AU2021107377A4

AU2021107377A4 - System, Program, and Method for Executing Margin Loan Transactions

Info

Publication number: AU2021107377A4
Application number: AU2021107377A
Authority: AU
Inventors: Emanuel Ajay Datt; Tony Yi Gu
Original assignee: Datt Fintech Innovations Pty Ltd
Current assignee: Datt Fintech Innovations Pty Ltd
Priority date: 2021-08-25
Filing date: 2021-08-25
Publication date: 2021-12-16
Anticipated expiration: 2029-08-25

Abstract

Margin Loans ABSTRACT Embodiments include a system for executing margin lending transactions, the system being operated by or on behalf of an trading entity, the system comprising memory hardware and processor hardware, the memory hardware storing processing instructions which, when executed by the processor hardware, cause the processor hardware to execute a method including: maintaining an investment registry comprising an entry per instance of investment product traded by the trading entity, each entry listing at least an owning entity and a real time value of the investment product instance; on a continual basis, receiving the one or more live feeds of market data comprising live valuations of components of the investment products traded by the trading entity, and using the live valuations to update the real time value of instances of investment products in the investment registry; receiving, from a borrower entity, a request to borrow credit from a lending entity; determining, from the investment registry, borrower security potential, being investment product instances in the investment registry for which the borrower entity is listed as the owning entity and which are indicated as being available as margin loan security; executing a transaction comprising transferring, as a margin loan, one or more instances of investment products traded by the trading entity into ownership of the borrower entity in exchange for credit borrowed from the lending entity, including entering the transferred one or more instances of investment products into the investment registry with an indication that at least a portion of the borrower security potential is margin loan security for the borrowed credit; wherein: the system is configured to execute the transaction in compliance with a determined maximum initial loan to value ratio, the loan being the borrowed credit, and the value being the aggregate value of the transferred one or more instances of investment products and the margin loan security. [FIGURE 2] Maintain investment Receive request to registry borrow credit S202 S212 Use live feed market Determine borrower data to calculate real security potential from time values investment registry S204 S214 I Execute margin loan transaction S216 FIGURE 2

Description

Maintain investment Receive request to registry borrow credit

S202 S212

Use live feed market Determine borrower data to calculate real security potential from time values investment registry S204 S214

I Execute margin loan transaction

S216

FIGURE 2

535135 Margin Loans

System, Program, and Method for Executing Margin Loan Transactions

FIELD OF INVENTION

The invention lies in the field of transaction technology and, in particular relates to technology

for executing margin loan transactions.

-0

BACKGROUND

A margin loan is an investment loan facilitating a borrower entity borrowing money (credit)

from a lending entity to invest in shares, managed funds, and other approved financial

products. Security for the margin loan is shares, managed funds, cash and other assets owned

.5 by the borrower entity.

Existing techniques for executing margin loan transactions include a number of disclosure

steps and exchange of funds and security between the brokerage, the borrower entity, and

the lending entity. Confidential information is exchanged between parties which carries

o inherent privacy risks. Fraudulent behavior is possible due to reliance on documentation

provided by the borrower entity and the manual review process by the brokerage or lender.

Margin loan transactions take a long time between initial request and execution of the loan

due to requirements that documents are reviewed manually, and risk calculated on a bespoke

basis in order to arrive at acceptable loan to value ratio (i.e. keeping the leverage ratio at an

acceptable level).

Furthermore, margin loan system relies on a system of margin calls, which introduces a further

transaction or number of transactions, again increasing the possibility of a security breach or

fraudulent activity. A margin call is made when the value of the security and the investment

products purchased with the margin loan change in value so that the loan to value ratio, or

leverage ratio, goes above an acceptable threshold. Margin calls require manual activity at

535135 Margin Loans

the brokerage and on behalf of the borrower entity. The margin call system is inherently flawed

due to a latency period between the margin call being required and the margin call being

responded to (often 36-48 hours), during which latency period the leverage ratio may be

unacceptable and may be worsening.

.0 It is desirable to provide a technological platform to at least partially alleviate one or more of

the above issues in the state of the art margin loan transaction technology.

STATEMENTS OF INVENTION

Embodiments include a system for executing margin lending transactions, the system being

.5 operated by or on behalf of an trading entity, the system comprising memory hardware and

processor hardware, the memory hardware storing processing instructions which, when

executed by the processor hardware, cause the processor hardware to execute a method

including: maintaining an investment registry comprising an entry per instance of investment

product traded by the trading entity, each entry listing at least an owning entity and a real time

O value of the investment product instance; on a continual basis, receiving the one or more live

feeds of market data comprising live valuations of components of the investment products

traded by the trading entity, and using the live valuations to update the real time value of

instances of investment products in the investment registry; receiving, from a borrower entity,

a request to borrow credit from a lending entity; determining, from the investment registry,

borrower security potential, being investment product instances in the investment registry for

which the borrower entity is listed as the owning entity and which are indicated as being

available as margin loan security; executing a transaction comprising transferring, as a margin

loan, one or more instances of investment products traded by the trading entity into ownership

of the borrower entity in exchange for credit borrowed from the lending entity, including

entering the transferred one or more instances of investment products into the investment

registry with an indication that at least a portion of the borrower security potential is margin

loan security for the borrowed credit; wherein: the system is configured to execute the

535135 Margin Loans

transaction in compliance with a determined maximum initial loan to value ratio, the loan being

the borrowed credit, and the value being the aggregate value of the transferred one or more

instances of investment products and the margin loan security.

