Instantaneous Financial Settlement via Predictive Validation
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Solution Overview
Problem
Current financial trading systems face limitations in reducing the timeframe between trade execution and settlement, with batch processing and the need for collateral holding leading to high transaction costs and credit risk, and there is a need for a system that can facilitate instantaneous settlement with minimal risk.
Innovation Solution
A computer-based trading system that includes an electronic platform with a validation module and order fulfillment module, capable of instantaneously novating and clearing trades by using predictive algorithms to determine the likelihood of settlement and adjusting order parameters for optimal execution, and utilizing instant funds transfer protocols for settlement.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Loss of time
If batch processing systems are used for clearing and settlement at the end of each trading day, then operational simplicity is maintained, but the time between trade execution and settlement cannot be reduced below one day
Solution Approach 1:
The system performs validation of settlement eligibility and predictive algorithms determining likelihood of settlement before the actual trade execution. Orders are validated pre-trade by querying trusted data repositories for account data and metadata, and the system determines settlement probability in advance, enabling instantaneous settlement when conditions are met without requiring end-of-day batch processing
Solution Approach 2:
The patent replaces the mechanical batch processing system with an electronic continuous processing system. Instead of periodic batch clearing and settlement operations, the system uses continuous electronic validation, matching, and instantaneous settlement through digital protocols, eliminating the inherent one-day minimum delay of batch systems
2Reliability
If collateral is posted to cover credit risk for the period between trade execution and settlement, then credit risk is reduced, but transaction costs increase due to margin requirements
Solution Approach 1:
The patent extracts the credit risk management function from the traditional collateral-based approach and replaces it with a validation-based system. The system queries trusted data repositories to validate settlement eligibility and uses predictive algorithms to assess settlement probability, removing the need for collateral posting while maintaining credit risk reduction
Solution Approach 2:
The system performs self-validation of settlement eligibility by automatically querying trusted data repositories for account data, metadata, and settlement probability assessments. This self-service validation mechanism eliminates the need for external collateral requirements while maintaining reliability
3Productivity
If predictive algorithms are used to determine likelihood of settlement and adjust order parameters, then instantaneous settlement is enabled, but system complexity increases
Solution Approach 1:
The validation module serves multiple functions: it validates order eligibility, queries trusted data repositories, retrieves account data and metadata, implements predictive algorithms to determine settlement probability, and adjusts order parameters. This multi-functional approach consolidates complexity into a single universal module rather than requiring separate systems for each function
Solution Approach 2:
The patent introduces trusted data repositories as intermediaries that provide validated account data, metadata, and settlement information. These intermediaries handle the complexity of data verification and validation, allowing the trading system to make instantaneous settlement decisions without duplicating complex validation logic
4Loss of energy
If instantaneous settlement is implemented without batch processing, then transaction costs are reduced, but the system requires real-time validation and processing capabilities that increase operational complexity
Solution Approach 1:
The system performs all necessary validation, data retrieval, and settlement probability assessment before trade execution. By completing these actions preliminarily, the system enables instantaneous settlement without requiring complex real-time operational interventions, maintaining ease of operation while reducing transaction costs
Data Source
AI summary
A computer system for facilitating instantaneous settlement of a financial transaction by a central counterparty system. A validation module validates a client order prior to trade. For a buy order, the validation module is configured to: (a) automatically query one or more trusted data repositories for:—retrieving account data for a nominated funds account;—retrieving meta data associated with the client and/or trade, the meta data including at least one of (i) historical client trading data; and (ii) current market data; (b) implement one or more predictive algorithms to determine a likelihood of settlement for the buy order, utilising the retrieved data. Following validation of the order, implementing an order fulfilment module configured to place the order in a queue responsive to determining that the likelihood of settlement meets or exceeds a predefined threshold.