Structured Futures Contracts for Exchange Trading
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Solution Overview
Problem
Structured products, such as notes and certificates of deposit, face limitations including issuer credit risk, difficulty in exchange listing, and challenges with valuation and transparency, which restrict their demand and appeal to investors, particularly retail investors.
Innovation Solution
Structured futures contracts issued by a central clearinghouse, which eliminate credit risk and allow for exchange trading, enabling desirable risk/return profiles with transparent pricing and flexible issuance to meet demand, and can be held in exchange-traded funds, trusts, or notes that mimic the structured futures.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If structured products are issued by investment banks, then they can provide customized risk/return profiles, but issuer credit risk arises and limits exchange listing
Solution Approach 1:
The patent introduces a structured futures contract as an intermediary instrument that replicates the payoff structure of traditional structured products while being issued and cleared through a futures exchange. This intermediary structure transfers the product away from bank balance sheets to exchange-traded contracts, eliminating issuer credit risk while preserving customized risk/return profiles through flexible contract design
Solution Approach 2:
The patent creates a copy of the structured product payoff structure using futures contracts. The structured futures contract replicates the complex risk/return characteristics of traditional structured notes through a combination of futures positions and options, allowing investors to obtain identical economic exposure without the credit risk of bank issuance
2Adaptability or versatility
If structured products are designed with complex payoff structures, then they can meet diverse investor objectives, but valuation and pricing transparency become difficult
Solution Approach 1:
The patent breaks down complex structured payoff structures into discrete, exchange-traded components including futures contracts, options, and other liquid instruments. By segmenting the structured product into these transparent building blocks, each with independently observable market prices, the overall valuation becomes more transparent while maintaining the ability to construct diverse risk/return profiles
Solution Approach 2:
The patent incorporates continuous market pricing feedback through exchange-traded futures contracts. The marked-to-market mechanism provides real-time valuation feedback, with daily settlement prices reflecting current market conditions. This feedback loop enhances pricing transparency by continuously updating the value of structured futures based on observable market data rather than opaque internal models
3Reliability
If structured products are issued as bank notes, then they can provide principal protection, but they cannot be listed and traded on US exchanges
Solution Approach 1:
The patent changes the fundamental parameters of the product structure from bank-issued debt to exchange-traded futures contracts. By altering the issuance mechanism, clearing structure, and trading venue parameters, the product gains exchange listing capability while maintaining principal protection features through carefully structured payoff designs that replicate protected note characteristics in a futures-based framework
Data Source
AI summary
Systems and methods for creating and trading structured futures and various vehicles to allow nearly equivalent financial instruments to be created and traded on exchanges are described, including computer systems and computer implemented methods that allow the creation and trading of structured futures and related financial instruments. Computer systems and methods may be used to calculate the value of structured futures and related financial instruments before maturity and their payoff value at maturity.