Note: Descriptions are shown in the official language in which they were submitted.
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SYSTEM AND METHOD FOR AFFIRMING OVER THE
COUNTER DERIVATIVE TRADES
Reference to Related Applications
[0001] This application claims priority to U.S. Provisional Application No.
60/833,793
filed July 28, 2007, and U.S. Provisional Application No. 60/906,530, filed
March 13, 2007,
the contents of which are hereby incorporated by reference.
Field of Invention
[0002] This invention relates generally to methods and platforms that provide
post-trade
affirmation and messaging services. This service allows parties to affirm
trades with their
counterparties prior to processing.
Background of Invention
[0003] Currently, conventional credit derivative markets include a user base
of larger
institutions. These larger institutions use the credit derivative markets for
a variety of reasons.
For example, commercial banks, both domestic and foreign, can obtain
significant economic,
regulatory, and capital relief from selling credit risk in a credit derivative
market. Commercial
banks can also use the credit derivative markets to add credit risk to their
portfolios as an
alternative to the lending market. Insurers, who typically posses excellent
credit evaluation
skills, primarily use the credit derivative markets to take on credit risk for
a premium.
Investment management companies and Hedge Funds, or other investors, use the
credit
derivative markets to both take on and shed risk.
[0004] The dealer community represents some of the largest financial
intermediaries in
the world. The dealers tend to be large, multi-national institutions that make
markets in credit
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derivatives. The scale and scope of each dealer's credit derivative business
varies widely, with
some dealers having extensive credit derivative operations, and other being
occasional market
participants.
Summary of the Invention
[0005] Currently the trading of credit derivative contracts occurs by direct
contact
between a dealer and a buyer. FIG. 1 is a flow diagram of the current new
trade process. As
shown in FIG. 1 the dealer and the buyer then each submit the trade details to
a matching
platform such as Depository Trust & Clearing Corporation (DTCC) DERIV/Serv for
execution.
If the trade details do not match exactly the DTCC server does not execute the
trade and the
trade fails. The parties then have to reenter the details, assuming that it
was an entry error, or
renegotiate the trade details if the error was an understanding between the
parties. FIG. 2 is a
flow diagram of the current novation process. The errors in this process are
even more
common than in a new trade process since the trade details of three separate
parties need to
agree for a trade to be executed. Fixing these errors after the time of the
trade can be difficult
and inefficient. Accordingly, a need exists for a new way to affirm trades.
[0006] One embodiment of a method according to invention includes receiving
from a
first party trade details concerning a credit derivative trade, transmitting
the trade details to a
second party, receiving from the second party an affirmation or a rejection,
and notifying the
first party of the affirmation or the rejection.
[0007] A rejection may be received from the second party along with a reason
for the
rejection. The method may include receiving modified trade details from the
first party
following the rejection. The method may also include transmitting the modified
trade details to
the second party and receiving from the second party an affirmation of the
modified trade
details.
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[0008] The method may further include transmitting the trade details to a
matching
trade settlement system.
[0009] A method of novating a credit derivative trade may include receiving
from a
transferor details concerning an original credit derivative transaction
between the transferor and
a remaining party, transmitting the trade details to the remaining party and a
transferee,
receiving from the remaining party an affirmation or a rejection, receiving
from the transferee
an affirmation or a rejection, and notifying the transferor of the affirmation
or rejection
received from the remaining party and the transferee.
[0010] The method may further include affirming the novation if an affirmation
is
received from both the remaining party and the transferee. The trade details
of an affirmed
novation may be transmitted to a matching trade settlement system. The method
may also
include rejecting the novation if a rejection is received from either the
remaining party or the
transferee.
[0011] The method may also include receiving a rejection from the remaining
party or
the transferee and receiving a reason for the rejection along with the
rejection. The method
may further include receiving modified trade details from the transferor
following a rejection,
transmitting the modified trade details to the remaining party and the
transferee, receiving an
affirmation of the modified trade details from the remaining party and the
transferee, and
transmitting the modified trade details to a matching trade settlement system.
[0012] A method of auto-affirming trade details may include receiving from a
first
party first trade details concerning a credit derivative trade, receiving from
a second party
second trade details concerning a credit derivative trade, transmitting the
first trade details to
the second party, and auto-affirming the first trade details when the first
trade details match the
second trade details.
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[0013] A method for exercising credit derivative options may include receiving
details concerning a plurality of credit derivative options, receiving weekly
fixings concerning
the plurality of credit derivative options, displaying the weekly fixings to a
first party, and
receiving from the first party an indication of whether to exercise one or
more of the plurality
of credit derivative options. The method may further include transmitting to a
second party the
indication of whether to exercise one or more of the plurality of credit
derivative options.
[0014] A trade system may include a first party system including a first party
interface
configured to receive from a first party trade details concerning a credit
derivative trade, and a
second party system in communication with the first party system and include a
second party
interface configured to receive from a second party an affirmation or a
rejection concerning the
trade details.
[0015] Another embodiment of a trade system may include a first party system
including a first party interface configured to receive from a first party
trade details concerning
a credit derivative trade, a second party system in communication with the
first party system
and including a second party interface configured to receive from a second
party an affirmation
or a rejection concerning the trade details, and a third party system in
communication with the
first party system and comprising a third party interface configured to
receive from a third party
an affirmation or a rejection concerning the trade details.
Brief Description of the Drawings
[0016] FIG. 1 is a flow diagram of the current new trade process.
[0017] FIG. 2 is a flow diagram of the current novation process.
[0018] FIG. 3 is a flow diagram that summarizes a new trade procedure in which
a trade
is executed at DTCC.
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[0019] FIG. 4 shows a screen that can be used by a dealer to enter new trade
details into
the platform for a single name trade.
[0020] FIG. 5 shows a screen that can be used by a dealer to enter new trade
details into
the platform for a new index trade.
[0021] FIG. 6 shows a screen that can be used by a dealer to enter new trade
details into
the platform for a new index tranche trade.
[0022] FIG.7 shows an example of an investment advisors main blotter screen.
[0023] FIG. 8 shows an allocation screen that can be used to allocate a trade
across
multiple funds.