Advantageously, the system provides a technical platform for executing a margin loan

.0 transaction in which security is constrained to being financial products and assets registered

in the investment registry maintained by the trading entity. The investment registry is a

manifestation of investments that are immediately verifiable by the trading entity (on behalf of

the lending entity) and therefore risk associated with the margin loan is greatly reduced and

security is greatly improved by reducing opportunities for fraud and reducing or eliminating

.5 transfers of cash and assets.

Compared with conventional margin loan systems, the security is limited to investment product

instances maintained in the investment registry of the trading entity. This limited recourse

facility means that any borrower entity able to meet the determined initial maximum loan to

o value ratio can borrow credit under the margin loan transaction system. Embodiments obviate

the need to sell stock to increase market exposure which avoids associated costs such as

capital gains tax.

Optionally, executing the transaction includes: calculating a margin loan security value for the

requested credit, based on the determined maximum loan-to-value ratio, and: if the calculated

margin loan security value is more than the borrower security potential, refusing the requested

credit; if the calculated margin loan security value is less than the borrower security potential:

obtaining a first indication from the lending entity that the requested credit is available;

obtaining a second indication from the borrowing entity that the calculated margin loan security

value is approved; approving the requested credit and determining the margin loan security,

from among the borrower security potential; and in accordance with the first indication and the

second indication, executing the transaction.

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Advantageously, such embodiments provide an automated mechanism for carrying out margin

loans wherein risk is managed by setting of appropriate loan to value ratios. Delays and costs

associated with manual assessment of loan applications and risk profiles are avoided.

.0 Optionally, refusing the requested credit further comprises presenting a counter offer to the

borrower entity, the counter offer being determined to comply with the determined maximum

initial loan to value ratio and comprising an offer to borrow credit of a value less than the

requested credit.

.5 Advantageously, such embodiments effectively engage the trading entity and the borrower

entity in an automated negotiation process which converges to a margin loan that is securable

with the investment product instances held by the borrower entity in the investment registry of

the trading entity.

O Optionally, the method further comprises, on a repetitive continual basis using market data

received via the one or more live feeds, calculating a real time loan to value ratio of the margin

loan, wherein the loan is the value of the borrowed credit, and wherein the value is the

aggregate real time value, as maintained in the investment registry, of the transferred one or

more instances of investment products and the margin loan security; comparing the calculated

real time loan to value ratio of the margin loan with a defined maximum maintenance loan to

value ratio for the margin loan, and, if the calculated real time loan to value ratio exceeds the

defined maximum maintenance loan to value ratio for the margin loan, or if a condition based

on the calculated real time loan to value ratio exceeding the maximum maintenance loan to

value ratio for the margin loan more than a predefined number or proportion of repetitions in

a predefined length of time, executing an automatic rebalancing process, comprising:

liquidating instances of investment products from among the margin loan security to adjust the

real time loan to value ratio to a predefined rebalancing target loan to value ratio.

535135 Margin Loans

The repetitive continual basis may be, for example, once per minute, once per ten minutes, or

once per hour. The repetitive continual basis may be constrained to be during active phases

of the relevant live feeds. The investment product registry is a dynamic record of investment

product instances under the control of the trading entity. Therefore, the trading entity is able

.0 to liquidate investment product instances listed in the investment product registry. The

continual monitoring of the real time LTV of the margin loan, combined with the ability to

liquidate the security in order to repay portions of the loan, provides a technical mechanism to

automatically rebalance the margin loan. Conventional margin loans suffer from a margin call

system whereby if a maintenance LTV of the margin loan is breached, the trading entity needs

.5 to manually call the borrower entity to present a deadline of, for example, 48 hours to take

steps to rebalance the loan. Dependence on manual calls increases costs, causes delays,

and can lead to premature termination of margin loans in event that, for whatever reason, the

margin call is unsuccessful because of failure to establish contact with the borrower entity or

failure of the borrower entity to respond as required. The automated rebalancing process of

embodiments replaces the margin call procedure. The automated rebalancing process is

desirable to lending entities due to reduced financial risk.

Optionally, the liquidating is in accordance with a liquidation preference predefined by the

borrower entity, wherein the borrower entity indicated a subset of instances of investment

products from among the margin loan security to be liquidated before another distinct subset

of instances of investment products from among the margin loan security. Such embodiments

provide the borrower entity with some control over the automated rebalancing process.

Optionally, determining the borrower security potential includes excluding from the borrower

security potential instances of investment products indicated as exclusions by the lending

entity. Advantageously, lending entities may be given an opportunity to input constraints on

the types of investment products that can serve as margin loan security.

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Several factors may influence the determination of the maximum initial loan to value ratio for

the margin loan. An algorithm can combine the factors, which may be a straightforward matter

of ensuring that none of plural component maximum loan to value ratios are breached by the

margin loan. Example component maximum loan to value ratios include: an initial margin

.0 requirement set by a governing body of an investment environment in which the system is

operable; a maximum loan to value ratio selected by the lending entity; the trading entity's own

maximum loan to value ratio.

The system may provide a user interface which is a mechanism by which the borrower entity

.5 issues requests to an HTTP layer of the system, which requests are parsed and processed by

an application layer. Optionally, the method further comprises providing a user interface to the

borrower entity, wherein: the request to borrow credit is received via the user interface. Other

communication between the borrower entity and the system may be handled via the user

interface, for example, the first indication is obtained via the user interface.

