Collateralized and securitized future financial transactions

Abstract

The present invention relates to a novel method for utilizing future financial transactions as collateral, or as securities or as both to enhance the accessibility and affordability of credit. By mitigating inherent lending risks and facilitating capital mobilization from investors, this invention aims to create a more inclusive financial ecosystem. The dual role of future financial transactions in securing loans and generating income through securities provides a unique solution to the challenges of credit accessibility, particularly in economically constrained environments.

Description

Collateralized and Securitized Future Financial Transactions

[0001] This invention pertains to financial methodology that integrate future financial transactions, collateral and securities markets to optimize credit access and affordability.

[0002] Access to affordable credit is a critical component of economic development and personal financial stability. In many regions of the world, especially in developing countries, access to affordable credit is limited due to the costs associated with credit such as high interest rates and other factors like low income levels. Traditional lending practices have also created barriers that prevent individuals and businesses from obtaining the funds they need to thrive leading to a cycle of financial exclusion for millions. The inability to secure affordable credit limits opportunities for education, homeownership, entrepreneurship etc., and ultimately stifling economic growth.

[0003] The invention provides a method for enabling the accessibility and affordability of credit by reducing the cost of borrowing capital. The invention also provides a method for enabling mobilization of capital from investors to where it is needed by mitigating risks associated with lending. The invention utilizes the concept of pledging as collateral future financial transactions carried out through a network that facilitates electronic payments and / or transfers. Additionally, it also utilizes the concept of selling to investors as securities future financial transactions carried out through a network that facilitates electronic payments and / or transfers. In other words future financial transactions are considered as collateral when they are pledged in order to borrow capital and considered as securities when they are sold to investors as underlying assets or as income-generating instruments. This shows that future financial transactions can play both roles, as collateral and securities.

[0004] At the beginning of the year, a bank issued loans to its customers amounting to USD 50, 000, 000, with an annual interest rate of 20%, compounded annually, and a repayment period of four years. This total included various types of loans, such as auto loans, student loans, and credit card debt. The bank anticipated an annual return of USD 19, 314, 456.04 from these loans. However, due to challenging economic conditions, customers were only able to repay at an interest rate of 8% over a six-year period, prompting requests for loan restructuring. If the bank agrees to these requests, its annual returns would decrease to USD 16, 712, 056.07. This reduction could hinder the bank's ability to meet its financial obligations, as it had also borrowed funds from other institutions to finance these loans.

[0005] To mitigate this potential crisis, the bank chose to restructure the debts, pooling them together and converting them into securities for sale to investors. These securities are designed to ensure that the annual returns from investors will enable the bank to uphold its original annual return of USD 19, 314, 456.04. This arrangement benefits both the bank and its customers by providing lower interest rates and extended repayment terms.

[0006] The process involves investors purchasing these restructured securities, which will yield annual returns from the customers. Upon receiving payments from the customers, the investors will remit the original annual amount of USD 19, 314, 456.04 to the bank. Following the restructuring, the investors will receive USD 16, 712, 056.07 annually from the securities. For the first four years, investors are expected to make payments to the bank, while no payments will be required during the fifth and sixth years, even though they will continue to receive returns from the securities.

[0007] The bank is optimistic about this strategy, as some investors possess collateral that allows them to secure funds for purchasing the securities at lower interest rates. However, when the bank approached various investors, including pension funds and hedge funds, there was little interest. The perceived risks associated with the current economic climate and the potential for increased loan defaults led to hesitance, and the collateral backing the securities was viewed as insufficient. Consequently, the bank was advised to explore methods for de-risking these securities.

[0008] The bank decides to hire a consultant for advice. The consultant advices the bank to try and sell the products to a company or firm with a network that facilitates electronic payments and transfers. This firm or company can pledge its future financial transactions that will pass through its network as collateral for borrowing a loan at very low interest rate or issuing securities to investors with its future financial transactions as the underlying assets and using the dammed financial transactions to pay the bank.

