Synthetic Spot FX Benchmark Rate for OTC Derivatives
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Solution Overview
Problem
Current benchmarks for settling over-the-counter (OTC) foreign exchange (FX) derivatives lack accuracy and transparency, as they are based on surveyed spot FX rates that do not provide an optimally reliable spot FX benchmark rate, and existing methods do not adequately account for market fluctuations.
Innovation Solution
A synthetic spot FX benchmark rate is derived from nearby FX futures prices and forward points, using a volume-weighted average price (VWAP) of FX futures contracts, which are adjusted with forward points to determine a spot FX benchmark rate, enabling accurate and transparent settlement of OTC derivatives.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Measurement precision
If current surveyed spot FX rates are used as benchmarks for settling OTC derivatives, then settlement can be performed using existing methods, but the accuracy and reliability of the benchmark is insufficient
Solution Approach 1:
The patent uses FX futures prices as an intermediary to derive a synthetic spot FX rate. Instead of directly using surveyed spot rates which lack reliability, the invention mediates through futures prices that are transparent and objectively determined, then applies forward points to convert them to spot equivalents. This intermediary approach resolves the contradiction by providing a benchmark that is both accurate and reliable.
Solution Approach 2:
The invention changes the parameter basis from surveyed spot rates to futures prices with forward point adjustments. By transforming the input parameters from subjective surveys to objective futures market data, and applying mathematical transformation (adding/subtracting forward points), the system achieves both accuracy and reliability in the benchmark rate.
2Loss of information
If surveyed spot FX rates are used for settlement, then existing settlement processes can be maintained, but transparency of the benchmark determination is insufficient
Solution Approach 1:
The patent replaces the mechanical survey process (subjective, opaque) with an automated computational system that uses publicly available futures prices and forward points. This substitution transforms the benchmark determination from a manual survey process to an automated calculation, improving transparency while the standardized formula maintains operational simplicity.
3Measurement precision
If volume-weighted average price of FX futures is used to derive synthetic spot rate, then accuracy and transparency of benchmark is improved, but the complexity of the settlement method increases
Solution Approach 1:
The invention creates a synthetic copy of the spot rate using futures prices and forward points. Instead of directly observing spot rates, it constructs a synthetic equivalent through calculation. This copying approach maintains accuracy by replicating the economic essence of spot rates while using transparent futures market data, and the standardized copying formula keeps operational complexity manageable.
Data Source
AI summary
Techniques and systems for settling over-the-counter financial instruments includes sampling over a periodic interval are disclosed. A volume weighted average price of the sampled process may be calculated and forward points may be applied to the volume weighted average priced to determine an associated spot exchange rate. Such a synthetic spot FX exchange rate may be published to subscribers. Over-the-counter financial derivatives may establish delivery obligations according to the spot exchange rate. In the event where a number of transactions during the sampling period is less than a threshold, a midpoint of bids and asks associated with orders for the exchange traded financial derivative may be used to determine an average of the midpoint, to which the forward points may be applied to determine the spot exchange rate. Alternatively, the time-weighted average of the bid and ask orders during a periodic interval may be used in computing the volume-weighted average price.