Portfolio Netting Graphs for OTC Delivery Settlement
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Solution Overview
Problem
The existing delivery process in OTC and exchange markets is inefficient, manual, and lacks automation, leading to operational inefficiencies, reduced participation, and diminished market liquidity due to the complexity of offsetting and cash settlement processes.
Innovation Solution
A system that generates a graph depicting all obligations between market participants, identifies trade circles and washes, and optimizes portfolios by netting out obligations, reducing manual effort and enhancing efficiency and cost-effectiveness.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Productivity
If manual delivery processes are used to manage trade obligations, then flexibility in negotiation is maintained, but operational efficiency decreases and paperwork increases
Solution Approach 1:
The patent replaces manual mechanical processes (phone calls, emails, physical paperwork) with an automated electronic system that uses algorithms to identify trade circles, calculate netting obligations, and generate settlement instructions automatically. This substitution dramatically improves productivity while reducing the operational complexity of managing trade obligations.
Solution Approach 2:
The system enables participants to automatically receive and process their optimized delivery obligations without manual intervention. The automated identification of trade circles and calculation of netting positions allows the system to serve itself by continuously optimizing portfolios without requiring manual reconfiguration when new trades are added or removed.
2Extent of automation
If automated portfolio optimization is implemented, then operational efficiency increases, but system complexity increases
Solution Approach 1:
The patent introduces an intermediary automated system that acts as a mediator between manual trade execution and final delivery settlement. This intermediary system handles the complex tasks of identifying trade circles, calculating netting obligations, and generating settlement instructions, thereby enabling high automation without requiring direct complex interactions between participants.
Solution Approach 2:
The system creates simplified copies or representations of complex trade obligation relationships through standardized data structures and algorithms. By copying the essential elements of trade circles and obligations into a standardized format, the system can process complex relationships automatically without requiring participants to manage the underlying complexity directly.
3Loss of time
If manual offsetting processes are used, then understanding of individual trades is maintained, but time consumption increases
Solution Approach 1:
The patent performs preliminary identification and calculation of trade circles and netting obligations automatically before the delivery process begins. By pre-calculating optimized delivery obligations and identifying all circular relationships in advance, the system eliminates the need for time-consuming manual offsetting processes during the actual delivery period.
Solution Approach 2:
The system maintains continuous optimization of portfolios by automatically detecting and processing new trades as they are added or removed from participant portfolios. This continuous action ensures that trade circle identification and netting calculations remain up-to-date without requiring periodic manual interventions, thereby reducing time loss while maintaining ease of operation.
Data Source
AI summary
A computer implemented method for optimizing a delivery or settlement process for a plurality of portfolios of a plurality of participants. Data records indicative of obligations between the plurality of participants are identified. A weighted directed graph data structure is generated that comprises vertex data records representing the plurality of participants and edge data records representing the obligations between the participants. All paths of edge data records where a vertex data record is reachable from itself in the weighted directed graph data structure are identified. The data records indicative of obligations between the plurality of participants are altered based on the identified paths.