Cash Settled Treasury Futures Consensus Yield
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Solution Overview
Problem
Existing methods for creating futures contracts based on U.S. Treasury securities face challenges in valuing and delivering underlying assets, particularly for 'on-the-run' securities, due to difficulties in determining consensus yields and physical delivery constraints, leading to inefficiencies and regulatory scrutiny.
Innovation Solution
A system is developed to determine the listing date, expiration date, and cash settlement price of Treasury Futures contracts by referencing the U.S. Treasury Auction cycle and industry surveys, using a combination of ISDA and ICAP data to calculate a market consensus yield, ensuring accurate and representative valuations and avoiding physical delivery constraints.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Ease of manufacture
If physical delivery is specified for Treasury futures contracts, then the contract structure is simpler, but delivery constraints and regulatory scrutiny increase
Solution Approach 1:
The patent extracts the problematic physical delivery requirement from the Treasury futures contract structure and replaces it with a cash settlement mechanism based on consensus yield. This removes the harmful delivery constraints while preserving the core hedging and speculation functions of the futures contract.
Solution Approach 2:
The patent introduces an intermediary valuation mechanism (consensus yield determination through industry surveys) that mediates between the buyer and seller. Instead of direct physical delivery, the contract is settled through this intermediary process that determines a fair market value based on multiple dealer quotations.
2Measurement precision
If consensus yield is determined through industry surveys, then valuation accuracy improves, but process complexity increases
Solution Approach 1:
The patent merges multiple dealer yield quotations into a single consensus yield value through statistical processing (trimmed mean). This combines multiple data sources to improve valuation accuracy while using a standardized mathematical approach to manage the complexity of processing multiple inputs.
Solution Approach 2:
The industry survey mechanism is self-service in that it automatically collects quotations from multiple dealers, processes them through predefined statistical rules, and generates the consensus yield without requiring manual intervention. The system serves itself by having the market participants provide the data and the algorithm determine the result.
3Object-affected harmful factors
If Treasury futures are cash settled, then physical delivery constraints are avoided, but valuation difficulty increases
Solution Approach 1:
The consensus yield determination mechanism serves multiple functions: it values the underlying Treasury security for cash settlement, provides a transparent reference price for market participants, and establishes a standardized valuation method that can be applied consistently across different contract expirations. This multi-functional approach makes cash settlement feasible despite the inherent valuation challenges.
Data Source
AI summary
The disclosed embodiments relate to determining a listing date, an expiration date and the cash settlement price of a futures contract, i.e. a Treasury Futures, for the delivery of the most recently issued, referred to as an on-the-run, US treasury Note of a particular maturity by reference to the U.S. Treasury Auction cycle and the difference between a resultant industry surveyed swap rate and a resultant industry surveyed swap spread of the respective tenors (time remaining until maturity) of the on-the-run treasury futures.