Eris Innovations, LLC - [2018] APO 17

IP AUSTRALIA
AUSTRALIAN PATENT OFFICE
Eris Innovations, LLC [2018] APO 17

Patent Application: 2017201734

Title:Non-biased, Centrally-cleared Financial Instrument and Method of Clearing and Settling

Patent Applicant:                   Eris Innovations, LLC
Delegate:  Xavier Gisz
Decision Date:  8 March 2018
Hearing Date:  Written submissions filed on 4 December 2017

Catchwords: PATENTS - The invention is a system for trading financial instruments - examiner’s objection – claims are not for a manner of manufacture – no patentable subject matter present – application refused

Representation: Patent attorney for the applicant: Peter Maxwell & Associates

IP AUSTRALIA
AUSTRALIAN PATENT OFFICE
Patent Application: 2017201734

Title:Non-biased, Centrally-cleared Financial Instrument and Method of Clearing and Settling

Patent Applicant: Eris Innovations, LLC
Date of Decision: 8 March 2018
DECISION
The invention claimed in all of the claims is not a manner of manufacture. Having reviewed the specification, I do not consider it appropriate to provide an opportunity to amend as, in the circumstances of the case, it will serve no useful purpose. The application is refused.
REASONS FOR DECISION
Background

This matter relates to patent application 2017201734 in the name of Eris Innovations, LLC (the Applicant), and examiner’s objections thereto on grounds of manner of manufacture.
The present application has been the subject of one examination report, the contents of this report being largely reflected in the reports already generated in respect to two previous generations of this application (Australian patent applications 2011293897 and 2015264931).
The first report of 15 June 2017 stated:
“My report below includes objections that are equivalent to objections raised in the examination of the related parent application which is directed to the same or essentially the same subject matter. As there has now been several adverse reports in relation to this subject matter, the application will be referred to a Hearing Officer to consider whether to accept or refuse the application under s49 or to direct amendment under s107. If you wish to be heard on this matter, you have 1 month from the date of this report to request a hearing. Fee item 230 applies.”
A response to the report was received on 11 July 2017. The response included proposed amendments to the specification.
The Applicant requested a hearing on 14 July 2017.
A hearing notice was issued on 7 November 2017, allowing the applicant 4 weeks to file submissions to the hearing. Written submissions were filed on 4 December 2017.
APPLICABLE LAW
The request for examination of the patent application was filed on 2 September 2016. As a consequence, substantive amendments to the Patents Act brought about by the Intellectual Property Laws Amendment (Raising the Bar) Act 2012 that came into effect on 15 April 2013 apply to the present patent application.
Thus the standard of proof that applies in the present case is the balance of probabilities. I must accept the application if satisfied on the balance of probabilities that the application complies with the Act. If I am not so satisfied, then I can refuse the application.
Section 18 of the Patents Act 1990 provides that:-
(1)Subject to subsection (2), an invention is a patentable invention for the purposes of a standard patent if the invention, so far as claimed in any claim:
(a) is a manner of manufacture within the meaning of section 6 of the Statute of Monopolies; and
(b) when compared with the prior art base as it existed before the priority date of that claim:
(i)is novel; and
(ii)involves an inventive step; …
The specification
The present invention relates to financial instruments, and to the electronic clearing and settling of such financial instruments. The specification provides an extensive background about the trading of financial instruments to explain the context in which the invention was developed.
The description explains various financial instruments at paragraphs 3 and 4:
“A variety of different types of financial instruments are traded throughout the world. Examples include cash contracts and derivatives. A cash contract is an agreement for either immediate or deferred delivery of the specified asset. A derivative is a financial instrument whose value is linked to the price of an underlying commodity, asset, rate, index, currency or the occurrence or magnitude of an event. Typical examples of derivatives include futures, forwards, options, and swaps.
Most commonly, a swap is an agreement between two parties to exchange sequences of cash flows for a set period of time. Usually, at the time the swap is initiated, at least one of these series of cash flows is benchmarked to an asset or an index that is variable, such as an interest rate, foreign exchange rate, equity price or commodity price. A swap may also be used to exchange one security for another to change the maturity (bonds), quality of issues (stocks or bonds) or to facilitate a change in investment objectives.”
