Automated Term SOFR Benchmark Generation Using Anonymized Futures Data

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Solution Overview

Problem

The existing interest rate benchmark, LIBOR, faces reliability and transparency issues due to subjective judgments and potential misconduct, necessitating a replacement that can provide a forward-looking, objective, and automated solution for short-term interest rates.

Innovation Solution

The development of an automated system that generates forward interest rates using anonymized electronic trading data from interest rate futures contracts, eliminating subjective influences by processing periodic sample sets of trade prices to compute stable and replicable short-term reference rates, such as the Term SOFR benchmark.

Engineering Contradictions & Design Principles

VSEngineering Contradiction Analysis

1Reliability

If LIBOR is used as the interest rate benchmark, then backward-looking rate aggregation from prior day data is achieved, but reliability and transparency deteriorate due to subjective judgments and potential misconduct

Engineering Contradiction:

Improvereliability of interest rate benchmarkVSAvoidautomation of rate generation

Core Design Contradiction:

ReliabilityVSExtent of automation

Solution Approach 1:

The patent replaces the manual, subjective judgment process of LIBOR generation with an automated electronic system. The system automatically collects trading data from multiple sources, processes it through defined algorithms, and generates the interest rate benchmark without human intervention, thereby eliminating subjective biases and improving reliability through consistent automated execution

Inventive Principle:

Principle #28Mechanics substitution (Replace mechanical system)

Solution Approach 2:

The system enables self-service by allowing the benchmark rate to be generated autonomously from available trading data. The automated collection, processing, and validation of data from multiple electronic sources allows the system to produce reliable rates independently, without requiring manual verification or subjective assessment by rate setters

Inventive Principle:

Principle #25Self-service

2Measurement precision

If automated electronic trading data is processed to generate forward interest rates, then objectivity and transparency are improved, but system complexity increases

Engineering Contradiction:

Improveobjectivity of rate determinationVSAvoidcomplexity of automated system

Core Design Contradiction:

Measurement precisionVSDevice complexity

Solution Approach 1:

The patent segments the complex task of benchmark generation into distinct modular components: data collection from multiple electronic sources, data validation against predefined criteria, processing through specific algorithms, and output generation. Each module performs a specific function with clear inputs and outputs, making the overall complex system manageable, testable, and transparent while maintaining objectivity

Inventive Principle:

Principle #1Segmentation

Solution Approach 2:

The system objectively determines rates by changing and analyzing multiple parameters from the trading data, including trading prices, volumes, timestamps, and source reliability metrics. By systematically processing these parameters through defined algorithms and validation rules, the system achieves high measurement precision and objectivity while the structured approach keeps complexity manageable

Inventive Principle:

Principle #35Parameter changes

3Reliability

If multiple data sources are aggregated to compute stable reference rates, then reliability is improved, but data processing complexity increases

Engineering Contradiction:

Improvestability of reference rateVSAvoidcomplexity of data processing system

Core Design Contradiction:

ReliabilityVSDevice complexity

Solution Approach 1:

The patent merges data from multiple electronic trading sources by collecting trading information from various exchanges and platforms, then processes this aggregated data through unified algorithms to produce a single stable reference rate. The merging process includes validating data quality, reconciling differences between sources, and combining them in a systematic way that improves reliability through diversification while managing complexity through standardized processing procedures

Inventive Principle:

Principle #5Merging (Combining)

Data Source

PatentUS20210056635A1Automated objective generation of data for, and post validation of, estimation of term SOFR benchmarks

Publication Date: 2021.02.25 CHICAGO MERCANTILE EXCHANGE INC

AI summary

The disclosed embodiments relate to automated generation of objective data for use in computing a forward interest rate for a future time period subsequent to a current date, as well as post validation thereof. Periodic sample sets of the prices of actual completed trades between anonymized parties of each of a set of interest rate futures contracts having consecutive expiration months which collectively include the selected future time period are obtained from an anonymized electronic trading system. The prices of current best offers to buy/sell each of those contracts are also randomly obtained. Each sample set, along with the randomly selected prices, is then processed to identify a subset thereof which are consistent with a relationship between the underlying interest rate of the set of contracts and time period covered thereby. The identified subset of each sampling period are then combined into an objective data set for submission to a rate generator which computes one or more forward interest rates, for one or more tenors, based thereon.