-O

The system provides remote access to each user account via an authentication process. The

user interface includes a graphical user interface, via which graphical user interface the

system presents interactive representations of investment products to users, users interact

with the interactive representations of investment products to access functionality comprising

trading, including purchasing, selling, and bidding to purchase, instances of investment

products. The user interface also provides a broadcast interface, which is one or more

mechanisms for broadcasting content to the user population 100 and receiving interactions

with the broadcast content. It is noted that the broadcast content may link to relevant pages of

the graphical user interface, and the act of following the link from the broadcast is considered

an interaction with the interactive representation of the investment product. Further information

regarding the investment product may be provided in the graphical user interface, which the

535135 Margin Loans

user may interact with further, for example purchasing an instance thereof, or making a

preliminary or formal offer to purchase an instance thereof.

The system is a computer system which may be a distributed computer system or a cloud

computing system. For example, the system may be a distributed computing system

.0 comprising plural computing devices each comprising memory hardware, processor

hardware, and network interface, the plural computing systems being configured to perform

the method collectively using respective processor hardware and memory hardware and

exchanging data via the respective network interfaces.

.5 Embodiments of another aspect include a computer-implemented method for executing

margin lending transactions, the method comprising, for or on behalf of a trading entity:

maintaining an investment registry comprising an entry per instance of investment product

traded by the trading entity, each entry listing at least an owning entity and a real time value

of the investment product instance; on a continual basis during active periods of one or more

o live feeds, receiving the one or more live feeds of market data comprising live valuations of

components of the investment products traded by the trading entity, and using the live

valuations to update the real time value of instances of investment products in the investment

registry; receiving, from a borrower entity, a request to borrow credit from a lending entity;

determining, from the investment registry, borrower security potential, being investment

product instances in the investment registry for which the borrower entity is listed as the

owning entity and which are indicated as being available as margin loan security; executing a

transaction comprising transferring, as a margin loan, one or more instances of investment

products traded by the trading entity into ownership of the borrower entity in exchange for

credit borrowed from the lending entity, including entering the transferred one or more

instances of investment products into the investment registry with an indication that at least a

portion of the borrower security potential is margin loan security for the borrowed credit;

wherein: the system is configured to execute the transaction in compliance with a determined

535135 Margin Loans

maximum initial loan to value ratio, the loan being the borrowed credit, and the value being

the aggregate value of the transferred one or more instances of investment products and the

margin loan security.

Embodiments further comprise software, such as a computer program or processing

.0 instructions, which when executed cause the executing computing apparatus to perform a

method of an embodiment.

DETAILED DESCRIPTION

Embodiments will now be described, purely by way of example, with reference to the following

.5 drawings, in which:

Figure 1 illustrates a hardware architecture of an embodiment;

Figure 2 illustrates a method for executing margin loan transactions according to an

embodiment;

Figure 3 illustrates a method for executing margin loan transactions and managing margin

o loans according to an embodiment;

Figure 4 illustrates a messaging protocol according to an embodiment; and

Figure 5 illustrates a hardware arrangement of a computing apparatus according to an

embodiment.

Figure 1 illustrates a hardware architecture. A system 10 for executing and managing margin

loans comprises, for example, an HTTP layer 12, a messaging layer 14, and an application

layer 16. The individual layers and their respective functionality and interactions are discussed

in more detail below in the description of the messaging protocol of Figure 4.

The system 10 may be implemented by a server such as a web server. The server may be

virtualized and operating on one or more physical servers. The system 10 is accessible to a

borrower entity 20 and a lending entity 30. For example, the system 10 and the borrower entity

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20 are in two-way data communication with one another, such as via a user interface provided

by the system 10. Furthermore, the lending entity 30 and the system 10 are in two-way data

communication with one another, such as via a user interface provided by the system 10. The

system 10 may be operated by or on behalf of a brokerage. Optionally, the brokerage may

itself be the lending entity 30. Alternatively, the lending entity 30 may be a third party.

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The borrower entity 20 and lending entity 30 are illustrated as computers since the computers

provide a mechanism to communicate with the system 10 and provide any inputs, such as

requests, approvals, required to execute and manage the margin loan. However, alternative

devices such as smartphones, tablets, or server type computers may be used by the borrower

.5 entity 20 and/or lending entity 30 to interact with the system 10.

Communication between the borrower entity 20 and the system 10 may be over a network

such as a local area network, or a distributed network. Communication between the borrower

entity 20 and the system 10 may be over the internet.

-O

Communication between the lending entity 30 and the system 10 may be over a network such

as a local area network, or a distributed network. Communication between the lending entity

30 and the system 10 may be over the internet.

Market data 40 is one or more live data feeds accessible to the system 10, for example via

subscription. The market data 40 is information including live prices (i.e. valuations) of

investment product instances and specifically of components of investment product instances

such as stocks and shares.

In this document, the term investment product is used to refer to a generic product offered or

otherwise traded by a brokerage, including funds, stocks, bonds, options, derivatives, other

financial instruments, assets and other marketable securities (including cryptocurrencies and

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other emerging alternative assets). The term investment product instance is used to refer to a

specific investment in an investment product made by an investor and therefore being an

actual property owned by or on behalf of the investor and having an actual value/price. The

term trading entity refers to the brokerage or equivalent that packages, transacts and sells

investment products to investors. The trading entity runs the system 10, that is, the system 10

.0 is operated for or on behalf of the trading entity. For example, the trading entity is a legal entity

executing transactions including stock transactions, which are considered secondary market

trading of stock that is already issued; and primary market stock issuances such as new share

subscriptions for a listed company.

