for receiving rate and other information from computer system 100 and displaying to a user.
- computer device 118 may include computer-executable instructions for receiving market data from computer system 100 and displaying that information to a user.
- VWAP futures price a volume-weighted average price
- CME VWAP FX futures price a volume-weighted average price
- a computing system 100 may receive and process information to be used for the VWAP calculation. The information may include the final price and volume of the completed transactions.
- the VWAP may be determined (in step 206) using information from various sources including, but not limited to CME Globex sales, or executed transactions during the interval. For contracts having a high volume or greater liquidity, the prices may be taken at a known period of time when there is a large amount of market activity, such as at 2:00 p.m.
- bid/ask data may be used to determine the midpoint of the bid/ask spread during a periodic interval (e.g., 30 seconds) in step 208.
- Samples of the bid/ask may be taken periodically, such as at least once per second, or randomly to compile a set of observed bid/asks during the interval.
- the VWAP FX futures price may be determined using the average of the midpoints of each observation. In one example, the computation above may be calculated not in real time (i.e., the calculation procedures are a "look back").
- the relevant period of data is first collected and the computations performed after the data for the period has been collected.
- the calculation may be a time-weighted average, where regular intervals are defined and the calculated average is the summations of price times the interval divided by the summation of intervals.
- forward points may be applied for each currency, which are priced to IMM dates to back out spot rates from futures.
- the forward points are considered as being added to or subtracted from the spot exchange rate to calculate a forward price, adjusted for point size convention.
- the forward points may be obtained from a quote vendor, such as Reuters, Bloomberg, CME Group GFX, or others.
- the forward points may be added or subtracted as appropriate.
- the resulting value may be used as a spot rate (e.g., CME Spot FX Benchmark Rate).
- OTC products may be settled to the benchmarks in step 212.
- the benchmark may be published (in step 214) at various periodic intervals, e.g., perhaps hourly.
- a FX option is yet another example of a financial product (e.g., FX derivative product) that may be settled in accordance with various aspects of the invention.
- An FX option may be considered a contract that grants the holder of the contract a right to buy or sell currency at a specified exchange rate during or at a specified period of time. Although the holder of the contract has the right to buy or sell, the holder is not obligated to buy or sell.
- FX options are another form of investment vehicle used to hedge against adverse movements in exchange rates.
- a trader may hedge against foreign currency risk by purchasing an FX option put or call.
- a trader may hedge against increases in the exchange rate between the U.S. Dollar and the European Euro (USD/EUR pair) by buying a call option on the USD/EUR exchange. In this manner, the trader may profit from an increase in the exchange rate.
- USD/EUR pair European Euro
- the steps, elements and processes discussed herein may be encoded as program logic, computer readable code and/or instructions. These encoded elements, in turn, may be stored or embedded on a computer readable medium such as, for example, a hard disk drive, a solid state drive or other storage medium.
- the computer readable medium may be in communication with a processor which, in response to an appropriate input or command, may execute the program logic stored on the computer readable medium. The execution of this program logic may result in the execution of the step, elements and processes embodied and discussed herein.
Abstract
Description
Claims
Priority Applications (2)
Application Number | Priority Date | Filing Date | Title |
---|---|---|---|
AU2008326505A AU2008326505A1 (en) | 2007-11-20 | 2008-11-18 | Settling over-the-counter derivatives using synthetic spot benchmark rates |
CA2706339A CA2706339A1 (en) | 2007-11-20 | 2008-11-18 | Settling over-the-counter derivatives using synthetic spot benchmark rates |
Applications Claiming Priority (2)
Application Number | Priority Date | Filing Date | Title |
---|---|---|---|
US11/943,308 US7840483B2 (en) | 2007-11-20 | 2007-11-20 | Settling over-the-counter derivatives using synthetic spot benchmark rates |
US11/943,308 | 2007-11-20 |
Publications (1)
Publication Number | Publication Date |
---|---|
WO2009067437A1 true WO2009067437A1 (en) | 2009-05-28 |
Family
ID=40642968
Family Applications (1)
Application Number | Title | Priority Date | Filing Date |
---|---|---|---|