[0024] FIG. 9 show an example of an investment advisor screen for entering
details for
terminating a single name CDS trade.
[0025] FIG. 10 shows an example of the main dealer screen after a termination
has been
received from an investment advisor.
[0026] FIG. 11 is an example of an investment advisor's position blotter
screen.
[0027] FIG. 12 is an example of an investment advisor's screen for entering
details for
novating a single name CDS contract transaction.
[0028] FIG. 13 shows an example of a dealer screen after receipt of an alleged
novation.
[0029] FIG. 14 is an example of a prime broker give-up acceptance screen.
[0030] FIG. 15 shows a view of the investment advisor screen after a trade has
been
rejected.
[0031] FIG. 16 shows an example of an investment advisor screen during a trade
void.
[0032] FIG. 17 shows an example of a dealer screen in which an un-affirmed
transaction is being recalled so that the transaction can be modified and re-
alleged.
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[0033] FIG. 18 shows an example of the capture new trade on an investment
advisor
screen.
[0034] FIG. 19 shows an example of an investment advisor screen of an auto-
affirmed
new trade.
[0035] FIG. 20 shows investment advisor screens used for reconciling a trade
that was
not auto affirmed.
[0036] FIG. 21 is a flowchart summarizing the auto-affirmation features.
[0037] FIG. 22 is a flow diagram of the process for exercising CDS options on
the
platform.
[0038] FIG. 23 is a view of the option screen for an option buyer.
Detailed Description of the Invention
[0039] Definitions
[0040] Following is a list of terms used herein and their meanings:
[0041] Affirmation: The positive acknowledgement of a derivatives transaction
by a
party on the Platform.
[0042] Allege: The initial messaging of trade details through the platform by
the party
who initiates the workflow.
[0043] Allocation: The distribution or splitting of a trade between two or
more funds
managed by an Investment Advisor.
[0044] Authorizer: An individual designated by a participant to provide
platform
authorizations.
[0045] Counterparty Authorization: The approval given by a dealer to transact
with a
particular investment advisor fund on the platform.
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[0046] Credit Derivatives Physical Settlement Matrix: A spreadsheet published
by
ISDA that specifies all legal terms for a particular credit derivatives
contract.
[0047] Dealer: A credit derivatives dealer or market-maker.
[0048] Fund: A hedge fund or other institutional account managed by, for
example, an
investment advisor that can act as counterparty to a derivatives transaction.
[0049] Give Up Trade: A derivatives transaction entered between an Investment
Advisor and a dealer that is given up to a prime broker.
[0050] Investment Advisor: A legal entity, including asset managers and
investment
managers, that is authorized to act as agent for, or otherwise trade on behalf
of, a fund.
[0051] New Notional: The notional amount after a termination or novation has
occurred.
[0052] New Trade: A new derivatives transaction entered into between two
parties.
This can occur outside of the platform.
[0053] Notional Amount: The calculation amount in a credit derivatives
contract.
[0054] Novation: The transfer by cancellation of an existing contract between
the
remaining party and the transferor and execution of a new contract between the
remaining party
and the transferee.
[0055] Over-the-counter (OTC) derivatives: are derivative contracts that are
traded (and
privately negotiated) directly between two parties.
[0056] Platform: The connectivity and electronic messaging system that is used
for the
post-transaction processing of trade details, the functionality of which is
further described
herein. References to "Platform" may include related software and
documentation. The
platform may include the user interfaces and the server system, which
implements the
functionality of the platform and which delivers and accepts data to the use
systems.
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[0057] Prime Broker: A credit derivatives dealer or market-maker
intermediating
transactions between dealers and investment advisors.
[0058] Product: A financial instrument that can be processed via the platform.
[0059] Rejection: The rejection of a derivatives transaction by a party on the
platform.
[0060] Recall: The recall of a derivatives transaction by a party on the
platform prior to
affirmation of a trade.
[0061] Software: The computer applications that allow users to interface with
the
platform. The software may include a Graphical User Interface (GUI).
[0062] Termination: Early settlement of a derivatives contract. Also known as
an
"unwind" or "tear-up."
[0063] Trade: A derivatives contract between two counterparties. This may
occur
outside of the platform.
[0064] Trade Details: Information relevant to a trade, including economic
details, date
and counterparty information.
[0065] Trade Status: A status associated with each trade in the Trade blotter
portion of
the platform.
[0066] Transaction Type: The jurisdiction specified in the credit derivatives
physical
settlement matrix, which specifies all legal terms for a particular credit
derivatives contract.
[0067] Void: An affirmed transaction on the platform that has been agreed as
invalid
between the parties.
[0068] The disclosed methods and platform allow counterparties to a
transaction to
dramatically reduce operational risks and costs associated with the trading of
financial
instruments, such as credit derivatives, particularly over-the-counter credit
derivatives.
Although the following description of the methods and platform is specific to
the trading of
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over-the-counter credit derivatives, similar methods and platforms can be
utilized to improve
the trading of a variety of financial instruments.
[0069] The platform helps ensure that all key economic details of a
transaction are
agreed upon by the counterparties to a trade. Preferably, this is accomplished
immediately after
the execution of the transaction between the counterparties - i.e., on the
date of the trade. The
platform reduces operational risks by ensuring accurate trade capture and by
providing
connectivity to support downstream processing of transactions outside of the
platform.
[0070] The platform uses an affirmation model to obtain electronic
verification of trade
details from parties to a trade. Trade details are delivered in real-time to
each party's trade
capture system via system-to-system links. In addition, trade details can be
delivered to third
parties, including prime brokers, fund administrators, and confirmations
matching platforms
such as DTCC DERIV/Serv. The Platform may incorporate established market
standards
including RED, ISDA and FpML.
[0071] The platform may support single-name CDS, CDS indices (such as for
example,
iTraxx, CDX ABX, TABX, LCDX, LevX, and CMBX) and index tranches. The platform
may support processing of new trades, terminations, novations and amendments.
In addition,
the platform may automate the allocation of trades across multiple funds.
