Method and system for securitizing contracts valued on an index

TLDR: In this paper, a method and system for securitizing contracts valued on an index, a special purpose entity (SPE) is provided and holds as substantially all of its assets a derivative contract with a contract dealer.

Abstract: In a method and system for securitizing contracts valued on an index, a special purpose entity (SPE) is provided and holds as substantially all of its assets a derivative contract with a contract dealer. The contract has an initial notional value and is tied to an index related to items traded by a multilateral transactional execution facility, such as futures contracts traded on an exchange. The held contract is also scalable so that the notional value can be increased on demand in exchange for a corresponding payment to the contract dealer and decreased on demand in exchange for a corresponding payment from the contract dealer. The SPE issues exchange tradable securities that derive value based on the value of the contract held by the SPE. To issue additional shares, assets are contributed to the contract dealer who increases the notional value of the contract held by the SPE. The increase in value of the contract supports the issuance of additional shares. Shares are redeemed by terminating some or all of the contract whereby the contract dealer reduces the notional value and provides a termination payment based on the amount of the termination and the value of the index. In one embodiment, investors purchase shares by providing to the contract dealer both a cash payment and a futures contract, the combination having a value corresponding to the value of the shares to be issued, and where the futures contract can then be used by the contract dealer to hedge the. forward contract between the contract dealer and the SPE.