PCT/US2008/083883 WO2009067437A1 (en) | 2007-11-20 | 2008-11-18 | Settling over-the-counter derivatives using synthetic spot benchmark rates |
Country Status (4)
Country | Link |
---|---|
US (4) | US7840483B2 (en) |
AU (1) | AU2008326505A1 (en) |
CA (1) | CA2706339A1 (en) |
WO (1) | WO2009067437A1 (en) |
Families Citing this family (16)
Publication number | Priority date | Publication date | Assignee | Title |
---|---|---|---|---|
US8429057B1 (en) | 2007-11-19 | 2013-04-23 | Curex Innovations Llc | Systems and methods for creation, issuance, redemption, conversion, offering, trading, and clearing a debt obligation convertible into cash plus a spot foreign exchange contract that is priced to reflect the value of the debt obligation in a base currency in relation to the value of a reference currency |
US8301491B2 (en) * | 2008-06-23 | 2012-10-30 | Google Inc. | Item reservation |
US20110208632A1 (en) * | 2010-02-19 | 2011-08-25 | Chicago Mercantile Exchange Inc. | Generation of a Hedgeable Index and Market Making for a Hedgeable Index-Based Financial Instrument |
US8341054B2 (en) | 2010-07-02 | 2012-12-25 | Cdt Global Soft, Inc. | System and method for bank account management and currency investment |
WO2012047988A2 (en) * | 2010-10-05 | 2012-04-12 | Tullett Prebon Americas Corp. | Derivative fixing matching system and method with greater liquidity |
US8473402B2 (en) * | 2011-04-14 | 2013-06-25 | Chicago Mercantile Exchange Inc. | Perpetual futures contracts with periodic reckonings |
US8666873B2 (en) | 2011-07-01 | 2014-03-04 | Curex Innovations Llc | Systems and methods for open execution auction trading of financial instruments |
US8527393B2 (en) * | 2011-07-14 | 2013-09-03 | Chicago Mercantile Exchange Inc. | Listing and expiring cash settled on-the-run treasury futures contracts |
US20140279365A1 (en) * | 2013-03-15 | 2014-09-18 | Integral Development Inc. | Method and Apparatus for Real-Time Benchmarking |
US20140316961A1 (en) * | 2013-04-23 | 2014-10-23 | Chicago Mercantile Exchange, Inc. | Dynamic Tick Size Order Aggregator |
US20150081503A1 (en) * | 2013-09-19 | 2015-03-19 | Chicago Mercantile Exchange Inc. | Pricing Range-Based Financial Instruments |
US9123076B2 (en) * | 2013-10-16 | 2015-09-01 | Nasdaq OMX Group, Inc. | Customizable macro-based order entry protocol and system |
US20150127520A1 (en) * | 2013-12-31 | 2015-05-07 | Nyse Group, Inc. | Large liquidity seeking trading platform |
US20150294417A1 (en) * | 2014-04-10 | 2015-10-15 | Cfph, Llc | Spot fixing auction |
US20170186086A1 (en) * | 2015-12-29 | 2017-06-29 | Credit Suisse Securities (Usa) Llc | Synthetic Cross-Currency Basis Swap Apparatuses, Methods, and Systems |
US20210383476A1 (en) * | 2019-10-31 | 2021-12-09 | Rakuten Group Inc. | Core rate generation apparatus, core rate generation method, and program thereof |
Citations (5)
Publication number | Priority date | Publication date | Assignee | Title |
---|---|---|---|---|
US20020161693A1 (en) * | 2001-04-30 | 2002-10-31 | Greenwald Jamie A. | Automated over-the-counter derivatives trading system |
US20040138983A1 (en) * | 2000-12-28 | 2004-07-15 | Ip Strategy Incorporated | Storage medium storing an exchange transaction program for financial and related instruments, exhange transaction system for financial and related instruments and exchange transaction method for products |
US20050080734A1 (en) * | 2003-08-06 | 2005-04-14 | Deutsche Bank Ag | Method, system, and computer program product for trading diversified credit risk derivatives |
US20060224492A1 (en) * | 2005-04-01 | 2006-10-05 | De Novo Markets Limited | Trading and settling enhancements to the standard electronic futures exchange market model leading to novel derivatives including on exchange ISDA type interest rate derivatives and second generation bond like futures based in part or entirely on them |
US20070118459A1 (en) * | 2005-11-18 | 2007-05-24 | Bauerschmidt Paul A | System and method for centralized clearing of over the counter foreign exchange instruments |
Family Cites Families (13)
Publication number | Priority date | Publication date | Assignee | Title |
---|---|---|---|---|
US6317727B1 (en) * | 1997-10-14 | 2001-11-13 | Blackbird Holdings, Inc. | Systems, methods and computer program products for monitoring credit risks in electronic trading systems |
GB2355556A (en) * | 1999-03-22 | 2001-04-25 | John Carroll Doyle | Computer system for trading and clearing futures contracts |
US20050015321A1 (en) * | 2000-08-30 | 2005-01-20 | Susanne Vindekilde | System and method for listing offerings of commercial paper and other interests |
GB0024671D0 (en) | 2000-10-09 | 2000-11-22 | Wm Company The Plc | Apparatus and methods for handling trading data |
US20030177126A1 (en) * | 2001-09-21 | 2003-09-18 | Weingard Fred S. | Volume weighted average price system and method |
US20040111356A1 (en) * | 2002-05-17 | 2004-06-10 | Vikas Srivastava | Method and system for executing foreign exchange transactions |