The description explains the differences between cleared and unclear financial instruments at paragraph 13:
“The method by which clearinghouses treat margin on cleared financial instruments (including futures and non-standardized financial instruments accepted for central clearing) is considerably different from the uncleared norm. For both cleared and uncleared financial instruments there are two forms of margin: initial margin and variation margin. For a cleared financial instrument, both parties must post initial margin in an amount set by the clearinghouse upon initiation of a position and maintain that initial margin as long as the position is held. For an uncleared financial instrument, only one party (but not both as in cleared financial instruments) may be required to post initial margin (known as collateral for uncleared financial instruments). In the case of cleared and uncleared financial instruments, a party posting this collateral generally continues to earn interest on cash posted or, if a Treasury instrument is posted, continues to have the right to the coupons generated by the Treasury instrument and accrues the gains or losses from any change in the value of the Treasury instrument.”
The description explains why the difference between cleared and uncleared financial instruments are problematic at paragraph 26:
“...[T]he cleared swap, without an appropriate adjustment, generates a different profit and loss from the uncleared swap when the underlying asset value, the price of natural gas in the example, changes. Furthermore, the example uncovers a potential risk to the clearinghouse that, when the settlement methodologies are not properly delineated, the marked-to-market price may not reflect the actual fair value of the financial instrument. Because central clearing of swaps is relatively new, this effect is not widely known or understood.”
The description explains the motivation to make financial instruments centrally cleared at paragraph 31-33:
“While swaps have traditionally been uncleared, recently there has been pressure to migrate swaps to central clearing, including mandates set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") (Pub.L 111-203, H.R. 4173) signed into law by President Obama on 21 July 2010. As a result of political pressure for greater transparency of uncleared financial instruments, the Dodd-Frank Act was passed into law in the wake of the 2008/2009 financial crisis. During the 2008/2009 financial crisis, many participants in uncleared financial instruments faced counterparties that were unable to meet their obligations.
One such effort to migrate swaps to an exchange and central clearing is the formation of Eris Exchange, an exempt board of trade. As reported by the Financial Times, Eris Exchange "will offer trading in interest-rate swap derivatives closely modeled on current over-the-counter (OTC) rate swaps". Grant, Weitzman, and Mackenzie, "Chicago Traders Launch New Derivatives Exchange" Financial Times (13 July 2010). The CME's clearinghouse will be the central clearer of interest-rate swap derivatives traded on Eris Exchange. "After the details of the swap, like national value, coupon, and maturity are agreed to, the Exchange passes the new trade to the Clearing House where it is processed like a traditional futures contract." (accessed 17 August 2010).
Unless addressed, the convexity bias and the NPV effect will in most cases result in significant pricing discrepancies between centrally-cleared interest-rate swaps and interest rate swap futures on the one band and uncleared interest-rate swaps on the other band. As a result, the cleared swaps will trade at significantly different yields than the uncleared equivalent. At the very least, the convexity bias and the NPV effect could create a serious impediment to the migration of interest-rate swaps to Eris Exchange, or to any other exchange or to central clearing, including, for example, interest-rate swaps cleared through the International Derivatives Clearing Group, LLC (IDCG), 150 East 52nd Street, 5th Floor, New York, New York l 0022 or the CME.”
The description summarises the motivation for the invention at paragraph 35:
“It would therefore be desirable to offer tools that adequately address the convexity bias and the NPV effect. It would be further desirable to help enable the migration of uncleared swaps and other uncleared financial instruments that are subject to the convexity bias and the NPV effect to exchanges and central clearing to eliminate counterparty risk, whereby the parties to a trade can look solely to a clearinghouse for performance, and to provide for greater transparency.”
The existing problems in the migration from cleared to uncleared financial instruments are convexity bias and the NPV effect. Convexity bias is explained at paragraph 15:
“There are two important effects that result from the difference in the treatment of variation margin between cleared and uncleared positions: the first effect is commonly known as the "'convexity bias'', and the second effect will be referred to herein as the "NPV effect". With respect to the convexity bias, assume a party establishes a short position in a Eurodollar future listed on the CME. Eurodollar futures are based on the 3-month LIBOR interest rate. The final settlement value for Eurodollar futures is equal to 100 minus the 3-month LIBOR rate. As interest rates rise, the price of Eurodollar futures decline. Further assume that shortly after establishing the position, the trade becomes profitable on a marked-to-market basis due to an increase in interest rates. As a result, the party receives variation margin in the form of cash equal to the profit. The party could now use the variation margin to purchase a zero-coupon Treasury bond.”
