System and Method of Margining Fixed Payoff Products

A system for computing a minimized a margin requirement for a portfolio comprising at least one product, each product of the at least one product having one or more discontinuous payoffs associated therewith, each of the one or more discontinuous payoffs being based on an outcome of an associated event at which the product may settle, the system comprising a processor and a memory coupled therewith, the system further comprising:

• a possible outcome generator computer software program stored in the memory and executable by the processor to determine a subset of outcomes, out of a finite set of all possible outcomes, at which each of the at least one product may settle and a resultant change in value thereof;
• a probability generator computer software program stored in the memory and coupled with the possible outcome generator computer software program and executable by the processor to assign a probability weight to each outcome of the subset of outcomes representative of a probability an occurrence thereof;
• and
• a risk processor computer software program stored in the memory and coupled with the possible outcome generator computer software program and the probability generator computer software program and executable by the processor to compute the margin requirement based on the resultant change in value resulting from each of the subset of outcomes and the probability weight assigned thereto.

A computer implemented method of computing a margin requirement for a portfolio, the portfolio comprising at least one product having at least one associated fixed payoff value based on at least one outcome of a finite set of outcomes of an event, the method comprising:

• determining, by a processor, for each of the at least one product, a set of non-redundant outcomes of the finite set of outcome including the at least one outcome;
• generating, by the processor, for each of the at least one product, a risk value for each-outcome of the set of non-redundant outcomes, the risk value comprising one of a gain or loss of a product value of the at least one product associated with the particular outcome;
• adjusting, by the processor, each of the risk values based on a likelihood that the associated outcome will occur;
• determining, by the processor, for each non-redundant outcome of the set of non-redundant outcomes, an aggregate risk value of each of the adjusted risk values generated for the particular outcome of each of the at least one product;
• determining, by the processor, a maximum aggregate risk value comprising the aggregate risk value representing the largest loss from among the determined aggregate risk values;
• and
• computing, by the processor, a margin requirement as a difference between a value of the portfolio and the maximum aggregate risk value.