WO2007090241A1

WO2007090241A1 - A method for optimising the security value of an investment portfolio

Info

Publication number: WO2007090241A1
Application number: PCT/AU2007/000140
Authority: WO
Inventors: Andrew Pearse; Mike Welsh; Michael O'toole; John Daley; Peter Bourke; Richard Morris
Original assignee: Australia And New Zealand Banking Group Limited
Priority date: 2006-02-10
Filing date: 2007-02-09
Publication date: 2007-08-16
Also published as: AU2007214264A1; NZ570623A

Abstract

An automated method of optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the method including the following steps: A) determining a market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion; B) applying a diversified LVR to the diversified portion of the portfolio and a standard loan to value ratio to the standard portion of the portfolio to calculate a maximum security value; and C) comparing the maximum security value calculated against a minimum security value required to secure the loan to determine whether the margin loan requires clearing.

Description

A METHOD FOR OPTIMISING THE SECURITY VALUE OF AN INVESTMENT

PORTFOLIO Field of the invention

The present invention relates to a method of optimising the security value of an investment portfolio lodged as security for a margin loan.

Background of the invention In this specification where a document, act or item of knowledge is referred to or discussed, this reference or discussion is not an admission that the document, act or item of knowledge or any combination thereof was at the priority date, publicly available, known to the public, part of common general knowledge; or known to be relevant to an attempt to solve any problem with which this specification is concerned. Investors typically refer to their collective financial assets as a 'portfolio'. A portfolio typically consists of a group of financial assets such as, for example, shares, bond options, real estate and fixed income securities. The level of diversification amongst financial assets in a portfolio may vary.

A portfolio that is not diversified has all, or most of its securities in a similar type of asset class or market sector. For example, an investor could have all their portfolio value in a small number of 'blue chip' securities. Although these securities may have a solid record of stable earnings and dividend growth, there is a systematic risk that all the securities could be affected by adverse market changes. For example, a portfolio consisting only of shares is vulnerable to stock market drop or crash. A portfolio consisting only of securities in a specific company is vulnerable to the fortunes of that company (e.g., Ansett Airlines, Enron) and all the value of the portfolio could be lost if the company fails.

To avoid this systematic risk investment managers typically diversify a portfolio into different non-perfectly-correlated asset classes. For example, investors might hold their assets in equal parts in three different asset classes such as equities, real estate and fixed income securities. Because each of these three asset classes is non-correlated (i.e., behaves independently), if one fails, then generally, it is unlikely that both the other two asset classes will do poorly.

Accordingly, typically the composition of a portfolio includes both a diversified portion and a concentrated or 'standard' portion of financial assets. The level of diversification (and concomitant level of concentration) is preferably managed by the portfolio owner or their investment advisor to balance investor returns against investment risk. In a well managed portfolio the desired degree of diversification and risk acceptable to the investor will be predetermined and the composition of the portfolio adjusted accordingly. Margin loans

Investors often have a margin loan associated with their investment portfolio. A margin loan is a line of credit that uses a range of financial assets, such as shares and managed funds, as security for the underlying loan amount. Margin loans are frequently used by investors to improve or increase their portfolio. By establishing a margin loan, a borrower can leverage existing equity held in deposits, managed funds and/or securities (stocks) to take advantage of further investment opportunities as they arise. That is, by adding borrowed money to existing assets, the borrower increases the total amount of money that they can invest in their portfolio. This leveraging effect can be used to increase the value of an investment portfolio over time. A lending institution will typically lend up to a certain percentage of the market value of the securities held in the portfolio. This percentage is commonly referred to as a loan to value ratio or LVR. The loan to value ratio may vary between different classes of assets and/or between different individual security holdings in the same asset class.

In the past, the calculation of LVRs has not taken into account whether there is a level of diversification that reduces the lender's risk.