The NPV effect is described at paragraphs 21 and 24:
“The second effect that results from the difference between variation margin on a cleared financial instrument and collateral posted in an uncleared financial instrument will be referred to herein as the "NPV effect". While the NPV effect and the convexity bias are intertwined, cleared financial instruments that have no correlation to interest rates still will be subject to the NPV effect, although they will not subject to a convexity bias.”
Now consider a cleared natural-gas swap without any adjustments for the NPV effect When the natural-gas forward curve moves to $5, the fair value settlement price of the cleared swap is $120, the sum of future cash flows, This is because futures by arbitrage-fee principle trade at their future value. Therefore the buyer receives $120 of variation margin today, as opposed to $90 in the uncleared case. The buyer could now exit or hedge off the position, and would be materially better off than had an uncleared swap been traded. This difference is caused by what is referred to herein as the NPV effect. Note that as interest rates approach zero, the NPV effect is eliminated.”
The specification as proposed to be amended contains 21 claims including 6 independent claims; the claims are annexed to this decision.
Examiner objection
The examiner objection from the report of 15 June 2017 states:
“Claims 1-21 do not define a manner of manufacture within the meaning of s 18(1)(a) of the Patents Act 1990. From reading your application as a whole the substance of the alleged invention is a purportedly more effective financial scheme.
Key factors to considering patentable subject matter identified by the Full Court in Commissioner of Patents v RPL Central Pty Ltd [2015] FCAFC 177 at [099] include whether the contribution of the invention "solves a technical problem within the computer or outside the computer or whether it results in an improvement in the functioning of the computer, irrespective of the data being processed."
The present invention solves the problem of a need to reduce pricing discrepancies and yield between cleared and uncleared swaps by addressing the convexity bias and net present value effect (present application, paragraphs [00033] and [00035]). This is not a problem of technical nature.
Given the generic description of the computer implementation in your application, I do not consider that your application involves more than a generic utilisation of well-known functions of a computer, including the particular arrangement/combination of functions, and therefore does not involve any invention or ingenuity in any program or operation of a computer, or implementation by a computer to operate the method. Consequently, as per Research Affiliates LLC v Commissioner of Patents [2014] FCAFC 150 and Commissioner of Patents v RPL Central Pty Ltd [2015] FCAFC 177 the alleged invention is not a manner of manufacture.”
Manner of Manufacture
Case law
In National Research Development Corporation v Commissioner of Patents (“NRDC”), [1959] HCA 67, (1959) 102 CLR 252, the High Court provided a statement of the law in respect to manner of manufacture. At page 275, “… a process, to fall within the limits of patentability which the context of the Statute of Monopolies has supplied, must be one that offers some advantage which is material, in the sense that the process belongs to a useful art as distinct from a fine art …- that its value to the country is in the field of economic endeavour”. In discussing the “vendible product” proposition put forward by Morton J in Re G.E.C’s Application, (1942) 60 RPC 1, the High Court in NRDC upheld the validity of a patent for the use of previously unknown properties of a known chemical to effect a new purpose. At page 277:-
“The effect produced by the appellant’s method exhibits the two essential qualities upon which “product” and “vendible” seem designed to insist. It is a “product” because it consists in an artificially created state of affairs, discernible by observing over a period the growth of weeds and crops respectively on sown land on which the method has been put into practice. And the significance of the product is economic; for it provides a remarkable advantage … for one of the most elemental activities by which man has served his material needs, the cultivation of the soil for the production of its fruits.”
The High Court though was not laying down a precise formulation that can be applied unthinkingly. In D’Arcy v Myriad Genetics Inc (“Myriad”), [2015] HCA 35, at [23]:-
“This Court in NRDC did not prescribe a well-defined pathway for the development of the concept of “manner of manufacture” in its application to unimagined technologies with unimagined characteristics and implications. Rather, it authorised a case-by-case methodology.”
That case-by-case approach must have regard to the substance of the claimed invention, not simply the form of the claim. The point was made succinctly in the Myriad case by Gageler and Nettle JJ. At [144]:-
“Whatever words have been used, the matter must be looked at as one of substance and effect must be given to the true nature of the claim.”
In Commissioner of Patents v RPL Central Pty Ltd (“RPL”), [2015] FCAFC 177, the Full Court of the Federal Court stated the same thing in the context of an invention that was in substance a scheme. At [96]:-
“A claimed invention must be examined to ascertain whether it is in substance a scheme or plan or whether it can broadly be described as an improvement in computer technology. The basis for the analysis starts with the fact that a business method, or mere scheme, is not, per se, patentable. The fact that it is a scheme or business method does not exclude it from properly being the subject of letters patent, but it must be more than that. There must be more than an abstract idea; it must involve the creation of an artificial state of affairs where the computer is integral to the invention, rather than a mere tool in which the invention is performed.”
