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Patent Issued for System and Process for Creating, Monitoring, and Transforming Multiple Interests of One Or More Issuer Entities at System...

June 3, 2014

Patent Issued for System and Process for Creating, Monitoring, and Transforming Multiple Interests of One Or More Issuer Entities at System Determined Intervals Based on a Variable Or Index

By a News Reporter-Staff News Editor at Information Technology Newsweekly -- A patent by the inventors Fonss, Jack (New Canaan, CT); Cataldo, Edward J. (Westport, CT); Gilman, Forrest (Closter, NJ), filed on February 14, 2013, was published online on May 20, 2014, according to news reporting originating from Alexandria, Virginia, by VerticalNews correspondents.

Patent number 8732070 is assigned to Accushares Holdings LLC (New Canaan, CT).

The following quote was obtained by the news editors from the background information supplied by the inventors: "The disclosed embodiments relate to electronic trading of funds, electronic funds management, and real-time fund processing systems.

"The financial industry utilizes various tools to assist it in tracking and reacting to changes in the market such as changes in index, asset, share/claim counts, prices, returns and the like. Some of these tools include specialized computer based systems to assist in performing various tasks. To date, however, these systems have had many draw backs and disadvantages despite some advantages they provide.

"For example, U.S. Pat. No. 5,987,435 to Weiss et al discloses a proxy asset data processor. The disclosed data processing system manages and implements a form of trading security designated as a proxy asset. Proxy assets according to the '435 patent purportedly provides a sophisticated risk management capabilities without the complexities associated with other types of risk management investment vehicles. The proxy asset is made possible by the enhanced processing capabilities of the proxy asset data processor that create, track, manage, and govern asset accounts for participating investors. The '435 patent has an Up Proxy Asset and a Down Proxy Asset that is an interface between the Pooled Sales Proceeds and the Broker Markets to provide security.

"Another example is U.S. Pat. No. 6,513,020 also to Weiss et al. that discloses another data processing system manages and implements a form of security designated as proxy asset. This system is some what different than the related '435 patent. Again, proxy assets purportedly provide a sophisticated risk management capability without the complexities associated with other types of risk management investment vehicles. The Proxy Asset is made possible by the enhanced processing capabilities of the Proxy Asset data processor which create, track, manage, and govern asset accounts for participating investors. The '020 patent does have segregated Proxy Assets. The '020 patent discloses a Proxy Asset interface between the Cash asset and Broker Markets to provide security.

"In both of these cases, the patents define in the Background sections Proxy Assets as a type of security designed to make effectively tradable existing broad categories of illiquid assets or claims on income flows, assets or claims that are individually difficult or impossible to buy, hold, or sell directly. The Proxy Asset is designed to have a traded market price that reflects the true liquid-market value of illiquid assets or claims . . . '. The Proxy Asset does not identify who is doing the trading, such as market professionals, market makers, sophisticated institutions, and sophisticated individuals.

"The '435 patent and the '020 patent are limited to operation over proxy assets; and limited to the transformation of 'illiquid assets or claims' into tradable instruments. Mechanistically, both patents rely on a segregation of assets within an entity which has issued shares to investors. Each class or group of issued shares is linked to a unique 'proxy asset account value' where value is shifted among all 'proxy asset account values' by reference to an 'account formula.'

"The '020 patent extends references to proxy assets (singular for a share) to encompass proxy asset groups to incorporate more complex proxy asset combinations and arrangements. It also extends value shifts to be performed with respect to higher order groupings of proxy assets in each 'account formula', and contemplates that assets other than cash may be moved (actually or nominally) under the account payout formulas.

"Importantly, both the '435 and '020 discloses segregated asset account values are used consistently in both patents for the purpose of driving the linked interests.

