Index Future Benchmark Trading for Early Price Settlement
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Solution Overview
Problem
Existing systems face challenges in executing trades associated with international index futures due to multiple time zones, leading to uncertainties in final price and quantity determination, which can cause issues in price publication and settlement before the final values are known.
Innovation Solution
Implementing automated systems and methods to facilitate trades priced relative to a reference benchmark value associated with an underlying index future, allowing for trade indications to be received and settled into the underlying index future at least one day prior to final price determination, using platforms that receive, report, clear, and arrange trades to physically settle into the index future.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Speed
If trades are executed and settled before final price and quantity are determined, then settlement speed is improved, but price accuracy and reliability deteriorate
Solution Approach 1:
The system performs preliminary trade execution and settlement actions before the final price and quantity are determined. Trade indications are received and processed in advance, allowing the settlement process to begin while awaiting final pricing data from international markets, thus improving settlement speed without sacrificing ultimate accuracy.
Solution Approach 2:
The system introduces an intermediary mechanism that decouples the settlement process from final price determination. Trade indications are received and settled based on available information, with the understanding that final pricing data will be incorporated subsequently, allowing settlement to proceed without waiting for international market closures.
2Loss of time
If trade indications are received at least one day prior to final price determination, then trade execution timeliness is improved, but uncertainty in final settlement increases
Solution Approach 1:
The system receives trade indications and initiates processing at least one day prior to final price determination. This preliminary action allows the settlement framework to be established early, reducing the time loss while managing uncertainty through structured information gathering from international markets.
Solution Approach 2:
The system implements feedback mechanisms to update trade settlements as final price and quantity information becomes available. Initial settlements are made based on available data, then adjusted or confirmed when international market prices are finalized, reducing uncertainty while maintaining timely execution.
3Productivity
If automated systems are implemented to facilitate trades priced relative to reference benchmark values, then trade processing efficiency is improved, but system complexity increases
Solution Approach 1:
The automated system facilitates trade processing by automatically receiving trade indications, matching them with reference benchmark values, and executing settlements without requiring extensive manual intervention. The system serves itself by autonomously managing the complex processes of international market monitoring, price comparison, and settlement coordination.
Solution Approach 2:
The automated system performs multiple functions including receiving trade indications, monitoring international markets, determining reference benchmark values, calculating settlements, and coordinating with multiple time zones. This multi-functionality consolidates complex operations into a single unified system, improving efficiency while managing complexity through integration.
Data Source
AI summary
According to some embodiments, an indication of a trade priced relative to a reference benchmark value (e.g., a trade at index close transaction) associated with an underlying index future may be received when a basis of the trade is agreed to by parties of the trade. Moreover, the indication may be received at least one day prior to a determination of a final price and quantity of the trade. The trade might create, according to some embodiments, any derivative, such as a future, an option, or a combination of put and call options. The trade may be reported and cleared, and it may then be arranged for the trade to physically settle into the underlying index future.