Moreover at [98]:-
“It is not a question of stating precise guidelines but of deciding, in each case, whether the claimed invention, as a matter of substance not form, is properly the subject of a patent”.
The Full Court of the Federal Court in RPL then detailed a number of considerations relevant to the determination and coming from earlier decisions of the Court. Summarising from [99] of RPL:-
- It is necessary to ascertain whether the contribution to the claimed invention is technical in nature.
- One consideration is whether the invention solves a “technical” problem within the computer or outside the computer, or whether it results in an improvement in the functioning of the computer, irrespective of the data being processed.
- Does the claimed method merely require generic computer implementation?
- Is the computer merely the intermediary, configured to carry out the method using a computer readable medium containing program code for performing the method, but adding nothing to the substance of the idea?
In Research Affiliates LLC v Commissioner of Patents, [2014] FCAFC 150, the Full Federal Court noted similarities in approach between Australia, the United Kingdom (“UK”) and the United States (“US”). In particular, the UK consideration of the “necessary technical contribution”, in the context of the statutory exclusions existing in the UK, was of relevance to an analysis of a necessary technical or artificial effect under Australian law (see [36], [45]). It follows that the UK cases may provide assistance in the present case.
In Aerotel Ltd v Telco Holdings Ltd; Macrossan’s Application, [2006] EWCA Civ 1371; [2007] RPC 7, the England and Wales Court of Appeal outlined a four-step “technical effect” approach in respect to the question of excluded subject matter under UK law. At [40]:-
“(1) properly construe the claim
(2)identify the actual contribution;
(3)ask whether it falls solely within the excluded subject matter;
(4)check whether the actual or alleged contribution is actually technical in nature.”
In addressing the second step, Jacob L.J. stated at [43]:-
“The second step – identify the contribution – is said to be more problematical. How do you assess the contribution? Mr Birss submits the test is workable – it is an exercise in judgment probably involving the problem said to be solved, how the invention works, what its advantages are. What has the inventor really added to human knowledge perhaps best sums up the exercise. The formulation involves looking at substance not form – which is surely what the legislator intended.”
In IGT v The Comptroller General of Patents, [2007] EWHC 1341 (Pat), the High Court of England and Wales at [12] followed the four-step approach from Aerotel. Moreover at [39]:-
“… applying the Aerotel four stage test, the issue of what is ‘technical’ is of much less importance than in the past since that aspect ought to have been dealt with in looking at the third step.”

Research Affiliates at [29] also cited the four step approach from Aerotel.
On the other hand, care must be taken not to determine the substance of the claimed invention merely on the basis of excluding known features in the claims. As indicated by Kitchin L.J. in Lantana Limited v The Comptroller General of Patents, Design and Trade Marks, [2014] EWCA Civ 1463, at [64]:-
“… it is the claim as a whole which must be considered when assessing the contribution which the invention has made, and that it is not permissible simply to cut the claim into pieces and then consider those pieces separately and without regard to the way they interact with each other. Thus in Symbian Ltd v Comptroller-General of Patents [2008] EWCA Civ 1066, [2009] RPC 1, Lord Neuberger (giving the judgment of the court) said at [37] (referring to decision T 0208/84 Vicom Systems Inc/Computer related invention [1987] OJ EPO 14, [1987] 2 EPOR 74 at [37]):
‘Finally at [16] the Board described “making a distinction between embodiments of the same invention carried out in hardware or in software” as “inappropriate”, as what is decisive is “the technical contribution which the invention described in the claim when considered as a whole makes to the known art”.’
What is the contribution to the art?
The submissions state at paragraph 9:
“Significantly, the present invention is not claiming a fundamental economic practice of migrating over-the-counter (OTC) swaps (in the form of swaps or swap-like futures) to central clearing on computer-implemented, back-office systems generally; rather, the present invention is claiming the concrete method of a computer-based, futures back-office creation, centralized clearing, and settlement of a non-biased financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade based on a final settlement value upon its stated expiration.”
The applicant argues that although ‘migration’ from an over-the-counter to a computer implemented method is a consequence of the invention, this migration is not, in itself, the invention.
