Market-based view of probability of default

Abstract

Systems and methods are provided for providing a credit default futures market. A system providing the credit default futures market includes a processor, memory and an interface. The interface is configured to display credit default futures contracts that subscribe to a set of standard terms and conditions. The processor is configured to settle certain credit futures contracts in kind and other in cash, depending on, at least in part, the maturity date of the futures contract. A method is presented for electronically clearing and settling probability of default futures contracts.

1 - 10 . (canceled) 
     
     
         11 . A method comprising:
 maintaining, by a computer, indications of current trading prices of probability of default futures contracts (PODs) relating to a reference entity, the PODs each having a maturity date, the PODs each having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD, wherein at maturity one of the first and second potential settlement prices is selected to be a final settlement price of the POD based at least in part on solvency of the reference entity, and wherein at maturity a final settlement payment between a first party having a long position on the POD and a second party having a short position on the POD is determined based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, the final settlement payment being paid by the first party to the second party if the reference entity is insolvent at the maturity date and the final settlement payment being paid by the second party to the first party if the reference entity is solvent at the maturity date;   providing a market-based view of a probability of default of the reference entity to participants in a credit market, including communicating the current trading price of the PODs for the reference entity to the market participants on at least a daily basis, wherein the current trading price of the PODs for the reference entity is indicative of the market-based view of the probability of default for the reference entity.   
     
     
         12 . The method according to  claim 11 , wherein the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date. 
     
     
         13 . The method according to  claim 11 , wherein the final settlement price is determined to be a face value of the POD if the reference entity is solvent at the maturity date. 
     
     
         14 . The method according to  claim 11 , wherein the traded price is (1−(probability of default of the reference entity)) multiplied by a face value of the contract. 
     
     
         15 . The method according to  claim 11 , further comprising charging a fee to the participants in the credit market for the market-based view of the probability of default of the reference entity. 
     
     
         16 . A method comprising:
 maintaining, by a computer, indications of current trading prices of probability of default futures contracts (PODs) relating to a reference entity, including, for each probability of default futures contract (POD)
 receiving, by the computer, a first trade order from a first party requesting a long position on the POD, the POD having a maturity date, and the POD having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD, 
 receiving, by the computer, a second trade order from a second party requesting a short position on the POD, 
 matching, by the computer, the first trade order with the second trade order, 
 recording on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order, the second trade order, and a traded price, 
 determining, by the computer, a daily settlement price for the POD for each day of trading of the POD, 
 determining, by the computer, a daily settlement payment between the first party and the second party based on the daily settlement price, 
 selecting one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity, 
 determining, by the computer, a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, the final settlement payment being paid by the first party to the second party if the reference entity is insolvent at the maturity date and the final settlement payment being paid by the second party to the first party if the reference entity is solvent at the maturity date, and 
 recording on a computer readable storage medium, settlement of the POD at the final settlement price; and 
   providing a market-based view of a probability of default of the reference entity to participants in a credit market, including communicating the current trading price of the PODs for the reference entity to the market participants on at least a daily basis, wherein the current trading price of the PODs of the reference entity is indicative of the market-based view of the probability of default for the reference entity.   
     
     
         17 . The method according to  claim 16 , wherein the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date. 
     
     
         18 . The method according to  claim 16 , wherein the final settlement price is determined to be a face value of the POD if the reference entity is solvent at the maturity date. 
     
     
         19 . The method according to  claim 16 , wherein the traded price is (1−(probability of default of the reference entity)) multiplied by a face value of the contract. 
     
     
         20 . The method according to  claim 16 , further comprising charging a fee to the participants in the credit market for the market-based view of the probability of default of the reference entity. 
     
     
         21 . The method according to  claim 16 , the method further comprises recording a clearing house as a counterparty to both the first party and the second party. 
     
     
         22 . The method according to  claim 16 , further comprising settling the POD in kind at a time prior to the maturity date. 
     
     
         23 . The method according to  claim 22 , wherein settling the POD in kind comprises settling the POD in kind based at least in part on a comparison between the maturity date and an identified date. 
     
     
         24 . The method according to  claim 23 , wherein settling the POD in kind comprises settling the POD in kind when a difference between the maturity date and the identified date is 3 years. 
     