[0072] The platform may include a trade exporter tool that allows for
customizable
trade activity downloads, in real-time, to a file stored on a users desktop or
network. The trade
exporter may permit clients to designate which trade details are needed and at
which time
intervals the information is needed. The trade exporter may provided users the
ability to apply
trade details to trade capture, risk, accounting, or fund administrator
systems thereby reducing
dual entry risk and operational efforts. The trade exporter software may
provide pre-configured
trade data extract requests that return data in, for example, a comma
separated value (CSV) file
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format. The software may also allow for source code customization for more
sophisticated
extract requests.
[0073] The platform is a connectivity and messaging platform that can be used
for the
post-trade processing of trade details. The platform may or may not include
trading and legal
execution/clearance functions.
Platform - Basic Operation
[0074] The Platform may provide post-transactional affirmation services to
market
participants in the over-the-counter derivatives market. Market participants
include derivative
dealers, users (for example, hedge funds, asset managers, etc.),
intermediaries (for example,
brokers, prime brokers, etc.) and service providers (vendors, administrators,
custodians,
clearing houses, etc.).
[0075] The platform can be utilized by users who have entered into credit
derivative
transactions outside of the platform. After entering into a trade with a
transaction counterparty,
a client enters the key details of the trade that he wants to allege against
such counterparty into
the platform. The transaction counterparty then either affirms the alleged
transactions as valid
or rejects the alleged transactions as invalid, adding any additional data
that may be required.
The data is then messaged back to the originating institution, either through
an electronic API,
a graphical user interface (GUI), or an e-mail message. The platform can also
be integrated
with a client's internal transaction capture platform; this may eliminate the
need for the initial
manual input of the trade details by the initiating party by routing trades
automatically across
the platform and onto the relevant counterparty's trade capture platform.
[0076] The graphical GUI interface of the platform can run on one or more
computer
systems including, for example, a PC with a Pentium/1.0 GHz or higher
microprocessor,
running Microsoft WINDOWS, and having a connection to a network, such as the
Internet.
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The platform can also include one or more servers configured to accept the
relevant
transactional information from the one or more counterparties and reroute the
relevant
information to the one or more counterparties. A network connection, for
example an internet
connection, can be used to provide a connection between the one or more
servers and the
different counterparties.
[0077] Once a transaction is affirmed, each counterparty to the trade has an
accurate
electronic record of the key details of the transaction and can deliver these
details to
downstream systems outside of the platform. The platform may include
connectivity to these
outside systems. For example, clients can send transaction details to
electronic confirmation
vendors in order to legally execute the transaction. In addition to this
functionality, the
platform can also transmit client transaction data onto other third party
platforms such as
platforms of client designated market intermediaries (inter dealer brokers,
dealers to client
brokers or prime brokers) and/ or operational vendors (fund administrators,
risk management,
valuation or other settlement services providers).
[0078] The platform may be designed not to execute or clear any transactions,
engage
in market-making activities, take proprietary positions in such transactions
or otherwise hold
securities, hold or receive client funds or securities and does not carry any
customer accounts.
In addition, the platform may not provide investment advisory services to
users or display live
or indicative prices for the purpose of price discovery or trade execution.
[0079] Clients that utilize the platform may include dealers, investment
advisors, prime
brokers, fund administrators, and other third parties such as custodians and
vendors.
[0080] Transactions that can be made on the platform may include new trades,
allocations, terminations (including partials), novations (including
partials), and amendments.
The platform can also indicate in real time the current status of the
transactions to users. Status
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indicators include alleged, amended, affirmed, terminated, novated, rejected,
recalled, and
voided.
[0081] CDS, CDS indices, and index tranches trades may be supported by the
platform.
Details that may be entered for a single name CDS trade may include buyer (of
protection),
trade date, seller (of protection), effective date, reference entity, maturity
date, reference
obligation, first pay date, RED Pair Clip, payment frequency, ISIN, CUSIP,
Bloomberg, ID,
upfront fee, notional, upfront fee date, fixed rate, transaction type,
restructuring, confirmation
method, initial margin, agreement date, margin payer, calc agent, and calc
city.
[0082] Details that may be entered for a CDS index trade may include: buyer
(of
protection), effective date, seller (of protection), maturity date, index,
first pay date, RED ID,
payment frequency, notional, upfront fee, spread, upfront fee date, deal
spread, transaction
type, initial margin, confirmation method, margin payer, agreement date, trade
date, calc agent,
and calc city.
[0083] Details that may be entered for a CDS index tranche trade may include:
buyer
(of protection), trade date, seller (of protection), effective date, index,
maturity date, RED ID,
first pay date, notional, payment frequency, tranche spread, upfront fee, deal
spread, upfront fee
date, attachment %, transaction type, detachment %, confirmation method,
initial margin,
agreement date, margin payer, calc agent, and calc city.
[0084] FIG. 3 is a flow diagram that summarizes a new trade procedure in which
a trade
is executed at DTCC. In FIG. 3 a dealer alleges a new trade against a buyer at
IA. At 1B, the
buyer rejects the trade because the trade details contain one or more errors.
The buyer's
rejection includes a message detailing the errors. At 1C, the dealer corrects
the errors in
accordance with the buyer's message. At 2 the buyer affirms the modified
trade. At 3 the
dealer and the buyer both submit the exact same trade details to DTCC for
execution. Instead
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of submitting the trade details to DTCC the dealer and buyer may execute the
trade using paper
documents or other systems.
[0085] The above fields are only exemplary additional or alternative fields
for each
trade may be covered by the platform. For example, for credit derivative
trades, if DTCC adds
any obligatory matchable fields to a Product that is supported by the
platform, the field in the
platform will be extended to cover such additional obligatory matchable
fields.
Affirmation of new transactions and terminations
[0086] Platform users can use the platform to enter the details of a new
transaction or a
transaction that they have agreed to terminate/unwind on the platform. To do
so, a user
completes a transaction record setting out the details of the new trade or the
termination details.
The record is then sent to the transaction counterparty, which can either
affirm or reject the
relevant transaction details. When rejected, the rejecting party enters a
comment explaining the
reason for the reject and the record is then amended and resubmitted by the
other party.