[0009] The Bank approaches a firm or company with a network that facilitates electronic payments and transfers and explains its case. The firm determines the following:To facilitate the bank’s objective of receiving an annual yield of USD 19, 314, 456.04 over a four-year term, it is imperative for the firm to procure a principal amount of USD 77, 257, 824.14, thereby enabling the annual disbursement of USD 19, 314, 456.04 to the bank for the stipulated duration.Given that the clientele is only positioned to service the loan at an interest rate of 8% over a six-year horizon, the firm must negotiate with prospective lenders or investors to secure financing at an interest rate of 7% or lower. This will ensure that the firm derives a minimum profit margin of 1% from its operations.The total annual value of financial transactions going through their network is at least USD 500, 000, 000 substantially exceeding the requisite USD 77, 257, 824.14 needed for the four-year repayment to the bank.To secure the necessary USD 77, 257, 824.14 at a competitively low interest rate, the firm must devise a comprehensive strategy for mitigating risk associated with the financial instruments or securities. This strategy must be clearly articulated to potential investors, including members of the public, to facilitate the attractiveness and marketability of the financial products.The firm applies the following approach or model to de-risk the financial products:Converting future financial transactions into collateral and securitiesSince the total value of the annual financial transactions going through their network is at least USD 500, 000, 000 this is enough to cater for the required USD 77, 257, 824.14. So based on this, the firm has three options available for raising this amount:Borrow a loan of USD 77, 257, 824.14 from a lender and pledge future financial transactions as collateral. This way the firm will have collateralized its future financial transactions.Issue a bond to investors to raise the required USD 77, 257, 824.14 while using future financial transactions as the underlying assets. This way the firm will have securitized its future financial transactions.Apply a combination of both of the above two approaches to raise the required USD 77, 257, 824.14.This amount (USD 77, 257, 824.14) will be used for simultaneously mirroring and damming financial transactions as they flow through the network in order to create a financial reservoir or pool of an equivalent amount (USD 77, 257, 824.14). The financial reservoir or pool created through this technique, mirror-and-dam, will act as collateral if used for borrowing or securitized if used as an underlying asset in the issuance of bonds.Setting up an escrow accountThe cumulative total of the dammed financial transactions, amounting to USD 77, 257, 824.14, will be deposited into a designated escrow account, subject to the fulfillment of specific conditions prior to the disbursement of any funds to the banking institution. For instance, before any withdrawals are made from the escrow account to remit an annual return of USD 19, 314, 456.04 to the bank, it is imperative that the bank first credits the account with USD 16, 712, 056.07, which represents the annual returns accrued from restructured loan repayments by its clientele. This credited amount is subsequently allocated to investors following the firm's deduction of its fee. It is important to note that the USD 16, 712, 056.07 reflects the restructured sum at an 8% interest rate, reduced from an original rate of 20%. Should the bank fail to deposit this requisite amount into the account, it will be considered in default, thereby triggering recovery protocols, which may include the seizure of collateral pledged by borrowers in support of their loans, or the confiscation of the bank's assets. Nonetheless, these recovery protocols will be governed primarily by the contractual agreement established between the parties involved. This de-risking framework is designed to safeguard the capital of investors or lenders. Upon the bank's deposit of USD 16, 712, 056.07 into the escrow account, the firm will retain a 2% fee (it is noteworthy that the firm can secure financing at markedly low interest rates due to this de-risking strategy) and disburse the remaining USD 15, 711, 354.19 to the investors. For the purposes of this scenario, it is assumed that the firm has procured capital at an interest rate of 6%. Furthermore, with the bank having fulfilled its deposit obligation, the firm will promptly remit USD 19, 314, 456.04 to the bank.Brief Description of System Architecture

[0010] The system comprises of the following:

[0011] Electronic payments and / or transfers network.

[0012] The network facilitates or enables or supports financial transactions involving electronic payments and / or the electronic transfer of funds / monetary assets / financial assets / financial resources / virtual assets.

[0013] Financial intermediaries

[0014] These entities include banks, investment banks, credit unions, insurance companies, pension funds, mutual funds, finance companies, and hedge funds, etc. all playing crucial roles in capital flow.

[0015] Investors

[0016] Potential investors can be individuals, institutional entities etc. seeking to lend money or acquire securities with the expectation of future financial returns.

[0017] Escrow account

[0018] For holding assets generated from mirroring and damming of financial transactions which may be utilized as collateral or as securities, contingent upon predefined conditions.

Claims

A method for utilizing future financial transactions as collateral, or as securities, or as both in a financial system, enhancing credit accessibility and affordability.A financial system architecture that integrates financial intermediaries and investors for the exchange of capital involving collateralized and securitized future financial transactions.A de-risking strategy that involves collateralization and securitization of future financial transactions to optimize lending conditions.