     
         25 . The method according to  claim 22 , wherein settling the POD in kind comprises settling the POD into a series of PODs, each of the series of PODs having a reference entity, a maturity date and a final settlement price at the maturity date based at least in part on solvency of the reference entity, none of the series of PODs sharing a common maturity date. 
     
     
         26 . The method according to  claim 25 , wherein settling the POD into the series of PODs comprises settling the POD into a series of PODs, each of the series of PODs having a quarterly maturity date. 
     
     
         27 . The method according to  claim 25 , further compromising settling each of the series of PODs subsequent to one of the series of PODs when the one of the series of PODs settles to 0. 
     
     
         28 . A computer readable medium comprising computer readable instructions that, as a result of being executed by a processor, instruct the processor to perform a method, the method comprising:
 maintaining, by a computer, indications of current trading prices of probability of default futures contracts (PODs) relating to a reference entity, including, for each probability of default futures contract (POD)
 receiving, by a computer, a first trade order requesting a long position on a probability of default futures contract (POD), the POD having a reference entity and a maturity date, the POD having first and second potential settlement prices at the maturity date that are predetermined prior to a beginning of a term of the POD; 
 receiving, by the computer, a second trade order from a second party requesting a short position on the POD; 
 matching, by the computer, the first trade order with the second trade order; 
 recording, on a computer readable storage medium, a completed transaction, the completed transaction indicating the first trade order, the second trade order, and a traded price; 
 determining, by the computer, a daily settlement price for the POD for each day of trading of the POD; 
 determining, by the computer, a daily settlement payment between the first party and the second party based on the daily settlement price; 
 selecting one of the first and second potential settlement prices to be a final settlement price of the POD, the selecting being performed based at least in part on solvency of the reference entity; 
 determining, by the computer, a final settlement payment between the first party and the second party based on the final settlement price, the first party and the second party both being obligated to settle the POD at the final settlement price via a payment of the final settlement payment, the final settlement payment being paid by the first party to the second party if the reference entity is insolvent at the maturity date and the final settlement payment being paid by the second party to the first party if the reference entity is solvent at the maturity date; and 
 recording on a computer readable storage medium, settlement of the POD at the final settlement price. 
   providing a market-based view of a probability of default of the reference entity to participants in a credit market, including communicating the current trading price of the PODs for the reference entity to the market participants on at least a daily basis, wherein the current trading price of the PODs of the reference entity is indicative of the market-based view of the probability of default for the reference entity.   
     
     
         29 . The method according to  claim 28 , wherein the final settlement price is determined to be 0 if the reference entity is insolvent at the maturity date. 
     
     
         30 . The method according to  claim 28 , wherein the final settlement price is determined to be a face value of the POD if the reference entity is solvent at the maturity date. 
     
     
         31 . The method according to  claim 28 , wherein the traded price is (1−(probability of default of the reference entity)) multiplied by a face value of the contract. 
     
     
         32 . The method according to  claim 28 , further comprising charging a fee to the participants in the credit market for the market-based view of the probability of default of the reference entity. 
     
     
         33 . The method according to  claim 28 , the method further comprises recording a clearing house as a counterparty to both the first party and the second party. 
     
     
         34 . The method according to  claim 28 , further comprising settling the POD in kind at a time prior to the maturity date. 
     
     
         35 . The method according to  claim 34 , wherein settling the POD in kind comprises settling the POD in kind based at least in part on a comparison between the maturity date and an identified date. 
     
     
         36 . The method according to  claim 35 , wherein settling the POD in kind comprises settling the POD in kind when a difference between the maturity date and the identified date is 3 years. 
     
     
         37 . The method according to  claim 34 , wherein settling the POD in kind comprises settling the POD into a series of PODs, each of the series of PODs having a reference entity, a maturity date and a final settlement price at the maturity date based at least in part on solvency of the reference entity, none of the series of PODs sharing a common maturity date. 
     
     
         38 . The method according to  claim 37 , wherein settling the POD into the series of PODs comprises settling the POD into a series of PODs, each of the series of PODs having a quarterly maturity date. 
     
     
         39 . The method according to  claim 37 , further compromising settling each of the series of PODs subsequent to one of the series of PODs when the one of the series of PODs settles to 0.