Margin Call

Since the prices of the financial assets acting as security for a margin loan typically fluctuate on a daily basis, there may be times when falls in the market value of the portfolio assets results in the security value of the portfolio falling below the minimum value required to secure the loan. In such cases, the borrower may become subject to a margin call. In a margin call, the lending institution requires the borrower to remedy any shortfall between the security value of the portfolio and the margin loan amount. Options for clearing a margin loan include depositing funds into the margin loan account, contributing additional approved securities or selling all or part of the portfolio. A call for margin loan clearance can be extremely inconvenient to an investor, disrupting cash flow or causing them to alter the composition of their portfolio at short notice. In many cases the fall in market value of the portfolio is due to temporary or aberrant short term behaviour of the stock market, exchange rate or economy generally.

Accordingly there is a need for a more realistic assessment of the security value of a portfolio so that an investor is not unnecessarily or prematurely subject to a margin call. In the event that the investor is subject to a margin call, a more realistic assessment should fulfil the need for a systematic sell down of assets that minimises the concomitant reduction in security value of the portfolio. Summary of the invention

According to an aspect of the present invention, there is provided an automated method of optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the method including the following steps:

A determining a market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion,

B applying a diversified LVR to the diversified portion of the portfolio and a standard LVR to the standard portion of the portfolio to calculate a maximum security value, and

C comparing the maximum security value calculated against a minimum security value required to secure the loan to determine whether the margin loan requires clearing.

A determining a market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion, B applying a diversified LVR to the diversified portion of the portfolio and a standard

LVR to the standard portion of the portfolio to calculate a maximum security value, and

The present invention also provides a system for automatically optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the system comprising,

(AA) a server, and

(BB) one or more user terminals located in one or more user locations, wherein the server,

A determines a market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion, B applies a diversified LVR to the diversified portion of the portfolio and a standard LVR to the standard portion of the portfolio to calculate a maximum security value, and

C compares the maximum security value calculated against a minimum security value required to secure the loan to determine whether the margin loan requires clearing.

The user may be the investor or another party such as a financial adviser, banker, stock broker, or the provider of the margin loan. In one embodiment of the present invention, the user comprises two or more parties.

The first and second databases may be one and the same, or linked. The first and second databases may reside on the same, or different servers.

The present invention also provides a method for automatically optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the method comprising,

A communicating to one or more remote user terminals, a determined market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion,

B communicating a maximum security value to the one or more remote user terminals, the maximum security value calculated based on application of a diversified LVR to the diversified portion of the portfolio and a standard LVR to the standard portion of the portfolio, and C communicating to the one or more remote user terminals advice as to whether the margin loan requires clearing, the advice being based on a comparison of the maximum security value calculated against a minimum security value required to secure the margin loan.

The present invention also provides a system for automatically optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the system including a processor configured for:

A generating market value and portfolio composition data based on a level of diversification in the portfolio, the data relating to composition of the portfolio including diversified portion data and standard portion data,

B generating maximum security value data by application of a diversified LVR to the diversified portion data and a standard LVR to the standard portion data, and

C generating data regarding clearance of the margin loan by comparison of the maximum security value data against data relating to the minimum security value required to secure the margin loan.

In a preferred embodiment the steps of the invention includes the initial steps of,

• registering details of the investor in a first database, and

• registering details of the investment portfolio associated with the investor in a second database, including information relating to the plurality of security holdings. Detailed description of the Invention

Typically the plurality of security holdings involves one or more investments chosen from the group comprising shares and managed funds. Typically shares and managed funds form part of the diversified portion of the portfolio, whereas options (including the underlying shares with which they are associated) and cash form part of the standard part of the portfolio. Optimising security value of the portfolio

The optimization is based on the level of diversification of the securities in the portfolio. The diversified LVR which is applied to the diversified portion of the portfolio is typically (but not always) higher than the standard LVR which is applied to the standard portion of the portfolio.

