US-12626301-B2 - System and method for enhanced electronic networked settlement processor

US12626301B2US 12626301 B2US12626301 B2US 12626301B2US-12626301-B2

Abstract

A system and method are provided for settlement and delivery of cash settled futures contracts overlying open-ended mutual fund shares with optional delivery of mutual fund shares when physical settlement is elected. On the last date of the contract, a party which has an open position in the contract tenders the clearing organization a request to elect optional physical settlement of a specified number of shares of the mutual fund in additional to the standard cash settlement of those contracts. The clearing organization, upon acceptance and when it is certain of the requestor's final position in the futures contract, it processes the election request against the requestor's final position and possibly submits an order on behalf of the requestor to the investment company which manages the mutual fund to purchase or redeem shares of the open-ended mutual fund in a quantity roughly the size of the requestor's final contract position.

Inventors

Steven I. Givot

Assignees

NYSE CHICAGO, INC.

Dates

Publication Date: 20260512
Application Date: 20231214

Claims (16)

1 . A method comprising: receiving, by at least one processor of one or more servers of a clearing organization, open ended mutual fund (OEMF) data and OEMF futures contract (FC) data in real time from a plurality of trading centers via a first communications network specifically configured for communicating with the clearing organization, the at least one processor operatively coupled to a memory configured to store computer-readable instructions executable by the at least one processor; storing, by the at least one processor, the OEMF data and the OEMF FC data in a storage device; determining, by the at least one processor, real time position information of a plurality of accounts; monitoring, by the at least one processor, the real time position information of the plurality of accounts; receiving, via an input portion of an interactive graphical user interface (GUI) of a member computer of a plurality of member computers, user input comprising a request for an optional physical settlement of a requested number of shares of an OEMF FC defining a position, the member computer associated with an account of the plurality of accounts; receiving, by the at least one processor, a first electronic message from the member computer via the first communications network, the first electronic message comprising the request; identifying, by the at least one processor, the first electronic message from among a plurality of electronic messages received from the plurality of member computers; determining, by the at least one processor, that the request is compatible with processing by a downstream third-party computer system by: determining that the first electronic message is timely in that it was received on a predetermined day and before a predetermined time set by the clearing organization and prior to a cutoff time of the downstream third-party computer system for submission of electronic orders, and validating that the requested number of shares of the OEMF FC is within a predetermined range of number of shares; accepting, by the at least one processor, the request; confirming, by the at least one processor, based on the monitoring of the real time position information of the plurality of accounts, that a current position of the account after the predetermined time corresponds in type to the position; generating, by the at least one processor, an electronic order to redeem the requested number of shares of the OEMF FC based on the confirming; sending, by the at least one processor, the electronic order to the downstream third-party computer system for processing before the cutoff time via a second communications network; sending, by the at least one processor, a second electronic message comprising information associated with the electronic order to the member computer via the first communications network; and displaying, via a display portion of the interactive GUI, the information associated with the electronic order on the member computer.
2 . The method of claim 1 , wherein the accepting the request supersedes any prior election request for a same OEMF FC for the account.
3 . The method of claim 1 , further comprising: reducing a size of the requested number of shares of the OEMF FC if said size is larger than a size of the current position; and computing a maximum number of shares of the OEMF FC PS available for physical settlement.
4 . The method of claim 1 , wherein the type of the position comprises a long position.
5 . The method of claim 1 , wherein the account is associated with a writer and the type comprises a short position.
6 . The method of claim 1 , wherein the requested number of shares of the OEMF FC accommodates both a mandatory round lot component and an optional odd lot component.
7 . The method of claim 1 , wherein the OEMF data is structured to comprise data related to fund assets and a plurality of fund shares having a value related to the fund assets.
8 . The method of claim 7 , wherein the OEMF FC data defines: a) a plurality of contract shares of the fund shares, which constitutes a contract size, b) a contract settlement date, and c) contract settlement terms.
9 . A non-transitory computer-readable medium storing program instructions that, when executed by one or more processors, causes the one or more processors to perform the functions: receiving open ended mutual fund (OEMF) data and OEMF futures contract (FC) data in real time from a plurality of trading centers via a first communications network specifically configured for communicating with a clearing organization, the one or more processors associated with one or more servers of the clearing organization; storing the OEMF data and the OEMF FC data in a storage device; determining real time position information of a plurality of accounts based on the OEMF data and the OEMF FC data; monitoring the real time position information of the plurality of accounts; receiving, via an input portion of an interactive graphical user interface (GUI) of a member computer of a plurality of member computers, user input comprising a request for an optional physical settlement of a requested number of shares of an OEMF FC defining a position, the member computer associated with an account of the plurality of accounts; receiving a first electronic message from the member computer via the first communications network, the first electronic message comprising the request; identifying the first electronic message from among a plurality of electronic messages received from the plurality of member computers; determining that the request is compatible with processing by a downstream third-party computer system by: determining that the first electronic message is timely in that it was received on a predetermined day and before a predetermined time set by the clearing organization and prior to a cutoff time of the downstream third-party computer system for submission of electronic orders, and validating that the requested number of shares of the OEMF FC is within a predetermined range of number of shares; accepting the request; confirming, based on the monitoring of the real time position information of the plurality of accounts, that a current position of the account after the predetermined time corresponds in type to the position; generating an electronic order to redeem the requested number of shares of the OEMF FC based on the confirming; sending the electronic order to the downstream third-party computer system for processing before the cutoff time via a second communications network; sending a second electronic message comprising information associated with the electronic order to the member computer via the first communications network; and displaying, via a display portion of the interactive GUI, the information associated with the electronic order on the member computer.
10 . The non-transitory computer-readable medium of claim 9 , wherein the accepting the request supersedes any prior election request for a same OEMF FC for the account.
11 . The non-transitory computer-readable medium of claim 9 , wherein the program instructions, when executed by the one or more processors, further cause the one or more processors to perform the functions of: reducing a size of the requested number of shares of the OEMF FC if said size is larger than a size of the current position; and computing a maximum number of shares of the OEMF FC available for physical settlement.
12 . The non-transitory computer-readable medium of claim 9 , wherein the type of the position comprises a long position.
13 . The non-transitory computer-readable medium of claim 9 , wherein the account is associated with a writer and the type comprises a short position.
14 . The non-transitory computer-readable medium of claim 9 , wherein the requested number of shares of the OEMF FC accommodates both a mandatory round lot component and an optional odd lot component.
15 . The non-transitory computer-readable medium of claim 9 , wherein the OEMF data is structured to comprise data related to fund assets and a plurality of fund shares having a value related to the fund assets.
16 . The non-transitory computer-readable medium of claim 15 , wherein the OEMF FC data defines: a) a plurality of contract shares of the fund shares, which constitutes a contract size, b) a contract settlement date, and c) contract settlement terms.

