System and method for managing initial or variation margin via custody

A computer-implemented system for mitigating counterparty credit risk exposure in a trade of a financial instrument between a pledgor and a secured party, the system comprising:

• a computer system operationally controlled by a custodian and comprising:
• a processor,
• a network connection between the processor and a computer network,
• a memory coupled to the processor and containing a database therein configured to store information relating to the trade,
• a margin processing module, and
• an investment processing module,
• wherein each of said processor, network connection, memory, margin processing module, and said investment processing module are operatively coupled together;
• a user interface to the processor through which the pledgor and the secured party access the computer system over the computer network, wherein an initial margin payment from the pledgor is electronically posted through the user interface and the margin processing module to a custody account record associated with the trade and maintained in the database;
• and
• an investment interface coupled to the computer system and configured to enable the custodian to invest the initial margin payment directly into one or more investment assets during a life of the trade,
• wherein information relating to a control agreement between the custodian, the pledgor, and the secured party is stored in the database, wherein the control agreement gives financial control of the custody account to the pledgor through the margin processing module if the secured party defaults on obligations related to the trade of the financial instrument, and wherein the control agreement gives financial control of the custody account to the secured party through the margin processing module if the pledgor defaults on obligations related to the trade of the financial instrument.

An article of manufacture comprising a non-transitory computer-readable medium therein that contains computer-executable code which, when executed by a computer processor, causes the computer processor to carry out processing related to the mitigation of counterparty credit risk exposure in a trade of a financial instrument between a pledgor and a secured party, wherein said processing carries out the functions of:

• configuring a memory that is coupled to the computer processor to include a database therein configured to store information related to the trade;
• communicating over a network so as to receive an initial margin payment from the pledgor and electronically post the initial margin payment in a custody account record maintained in the database;
• storing information relating to a control agreement between the pledgor and the secured party in the database, wherein a first parameter associated with the control agreement enables control of the custody account to be given to the pledgor if the secured party defaults on obligations related to the trade of the financial instrument, and wherein a second parameter associated with the control agreement gives control of the custody account to the secured party if the pledgor defaults on obligations related to the trade of the financial instrument;
• enabling investment by the custodian of at least a portion of a current margin amount directly through the network into one or more investment assets during a life of the trade;
• and
• providing one or more automated periodic reports via the network that include information comprising one or more of a current yield, asset size, weighted average maturity, and an interest factor for each of the one or more investment assets.