Transaction records can also be recalled before being submitted to the other
participant or
voided if they need to be amended after they have already been affirmed by
both parties (all
parties have to insert a comment to explain the reason for the record being
voided). After a
transaction is recalled, rejected or voided, the initiating user can amend the
details of the
transaction and resubmit the record to the relevant counterparty.
[0087] For example, in a new credit derivatives trade, a dealer may first
enter all
relevant trade details into the platform and allege them to an investment
advisor. The
investment advisor can either affirm or reject the trade. FIG. 4 shows a
screen that can be used
by a dealer to enter new trade details into the platform for a single name
trade. Also shown in
FIG. 4 is how this screen can be accessed from a new trade drop down menu on
the main dealer
screen. FIG. 5 shows a screen that can be used by a dealer to enter new trade
details into the
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platform for a new index trade. Also shown in FIG. 5 is how this screen can be
accessed from
a new trade drop down menu on the main dealer screen. FIG. 6 shows a screen
that can be used
by a dealer to enter new trade details into the platform for a new index
tranche trade. Also
shown in FIG. 6 is how this screen can be accessed from a new trade drop down
menu on the
main dealer screen. An alleged trade may be indicated on the dealer and
investment advisor
screen; for example, by placing a question mark next to the trade.
[0088] FIG.7 shows an example of an investment advisors main blotter screen.
From
this main blotter screen an investment advisor can chose to allocate new
trades, launch reports,
view positions, initiate novation or termination transactions, create/modify
allocation strategies,
submit trades to DTCC for legal confirmation, view a DTCC legal confirmation
status.
[0089] If the investment advisor desires to allocate a trade across multiple
funds, it may
be required to do so prior to affirmation of the trade details. FIG. 8 shows
an allocation screen
that can be used to allocate a trade across multiple funds. This screen can be
accessed from the
main blotter screen.
[0090] From the main dealer screen, the dealer may also have the ability to
recall a
trade prior to affirmation of such trade. The platform may allow the dealer to
modify and
resubmit recalled trades.
[0091] If the investment advisor affirms the trade details, the platform may
generate a
single trade ticket for the trade if the trade was not allocated or a separate
trade ticket for each
allocation where the trade was allocated across multiple funds. Affirmed
trades may be
indicated on the dealer and investment advisor screens; for example, by
placing a green
checkmark next to the affirmed trade.
[0092] If the investment advisor rejects the trade details, the platform can
send a reject
message back to the dealer. FIG. 15 shows a view of the investment advisor
screen after a
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trade has been rejected. The screen in FIG. 15 includes a window for input a
reason for the
rejection. The investment advisor may be required to add a comment explaining
why the trade
was rejected. Such rejected trades may be indicated on the dealer and
investment advisor
screens; for example, by placing a red "X" next to the rejected trade. The
platform may allow
the dealer to modify and resubmit the rejected trade.
[0093] Either party to a trade may have the ability to void a trade whose
trade details
have been affirmed. Prior to allowing a trade to be voided, both parties may
be required to
agree that the trade should be voided and to add a comment explaining why the
trade was
voided. FIG. 16 shows an example of an investment advisor screen during a
trade void. The
screen in FIG. 16 includes a window for inputting the reason for the void. The
platform may
allow the dealer to modify and resubmit voided trades. FIG. 17 shows an
example of a dealer
screen in which an un-affirmed transaction is being recalled so that the
transaction can be
modified and re-alleged.
[0094] If the trade is in either an alleged or affirmed state, the platform
may allow the
dealer to allege an amendment to modify the trade details. All parties to the
trade must affirm
the amendment.
[0095] Terminations can be initiated by an investment advisor, who alleges the
termination details to the dealer. FIG. 9 show an example of an investment
advisor screen for
entering details for terminating a single name CDS trade. If the original
trade was affirmed via
the platform, the investment advisor may select the option to terminate the
trade and enter the
relevant termination details (as defined below). The investment advisor may
have the option to
terminate (a) a single allocation, (b) an entire block trade or (c) multiple
allocations within a
block trade. If the original trade was not affirmed via the platform, the
investment advisor may
enter the original trade details, as well as the termination details, into the
platform.
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[0096] Termination details may include termination amount, termination spread,
termination fee, payer/payee, termination date, effective date, termination
fee date, and
termination ref. To specify a full termination, an investment advisor may
enter the full
termination amount. For a partial termination, the investment advisor may
enter the partial
termination amount.
[0097] The investment advisor may have the option to either enter the
termination fee
or the termination spread. If the investment advisor enters the termination
spread instead of the
termination fee, then the dealer may be required to enter the termination fee.
Once the dealer
has entered the termination fee, the investment advisor can either affirm or
reject the
termination fee.
[0098] If all relevant fields are provided, the platform can send the
termination to the
dealer for affirmation. FIG. 10 shows an example of the main dealer screen
after a termination
has been received from an investment advisor. As shown in FIG. 10, the dealer
is provided the
opportunity to affirm or reject the termination with a single click.
[0099] The investment advisor may have the ability to recall a termination
prior to
affirmation of such termination. The platform may allow the investment advisor
to modify and
resubmit recalled terminations.
[0100] If the dealer affirms the termination, the platform can reduce the
notional
amount of the trade to the new notional. If the notional amount is reduced to
OMM, the trade
status can be set to terminated.
[0101] If the dealer rejects the termination, the platform can send a reject
message back
to the investment advisor. The dealer may be required to add a comment
explaining why the
termination was rejected. The platform may allow the investment advisor to
modify and
resubmit the rejected trade.
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[0102] Either party may have the ability to void a termination that has been
affirmed.
Both parties may be required to agree to the termination and add a comment
explaining why the
termination was voided. The platform may allow the investment advisor to
modify and
resubmit the voided Termination.
Novations
[0103] It is possible for two parties who have entered into a transaction to
arrange for
this transaction to be "novated" to a third party. For instance, an investment
advisor may have
entered into a transaction with a dealer on behalf of a number of funds. The
investment advisor
may wish to "transfer" its position under the trade to a new dealer. In order
to achieve this, the
contract between the investment advisor and the original dealer is terminated
and replaced with
an identical contract between the original dealer and the new dealer. This is
referred as a
"novation." The novation may be agreed to by the investment advisor and the
new dealer
outside of the platform. The novation may then be affirmed using the platform.
