System and method using securities issuance for risk transference

Abstract

Disclosed herein is a system and method for eliminating or transferring the non-economic risk of financial securities. The system and method serves to avoid non-economic losses in the first instance, and to counter the adverse capital impact of prior non-economic gap losses by providing capital relief consistent with a determined protected amount. An investor purchases from a financial institution a number of shares whose principal repayment at redemption is contingent upon the maturity proceeds of a designated fixed income securities (FIS) Portfolio. If the aggregate principal payment of the FIS Portfolio is less than a stipulated value, the shares are redeemed for less than the original purchase price. Otherwise the financial institution will repay the full principal amount of the shares at the stated redemption date. To secure the obligation to repay share principal, the financial institution pledges security that is invested in securities that are held in trust and margined periodically.

Description

CROSS REFERENCE TO RELATED APPLICATIONS[0001]This application claims the benefit of U.S. Provisional Application No. 61 / 052,035, filed May 9, 2008; U.S. Provisional Application No. 61 / 052,048, filed May 9, 2008; U.S. Provisional Application No. 61 / 052,067, filed May 9, 2008; and U.S. Provisional Application No. 61 / 052,053, filed May 9, 2008. This application is related to the following co-pending non-provisional applications: “SYSTEM AND METHOD USING CONTRACT FOR RISK TRANSFERENCE,” filed May 8, 2009; “SYSTEM AND METHOD USING INSURANCE FOR RISK TRANSFERENCE,” filed May 8, 2009; and “SYSTEM AND METHOD USING ASSET SALE AND LOAN FOR RISK TRANSFERENCE,” filed May 8, 2009, all of which are hereby incorporated by reference in their entirety as if fully set forth herein.FIELD OF THE INVENTION[0002]The present invention relates generally to systems and methods for transferring / acquiring a defined risk / discount associated with a security or portfolio of securities. More specifically, the inv...

AI Technical Summary

Benefits of technology

[0008]Disclosed herein are methods and systems, including computer program products, for eliminating or transferring the non-economic risk of financial securities. The systems and methods serve to avoid non-economic losses in the first instance, and to counter the adverse capital impact of prior non-economic gap losses by providing income and capital relief. In addition, the systems and methods described herein have the effect of transferring risk and countering the adverse profit-and-loss and capital impact of a non-economic component of marking to market in relation to illiquid securities or credit derivatives portfolios. More specifically, the systems and methods described herein provide for transferring risk up to an amount equal to the difference between (a) the current liquidation or fair market value of an individual security or a portfolio of securities and, (b) a value that is equal to the present value of expected future principal payments discounted at an appropriate discount rate (e.g., the swap rate for the corresponding maturity) of the security or the portfolio of securities (the “Gap” risk).

Problems solved by technology

In addition, the reported value of FIS may affect its credit rating or otherwise influence the amount of capital necessary to maintain a given FIS or FIS Portfolio.

However, given characteristic market and regulatory conditions it may be difficult to appropriately value, finance, or trade FIS, regardless of the credit quality of its underlying assets or cash flows.

For example, difficulties surrounding the decline of securities backed by sub-prime mortgages have affected the values of FIS under fair value accounting standards.

Factors such as a perceived lack of transparency, as well as the presence of securities issued by highly leveraged entities investing in FIS Portfolios (such as structured investment vehicles and conduits), have led investors to largely exit certain sectors of the FIS market.

Despite attempts to increase transparency in accounting standards, the main sources of investor concern relate to an impaired ability to establish a current estimated market value for FIS, estimate future market value or maturity value for FIS, and estimate correlations between various FIS investments.

In addition to other factors, the changes to accounting standards and variations in investor demand represent forces that give rise to non-economic changes in the value of FIS.

Because they are not generally based on changes in the level of interest rates (the interest rate curve) and the credit quality of the underlying securities (i.e., the expected amount of repayment of principal at maturity or upon default, as determined by qualitative analysis or by use of a model), these non-economic changes in value have significant accounting consequences and, if the securities are sold, real economic consequences for the holders of FIS and participants in FIS markets.

In the current environment, the above factors have resulted in an increasing number of market participants having determined that the current market or liquidation value for FIS is often significantly below the expected or model-based value, resulting in the booking of substantial losses or reductions in capital resources.

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