Balance Derivative Trade Clearing Across Exchanges

Solution Overview

Problem

Trading participants face higher collateral requirements and increased complexity when trading the same derivative contract across multiple markets, as each market's clearing house requires collateral for both sides of the contract, lacking the netting benefits available within a single clearing house, and this is exacerbated by best-price order routing across exchanges.

Innovation Solution

A computer-implemented method creates a 'balance derivative trade' at the home marketplace to balance derivative positions across multiple exchanges, allowing for netting and reduced margin requirements, and enables dual derivative exercise operations to manage overnight risk, using a balancing clearing entity to manage obligations and collateral across different clearing houses.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Adaptability or versatility

If trading participants trade the same derivative contract on multiple markets, then they can access better prices and increase trading flexibility, but they face higher collateral requirements and increased complexity as each clearing house requires collateral for both sides of the contract

Engineering Contradiction:

Improvetrading flexibilityVSAvoidcollateral requirement

Core Design Contradiction:

Adaptability or versatilityVSQuantity of substance

Solution Approach 1:

The patent merges the clearing operations of multiple clearing houses into a unified clearing system. By consolidating the clearing functions, the system enables netting of positions across different markets, allowing trading participants to reduce collateral requirements while maintaining trading flexibility across multiple exchanges.

Inventive Principle:

Principle #5Merging (Combining)

Solution Approach 2:

The clearing house is designed to handle multiple markets and derivative contracts universally. The system can clear trades from different exchanges and contract types through a single integrated platform, providing multi-functional clearing services that reduce the need for separate collateral assessments for each market.

Inventive Principle:

Principle #6Universality (Multi-functionality)

2Adaptability or versatility

If trading participants trade the same derivative contract on multiple markets, then they can access better prices, but the complexity increases as each market's clearing house requires separate collateral management

Engineering Contradiction:

Improvetrading flexibilityVSAvoidclearing complexity

Core Design Contradiction:

Adaptability or versatilityVSDevice complexity

Solution Approach 1:

The patent merges the clearing operations of multiple clearing houses into a unified clearing system. By consolidating the clearing functions, the system enables netting of positions across different markets, allowing trading participants to reduce collateral requirements while maintaining trading flexibility across multiple exchanges.

Inventive Principle:

Principle #5Merging (Combining)

Solution Approach 2:

The system introduces an intermediary clearing mechanism that mediates between multiple markets and trading participants. This intermediary layer standardizes the clearing process across different exchanges, reducing the complexity of managing multiple separate clearing houses while maintaining access to various markets.

Inventive Principle:

Principle #24Intermediary (Mediator)

3Reliability

If a clearing house interposes between buyers and sellers as a legal counterparty, then settlement risks are reduced, but the complexity of managing multiple clearing houses and balance derivative trades increases

Engineering Contradiction:

Improvesettlement risk reductionVSAvoidclearing house complexity

Core Design Contradiction:

ReliabilityVSDevice complexity

Solution Approach 1:

The patent merges the clearing operations of multiple clearing houses into a unified clearing system. By consolidating the clearing functions, the system enables netting of positions across different markets, allowing trading participants to reduce collateral requirements while maintaining trading flexibility across multiple exchanges.

Inventive Principle:

Principle #5Merging (Combining)

Solution Approach 2:

The system segments the clearing function into distinct modules: home clearing house, away clearing house, and balancing clearing entity. This segmentation allows each component to have specialized functions while working together in a coordinated manner, managing complexity through modular architecture while maintaining settlement reliability.

Inventive Principle:

Principle #1Segmentation

Data Source

PatentUS9928551B2Computer-implemented system and method for clearing a derivative trade involving multiple trading exchanges

Publication Date: 2018.03.27 NASDAQ TECHNOLOGY AB

AI summary

A derivative trade order at a home marketplace is routed to an away market place having a better price for a counter position to the order where it is executed. The executed order triggers creation of a “balance derivative trade” at the home marketplace to balance at a home clearing house the away trade. The home clearing house uses the balance derivative trade to create derivative positions of the balance derivative trade and informs a balancing clearing entity which manages the balance derivative trade obligations. The balance derivative trade order account permits netting and reduced margin benefits for the trading participant. A dual derivative exercise operation allows balance derivative positions to be performed in one day to reduce overnight risk for the clearing entity.