.5 The investment registry 50 is a secure data store such as a server or servers operated by or

otherwise accessible to the system 10 (i.e. the brokerage as trading entity). The investment

registry 50 stores data representing investment product instances traded by or purchased via

the brokerage. The investment registry 50 is definitive in terms of reflecting the legal owners

of investment product instances and the real time values thereof, which real time values are

o updated by the system 10, or otherwise by or on behalf of the trading entity, using data from

the market data live feeds 40. Data stored by the investment registry 50 is encrypted and not

accessible by parties other than the trading entity. For example, data stored by the investment

registry is accessible by the system 10 (and optionally also by other computers operated by

or on behalf of the trading entity) but is not accessible by third parties. Access may be, for

example, via biometrics and/or temporally dynamic authentication code.

The investment registry may include a capital holding account linked to each user account of

the system 10. Investment product instances assigned to ownership of a user account, plus

capital held by the respectively linked capital holding account, compose the net worth of a user

in the context of the system 10.

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The system 10 provides a technological platform via which the borrower entity 20 can borrow

credit from a lending entity to purchase investment product(s) from the trading entity using

investment products already owned by the borrower entity 20 and traded by the trading entity

as security, as evidenced by the investment registry 50.

.0 Figures 2 to 4 illustrate exemplary processes for executing margin loan transactions and

managing margin loans via the hardware architecture of Figure 1.

Figure 2 illustrates a process for maintaining and updating the investment registry as a distinct

process from the process for executing the margin loan transaction. The two processes are

.5 interdependent since information from the investment registry is used in executing the margin

loan transaction. The separation of the two processes indicates that the process for

maintaining and updating the investment registry is ongoing regardless of activity relating to

executing margin loan transactions.

O At S202, the system 10 maintains the investment registry 50. The maintaining may be

relatively passive at times and active at other times. For example, the maintaining may be

updating the investment registry 50 when live feeds of market data indicate prices of

components of investment products have changed at S204. Therefore, though S202 and S204

are illustrated as distinct steps, the update S204 of real time values in the investment registry

50 may be considered to be part of the maintaining S202.

The maintaining S202 may include keeping information such as ownership information up to

date when investment product instances are bought/sold, and also indicating availability of

investment product instances to act as security in margin loans. For example, an investment

product instance cannot act as security to more than one margin loan at a time, so a flag or

other such datafield per entry can be used to track availability of investment product instances

to act as security in margin loans.

535135 Margin Loans

The maintaining S202 may further comprise maintaining a secure data environment for the

investment registry 50 by encrypting the investment registry data and restricting decryption to

parties providing, for example, biometric information satisfying an authentication process

and/or a time dynamic authentication code satisfying an authentication process.

-0

In particular, S204 includes on a continual basis during active periods of one or more live

feeds, receiving the one or more live feeds of market data 40 comprising live valuations of

.5 registry 50. The live feeds may be from stock markets and/or from data sources that monitor

and publish investment product prices from secondary markets and exchanges. The system

10 reads data from the live feeds, and uses prices of individual investment products to price

investment product instances comprising quantities of a combination of various investment

products (which may be from plural different markets or investment platforms).

-O

Steps S212 to S216 illustrate a process for executing a margin loan transaction. At S212 the

system 10 receives from the borrower entity 20 a request to borrow credit from a lending entity

30. The request is to borrow credit in the form of a margin loan. The request may be made via

a user interface served to the borrower entity 20 by the system 10 over the internet. For

example, the system 10 may provide a webapp to the borrower entity 20 to request and

manage margin loans. The lending entity 30 may be unspecified. Alternatively, the lending

entity 30 may be specified or otherwise constrained. The lending entity 30 may be the trading

entity (i.e. the operator of the system 10) or may be a third party in data communication with

the trading entity. The request may specify a value of credit requested (i.e. amount of credit),

may specify a value range of credit requested, or may not specify a value (i.e. being a generic

request to which the system 10 is configured to respond with one or more offers.

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At step S214 the system 10 is configured to determine, from the data maintained in the

investment registry 50, a total real time value of investment product instances listed in the

investment registry 50 for which the borrower entity is listed as the owning entity and which

are indicated as being available to act as margin loan security (i.e. are not flagged as already

being security for a margin loan or otherwise secured against a loan by the borrower entity

.0 20). This total real time value may be referred to as borrower security potential. Alternatively,

in scenarios when a credit value or range of credit values are specified in the request, the

determining step S214 may simply be determining whether or not the borrower entity 20 has

sufficient security in the investment registry 50 to achieve a predefined maximum initial loan

to value ratio for the margin loan.

-5

At step S216 the margin loan transaction is executed. A number of optional interactions

between borrower entity 20 and the system 10, and between lending entity 30 and the system

10, may be executed between steps S214 and S216. For example, the system 10 offering (via

the user interface) the requested credit to the borrower entity 20 at a determined loan to value o ratio (being equal to or lower than the predefined maximum initial loan to value ratio), and

seeking approval from the borrower entity 20. The approval may be a simple indication or may

include a liquidation preference for securities (explained in more detail below). The lending

entity 30 may be provided with an indication of the amount of credit sought, and given an

opportunity to approve or refuse the credit. For example, via a user interface provided by the

system 10.

Executing the margin loan includes transferring, as a margin loan (i.e. secured against

investment products owned by the borrower entity 20), one or more instances of investment

products traded by the trading entity into ownership of the borrower entity 20 in exchange for

instances of investment products into the investment registry with an indication that the

borrower entity 20 is owner and at least a portion of the borrower security potential is margin

535135 Margin Loans

loan security for the borrowed credit. A loan to value ratio of the loan (being the borrowed

credit) to the value (being the value of the margin loan security plus the value of the one or

instances of investment products transferred as the margin loan) in the executed transaction

is set at or below a determined maximum initial loan to value ratio for the loan. The determined

maximum initial loan to value ratio for the loan may be predetermined at a fixed ratio for all

.0 margin loans executed by the system 10. Alternatively the system 10 may determine the

maximum initial loan to value ratio for the loan based on a risk profile of the borrower security

potential (i.e. the investment products already owned by the borrower entity 20 in the

investment registry 50).

