Paired basis swap risk and credit mitigation system and collateral minimization system

A method of risk mitigation and collateralization of a swap used to hedge a forward contract, comprising:

• qualifying a plurality of eligible counterparties, pairs of which desire to form swaps;
• forming offsetting paired swaps with a central swap authority for each of the pairs of counterparties utilizing a data storage device coupled to the central swap authority for storing all of the swaps the system counterparty enters into with each other counterparty and a communication device coupled to the central swap authority to communicate the formation of the paired swaps to each of the pairs of counterparties;
• evaluating an initial fixed value at risk for each counterparty to the swaps with the central swap authority utilizing a communication device coupled to the data storage device of the central swap authority;
• calculating an initial collateral requirement for each counterparty to a swap with the central swap authority based on an agreed upon termination payment;
• assuring that required collateral by each counterparty is in the central swap authority's possession each delivery day;
• transferring the payment under the forward contract from one counterparty's funds held by the central swap authority to the other counterparty's control for each day's notional delivery under the forward contract;
• determining a floating rate index contract price for a day;
• updating new collateral requirements based on the difference between the fixed rate contract price and the floating rate index contract price for the previous day;
• terminating the paired swap utilizing a termination device coupled to the central swap authority if one of the counterparties defaults in any of its obligations to make payments to the central swap authority.

A method of risk mitigation and collateralization of a swap used to hedge a forward contract, comprising:

• qualifying a plurality of eligible counterparties, pairs of which desire to form swaps;
• forming offsetting paired swaps with a central swap authority for each of the pairs of counterparties utilizing a data storage device coupled to the central swap authority for storing all of the swaps the system counterparty enters into with each other counterparty and a communication device coupled to the central swap authority to communicate the formation of the paired swaps to each of the pairs of counterparties;
• evaluating an initial fixed value at risk for each counterparty to the swaps with the central swap authority utilizing a communication device coupled to the data storage device of the central swap authority;
• calculating an initial collateral requirement for each counterparty to a swap with the central swap authority based on an agreed upon termination payment;
• assuring that required collateral by each counterparty is in the central swap authority's possession each delivery day;
• transferring the payment under the forward contract from one counterparty's funds held by the central swap authority to the other counterparty's control for each day's notional delivery under the forward contract;
• determining a floating rate index contract price for a day;
• updating new collateral requirements based on the difference between the fixed rate contract price and the floating rate index contract price for the previous day;
• terminating the paired swap utilizing a termination device coupled to the central swap authority if one of the counterparties defaults in any of its obligations to make payments to the central swap authority and making the agreed upon termination payment to the non-defaulting paired swap counterparty or exercising a swaption with such counterparty.

A method of risk mitigation and collateralization of a swap used to hedge a forward contract, comprising:

• qualifying a plurality of eligible counterparties, pairs of which desire to form at least one contracts with each other;
• forming offsetting paired contracts with a central swap authority for each of the pairs of counterparties utilizing a data storage device coupled to the central swap authority for storing all of the contracts the system counterparty enters into with each other counterparty and a communication device coupled to the central swap authority to communicate the formation of the paired contracts to each of the pairs of counterparties;
• evaluating an initial fixed value at risk for each counterparty to the contract with the central swap authority utilizing a communication device coupled to the data storage device of the central swap authority;
• calculating an initial collateral requirement for each counterparty to the contract with the central swap authority based on an agreed upon termination payment;
• assuring that required collateral by each counterparty is in the central swap authority's possession each delivery day;
• transferring the payment under the forward contract from one counterparty's funds held by the central swap authority to the other counterparty's control for each day's notional delivery under the forward contract;
• determining a floating rate index contract price for a day;
• updating new collateral requirements based on the difference between the fixed rate contract price and the floating rate index contract price for the previous day;
• terminating the paired contract utilizing a termination device coupled to the central swap authority if one of the counterparties defaults in any of its obligations to make payments to the central swap authority.

A method of risk mitigation and collateralization of a swap used to hedge a forward contract, comprising:

• qualifying a plurality of eligible counterparties, pairs of which desire to form at least one contract with each other;
• forming offsetting paired contracts with a central swap authority for each of the pairs of counterparties utilizing a data storage device coupled to the central swap authority for storing all of the contracts the system counterparty enters into with each other counterparty and a communication device coupled to the central swap authority to communicate the formation of the paired swaps to each of the pairs of counterparties;
• evaluating an initial fixed value at risk for each counterparty to the contract with the central swap authority utilizing a communication device coupled to the data storage device of the central swap authority;
• calculating an initial collateral requirement for each counterparty to the contract with the central swap authority based on an agreed upon termination payment;
• assuring that required collateral by each counterparty is in the central swap authority's possession each delivery day;
• transferring the payment under the forward contract from one counterparty's funds held by the central swap authority to the other counterparty's control for each day's notional delivery under the forward contract;
• determining a floating rate index contract price for a day;
• updating new collateral requirements based on the difference between the fixed rate contract price and the floating rate index contract price for the previous day;
• terminating the paired contract utilizing a termination device coupled to the central swap authority if one of the counterparties defaults in any of its obligations to make payments to the central swap authority and making the agreed upon termination payment to the non-defaulting paired contract counterparty or exercising a right to enter into a new contract with such counterparty.

A credit risk mitigation system for contract transactions between counterparties, comprising:

• pairs of the counterparties, interested in forming a contract with each other:
• a system counterparty, which forms paired contracts with pairs of counterparties interested in forming a contract;
• the system counterparty making paired, balanced offsetting contracts with the individual members of a pair of counterparties interested in forming a contract and simultaneously creating a right of the system counterparty to enter into a new contract with each of the pair of counterparties, the system counterparty including:
• a data storage means retaining all of the contracts the system counterparty enters into with each other counterparty;
• communication means coupled to the system counterparty allowing the system counterparty to communicate with potential pairs of counterparties interested in forming the contract to receive potential contract information and to communicate paired contract information to accepted pairs of counterparties and collateral requirements with each accepted contract between the system counterparty and the other counterparty to such contract;
• termination means coupled to the system counterparty determining if a counterparty to an accepted paired contract is in default and if in default selecting an appropriate response.