Description

TECHNICAL FIELD Disclosed herein is a system and method for operating an enhanced electronic networked settlement processing system that improves the efficiency of a settlement process. Specifically, the system and method improves on the processors used for settlement and delivery of cash settled futures contracts by incorporating a processing module that accommodates a physical settlement. BACKGROUND The system and method described below relate, in general, to processors utilized in a marketplace for the automated (electronic) or manual trading of Futures Contracts on Open-Ended Mutual Funds (OEMFs) and, more particularly, to a system and method for enhancing processors utilized in the settlement and delivery against such contracts. In the past two decades, there has been extraordinary growth in both the number of Exchange Traded Funds (ETFs) available for trading and the trading activity in those ETFs. ETFs are governed by the Securities Act of 1933 (“1933 Act”). Closed-end Mutual Funds (CEMFs) are also governed by the 1933 Act. OEMFs are governed by the Investment Company Act of 1940 (“1940 Act”). ETFs offer an attractive investment and trading alternative to OEMFs for several reasons. First, ETFs and CEMFs trade through the trading day. This permits the purchase or sale price of an ETF or CEMF transaction to be determined at the time of transaction. OEMFs do not trade throughout the trading day. All transactions in OEMFs are done with the Investment Company that manages the OEMF taking the opposite side of the transaction. OEMF transactions are always priced at the net asset value (NAV) which is calculated by the Investment Company at the end of the trading day. At the end of each business day, the difference between the number of shares of an OEMF that investors (in aggregate) wish to purchase minus the number of shares that investors (in aggregate) wish to redeem (sell) is the net demand for shares in that OEMF. The Investment Company stands ready to purchase or sell a sufficient number of shares in the OEMFs to meet the net demand at the end of each trading day. However, there is no market in shares of OEMFs during trading hours which would permit an investor to establish a known price for a transaction at the time of the transaction. ETFs and CEMFs trade throughout the trading day. ETF transactions are priced based on supply and demand at the time of the transaction similar to the pricing of transactions in common stocks, preferred stocks, CEMFs, and other equity securities. In the trading of ETFs, there is no party analogous to an Investment Company which always stands ready to purchase or sell ETF shares at a calculated price. Second, OEMFs and ETFs can have significantly different cost structures. There can be considerable distribution charges related to buying or holding a position in a Mutual Fund. These are governed by Section 12b-1 of the 1940 Act. A given OEMF may have several classes of stock—each with its own set of Section 12b-1 distribution charges. As a result, different classes of stock in the same Mutual Fund may have different NAVs. Section 12b-1 distribution charges are paid by the OEMF and, therefore, are borne by the investors in the OEMF. The Section 12b-1 distribution charges are in addition to the Investment Company's fee for managing the OEMF. Section 12b-1 distribution charges can significantly reduce the return on investment in an OEMF. ETFs have no equivalent to a Section 12b-1 distribution charge since—unlike OEMFs—they are not sold through distribution channels. ETFs do, however, have a management fee similar to that of OEMFs. Third, unlike ETFs and CEMFs, it is not possible to carry a short position in an OEMF. There is no provision in the 1940 Act which support establishing or maintaining a short position. The only position that an investor may have in an OEMF is a long position. One cannot sell more shares in an OEMF than one owns. It is not possible to make a short sale of an OEMF because there is no way to borrow shares of the OEMF to deliver against a short sale. ETF and CEMF shares can be sold short because they can be borrowed and delivered by the party making a short sale. This is an important factor in the trading of ETFs because it provides an arbitrage mechanism to assure that the market price of ETFs tracks the NAV of the ETF. To assure that ETF shares will track the NAV of the ETF, ETFs have provisions for certain parties to create or redeem ETF shares by means of swapping the assets underlying the ETF in exchange for ETF shares. This and the ability to sell short promotes and encourages parity between the market price and NAV of the ETF. These three differences between ETFs and OEMFs described above give rise to a competitive threat that ETFs have made against more traditional investment in OEMFs. However, a more recent product introduction makes that threat even stronger. The most recent innovation in ETF products has been the introduction of exchange-trad