[0104] In order to affirm the novation, the investment advisor enters the new
transaction record into the platform, which is then affirmed by the new dealer
and accepted by
the original dealer. Although the original dealer (remaining party) may not
always be aware of
the novation prior to receiving a message through the platform, it may be
required to consent to
or deny the novation in line with ISDA Novation Protocol II. Once affirmed and
accepted by
all the parties, the original dealer and the new dealer become party to a new
transaction under
the terms set out in the transaction record, and the transaction between the
investment manager
and the original dealer is terminated.
[0105] Following is a more detailed description of the novation procedure
between an
investment advisor and two dealers. A novation can be initiated by the
investment advisor (the
"transferor"), who alleges the novation details to both the original dealer
(the "remaining
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party") and the dealer stepping into the trade (the "transferee"). FIG. 11 is
an example of an
investment advisor's position blotter screen. This screen shows an investment
adviser's
outstanding positions. An investment advisor may initiate a novation or
termination of a
position affirmed via the platform from this screen.
[0106] If the original trade was affirmed via the platform, the investment
advisor may
select an option to novate the trade and enter the relevant novation details
(as discussed below).
The investment advisor may have the option to novate: (a) a single allocation,
(b) an entire
block trade or (c) multiple allocations within a block trade. If the original
trade was not
affirmed via the platform, the investment advisor may enter the original trade
details, as well as
the novation details, into the platform. FIG. 12 is an example of an
investment advisor's screen
for entering details for novating a single name CDS contract transaction.
[0107] The novation details may include: transferee, novation amount, novation
spread,
novation fee, payer/payee, novation date, effective date, novation fee date,
and novation ref.
[0108] To specify a full novation, the investment advisor may enter the full
novation
amount of the trade in the novation amount field. For a partial novation, the
investment advisor
may enter the partial novation amount.
[0109] The investment advisor may have the option to either enter the novation
fee or
the novation spread. If the investment advisor enters the novation spread
instead of the
novation fee, then the transferee may be required to enter the novation fee.
Once the transferee
has entered the novation fee, the investment advisor can either affirm or
reject the novation fee.
[0110] If all relevant fields are provided, the platform may send the novation
simultaneously to both the transferee and the remaining party for affirmation.
Both dealers
may either affirm or reject the novation. FIG. 13 shows an example of a dealer
screen after
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receipt of an alleged novation. The dealer has the choice of affirming or
rejecting the novation
using one click.
[0111] The investment advisor may the ability to recall a novation prior to
affirmation
of such novation. The platform may allow the investment advisor to modify and
resubmit
recalled novations.
[0112] If the novation is affirmed by both dealers: (a) The platform may
reduce the
notional amount of the trade between the transferor and remaining party by the
novation
amount. If the notional amount is reduced to OMM, the trade status can be set
to novated. (b)
The platform may create a new trade between the remaining party and the
transferee of the
novation amount with all of the same trade details as the original trade.
[0113] If either dealer rejects the novation, the platform may send a reject
message back
to the other dealer and the investment advisor. The rejecting dealer may be
required to add a
comment explaining why the novation was rejected. The platform may allow the
investment
advisor to modify and resubmit rejected trades.
[0114] If the novation is affirmed, either party has the ability to void the
novation. All
three parties may be required to agree on the void and add a comment
explaining why the
novation was voided. The platform may allow the investment advisor to modify
and resubmit a
voided novation.
Prime broker "give-up"
[0115] A prime broker "give-up" occurs when an investment advisor enters into
a
transaction with a dealer and informs the dealer that it is "giving-up" its
transaction to a
designated prime broker (usually a dealer in order to obtain margin or
collateral relief). The
dealer then enters details of the transaction into the platform and indicates
that his trade
counterparty is the prime broker. The investment advisor and its prime broker
each may need
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to affirm (or reject) the details of the trade on the platform. FIG. 14 is an
example of a prime
broker give-up acceptance screen.
[0116] If accepted via the platform, this transaction results in the original
trade between
the dealer and the investment advisor being given-up to the prime broker and
replaced by (i) a
transaction between the dealer and the prime broker and (ii) transaction(s)
between the prime
broker and the investment advisor acting on behalf of one or more funds. The
platform may
also handle communication of termination and novation transaction information
to prime
brokers. Prime brokers may be classified into two types, step out and stay-in.
A stay-in prime
broker can act as the remaining party to a novation transaction initiated by
their clients whereas
a step-out prime broker will exit the trade with the executing broker when
their client novates.
The platform may handle the messaging of the transaction details specific to
the type of prime
broker in the transaction.
[0117] Following are examples of workflows involving a prime broker:
New trade workflow (dealer versus investment advisor via prime broker give up)
[0118] The new trade affirmation process may be initiated by the dealer and
affirmed
by the investment advisor and prime broker. The dealer may enter all relevant
trade details of
the trade, including the prime broker to whom the trade is being given-up. The
investment
advisor can either affirm or reject the trade. If the investment advisor
desires to allocate the
trade across multiple Funds, it may do so prior to affirmation of the trade
details.
[0119] The dealer may have the ability to recall a trade prior to affirmation
of such
trade. The platform may allow the dealer to modify and resubmit recalled
trades.
[0120] If the trade is affirmed by the investment advisor, the prime broker
may be
notified of the trade give up and a clock may start running for that Trade.
The clock indicates
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the response time within which the prime broker has to action the trade give
up. The prime
broker can either affirm or reject the trade.
[0121] If the trade is affirmed by both the investment advisor and prime
broker: (a) For
the investment advisor: the platform may generate a single trade ticket for
the trade if the trade
was not allocated, or a separate trade ticket for each allocation where the
trade was allocated
across multiple funds. (b) For the Prime Broker: the platform may generate a
single trade ticket
for the trade against the investment advisor if the trade was not allocated,
or a separate trade
ticket for each allocation where the trade was allocated across multiple
funds. The platform
may also generate a single trade ticket for the trade against the dealer. The
notional amount on
this trade ticket may be the sum of the allocated trades if the investment
advisor allocated
across multiple funds. (c) For the dealer: the platform may generate a single
trade ticket for the
trade against the prime broker. The notional amount on this trade ticket may
be the sum of the
allocated trades if the investment advisor allocated across multiple funds.