"However, there are still draw backs with these systems and other similar systems in the art. For example, none of these financial systems address the needs of a system with transformations of interests, having no asset segregation, real time market monitoring of system (intrinsic) values with realized real-time market trading values, and automated system responsiveness to alter the transformations in response to real-time monitoring. There still remains a need in the art for a financial system and method based on issuers which issue and distribute interests which resolve accurate holder values at intervals measured in days, weeks or months rather than years. There is a further need to have no segregation of accounts or assets and all shares have an equal claim in liquidation (different shares may have differing entitlement to shares distributions). The financial system and method should also perform continuous real-time monitoring to compare system created intrinsic values with realized market trading values. It should also transform all shares into offsetting index neutral positions upon the occurrence of a tracking error to ensure that holders of interests realize accurate outcomes regardless of market conditions."

In addition to the background information obtained for this patent, VerticalNews journalists also obtained the inventors' summary information for this patent: "The present invention provides for a system and method for providing a user with a financial tool to create, monitor, and transform interests of one or more issuing entities where interests are created in offsetting groupings (pairs, triplets, quadruplets, or higher order groupings). Such offsetting groupings will be linked to a variable or index such that changes in the value of the variable or index will alter the entitlement an interest has over the issuing entity assets. The disclosed system and processes are specifically applied to create interests and to subsequently transform the created interests where the interests are either materialized interests held as physical certificates or immobilized interests held at a central depository such as the Depository Trust & Clearing Corporation (DTCC) where registered direct and indirect holders are indicated on the records of DTCC. Interests when created and transformed, represent tangible property of a holder such that interests can be sold, pledged or otherwise transacted as an article of property with precisely determined parameters.

"Where the created interests are in linked pairs, one interest of the pair is positively related to a variable or index (the 'Positive Interest') and the other interest of the pair is negatively related to the same variable or index (the 'Negative Interest'). While the separate interests which comprise a linked pair are only created by the system in matched pairs (i.e. a Negative Interest is created simultaneous with a Positive Interest), Negative Interests and Positive Interests are separately tradable following creation by the system. The terms 'interest' and 'claim' are used herein and are intended to be synonymous with any interest in or claim on an issuing entity including shares, certificates, notes, deposits, and derivatives thereof.

"The linked variable or index may be endogenous or exogenous to the issuing entity and examples include: government reported levels of price inflation, stock market index levels, crude oil prices, industrial or precious metals prices, agricultural commodity prices, and government published unemployment rates. Unlike previously known methods, there is no limitation relating to illiquidity or tradability as measured prior to or following any implementation or embodiments. In an example of a pair grouping where the linked variable is crude oil prices, the system creates two interests where one interest is positively related to the change in oil prices and one interest is negatively related to the change in oil prices. In the disclosed embodiment, the system will automatically track and schedule transformation dates, and on each transformation date, the system will automatically transform one or more interests of a grouping into a full or partial amalgamation of offsetting interests; the determination to implement full or partial transformations into such amalgamation will be based on real-time system monitoring as described below. Further, in a preferred embodiment, based on specific thresholds or triggers set by the system administrator relating to the aggregate value of a distribution, the system will distribute interests which are immediately redeemed for cash; the threshold or trigger for a preferred embodiment, expressed as a percentage of the aggregate value of the issuer or issuers, may take on any value between 0 and 100%. In an alternate preferred embodiment, the system will nominally compute the respective interest's claims and distribute an amount of cash or issuing entity assets in lieu of interests

"Previously known methods have specified arrangements in which interests are issued in pairs by separate issuing entities where the separate issuing entities engage in bilateral derivatives or other transactions between each other to adjust the respective assets and liabilities in response to the changes in a linked variable or index. The previously known methods have relied solely on broad arbitrage principles to maintain accurate market prices and accurate return tracking; no process of transformation or modification exists in previously known methods.