The submissions state at paragraph 10:
“In addition, the presently claimed computer-based, futures back-office creation, centralized clearing, and settlement of a non-biased financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade based on a final settlement value upon its stated expiration is directed to an improvement of computerized-futures, backoffice, electronic-clearing technology. This computerized-futures, back-office, electronic-clearing technology includes a complex of interdependent computer devices and/or systems connected to a number of applications and interfaces (in a variety of architectures and configurations) that communicate (via internet or communications networks) with futures electronic central clearinghouses using necessarily common industry trading protocols that together present technological barriers overcome by the present invention.”
The Applicant argues that the invention resides in the “complex of interdependent computer devices and/or systems ... that communicate (via internet or communications networks) with futures electronic central clearinghouses”.
I agree that the invention should be considered as a whole, however this does not preclude investigation of the elements of the invention to understand where the contribution to the art lies.
The computer and network
The details of the hardware used to perform the invention are provided at paragraphs 88 and 89:
“Referring to Figure 3, a non-limiting example of a high level hardware implementation can used to run a system of the present invention is seen. The infrastructure should include but not be limited to: wide area network connectivity, local area network connectivity, appropriate network switches and routers, electrical power (backup power), storage area network hardware, server-class computing hardware, and an operating system such as for example Redhat Linux Enterprise AS Operating System available from Red Hat, Inc, 1801 Varsity Drive, Raleigh, North Carolina.
The clearing and settling and administrative applications software server can run for example on an HP ProLiant DL 360 G6 server with multiple Intel Xeon 5600 series processors with a processor base frequency of 3.33 GHz, up to 192 GB of RAM, 2 PCIE expansion slots, 1GB or 10GB network controllers, hot plug SFF SATA drives, and redundant power supplies, available from Hewlett-Packard, Inc, located at 3000 Hanover Street, Palo Alto, California. The database server can be run for example on a HP ProLiant DL 380 G6 server with multiple Intel Xeon 5600 series processors with a processor base frequency of 3.33 GHZ, up to 192 GB of RAM, 6 PCIE expansion slots, 16 SFF SATA drive bays, an integrated P41 Oi integrated storage controller, and redundant power supply, available from Hewlett-Packard.”
The hardware disclosed was commercially available at the priority date. There is nothing to suggest the invention resides in the hardware. The computing hardware is merely an intermediary or tool for performing the method while adding nothing of substance to the idea.
The software
The specification states at paragraph 87:
“According to the principles of this invention, in order to publish daily and terminal settlement values, a clearinghouse, exchange, futures commission merchant or other market participant may use computers with software specifical1y designed for this purpose. The computation of the terminal value in accordance with the present invention is iterative and complex, and special software is required for this purpose. This software may be linked to a centralized marketplace via data lines, networks or the Internet, so that the prices are published in a seamless manner. The clearing house may store the daily prices for each financial instrument in existence at any given moment in a database and can be electronically published to the marketplace.”
The specification provides no further detail of the software to implement the invention except the formulas and algorithms. The algorithms are considered below.
The algorithms
The Applicant states at paragraph 8 of their submissions:
“The useful, concrete and tangible invention here is the computer-based, futures back-office creation, centralized clearing, and settlement of a non-biased financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade based on a final settlement value upon its stated expiration, as determined by the various methods of the present invention.”
The Applicant further states at paragraph 11 of their submissions:
“As detailed below and in the Background of the Invention, the present invention, namely, the computer-based creation, centralized clearing, and settlement of a non-biased financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade based on a final settlement value upon its stated expiration, solves the problems particular to computerized-futures, back-office, electronic- clearing technology (as exemplified by the disparate treatment of IDCG Swap and IDCG Swap Futures, as detailed below) which is the inability of computerized-futures, back-office, electronic-clearing technology to support swap-like futures that overcome the convexity bias and the NPV effect (see Background of the Invention, paragraphs [0015]-[0035]). Here, the claims are directed to an invention that reflects an inventive solution to a problem presented by combining OTC swaps (in the form of swaps or swap-like futures) and central clearing on computer-implemented, back-office systems: computerized-futures, back-office, electronic-clearing technology that supports swap-like futures that overcome the convexity bias and the NPV effect.”
The Applicant contends that offsetting the effects of convexity bias and/or the net present effect (NPV) effect when financial futures are traded is central to the invention.