[0122] If the trade is rejected by either the investment advisor or the prime
broker,. the
platform may send a reject message back to the parties on the trade. The party
rejecting the
trade may be required to add a comment explaining why the trade was rejected.
The platform
may allow the dealer to modify and resubmit rejected trades.
[0123] If the trade is affirmed, all parties may have the ability to void the
Trade. All
parties may be required to agree to the voided trade and to add a comment
explaining why the
trade was voided. The platform may allow the dealer to modify and resubmit
voided trades.
Termination workflow (dealer versus investment advisor for prime broker give-
up trade)
[0124] Terminations can be initiated by the investment advisor, who alleges
the
termination details to the dealer and prime broker. If the original trade was
affirmed via the
platform, the investment advisor may select the option to terminate the trade
and enter the
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relevant termination details (as defined below). The investment advisor may
have the option to
terminate (a) a single allocation, (b) an entire block trade or (c) multiple
allocations within a
block trade. If the original trade was not affirmed via the platform, the
investment advisor may
enter the original trade details, as well as the termination details, into the
platform.
[0125] The termination details may include: termination amount, termination
spread,
termination fee, payer/payee, termination date, effective date, termination
fee date, and
termination ref.
[0126] To specify a full termination, the investment advisor may enter the
full
termination amount. For a partial termination, the investment advisor may
enter the partial
termination amount.
[0127] The investment advisor may have the option to either enter the
termination fee
or the termination spread. If the investment advisor enters the termination
spread instead of the
termination fee, then the dealer may be required to enter the termination fee.
Once the dealer
has entered the termination fee, the investment advisor may either affirm or
reject the
termination fee.
[0128] If all relevant fields are provided, the platform may send the
termination to both
the dealer and the prime broker for affirmation. Both parties can either
affirm or reject the
termination.
[0129] The investment advisor may have the ability to recall a termination
prior to
affirmation of such termination. The platform may allow the investment advisor
to modify and
resubmit recalled terminations.
[0130] If the termination is affirmed by the dealer and the prime broker, the
platform
may reduce the notional amount of the trade to the new notional. If the
notional amount is
reduced to OMM, the trade status may be set to terminated.
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[0131] If either the dealer or prime broker rejects the termination, the
platform may
send a reject message back to the other parties. The party rejecting the trade
may be required to
add a comment explaining why the trade was rejected. The platform may allow
the investment
advisor to modify and resubmit rejected trades.
[0132] If the termination is affirmed, all parties may have the ability to
void the
termination. All parties may be required agree to void the termination and to
add a comment
explaining why the termination was voided. The platform may allow the
investment advisor to
modify and resubmit voided terminations.
Novation workflow (dealer versus investment advisor for prime broker give-up
trade)
[0133] Following are two workflows for novation of a trade given up to a prime
broker:
(a) The prime broker acts as the remaining party in the novation; or (b) The
prime broker steps
out of the trade by simultaneously terminating the trade with the investment
advisor and
novating the trade with the dealer on the other side.
[0134] The platform may automatically select one of the two workflows based on
a
preference specified by the prime broker. In both cases, the novation may be
initiated by the
investment advisor and affirmed by the dealer(s) and prime broker. If the
original trade was
affirmed via the platform, the investment advisor may select the option to
novate the trade and
enter the relevant novation details (as defined below). The investment advisor
has the option to
novate (a) a single allocation, (b) an entire block trade or (c) multiple
allocations within a block
trade. If the original trade was not affirmed via the platform, the investment
advisor may enter
the original trade details, as well as the novation details, into the
platform.
[0135] The novation details may include: transferee, novation amount, novation
spread,
novation fee, payer/payee, novation date, effective date, novation fee date,
novation ref.,
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[0136] To specify a full novation, the investment advisor may enter the full
novation
amount of the trade in the novation amount field. For a partial novation, the
partial notional
amount being novated may be entered under the "novation amount" field.
[0137] The investment advisor may have the option to either enter the novation
fee or
the novation spread. If the investment advisor enters the novation spread
instead of the
novation fee, then the transferee may be required to enter the novation fee.
Once the transferee
has entered the novation fee, the investment advisor may either affirm or
reject the novation
fee.
Novation workflow (prime broker is the remaining party)
[0138] For the workflow where the prime broker acts as the remaining party,
the
platform may send the novation to the transferee (dealer) and remaining party
(prime broker)
for affirmation. Both parties may either affirm or reject the novation.
[0139] The investment advisor may have the ability to recall a novation prior
to
affirmation of such novation. The platform may allow the investment advisor to
modify and
resubmit recalled novations.
[0140] If the novation is affirmed by both parties: (a) The platform may
reduce the
notional amount of the trade between the transferor (investment advisor) and
remaining party
(prime broker) by the novation amount. If the notional amount is reduced to
OMM, the trade
status may be set to novated. (b) The platform may create a new trade between
the remaining
party (prime broker) and the transferee (dealer) of the novation amount with
all of the same
trade details as the original trade.
[0141] If either party rejects the novation, the platform may send a reject
message back
to the parties. The party rejecting the trade is required to add a comment
explaining why the
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trade was rejected. The platform may allow the investment advisor to modify
and resubmit
rejected trades.
[0142] If the novation is affirmed, all parties have the ability to void the
novation. All
parties are required to add a comment explaining why the novation was voided.
The platform
may allow the investment advisor to modify and resubmit voided novations.
Novation workflow (prime broker steps out)
[0143] For the workflow where the prime broker steps out of the trade, the
platform
may send the novation to the transferee (dealer), transferor (prime broker)
and remaining party
(dealer) for affirmation. All parties may either affirm or reject the
novation.
[0144] The investment advisor may have the ability to recall a novation prior
to
affirmation of such novation. The platform may allow the investment advisor to
modify and
resubmit recalled novations.