"Adverting to FIG. 6, the figure illustrates two interests whose value diverges from system generated values; the solid lines indicate realized market prices and the dashed lines indicate system generated and mathematically correct values (note that the labels along the x-axis would not be applicable to previously known methods as previously known methods not do have transformation dates). The undesirable divergence illustrated in the figure shows that the L interest has a system price and theoretical value of 1.10, but due to imbalanced market forces it has attracted a higher trading value (i.e. that value at which it is being transacted between buyers and sellers unrelated to the issuer) equal to 1.20. Correspondingly, the S interest has a system price value and theoretical value of 0.90, but due to an imbalance in market forces, it has a trading value of 0.80; the sums of the system and trading values are equal (both 2.00), but the S interest suffers from undervaluation and the L interest will ultimately suffer from a price-bubble deflation when its value will align on some uncertain future date in the form of a sharp drop. The arbitrage assumption built into known methods assumes that market professionals will react in a timely manner to price imbalances, and in the example depicted in FIG. 6, it would be assumed that market professionals would purchase the S interest in order to effect redemptions, or purchase the S interest and sell the L interest on a short or borrow basis. The primary fallacy in reliance on basic arbitrage to realign such price anomalies is that no arbitrage opportunity is available to exploit; because the interests are offsetting and because the discount associated with the 'cheap' interest (the S interest) is equal (or close) in magnitude to the premium associated with the 'rich' interest (the L interest), there is no incentive for market makers or arbitrageurs to transact.

"In one departure from known methods, the disclosed system monitors deviations between market prices and system generated prices, and the disclosed embodiment transforms interests on a periodic basis (based on system determinations) to cause market trading prices to properly align with system generated prices.

"In a second departure from previously known methods, the disclosed embodiment realigns the related variable or index to the outstanding interests with regularity on each transformation date. Where previously know methods maintain their initial variable or index level throughout the life of the interests, the disclosed embodiment recalibrates the interests with a modified related variable or index level. As a result period-to-period tangible returns are correct as indicated in FIGS. 13 and 14 rather than inaccurate as illustrated in FIG. 15 relating to the previously known methods.

"The disclosed embodiment is a novel system of processes where each interest is transformed by the system into an amalgamation of interests at: (i) regular intervals, or (ii) at intervals triggered by system monitoring of changes, settlements or resets in a subject variable or index. The advantages of the disclosed embodiment include: (i) interests periodical resolve (either partially or fully) into a matched redeemable pair through system transformation so the holder of an interest can effect simple and known redemptions; (ii) where practical, interests are transformed on timetables consistent with the natural resets of the subject variable or index to cause proper tracking; (iii) each embodiment includes a system run process where authorized participants or APs (a special class of market makers) can effect timely and accurate creations and redemptions to enable them to transact, and; (iv) the implementation of the system either entirely or largely obviate expensive market trading and issuing entity position rebalancing.

"Known methods have failed due to a number of factors including: (i) tracking errors with respect to one of more of the interests with respect to the related variable or index, (ii) the persistent inability of arbitrageurs or other holders to effect an efficient redemption, (iii) early mandatory redemption of all interests due to movement in the related variable or index, and (iv) a broad inability for market markers or other larger holders to implement risk management strategies.

"The disclosed embodiment has a number of marked benefits for participants. Firstly, because interests are created, modified and redeemed in groupings the issuing entity and interests create a closed environment in which participants hold or transact over interests linked to variables and indices currently unavailable on conventional financial exchanges. Secondly some markets, such as those for commodities and metals, have complex pricing curves relating to their spot (today) prices and their forward prices as indicated by exchanges traded futures (storage costs, risk premiums, and time value of money are some of the complicating factors); the groupings created and processed by the system greatly simplify or substantially eliminate complex curve valuations and excess asset trading."

URL and more information on this patent, see: Fonss, Jack; Cataldo, Edward J.; Gilman, Forrest. System and Process for Creating, Monitoring, and Transforming Multiple Interests of One Or More Issuer Entities at System Determined Intervals Based on a Variable Or Index. U.S. Patent Number 8732070, filed February 14, 2013, and published online on May 20, 2014. Patent URL:

Keywords for this news article include: Legal Issues, Information Technology, Accushares Holdings LLC, Information and Data Processing.

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Source: Information Technology Newsweekly

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