.5 Figure 3 illustrates a method which includes the steps of the Figure 2 method as described

above, and further comprises steps S220 to S224, which represent an automated rebalancing

process executed by the system 10 and which replaces the margin call system required in

conventional margin loan lending. The automated rebalancing is more or less instantaneous

and does not require interaction with the borrower entity 20 or the lending entity 30. Speed of

o rebalancing is enhanced in comparison with state of the art systems so a period of time during

which an acceptable risk is exceeded is minimized. Cancellation of margin loans caused by

failure to respond to a margin call by a borrower entity 20 is avoided.

On an ongoing repetitive basis, at S220 the system 10 calculates the real time loan to value

ratio for the margin loan using the data from the market data live feeds 40. The system 10 is

configured to, on a repetitive continual basis during the active periods of the one or more live

feeds, calculate a real time loan to value (LTV) ratio of the margin loan. The loan in the LTV

is the value of the borrowed credit (which is static), and the value in the LTV is the aggregate

real time value, as maintained in the investment registry, of the transferred one or more

instances of investment products (as the margin loan) and the margin loan security.

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The system 10 uses the market data live feeds 40 to keep the real time values of investment

product instances up to date in the investment registry 50, and in doing so provides a basis

for the real time loan to value ratio of the margin loan executed at S216 to be calculated and

monitored.

.0 At S222 the calculated real time loan to value ratio of the margin loan is compared with a

defined maximum maintenance loan to value ratio for the margin loan. The maximum

maintenance loan to value ratio for the margin loan may be the same as or higher than the

maximum initial loan to value ratio for the margin loan, so that there is some latency built in to

the arrangement and rebalancing will not be required immediately upon the one or more

.5 investment product instances transferred as the margin loan dropping in value.

The condition at S222 may be more complex than a straightforward is the maximum

maintenance LTV exceeded or not. Instead the condition may be, for example, have m out of

the last n repetitions of the calculated real time LTV exceeded the maximum maintenance

O LTV? Or in the most recent time period of length a (wherein a is, for example, one hour, twelve

hours, twenty four hours, or a week), has the calculated real time LTV exceeded the maximum

maintenance LTV for more than a predefined threshold %age of the time (which may be, for

example, 50%, 60%, 70%, 80%, 90%, 100%)? In which case, the condition is satisfied and

the flow proceeds to S224 for automated rebalancing, and if not the flow returns to S220 and

the monitoring continues.

At S224 the system 10 executes an automated rebalancing to restore the real time LTV to

below the maximum maintenance LTV. The automated rebalancing comprises liquidating,

entirely or partially, investment product instances from the margin loan security and to repay

a portion of the loan with the revenue generated in the liquidation. In doing so, the loan side

and the value side of the LTV are both reduced which (since the value side is greater than the

loan side) has the effect of reducing the real time LTV. In particular, a rebalancing target LTV

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may be defined which is, for example, a predetermined percentage (such as 0.1%, 1%, 2%,

5%, or 10%) lower than the maximum maintenance LTV in order that rebalancing will not be

required as soon as the value of the investment product instances transferred as the margin

loan decreases.

.0 The margin loan security may be liquidated in accordance with a liquidation preference

indicated by the borrower entity 20 either in advance of executing the margin loan transaction

at S216 or specified at a time after the transaction.

Figure 4 illustrates a messaging protocol for executing margin loan transactions and managing

.5 margin loans via the hardware architecture of Figure 1. A messaging protocol for performing

a margin loan transaction is illustrated as steps S400 to S406. A messaging protocol for

managing a margin loan is illustrated as steps S410 to S412.

The system 10 is implemented by a computing apparatus which may be a distributed

O computing system, with an architecture comprising a set of functional layers as illustrated by

the system 10 of Figure 1 comprising an HTTP layer 12, a messaging layer 14, and an

application layer 16, that work cooperatively to perform the methods and messaging protocols

illustrated by Figures 2 to 4. The HTTP layer 12 may be a manifestation of a user interface

such as a graphical user interface provided by the system 10.

The system includes an application layer 16 which is the implementation of the rules

necessary for the initiation, validation and execution of the margin loan transactions between

the borrower and lending entities. The layers (or modules) interpret a business request

semantically from the borrower entity 20 to perform a series of steps which will result in the

creation/update or retrieval of data from the investment registry 50 and the creation of

response messages that will be transmitted by the messaging layer 14 to the borrower entity

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20 and to the lending entity 30. The messaging layer 14 is the interface to the functionality to

the other layers.

A messaging layer 14 acts as the interface to the lending entity's proprietary systems 30. The

messaging layer 14 receives messages, parses them and extracts valid values from various

.0 fields. It then determines the appropriate software component in the application layer 16 that

handles the relevant stage of the process and interacts with that software component to

perform the necessary function. Conversely, the application layer 16 uses the functionality

provided by the messaging layer 14 to construct valid messages and send them to the

intended recipients or borrower entities 20.

