Methods and apparatus for formulation, initial public or private offering, and secondary market trading of risk management contracts

Abstract

Key features of these methods, apparatus, and designs include (but are not limited to) innovations and implementations of futures securities; the notion of Type I, Type II, and Type III futures contracts custom tailored to specific clienteles; the notion of tickets and coupons as tradable futures contracts; the notion of bifurcation; the notion of redeemable bundles; and notion of realization of the futures market on the Internet; the apparatus of an Internet-based trading interface and engine; the notion of cookie-cutter futures electronic Internet-based futures markets for each security; the feature of maximal reliance on the Internet; and the business concept of “profitability without the need for high trading volume.”

Description

CROSS-REFERENCE TO RELATED APPLICATIONS [0001] This application is a divisional and claims the priority benefit of U.S. patent application Ser. No. 09 / 923,035, entitled “Methods and Apparatus for Formulation, Initial Public or Private Offering, and Secondary Market Trading of Risk Management Contracts” and filed Aug. 6, 2001, which claims the priority benefit of U.S. Provisional Patent Application Ser. No. 60 / 240,903 filed Oct. 17, 2000, and U.S. Provisional Patent Application Ser. No. 60 / 284,051 filed Apr. 16, 2001, the entire contents of each of which are hereby incorporated by reference. FIELD OF THE INVENTION [0002] The present invention relates to a method and apparatus for risk management and to a method and apparatus for establishing and maintaining a market for initial and secondary trading in risk management instruments. BACKGROUND OF THE INVENTION [0003] General George Patton is reputed to have once said, “Take calculated risks. That is quite different from being rash.” Ge...

AI Technical Summary

Benefits of technology

[0028] Accordingly, in view of the shortcomings of prior art, it is an object of the present invention to provide a risk hedging, contract trading system whereby prospective traders can transact with each other with low transaction overhead, in real-time, near instantaneous speed, twenty-four hours-per-day, 7 days-per-week, and without any intermediary or broker.

[0044] The computer-network based system also acts an umbrella aggregator, facilitator, and administrator of potentially thousands or millions of small, simultaneous markets, each of which may have virtually zero trading volume individually. This is possible because the platform profits from aggregate activity integrated over all of the small individual markets. Thus, the platform is able to (i) effectively “complete” the securities market for risk management; (ii) act as an umbrella portal where hedgers can go to access millions of futures markets in one place; and (iii) provide a direct channel to the hedging and speculating clientele for advertisers and others.

Problems solved by technology

And the fact remains that most of the risks—economic and otherwise—that individuals face in their lives are not shared by society.

As inefficient and insecure as it may seem, “we allow our standards of living to be determined substantially by a game of chance.”

So, like a bank, which could not pay if all depositors asked for their money, insurance companies are not generally designed to pay if all policies claimed their limits.

Conversely, a relatively small loss over premium results in a significant loss to capital.

This system does not absolutely assure an insurer's ability to pay in that an insurer's policy limits are generally much larger than its assets.

It is when insurers accept unique or difficult-to-place risks that premium as well as capital may not be sufficient to cover claims.

Even Lloyd's of London (which operates in a manner similar to a collection of small insurance companies with the exception that should losses exceed available funds, its underwriting members, similar to shareholders, can be forced, in theory, to pay up to the limit of their assets) has experienced such difficulties.

These narrowly defined contracts offer little flexibility in the risk being accepted.

As financial transactions and our world in general grow more complex, certain types of risk exposures have become increasingly difficult to transfer in today's markets.

In the insurance markets, catastrophic events and judicial reinterpretation have caused a contraction in some types of insurance capacity.

It appears that today's insurance markets are frequently unable or unwilling to facilitate the transfer of unique risks such as those with a high possibility of loss, where the loss could come earlier rather than later or with more severity than projected.

The exchanges have taken some steps toward addressing unique risks, such as catastrophe futures contracts, but again the terms are restrictive and do not easily integrate with the flexibility of a reinsurance contract.

In spite of insurance companies and exchanges, the fact remains that there are no existing instruments that people can use to hedge most of the common, everyday risks they face.

For example, workers have no direct way to hedge against the pain of prolonged work stoppage.

Retailers have no way to hedge against macroeconomic surprises in the global economy which could impact the availability of inventory items.

And individuals have no way to hedge against government decisions—such as war, economic embargoes, legislation and a myriad of other possibilities—that could substantially impact their livelihoods.

Participants in these markets invest their own funds, buy and sell listed contracts, and bear the risk of losing money as well as earning profits.

No commissions or transactions fees are charged, and the method of issuing contracts and making final payoffs on these contracts ensures that the IEM does not realize financial profits or suffer losses from market transactions.

Accordingly, IEM, like other traditional risk hedging methods such as insurance, offers a limited variety of contracts and provides incomplete markets and thus restricts opportunities for risk management.

Thus, presently available risk hedging methods, including IEM, fail to address potential needs of parties including such problem as: Inadequate contract diversity to address the vast range of uncertainties for which risk hedging is potentially advantageous; Excessive transaction costs rendering small markets of limited traders impractical; Liquidity restrictions to trading viability in brick and mortar futures markets; Inadequate real time communications capabilities necessary for market trading when traders are geographically dispersed; Problems due to the absence of liquid secondary markets in tickets, coupons, hotel and airline reservations, and advance purchase orders; and Problems in inventory management

But, because of a variety of heretofore insurmountable barriers, no such platform has yet emerged in the world.

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