New Patent on Risk Monitoring : An Issue for CCPs and FinTech Vendors?

A new patent covering the risk monitoring of multiple cleared CCP accounts may conflict with CCPs and other FinTech vendors from providing similar functions. Other sites have already copied and
November 2, 2018 - Editor
Category: Clearing

A new patent covering the risk monitoring of multiple cleared CCP accounts may conflict with CCPs and other FinTech vendors from providing similar functions.

Other sites have already copied and pasted the press release from Cinnober about the granting of a patent, covering an invention to monitor the risk in multiple accounts CCP in real-time. Firstly here is the press release but later are my thoughts on why this matters, and whether this could have an impact on other firms. And finally feedback from Cinnober themselves on the purpose for the patent.

Cinnober, a global independent provider of exchange and clearing technology, announce today that the U.S. Patent and Trademark Office has granted the company the patent Risk Assessment US 9,959,574 originally filed in 2011.

The invention comprises real-time risk assessments in a clearing system, including the calculation of margin requirements on accounts or groups of accounts triggered by events that affect the accounts as they occur, such as new trades or changes to market data. It also comprises netting of positions held in a group of accounts when calculating risk and carrying out several risk calculations in parallel using multiple risk algorithms, such as Value at Risk (VaR) and SPAN® to compare the outcome.

“This patent demonstrates Cinnober’s ability to innovate and our leading position in the development of next generation post-trade solutions,” says Peter K. Lenardos, CEO of Cinnober. “Cinnober is committed to providing best-in class solutions for financial markets and was first to provide a real-time clearing system, a solution that today powers some of the world’s most important clearinghouses.”

The invention enables clearinghouses to minimize the discrepancy between the value of the collateral provided by a member as security and the highest probable loss that the portfolio may experience. With real-time risk calculations, margin requests can be issued immediately when needed rather than waiting until the end of the day or for a scheduled run of calculations.

The patent application was filed in June 2011 and adds to Cinnober’s existing patent for Micro Auction (US8719146) and a pending patent application related to order matching.

The details of the patent are here and describe the following:

  • Monitoring of the risk in multiple CCP accounts
  • Updating the risk measures due to new trades or market data events
  • Stress testing the accounts
  • Instructing a trading system to clear (or not clear) a new trade based on the risk assessment
  • Calling for more margin from the owner of the accounts

Which struck me as exactly the process that a CCP would carry out within it's own systems to monitor intraday risk and make an intraday margin call, which is indeed why Cinnober applied for the patent, to protect the new ideas within their software.  This would also be a sensible process for a clearing member to carry out upon the accounts of its clients, or for any firm to carry out on its cleared business to ensure they don't get blocked from trading due to busting a risk limit. Why would the US patent office grant such a patent covering what seems like a generic re-usable workflow within the capital markets? I guess their judgement is that this is the first time there has been an application to protect this invention, and that nobody else applied for a similar patent. Look at the feedback from Cinnober below, they feel this is a specific workflow withing a CCP and that is the limit of their invention.

A spokesperson for Cinnober said to The OTC Space:

Cinnober regularly files innovations that are eligible for patent in order to protect our intellectual property, ensure the continuity of our business development and minimize the risks to infringe the rights of others. The primary objective to apply for patents is to give us freedom to enhance our technical solutions and the value of our intellectual property and to protect the interests of Cinnober and its customers
Generally, we will initiate discussions where there might be a potential infringement of our patents and are normally open for licensing discussions. To clarify, in this particular case, we have patented a specific technical solution which can significantly improve handling of risk assessments in a clearing system, not a generic re-usable workflow.

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