This offset includes the calculation of the variation margin. The total return on variation margin is defined in claim 2 as:
Claim 3 defines the net summation of cash flows as:
And the total return on modified variation margin as:
Where:
·P_t is the settlement price of the non-biased financial future on day t,
·C_i is the amount of fixed leg payment payable at time t_{c, i};
·L_i is the amount of the floating leg payment payable at time t_{l, i};
·T is the expiration of the future;
·R_t is the overnight interest rate on day t; and
·B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate; and
·the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
These algorithms appear to provide a reasonable method of offsetting the effects of convexity bias and/or the net present effect (NPV) effect. I am satisfied that, in light of the information available to me, these algorithms provide a contribution to the art. I am further satisfied that the invention as claimed or as described provides no other contribution to the art apart from these algorithms. Thus I conclude that the substance of the invention is a method of trading futures which incorporates this algorithm for offsetting variation margins.
Is the substance of the invention patentable?
The invention is system for trading futures electronically. The contribution to the art provided by the invention is an algorithm that offsets the effects of convexity bias and/or the net present effect (NPV) effect. This offset is taken into account when trades are cleared. The result of the system is the facilitation of trading financial instruments.
The contention that system utilises computing technology and thus making the scheme patentable is untenable. As has been noted above, the computing technology utilised is generic and thus does not contribute to the substance of the invention. This is a point made repeatedly in court rulings on manner of manufacture. For example, in RPL Central it was stated:
“Where the claimed invention is to a computerised business method, the invention must lie in that computerisation. It is not a patentable invention simply to ‘put’ a business method ‘into’ a computer to implement the business method using the computer for its well-known and understood function.”
The problem addressed by the invention is a system for trading financial instruments without convexity bias and/or the net present value (NPV) effect. The solution to this problem is not a technical solution – there is no technical effect produced by the algorithm. It is merely a financial scheme. Therefore the invention both as claimed and as described is not a manner of manufacture.
Conclusion
I have found that the claims are not for a manner of manufacture. I find no patentable subject matter in the application. The application is refused.
I note that the applicant has recently filed a further divisional application (2017272139) for the present subject matter. While the applicant is permitted to do so under the Act, as it currently stands this case will soon be examined and referred to another delegate for determination. Given my findings above, in a similar vein to the then Deputy Commissioner’s comments in Swiss Reinsurance Company Limited [2017] APO 12 at [4] it appears that further prosecution of this new divisional application will likely be “the cause of considerable wastage of Patent Office resources and presumably significant inconvenience for any interested third parties”.
Xavier Gisz
Delegate of the Commissioner of Patents
ANNEX
THE CLAIMS DEFINING THE INVENTION ARE AS FOLLOWS:-
1.    A computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade to address at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, comprising:
receiving at memory of the electronic trading platform an identity of a first party, an identity of a first non-biased financial future, and a buy/sell request;
receiving at memory of the electronic trading platform an identity of a second party, an identity of a second non-biased financial future, and a sell/buy request;
by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the first non-biased financial future matches the second non-biased financial future;
if the first non-biased financial future matches the second non-biased financial future, by a processor in communication with memory of the electronic trading platform electronically automatically determining if the buy/sell request matches the sell/buy request:
if the buy/sell request matches the sell/buy request, by a processor in communication with memory of the electronic trading platform, electronically automatically determining what a final settlement value of the non-biased financial future would be upon its stated expiration in accordance with;
net accumulated value of cash flow - total return on variation margin for the life of the non-biased financial future;
where,
the net accumulated value of cash flows is determined in accordance with:
net accumulated value of cash flows =
where,
C_i; is the amount of fixed leg payment payable at time t_{c, i};
L_i; is the amount of the floating leg payment payable at time t_{l, i};
T is the expiration of the non-biased financial future; and
B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate;
total return on variation margin for the life of the non-biased financial future is the sum of the interest earned on the cumulative variation margin for each day reinvested at the overnight rate to expiration of the non-biased financial future; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
automatically electronically storing the final settlement value of the nonbiased financial future upon its stated expiration in memory of the electronic central clearinghouse; and
by a processor in communication with memory of the electronic central clearinghouse, centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled non-biased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
2.    A computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade to address at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, comprising:
receiving at memory of the electronic trading platform an identity of a first party, an identity of a first non-biased financial future, and a buy/sell request;
receiving at memory of the electronic trading platform an identity of a second party, an identity of a second non-biased financial future, and a sell/buy request;
by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the first non-biased financial future matches the second non-biased financial future;
if the first non-biased financial future matches the second non-biased financial future, by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the buy/sell request matches the sell/buy request;
if the buy/sell request matches the sell/buy request, by a processor in communication with memory of the electronic trading platform, electronically automatically determining what a final settlement value of the non-biased financial future would be upon its stated expiration in accordance with;
