Payer Contracts for Periodic Payment Clearing
Find Innovative SolutionsGenerate Solutions
Solution Overview
Problem
Current futures contract clearing systems cannot handle related cash flows such as coupons, interest on variation margin, or periodic payments, requiring separate and external ad hoc payment and accounting mechanisms, which complicates the acceptance of novel contracts with periodic payments and impedes their implementation in exchange clearing systems.
Innovation Solution
The introduction of 'payer contracts' that facilitate a 1-to-many relationship between contracts and prices, allowing for the creation of defined and riskless positions to manage money movements between related positions, and enabling anonymous payments between traders without requiring them to know each other, leveraging the clearing system's mechanisms to accommodate periodic payments.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If traditional clearing systems are used, then existing futures contracts can be settled, but periodic payments and complex cash flows cannot be handled
Solution Approach 1:
The clearing system is enhanced to perform multiple functions: it now handles both traditional futures contract settlement and periodic payments (coupons, interest, dividends) through a unified clearing instrument mechanism. The system can process one-to-many relationships where a single clearing instrument generates multiple payment obligations at different times, making the system versatile enough to handle complex cash flows while maintaining existing functionality.
Solution Approach 2:
The payment process is segmented into discrete clearing instruments that can be individually created, tracked, and settled. Each periodic payment (coupon, interest, dividend) is represented as a separate clearing instrument with its own settlement date and amount, allowing the system to handle complex cash flow patterns by breaking them down into manageable, independently processable units.
2Adaptability or versatility
If separate external payment mechanisms are used, then periodic payments can be processed, but accounting complexity increases
Solution Approach 1:
The patent merges the payment processing function with the existing clearing and settlement infrastructure. Instead of using separate external payment mechanisms, periodic payments are processed through the same clearing house and settlement account system that handles futures contracts. This integration eliminates the need for parallel accounting systems and reduces overall complexity by unifying payment processing within the existing regulatory and operational framework.
Solution Approach 2:
The clearing house acts as an intermediary between traders and the settlement system for periodic payments. It creates clearing instruments that mediate the payment obligation, tracks the payment through the clearing system, and facilitates settlement through existing accounts. This intermediary role simplifies accounting by providing a standardized interface between payment obligations and the settlement infrastructure.
3Adaptability or versatility
If novel contracts with periodic payments are accepted, then product diversity increases, but implementation difficulty increases
Solution Approach 1:
The system employs dynamic parameters for clearing instruments, including variable payment amounts, multiple settlement dates, and flexible underlying asset references. These dynamic characteristics allow the same clearing instrument framework to adapt to different contract types (futures, options, swaps, structured products) without requiring separate implementation logic for each product, thereby easing implementation while maintaining product diversity.
Solution Approach 2:
The patent uses parameter changes to differentiate contract types within a unified framework. By varying parameters such as payment frequency, settlement date, underlying asset, and payment amount, the system can accommodate novel contracts with periodic payments while using the same core clearing and settlement mechanics. This parameter-based approach simplifies implementation compared to creating separate systems for each contract type.
Data Source
AI summary
A system for moving money between accounts of traders by a central counterparty to facilitate payments, i.e. the movement of funds, there between is disclosed which provides a flexible mechanism which supports simpler accounting, new types of derivatives contracts as well new types fees. The disclosed futures contract, referred to as a “payer” contract, comprises a “no-uncertainty” futures contract, i.e. the initial value and settlement value parameters are defined, that leverages the mechanisms of the clearing system to, for example, accommodate related payments. Accordingly, a 1-to-many relationship between contracts and prices is provided whereby each price component may be assigned its own payer contract. The function of the payer contract may be to guarantee the movement of money from related positions. In one embodiment, payer contracts are dynamically created whenever a payment is needed.