-5

The HTTP layer 12 is a mechanism for receiving user interactions and may be interacted with

via a user interface. A user in this context is the borrower entity 20. A user interface may also

be provided for lending entities 30. The user interface may be implemented as a web-based

interface. Borrower entities 20 interact with the system 10 by navigating through user interface

o screens in a web-browser application navigated to the user interface which inputs requests to

the HTTP layer 12. Each user action results in one or more HTTP requests that are sent to a

web server of the system 10 and reach the HTTP layer 12. The HTTP layer 12 receives

requests made by the user through the web browser, parses and validates them and interacts

with the application layer 16 to perform associated functionality.

At S400, an optional preprocessing step is performed. The method provides an opportunity

for a lending entity 30 to constrain the collateral (i.e. security) that they will accept as security

against a margin loan for which the lending entity 30 provides the credit. For example, there

may be two or more aspects to the constraint, including: 1) alending entity specified maximum

loan-to-value ratio, which maximum loan-to-value ratio may be taken into account by the

system 10 in determining a maximum initial loan-to-value ratio for the margin loan (i.e. the

maximum initial loan-to-value ratio determined by the system 10 may be lower than the lending

535135 Margin Loans

entity 30 specified loan-to-value ratio, but not greater than); 2) a selection of investment

products that are precluded from acting as security (i.e. the lending entity 30 may preclude

any investment products other than exchange traded funds or fixed interest investments, or

the lending entity may specifically preclude real estate investment trusts).

.0 At S401, a borrower entity 20 wishing to engage in a margin loan transaction initiates a request

indicating a desire to obtain a margin loan against allowable security using the method

implemented by the system 10.

The request at S401 is transmitted via the distributed network or the HTTP layer 12, and is

.5 intercepted by the messaging layer 14. The messaging layer 14 forwards the request to an

application layer 16 to validate the syntax of the message and/or to process the request.

Provided that the request includes a parameter for engaging in a margin loan transaction, the

application layer 16 transmits the request back to the messaging tier for distribution to the

borrowing entity 20 at S401a.

-O

Whether step S401a is included in the method, and a number of repetitions of the messaging

at S401a is implementation dependent and is configurable by the operator of the system 10.

S401a is a process for agreeing parameters for the margin loan between the system 10 and

the borrower entity 20, optionally based at least partially on the constraints input by the lending

entity 30 at S400 and also on system-determined parameters such as a maximum initial loan

to value ratio. For example, the borrow request at S401 may specify an amount that the

borrower entity 20 wishes to borrow, which gives rise to a particular set of parameters (i.e. an

offer) determined by the system 10 and communicated to the borrower entity 20 at S401a.

The borrower entity 20 may wish to make a counter offer by changing one or more parameters,

which the system 10 may approve or use to compile a new offer to the borrower entity 20. The

borrower entity may accept an offer (that is, a set of parameters for the margin loan) at S401a.

Part of the processing performed by the system 10 in response to the request at S401 and in

535135 Margin Loans

responding at S401a is determining a borrower security potential of the borrower entity 20,

which is determining of all investment product instances traded by the system operator and

thereby listed in the investment registry 50, a total value available to act as security against a

margin loan. Wherein investment product instances already acting as security against a

margin loan, or any other type of loan, are not available to act as margin loan security. Neither

.0 are investment product instances not compliant with the acceptable collateral input by the

lending entity 30 at S400. The borrower security potential and an amount of credit requested

are used to determine whether aloan to value ratio compliant with a determined (by the system

10) maximum initial loan to value ratio is feasible. The determined maximum loan to value

ratio is determined by the system based on constraints including one or more from among:

.5 initial margin requirements of a governing body governing margin loans in the relevant

jurisdiction; maximum loan to value ratio input by lending entity 30 at S400; maximum loan to

value ratio calculated by the system 10 to be compliant with a level of credit risk predefined

for margin loans transacted by the system 10.

o At S402 the system 10 notifies the lending entity 30 that a margin loan request compliant with

the requirements of the system 10, and in implementations in which constraints are input by

the lending entity 30 at S400, also compliant with the constraints of the lending entity 30 input

at S400. At S403 the lender entity 30 responds to either accept or refuse the margin loan

request. At S404 the borrower entity 20 is notified of the response of the lending entity 30.

Methods may communicate with plural different lending entities 30, so that acceptable

collateral for multiple different lending entities 30 is stored by the system 10, and in the process

of agreeing margin loan parameters between the system 10 and the borrower entity 20 at

steps S401 to S401a, the system identifies one or more lending entities 30 having available

credit and acceptable collateral constraints that are compliant with the margin loan parameters

agreed by the system 10 and borrower entity 20. The compliant request is communicated to

each of those identified one or more lending entities 30 at S402 and the responses S403

collated by the system 10. The system 10 may have processing logic (i.e. rules) for selecting

535135 Margin Loans

a lending entity 30 from plural positive responses, or alternatively the borrower entity 20 may

be given an opportunity to indicate a selection. One or more positive responses are indicated

to the borrower entity 20 at S404.

At S405 the margin loan transaction is executed by the system 10 and the lending entity 30.

.0 The execution of the transaction at S405 comprises transferring, as a margin loan, one or

more instances of investment products traded by the trading entity into ownership of the

borrower entity in exchange for credit borrowed from the lending entity, including entering the

transferred one or more instances of investment products into the investment registry 50 with

an indication that at least a portion of the borrower security potential is margin loan security

.5 for the borrowed credit. Write access to the investment registry is heavily restricted and the

data stored thereon is encrypted. The system is a secure environment configured to access

the investment registry to modify data held thereon, and to decrypt data stored thereon. The

system is authenticated by the investment registry and granted access.