net accumulated value of cash flow - total return on variation margin;
where,
net accumulated value of cash flow is the accumulated value that a buyer or seller of a non-biased financial future receives minus the payments the buyer or seller makes, reinvested at the overnight rate from the date that the cash flow occurs to expiration of the non-biased financial future;
the total return on variation margin is determined in accordance with:
total return on variation margin=
where
P_t is the settlement price of the non-biased financial future on day t,
R_t is the overnight interest rate on day t; and
B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
automatically electronically storing the final settlement value of the nonbiased financial future upon its stated expiration in memory of the electronic central clearinghouse: and
by a processor in communication with memory of the electronic central clearinghouse, centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the first party and
automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
3.    A computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade to address at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, comprising:
receiving at memory of the electronic trading platform an identity of a first party, an identity of a first non-biased financial future, and a buy/sell request;
receiving at memory of the electronic trading platform an identity of a second party, an identity of a second non-biased financial future, and a sell/buy request:
by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the first non-biased financial future matches the second non-biased financial future;
if the first non-biased financial future matches the second non-biased financial future, by a processor in communication with memory of the electronic trading platform, electronically automatically determining if the buy/sell request matches the sell/buy request;
if the buy/sell request matches the sell/buy request, by a processor in communication with memory of the electronic trading platform, electronically automatically determining what a final settlement value of the financial future would be upon its stated expiration in accordance with:
net summation of cash flows - total return on modified variation margin,
where
net summation of cash flows =
total return on modified variation margin =
further where
P_t is the settlement price of the future on day t;
C_i is the amount of fixed leg payment payable at time t_{c, i};
L_i is the amount of the floating leg payment payable at time t_{l, i};
T is the expiration of the future;
R_t is the overnight interest rate on day t; and
B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate;
automatically electronically storing the final settlement value of the nonbiased financial future upon its stated expiration in memory of the electronic central clearinghouse; and
by a processor in communication with memory of the electronic central clearinghouse, centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
4.    The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising selecting the nonbiased financial future from the group consisting of interest-rate swap futures, credit default swap futures, and other interest-rate futures.
5.    The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising exchange trading the non-biased financial future.
6.    The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising not exchange trading the non-biased financial future.
7.    The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising having a correlation between the value of the non-biased financial future and interest rates.
8.    The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising having a constant added or subtracted to the price or rate applicable to the non-biased financial future.
9.    The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising having an expiration date being the maturity date of the non-biased financial future.
10. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising cash settling the nonbiased financial future.
11. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising physically settling the non-biased financial future.
12. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising denominating the nonbiased financial future in United States dollars.
13. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising trading the non-biased financial future on ERIS EXCHANGE.
14. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 3 further comprising settling the non-biased financial future at a value equal to a sum of present value of remaining asset flows, plus accumulated value of past asset flows, minus accumulated return on variation margin.
15. In a computer-implemented futures back-office system used for creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of the type having memory of the electronic trading platform that receives an identity of a first party, an identity of a first financial future, and a buy/sell request; memory of the electronic trading platform that receives an identity of a second party, an identity of a second financial future, and a sell/buy request; a processor in communication with memory of the electronic trading platform that electronically automatically determines if the first financial future matches the second financial future; if the first financial future matches the second financial future, then a processor in communication with memory of the electronic trading platform electronically automatically determines if the buy/sell request matches the sell/buy request; and if the buy/sell request matches the sell/buy request the created, centrally cleared, and settled financial future contains at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, the improvement comprising:
if the buy/sell request matches the sell/buy request, a processor in communication with memory of the electronic trading platform electronically automatically determines what a final settlement value of the swap would be upon its stated expiration in accordance with;
net accumulated value of cash flow - total return on variation margin for the life of a non-biased financial future;
where
the net accumulated value of cash flow is determined in accordance with:
net accumulated value of cash flows=
where,
C_i is the amount of fixed leg payment payable at time t_{c, i};
L_i is the amount of the floating leg payment payable at time t_{l, i};
T is the expiration of the non-biased financial future; and
B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at overnight rate;
the total return on variation margin for the life of the non-biased financial future is the sum of the interest earned on the cumulative variation margin for each day reinvested at the overnight rate to expiration of the non-biased financial future; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
