Contracts Exchange System Without Margin Accounts
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Solution Overview
Problem
Futures exchanges face high costs due to conventional counterparty risk management measures like margin accounts and price change limits, which increase trading costs and reduce liquidity.
Innovation Solution
Implementing a system that allows transparent traders to operate without collateral or margin accounts by marginalizing counterparty risk through surety guarantees, liquid exchange-traded contracts, and transparent balance sheets, enabling trading with reduced counterparty risk and increased liquidity.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If margin accounts and collateral are required to manage counterparty risk, then counterparty risk is reduced, but trading costs increase and liquidity decreases
Solution Approach 1:
The patent extracts the counterparty risk management function from traditional margin accounts and collateral requirements. By using centralized virtual currency ledgers and real-time monitoring, the system removes the need for traders to post collateral while maintaining risk management through direct observation of account balances and transaction flows on the blockchain ledger.
Solution Approach 2:
The system implements continuous feedback loops through real-time monitoring of trader account balances, transaction histories, and market conditions. The centralized ledger provides instant feedback on counterparty solvency and risk exposure, enabling dynamic risk management without requiring margin accounts. This feedback mechanism allows the system to maintain reliability while eliminating the productivity-reducing collateral requirements.
2Reliability
If daily price change limits are imposed to reduce counterparty risk, then counterparty risk is managed, but trading flexibility is reduced and liquidity is decreased
Solution Approach 1:
The patent removes artificial price change limits by replacing them with real-time risk monitoring based on actual counterparty solvency data from the centralized ledger. The system extracts the risk management function from price controls and implements it through direct observation of account balances and transaction flows, allowing prices to move freely based on market forces while maintaining counterparty risk management through alternative means.
Solution Approach 2:
The system replaces the mechanical constraint of daily price change limits with an information-based risk management approach. Instead of imposing artificial price caps, the system uses real-time data from the centralized virtual currency ledger to monitor counterparty risk, substituting information processing and analysis for mechanical price controls, thereby maintaining flexibility while ensuring reliability.
3Reliability
If margin accounts are required to secure futures positions, then counterparty risk is reduced, but transaction costs increase
Solution Approach 1:
The patent extracts the risk security function from margin accounts and collateral postings. By using the centralized virtual currency ledger to track and verify counterparty solvency in real-time, the system removes the need for traders to post margin or maintain collateral accounts, eliminating the associated transaction costs of opening, maintaining, and adjusting margin accounts while maintaining counterparty risk management through direct ledger monitoring.
Solution Approach 2:
The system implements self-service risk management where the centralized ledger automatically monitors counterparty solvency and transaction flows without requiring manual margin calls or collateral adjustments. The blockchain infrastructure provides automatic verification and recording of all transactions, eliminating the need for traders to actively manage margin accounts and reducing the transaction costs associated with margin maintenance.
Data Source
AI summary
Methods and systems are provided for operating a contracts exchange without conventional counterparty risk measures used by existing futures exchanges such as collateral, margin accounts, position limits, price change limits and regular settlement times. Traders on the contracts exchange hold substantially, or exclusively, cash and/or liquid exchange-traded assets or liabilities. Traders maintain transparent balance sheets which can be made available to third parties. A trader holding assets or liabilities that are illiquid or approaching illiquidity should demonstrate diligence in divesting such holdings. The trader's holdings are marked to their fair market value using acceptable accounting standards. Traders may also be required to obtain and maintain surety guarantees.