O At S406 a notification is transmitted to the borrower entity 20 by the system 10 to confirm that

the transaction has been executed. At S406, or at any stage during or after the method of

S401 to S406, the borrower entity 20 may be given an opportunity to indicate a liquidation

preference S410.

The indication of liquidation preference S410 is a preference of one investment product

instance over another, wherein the preference determines order of liquidation in case an

automated rebalancing is required. The indication may be a complete serial ordering of all

margin loan security, noting that all are listed in the investment registry 50, or may be partial

(for example, indicating one or more investment product instances to liquidate first, and leaving

the system 10 to determine an order thereafter).

535135 Margin Loans

At S411, on a repetitive continual basis using market data 40 received via the one or more live

feeds, the system 10 monitors a real time loan to value ratio of the margin loan, wherein the

loan is the value of the borrowed credit, which is static, and wherein the value is the aggregate

real time value, as maintained in the investment registry 50, of the transferred one or more

instances of investment products and the margin loan security. The calculated real time loan

.0 to value ratio of the margin loan is compared with a defined maximum maintenance loan to

value ratio for the margin loan (which may be higher than the determined maximum initial loan

to value ratio), and, if the calculated real time loan to value ratio exceeds the defined maximum

maintenance loan to value ratio for the margin loan, executing an automatic rebalancing

process. Alternatively, the automated rebalancing may be triggered by a condition based on

.5 the calculated real time loan to value ratio exceeding the maximum maintenance loan to value

ratio for the margin loan more than a predefined number or proportion of repetitions in a

predefined length of time).

The automated rebalancing at S411 comprises liquidating instances of investment products

o from among the margin loan security and reducing the borrowed credit by the revenue

generated by the liquidation to adjust the real time loan to value ratio to a predefined

rebalancing target loan to value ratio. The liquidating is in accordance with the liquidation

preference indicated by the borrower entity 20 at S410 or if no preference specified then

according to the system default.

At S412 a report of the automated rebalancing is transmitted to the borrower entity 20 and

optionally also to the lending entity 30.

Figure 5 is a schematic illustration of a hardware arrangement of a computing apparatus. The

borrower entity 20 may interact with the system 10 by an apparatus having an arrangement

such as illustrated in Figure 5. The lending entity 30 may interact with the system 10 by an

apparatus having an arrangement such as illustrated in Figure 5. The system 10 may be

535135 Margin Loans

implemented by a computing apparatus having an arrangement such as illustrated in Figure

5. The system 10 may be implemented by a distributed computing system comprising a

plurality of computing apparatus having an arrangement such as illustrated in Figure 5

cooperating with one another to perform methods including those illustrated in Figures 2 to 4.

The investment registry 50 may be implemented by a computing apparatus having an

.0 arrangement such as illustrated in Figure 5.

The computing apparatus comprises a plurality of components interconnected by a bus

connection. The bus connection is an exemplary form of data and/or power connection. Direct

connections between components for transfer of power and/or data may be provided in

.5 addition or as alternative to the bus connection.

The computing apparatus comprises memory hardware 991 and processing hardware 993,

which components are essential regardless of implementation. Further components are

context-dependent, including a network interface 995, input devices 997, and a display unit

999.

The memory hardware 991 stores processing instructions for execution by the processing

hardware 993. The memory hardware 991 may include volatile and/or non-volatile memory.

The memory hardware 991 may store data pending processing by the processing hardware

993 and may store data resulting from processing by the processing hardware 993.

The processing hardware 993 comprises one or a plurality of interconnected and cooperative

CPUs for processing data according to processing instructions stored by the memory

hardware 991.

Implementations may comprise one computing device according to the hardware arrangement

of Figure 5, or a plurality of such devices operating in cooperation with one another. For

535135 Margin Loans

example, a plurality of such devices operating in cooperation increases potential rate of data

throughput.

A network interface 995 provides an interface for transmitting and receiving data over a

network. Connectivity to one or more networks is provided. For example, a local area network

.0 and/or the internet. Connectivity may be wired and/or wireless.

Input devices 997 provide a mechanism to receive inputs from a user. For example, such

devices may include one or more from among a mouse, a touchpad, a keyboard, an eye-gaze

system, and a touch interface of a touchscreen. Inputs may be received over a network

.5 connection. For example, in the case of server computers, a user may connect to the server

over a connection to another computing apparatus and provide inputs to the server using the

input devices of the another computing apparatus.

A display unit 999 provides a mechanism to display data visually to a user. The display unit

o 999 may display graphical user interfaces by which certain locations of the display unit become

functional as buttons or other means allowing for interaction with data via an input mechanism

such as a mouse. A server may connect to a display unit 999 over a network.

Claims

535135 Margin Loans CLAIMS

1. A system for executing margin lending transactions, the system being operated by or

on behalf of an trading entity, the system comprising memory hardware and processor

hardware, the memory hardware storing processing instructions which, when executed by

.0 the processor hardware, cause the processor hardware to execute a method including:

maintaining an investment registry comprising an entry per instance of investment

value of the investment product instance;

on a continual basis, receiving one or more live feeds of market data comprising live

.5 valuations of components of the investment products traded by the trading entity, and using

the live valuations to update the real time value of instances of investment products in the

investment registry;

receiving, from a borrower entity, a request to borrow credit from a lending entity;

o product instances in the investment registry for which the borrower entity is listed as the

owning entity and which are indicated as being available as margin loan security;

executing a transaction comprising transferring, as a margin loan, one or more instances

of investment products traded by the trading entity into ownership of the borrower entity in

exchange for credit borrowed from the lending entity, including entering the transferred one or

more instances of investment products into the investment registry with an indication that at

least a portion of the borrower security potential is margin loan security for the borrowed credit;

wherein:

the system is configured to execute the transaction in compliance with a determined

margin loan security.