memory of the electronic central clearinghouse automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration; and
a processor in communication with memory of the electronic central clearinghouse centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
16. In a computer-implemented futures back-office system used for creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of the type having memory of the electronic trading platform that receives an identity of a first party, an identity of a first financial future, and a buy/sell request; memory of the electronic trading platform that receives an identity of a second party, an identity of a second financial future, and a sell/buy request; a processor in communication with memory of the electronic trading platform that electronically automatically determines if the first financial future matches the second financial future; if the first financial future matches the second financial future, then a processor in communication with memory of the electronic trading platform electronically automatically determines if the buy/sell request matches the sell/buy request; and if the buy/sell request matches the sell/buy request the created, centrally cleared, and settled financial future contains at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, the improvement comprising:
if the buy/sell request matches the sell/buy request, a processor in communication with memory of the electronic trading platform electronically automatically determines what a final settlement value of the swap would be upon its stated expiration in accordance with;
net accumulated value of cash flow - total return on variation margin;
where,
net accumulated value of cash flow is the accumulated value that a buyer or seller of a non-biased financial future receives minus the payments the buyer or seller makes, reinvested at the overnight rate from the date that the cash flow occurs to expiration of the non-biased financial future;
the total return on variation margin is determined as:
total return on variation margin=
where
P_t is the settlement price of the non-biased financial future on day t, and
R_t is the overnight interest rate on day t; and
B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate; and
the overnight rate is the rate specified by the exchange or clearinghouse to reflect the short-term financing rate of market participants;
memory of the electronic central clearinghouse automatically electronically storing the final settlement value of the non-biased financial future upon its stated expiration; and
a processor in communication with memory of the electronic central clearinghouse centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
17. In a computer-implemented futures back-office system used for creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of the type having memory of the electronic trading platform that receives an identity of a first party, an identity of a first financial future, and a buy/sell request; memory of the electronic trading platform that receives an identity of a second party, an identity of a second financial future, and a sell/buy request; a processor in communication with memory of the electronic trading platform that electronically automatically determines if the first financial future matches the second financial future; if the first financial future matches the second financial future, then a processor in communication with memory of the electronic trading platform electronically automatically determines if the buy/sell request matches the sell/buy request; and if the buy/sell request matches the sell/buy request the created, centrally cleared, and settled financial future contains at least one of two effects that result from the difference between variation margin on a cleared financial future and collateral posted in an uncleared financial future, the first effect being a systematic advantage of being short the financial future when there is a correlation between the value of the financial future and interest rates, referred to as a convexity bias, and the second effect being a distortion in the financial future when an underlying asset value of the financial future changes, referred to as a net present value (NPV) effect, the improvement comprising:
if the buy/sell request matches the sell/buy request, a processor in communication with memory of the electronic trading platform electronically automatically determines what a final settlement value of the swap would be upon its stated expiration in accordance with:
net summation of cash flows - total return on modified variation margin,
where
net summation of cash flows =
and
total return on modified variation margin =
further where
P_t is the settlement price of the future on day t,
C_i is the amount of fixed leg payment payable at time t_c,i;
L_i is the amount of the floating leg payment payable at time t_{l, i};
T is the expiration of the swap; and
R_t is the overnight interest rate on day t; and
B(t, T) is the value of the money market account at time T with an initial deposit of 1 at time t and accumulated at the overnight rate;
memory of the electronic central clearinghouse automatically electronically storing the final settlement value of a non-biased financial future upon its stated expiration; and
a processor in communication with memory of the electronic central clearinghouse centrally clearing and settling the non-biased financial future by automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the first party and automatically electronically associating the centrally cleared and settled nonbiased financial future with a trading account associated with the second party;
whereby the final settlement value of the non-biased financial future upon its expiration offsets co-movement of variation margin and investment return on the variation margin to address at least one of the convexity bias and the net present value (NPV) effect.
18. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 1 or claim 2, further comprising selecting the non-biased financial future from the group consisting of interest-rate swap futures, credit default swap futures, and other interest-rate futures.
19. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 1 or claim 2, further comprising settling the non-biased financial future at a value equal to a sum of present value of remaining asset flows, plus accumulated value of past asset flows, minus accumulated return on variation margin.
20. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of any one of claims 2, 3, 16 and 17, further wherein
P_t= A+ B - C, where:
A is expected future cash flow;
B is the historical cash flow; and
C is the Price Alignment Interest.
21. The computer-implemented futures back-office method of creating, centrally clearing, and settling a financial future through an electronic trading platform and an electronic central clearinghouse to effectuate payments between parties to a trade of claim 20, further wherein at P_t, B=0 and C=0.