[0145] If the novation is affirmed by all parties: (a) The platform may reduce
the
notional amount of the trade between the prime broker and the investment
advisor by the
novation amount. If the notional amount is reduced to OMM, the trade status
may be set to
terminated. (b) The platform may reduce the notional amount of the trade
between the
transferor (prime broker) and remaining party (dealer) by the novation amount.
If the notional
amount is reduced to OMM, the trade status may be set to novated. (c) The
platform may create
a new trade between the remaining party (dealer) and the transferee (dealer)
of the novation
amount with all of the same trade details as the original trade.
[0146] If any party rejects the novation, the platform may send a reject
message back to
the parties. The party rejecting the trade may be required to add a comment
explaining why the
trade was rejected. The platform may allow the investment advisor to modify
and resubmit
rejected trades.
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[0147] If the novation is affirmed, all parties may have the ability to void
the novation.
All parties may be required to agree to void the novation and add a comment
explaining why
the novation was voided. The platform may allow the investment advisor to
modify and
resubmit voided novations.
Platform Auto-affirmation
[0148] Platform auto-affirmation provides buy-side clients (for example, an
investment
advisor) one or more of the following features: a)The ability to
electronically capture new trade
details with allocations from trade capture systems without waiting for
dealers to message trade
details. b) Automatic comparison and affirmation of investment advisor
captured new trade
details against dealer messaged new trade details. c) Electronic messaging of
investment
advisor trade allocations to dealer counterparties upon automatic affirmation.
d) Exception
processing tools to resolve un-affirmed captured transactions.
[0149] To capture new trades on the platform using auto-affirmation, the
following
procedure is performed: 1) New trade and allocation details from the
investment advisors trade
capture system is delivered to platform (for example, via the platform API).
These details are
captured and used in the auto-affirmation process (In `captured' status). 2)
Upon capturing the
trade, the platform applies a unique UTRAN# trade identifier to the captured
trade and delivers
an acknowledgement that the transaction was successfully captured. 3) The
platform displays
the captured transaction in the transaction blotter for the investment advisor
(which may be
recalled by the investment advisor if not already automatically affirmed).
FIG. 18 shows an
example of the capture new trade on an investment advisor screen.
[0150] Captured trades may be automatically affirmed by the platform. Upon
receipt of
the captured buy-side new trade, the platform may automatically compare the
block trade
details against all dealer alleged transactions and automatically affirm
transactions where all
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key comparable fields are in agreement (based on, for example, product,
buyer/seller legal
entity names, reference entity/obligation, dates, and payment information; an
automatic 50
EUR / USD tolerance is applied when comparing upfront fees. FIG. 19 shows an
example of
an investment advisor screen of an auto-affirmed new trade.
[0151] As shown in FIG. 19, if a new comparable trade is found, the platform
may
automatically: 1) Affirms the dealer alleged trade; changes the captured
investment advisor
trade transaction status from "captured' to "auto-affirm." 2) Applies and
delivers allocations to
the dealer affirmed trade (with notional breakdowns and buy-side trade IDs).
3) Enriches the
auto-affirmed dealer block trade with captured internal trade
identifiers/client defined fields. 4)
References the platform UTRAN# of the captured transaction that was
automatically affirmed
using dealer provided trade details.
[0152] To reconcile un-affirmed transactions, the investment advisors can
either
reconcile trades normally or can use the following tools and procedures
described with respect
to FIG. 20. FIG. 20 shows investment advisor screens used for reconciling a
trade that was not
auto affirmed. To reconcile trades using the interface in FIG. 20 the
investment advisor: 1)
Selects the captured trade in the transaction blotter to view the captured
trade details. 2)
Selects the `compare' button of in the details section to open a position
reconciliation screen.
The screen can list all un-affirmed dealer alleged new trades for the product
type and trade date
by order of most to least number of fields that are in agreement. 3) Review
the buy-side
captured trade details that don't agree with the dealer alleged trade details
(highlighted in red)
and either reject a dealers allege (with a reject reason) or repair the trade
details in the buy-side
trade Capture system and re-capture the new trade details. 4) Should the buy-
side trade capture
system not support trade cancels, users may purge erroneous un-affirmed
captured transactions
by selecting the Recall button on the Platform GUI.
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[0153] FIG. 21 is a flowchart summarizing the auto-affirmation features.
Following is
a description of the flow diagram: 1) Initiate trade: dealer and investment
advisor execute a
new block trade and enter trade details in their respective trade capture
systems. 2) Submit
trade: dealer and investment advisor submit the trade details to the platform.
3) Allege/capture
transaction: the platform delivers the dealer submitted trade details (allege)
to the investment
advisor; the platform creates a transaction ('capture' new trade status) for
investment advisor
captured new trades used for automatic affirmation purposes. 4) Comparison of
trade
details/automatic affirmation: The platform auto-affirmation engine compares
the investment
advisor captured auto-affirm trade details against all dealer alleged new
trade transactions and
automatically affirms the dealer alleged transaction when all fields are in
agreement; the
captured investment advisor new trade status is set to `auto-affirm'. 5)
Allocations
applied/trade identifiers copied: the platform, upon automatic affirmation,
automatically copies
the investment advisor allocations, trade ID's, and client defined fields from
the captured auto-
affirm transaction to the dealer alleged transaction and delivers the
allocation to the dealer
(captured investment advisor new trade status is delivered via API). 6) Deal
enrichment:
dealers, upon receiving the affirmed trade and allocations, submits its
internal trade ID's for
each allocation leg.
[0154] In the auto-affirmation system captured new trades may be 100%
allocated to
either a block entity (i.e. no allocation) or to established funds on the
platform. The platform
may not allow captured new trades to be modified. The platform may allow
trades to be
recalled; corrected trade details in the investment advisor's trade capture
system can be
messaged to platform as a separate captured new trade.
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[0155] Captured new trades may only be visible to the buy-side firm; upon auto-
affirmation, dealers may only see the captured trade allocations that were
copied to the dealer
messaged new trade (as if the trade was manually affirmed and allocated).
