Portfolio Liquidation Cost Allocation for Performance Bond Accuracy
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Solution Overview
Problem
Existing systems struggle to accurately calculate performance bond values for large financial positions due to the difficulty in estimating liquidation costs, which are influenced by market conditions and the complexity of spread-traded products.
Innovation Solution
The system accesses portfolio data, identifies a liquidation set of products including outright-traded and spread-traded products, and performs calculations to determine optimized allocations that minimize liquidation costs. This involves using cost functions for each product and iterating through possible allocations to find the optimal set that reduces liquidation costs.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If a holder of a portfolio goes bankrupt or otherwise defaults, the performance bond for that portfolio can be used to reduce losses resulting from the holder no longer being able to cover its positions, but attempting to liquidate a large position in a particular financial product can itself significantly affect the market for that product
Solution Approach 1:
The patent segments the liquidation process by dividing the portfolio into different product categories (outright-traded products and spread-traded products) and further dividing spread-traded products into their underlying components. This segmentation allows for more granular allocation decisions that can minimize market impact by liquidating positions in a structured manner across multiple products rather than as a single large block.
Solution Approach 2:
The patent performs preliminary actions by pre-calculating optimal allocation strategies and liquidation costs before actual liquidation occurs. The system identifies the liquidation set of products and determines estimated allocations in advance, allowing market participants to understand potential liquidation impacts and plan accordingly, while also enabling the liquidation process to be executed more efficiently with pre-determined strategies.
2Measurement precision
If one attempts to liquidate a large position in a particular financial product, then the performance bond can cover losses, but estimating liquidation recovery becomes more difficult as position sizes increase
Solution Approach 1:
The patent applies segmentation by breaking down the complex liquidation estimation problem into manageable components: identifying outright-traded products separately from spread-traded products, then further decomposing spread-traded products into their underlying outright-traded components. This hierarchical segmentation transforms a single complex estimation problem into multiple simpler sub-problems that can be solved more accurately.
Solution Approach 2:
The patent merges the treatment of spread-traded products with their underlying outright-traded products by including both in a unified liquidation set. This merging allows the optimization algorithm to consider allocations across the entire set of related products simultaneously, capturing the interrelationships between spread products and their components to determine optimal liquidation strategies that minimize total liquidation costs.
3Measurement precision
If calculations are performed to determine optimized allocations that minimize liquidation costs, then a more accurate performance bond value is obtained, but the computational process becomes more complex
Solution Approach 1:
The patent segments the calculation process into distinct phases: (1) identifying the liquidation set of products including both outright-traded and spread-traded products, (2) determining estimated allocations to minimize liquidation costs, and (3) calculating the optimized performance bond value. This segmentation of the computational process makes the complex calculations more manageable and implementable while maintaining high accuracy.
Solution Approach 2:
The patent performs preliminary computational actions by pre-identifying the liquidation set and determining estimated allocations before final performance bond calculation. This preliminary analysis phase separates the complex optimization work from the final valuation step, allowing the system to reuse the estimated allocations across multiple scenarios or for different portfolios with similar characteristics, thereby reducing overall computational burden.
Data Source
AI summary
A set of estimated allocations Nest(X1) through Nest(Xk) of portfolio positions to products X1 through Xk may be determined, with products X1 through Xk including portfolio products and spread-traded products based on some of the portfolio products. Utilizing the set of estimated allocations, an optimized liquidation cost LCopt may be designated. Data indicating at least a portion of a performance bond based on the optimized liquidation LCopt may be output.