EP1526473A1 (en) * | 2003-10-17 | 2005-04-27 | eSpeed, Inc. | Systems and methods for providing enhanced volume-weighted average price trading |
US20060218075A1 (en) * | 2005-01-21 | 2006-09-28 | Feldman Victor D | Exchange traded fund with futures contract based assets |
US20070038550A1 (en) * | 2005-03-22 | 2007-02-15 | Lehman Brothers Inc. | Methods and systems for conditional auto trading |
US20060253367A1 (en) * | 2005-05-04 | 2006-11-09 | Chicago Board Options Exchange | Method of creating and trading derivative investment products based on a volume weighted average price of an underlying asset |
US7496531B1 (en) * | 2005-05-31 | 2009-02-24 | Managed Etfs Llc | Methods, systems, and computer program products for trading financial instruments on an exchange |
US20080120246A1 (en) * | 2006-11-16 | 2008-05-22 | Brian Sopinsky | System and method for trading financial instruments associated with future events |
US20090048982A1 (en) * | 2007-08-13 | 2009-02-19 | Dean Payton | Method of computing a settlement price |
-
2007
- 2007-11-20 US US11/943,308 patent/US7840483B2/en active Active
-
2008
- 2008-11-18 CA CA2706339A patent/CA2706339A1/en not_active Abandoned
- 2008-11-18 AU AU2008326505A patent/AU2008326505A1/en not_active Abandoned
- 2008-11-18 WO PCT/US2008/083883 patent/WO2009067437A1/en active Application Filing
-
2010
- 2010-10-19 US US12/907,505 patent/US8010444B2/en active Active
-
2011
- 2011-08-15 US US13/209,535 patent/US8510209B2/en active Active
-
2013
- 2013-08-12 US US13/964,495 patent/US20130332330A1/en not_active Abandoned
Patent Citations (5)
Publication number | Priority date | Publication date | Assignee | Title |
---|---|---|---|---|
US20040138983A1 (en) * | 2000-12-28 | 2004-07-15 | Ip Strategy Incorporated | Storage medium storing an exchange transaction program for financial and related instruments, exhange transaction system for financial and related instruments and exchange transaction method for products |
US20020161693A1 (en) * | 2001-04-30 | 2002-10-31 | Greenwald Jamie A. | Automated over-the-counter derivatives trading system |
US20050080734A1 (en) * | 2003-08-06 | 2005-04-14 | Deutsche Bank Ag | Method, system, and computer program product for trading diversified credit risk derivatives |
US20060224492A1 (en) * | 2005-04-01 | 2006-10-05 | De Novo Markets Limited | Trading and settling enhancements to the standard electronic futures exchange market model leading to novel derivatives including on exchange ISDA type interest rate derivatives and second generation bond like futures based in part or entirely on them |
US20070118459A1 (en) * | 2005-11-18 | 2007-05-24 | Bauerschmidt Paul A | System and method for centralized clearing of over the counter foreign exchange instruments |
Also Published As
Publication number | Publication date |
---|---|
AU2008326505A1 (en) | 2009-05-28 |
US20090132402A1 (en) | 2009-05-21 |
US20130332330A1 (en) | 2013-12-12 |
US8510209B2 (en) | 2013-08-13 |
US8010444B2 (en) | 2011-08-30 |
AU2008326505A2 (en) | 2010-11-11 |
CA2706339A1 (en) | 2009-05-28 |
US7840483B2 (en) | 2010-11-23 |
US20110040671A1 (en) | 2011-02-17 |
US20110295737A1 (en) | 2011-12-01 |
Similar Documents
Publication | Publication Date | Title |
---|---|---|
US7840483B2 (en) | Settling over-the-counter derivatives using synthetic spot benchmark rates | |
US8438102B2 (en) | Processing binary options in future exchange clearing | |
US20150221034A1 (en) | Pricing a Swap Financial Product Using a Non-Par Value | |
JP6546969B2 (en) | Financing and interest rate price discovery method using central clearing derivatives | |
US8219472B2 (en) | Valuation of derivative products | |
US20150254774A1 (en) | Pricing a Forward Rate Agreement Financial Product Using a Non-Par Value | |
US20230351505A1 (en) | Listed options position compression system | |
US20100325031A1 (en) | Method and system for trading financial assets | |
US20160247225A1 (en) | Option Box Volatility Indexes | |
US20150379641A1 (en) | Implied Volatility Skew Futures Product | |
US20160019643A1 (en) | Invoice Swap Spreads | |
US20150379633A1 (en) | Implied Volatility Futures Product |
Legal Events
Date | Code | Title | Description |
---|---|---|---|
121 | Ep: the epo has been informed by wipo that ep was designated in this application |
Ref document number: 08851783 Country of ref document: EP Kind code of ref document: A1 |
|
WWE | Wipo information: entry into national phase |
Ref document number: 2008326505 Country of ref document: AU |
|
WWE | Wipo information: entry into national phase |
Ref document number: 2706339 Country of ref document: CA |
|
NENP | Non-entry into the national phase |
Ref country code: DE |
|
ENP | Entry into the national phase |
Ref document number: 2008326505 Country of ref document: AU Date of ref document: 20081118 Kind code of ref document: A |
|
122 | Ep: pct application non-entry in european phase |
Ref document number: 08851783 Country of ref document: EP Kind code of ref document: A1 |