[0156] A transporter tool can be part of the platform the transporter tool may
allow
users to upload trade capture details in a spreadsheet format (for example csv
format) for use
with auto-affirmation. The uploaded details may be viewed in a transporter
viewer. Using the
transporter upload tool, users may save the trade capture spreadsheet details
to a server
directory where the transporter delivers the trade details to the platform.
Users may be able to
see a list of captured, auto-affirmed, and trade upload errors in a browser
based transporter file
viewer by selecting the appropriate folder.
Credit option expiry s~~tem
[0157] The platform may also include a system for exercising credit derivative
options.
[0158] CDS options tend to expire on 20 March, 20 June, 20 September, 20
December
of a given year. As a result there is a large concentration of work that needs
to be performed on
these days in relation to the decision to exercise and option (or otherwise).
[0159] On maturity date of the option, the buyer of the option typically has
to decide
between 9am and 4pm whether to exercise any options they have bought. To do
this, the
exercise price on all options that a trader has bought needs to be compared to
the current price
for the underlying CDS contract in the market. Currently most of this work has
to be done
manually and each option has to be exercised individually. The platform may
provide a more
efficient process for exercising CDS options.
[0160] FIG. 22 is a flow diagram of the process for exercising CDS options on
the
platform. In FIG. 4, Step 1- is the load and affirming of the trades. This can
be done in a
similar manner to the method for loading other trades onto the platform. Where
possible, the
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platform may accept straight-through-processing solutions in the same way that
it may for
typical credit derivatives. A bulk upload tool can be used to allow for
multiple trades to be
quickly and easily uploaded from Microsoft EXCEL or other file formats. Once
all trades are
loaded they may be affirmed in the usual manner before they can be exercised.
In step 2, a
credit feed is received from www.Creditfixin s.g com, or from a similar
source. This feed
provides the appropriate weekly credit fixing for all credits currently
covered by the fixings
process. This provides an accurate representation of the market at 11 am and
can be used to
decide which options to exercise. In step 3 the buyer decides which options to
exercise and in
step 4 the options to be exercised are communicated to counterparties.
[0161] FIG. 23 is a view of the option screen for an option buyer. Each trade
is listed
either on the buy or sell tab, and may only be listed once it has been
affirmed by both
counterparties.
[0162] Buyers can select an individual trade to execute by selecting the
tickbox against
that trade on the left hand side and then pressing the exercise button. Buyers
may have the
option to filter the list of visible trades by, for example, credit,
counterparty, status, and %
difference between the underlying market and Strike on the Options.
[0163] Buyers may also be able to elect to bulk exercise all selected trades,
all trades
"in the money" (i.e. that have value to the owner by exercising the option),
and all trades "in
the money" by a certain percentage. On the sell tab dealers may automatically
see those
options that they have sold, where the buyer is exercising the option.
[0164] Once a trade has been exercised, a message may be sent to the
appropriate
counterparty on platform. The platform may also automatically generates the
standard ISDA
confirmation for this trade. Exercise of an option results in the creation of
a new trade, and this
can be automatically created and booked on the platform if requested by the
user.
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Credit event services
[0165] The platform may also support delivery of Credit Event Notices (CENs).
CENs
are contractual correspondence used between credit derivative buyers and
sellers when the
defined underlying legal entity in a traded default swap experiences a credit
event (such as a
bankruptcy or defaults on a payment).
[0166] After the CEN's are delivered (usually with an attached public notice
detailing
the event) and acknowledged, protection buyers communicate their settlement
preferences to
protection sellers in a letter called the Notice of Physical Settlement
(NOPS). Settlement
preferences include: referenced bonds/obligations, settlement pricing, and
indication of cash or
physical settlement).
[0167] Processing and settlement of credit events typically must be done
between
specific timelines and terms or protection buyers could lose their settlement
preferences or the
ability to settle at all; an inherent risk. This risk is further aggravated by
the current process
which is decentralized and largely manual (fax, email, mail).
[0168] The platform can include functionality to permit the electronic
delivery and
affirmation of CEN's and NOPS in order to reduce the risks associated with
processing credit
events and help centralize the process.
[0169] More specifically, the platform may allow users to upload event
affected trades
using, for example, Excel, Flat File, or FpML, of which, can be validated
against DTCC. The
platform can also include a counterparty contact database with, for example,
an Institution
name, address, and event central point of contact (name phone, fax, bloomberg,
and email
addresses). This database can be accessible, for example, via the GUI and
third parties website
(ISDA website).
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[0170] The platform may allow dealers to electronically deliver CENs (with
attached
Publicly Available Information; in PDF or DOC format) for any platform entered
position to
Investment Advisors (not a legal affirmation but independent delivery
guarantor). Email and
Bloomberg delivery can be available options (with CNOS like indicators of
such). Dealers may
also have the ability to recall CEN's delivered in error.
[0171] The platform may calculate and display remaining time to deliver NOPS
to
parties.
[0172] Buyers of protection may be able to deliver settlement notices
electronically
over the platform (the platform may allow updating of the reference
obligation, cash or
physical settlement, auction eligibility, ISDA credit definitions, and use of
ISDA Index
settlement protocol).
[0173] The platform may provide API support, for supporting, for example,
Bloomberg
CEN message delivery.
[0174] Protection buyers may have the option to net positions across
counterparties to
reduce multiple settlements due to off-setting positions. The platform may
also allow net
positions to be used in market order calculations for auction process.
[0175] The above description is presented to enable a person skilled in the
art to make
and use the invention, and is provided in the context of a particular
application and its
requirements. Various modifications to the preferred embodiments will be
readily apparent to
those skilled in the art, and the generic principles defined herein may be
applied to other
embodiments and applications without departing from the spirit and scope of
the invention.
Thus, this invention is not intended to be limited to the embodiments shown,
but is to be
accorded the widest scope consistent with the principles and features
disclosed herein.
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[0176] Other embodiments and uses of the invention will be apparent to those
skilled in
the art from consideration of the specification and practice of the invention
disclosed herein.
All references cited herein, including all U.S. and foreign patents, patent
applications, all
publications and other documentary materials, are specifically and entirely
hereby incorporated
by reference.