535135 Margin Loans

2. The system according to claim 1, wherein executing the transaction includes:

calculating a margin loan security value for the requested credit, based on the

determined maximum loan-to-value ratio, and:

if the calculated margin loan security value is more than the borrower security

potential, refusing the requested credit;

.0 if the calculated margin loan security value is less than the borrower security

potential:

obtaining a first indication from the lending entity that the requested credit is

available;

obtaining a second indication from the borrowing entity that the calculated

.5 margin loan security value is approved;

approving the requested credit and determining the margin loan security,

from among the borrower security potential; and

in accordance with the first indication and the second indication, executing

the transaction.

-o

3. The system according to claim 2, wherein

refusing the requested credit further comprises presenting a counter offer to the

requested credit.

4. The system according to any of the preceding claims, wherein the method further

includes:

on a repetitive continual basis using market data received via the one or more live feeds,

calculating a real time loan to value ratio of the margin loan, wherein the loan is the value of

the borrowed credit, and wherein the value is the aggregate real time value, as maintained in

535135 Margin Loans

the investment registry, of the transferred one or more instances of investment products and

the margin loan security;

comparing the calculated real time loan to value ratio of the margin loan with a defined

maximum maintenance loan to value ratio for the margin loan, and, if the calculated real time

loan to value ratio exceeds the defined maximum maintenance loan to value ratio for the

.0 margin loan, or if a condition based on the calculated real time loan to value ratio exceeding

the maximum maintenance loan to value ratio for the margin loan more than a predefined

number or proportion of repetitions in a predefined length of time, executing an automatic

rebalancing process, comprising:

liquidating instances of investment products from among the margin loan security to

.5 adjust the real time loan to value ratio to a predefined rebalancing target loan to value ratio.

5. The system according to claim 4, wherein

the liquidating is in accordance with a liquidation preference predefined by the

o products from among the margin loan security to be liquidated before another distinct subset

of instances of investment products from among the margin loan security.

6. The system according to any of the preceding claims, wherein determining the

borrower security potential includes excluding from the borrower security potential instances

of investment products indicated as exclusions by the lending entity.

7. The system according to any of the preceding claims, wherein the determined initial

loan to value ratio is determined to comply with an initial margin requirement set by a governing

body of an investment environment in which the system is operable.

8. The system according to any of the preceding claims, wherein the method further

comprises providing a user interface to the borrower entity, wherein:

535135 Margin Loans

the request to borrow credit is received via the user interface.

9. The system according to claims 2 &8, wherein:

the first indication is obtained via the user interface.

.0

10. The system according to any of the preceding claims, wherein:

the system is a distributed computing system comprising plural computing devices each

comprising memory hardware, processor hardware, and network interface, the plural

computing systems being configured to perform the method collectively using respective

processor hardware and memory hardware and exchanging data via the respective network

.5 interfaces.

11. The system according to claim 10, wherein the system is a cloud computing system.

12. A computer-implemented method for executing margin lending transactions, the

o method comprising, for or on behalf of a trading entity:

value of the investment product instance;

on a continual basis during active periods of one or more live feeds, receiving the one

or more live feeds of market data comprising live valuations of components of the investment

products traded by the trading entity, and using the live valuations to update the real time

value of instances of investment products in the investment registry;

535135 Margin Loans

.0 wherein:

margin loan security.

-5

13. The computer-implemented method according to claim 12, wherein executing the

transaction includes:

calculating a margin loan security value for the requested credit, based on the

determined maximum loan-to-value ratio, and:

O if the calculated margin loan security value is more than the borrower security

potential, refusing the requested credit;

if the calculated margin loan security value is less than the borrower security

potential:

available;

obtaining a second indication from the borrowing entity that the calculated

margin loan security value is approved;

approving the requested credit and determining the margin loan security,

from among the borrower security potential; and

in accordance with the first indication and the second indication, executing

the transaction.

535135 Margin Loans

14. The computer-implemented method according to claim 13, wherein

requested credit.

-0

15. The computer-implemented method according to any of claims 12 to 14, wherein the

method further includes:

.5 the borrowed credit, and wherein the value is the aggregate real time value, as maintained in

the margin loan security;

o loan to value ratio exceeds the defined maximum maintenance loan to value ratio for the

margin loan, or if a condition based on the calculated real time loan to value ratio exceeding

rebalancing process, comprising:

adjust the real time loan to value ratio to a predefined rebalancing target loan to value ratio.

16. The computer-implemented method according to claim 15, wherein

of instances of investment products from among the margin loan security.

535135 Margin Loans

17. The computer-implemented method according to any of claims 12 to 16, wherein

determining the borrower security potential includes excluding from the borrower security

potential instances of investment products indicated as exclusions by the lending entity.

.0

18. The computer-implemented method according to any of claims 12 to 17, wherein the

determined initial loan to value ratio is determined to comply with an initial margin requirement

set by a governing body of an investment environment in which the system is operable.

19. The computer-implemented method according to any of claims 12 to 18, wherein the

.5 method further comprises providing a user interface to the borrower entity, wherein:

the request to borrow credit is received via the user interface.

20. The computer-implemented method according to claims 13 & 19, wherein:

the first indication is obtained via the user interface.

o

21. A computer program which, when executed by a computing apparatus comprising

processor hardware and memory hardware, causes the computing apparatus to perform the

computer-implemented method of any of claims 12 to 20.