The method of optimising the security value of investment portfolios relies on the lending institution using approved security listings of diversified and standard LVRs for a large number of securities to manage risk exposure. For example, financial institutions create lists of hundreds of margin lending approved securities that are regularly updated and have the following general format:

This diversified LVRs will typically be 5 to 20% higher than the standard LVRs. Higher LVRs can be offered economically by a lending institution because the diversification of the portfolio used to secure the loan helps to mitigate risk to the lending institution.

The use of separate standard and diversified LVRs is advantageous to the borrower because provided that the borrower maintains diversification of the portfolio, the borrower can increase the leverage on investments when compared to the leverage that would be available if the lending institution did not take into account the level of diversification of the borrower's investment portfolio. An additional advantage is that the borrower has the option of maintaining their existing margin loan amount and using the diversified LVRs to increase the amount by which the market would need to fall before they receive a margin call.

Maximum security value If the maximum security value calculated is greater than the minimum security value the difference in value may be used to leverage further margin loan funds. For example leverage could be obtained by increasing an existing variable loan or by instigating one or more new fixed loans. The determination of the market value and composition of the portfolio may include the following steps:

A(a) ranking each of N securities from Sj (greatest value) to S_N (least value),

1

A(b) computing C = where MaxP is the greatest percentage of the portfolio that a

MaxP single security may comprise and still be eligible for a diversified LVR,

A(c) for each of the N securities S_n where n = N, N- 1...1 , computing the diversified value of the security D_n as:

(i) For n = [N,C], D_n = S_n , and

N

(ii) For n = [C - l,l], D_n = mmim ι=n+l

S_n,-

— n

MaxP

Preferably, the diversified LVR is applied to the maximum diversified value of each security holding. More preferably, the standard LVR is applied to the value of each single security holding in excess of the maximum diversified value for that security holding.

If the portfolio includes cash and options it may be necessary to carry out an initial step to apportion the cash and options (along with their underlying securities) to the standard portion of the portfolio (ie not the diversified portion). In this case the determination of the market value and composition of the portfolio includes:

A(I) apportioning securities by,

A(I )(a) allocating all eligible securities to the diversified valuation,

A(I )(b) allocating all remaining non eligible securities to the standard valuation, then

A(2) determining the market value and composition of the portfolio by,

A2(a) ranking each of N securities from S] (greatest value) to S_N (least value),

1

A(2)(b) computing C = where MaxP is the greatest percentage of the

MaxP portfolio that a single security may comprise and still be eligible for a diversified LVR, A(2)(c) for each of the N securities S_n where n = N, N-I ...1, computing the diversified value of the security D_n as:

(i) For n = [N,C], D_n = S_n , and

(ii) For n = [C - l,l], D_n = mm

Restricted Securities

The plurality of security holdings includes one or more restricted securities. Where used herein the term 'restricted security' refers to securities that, in the lender's opinion, have insufficient or limited liquidity in a market and may be difficult to sell except at a substantial discount. If an attempt is made to sell restricted security to clear a margin call, they may be difficult to sell, or the share sale price may be affected by the actual sale. This can happen for example, when the shares constitute a large proportion of a small value company. Accordingly the financial institutions may class certain securities as 'restricted security'.

Where the portfolio includes restricted securities, the method of the present invention will preferably further include the step of reducing the diversified portion of the restricted securities so that they comprise no more than a limited percentage of the diversified portfolio. This is referred to as 'restricted security limitation'.

The steps taken to enforce the Restricted Security Limitation (for example, as set out below) may violate the MaxP Single Security Limitation. Accordingly, to ensure that the non- restricted section of the portfolio is appropriately diversified the following steps may be applied:

A(3) For each of the N' Diversified Non-Restricted securities Ni?:

A(3)(a) ranking each of N' securities from NRi (greatest value) to ΝR^ (least value),

MaxP

A(3)(b) computing MaxNR = where MaxNR is the greatest

(l -MaxR) percentage of the Non-Restricted section of the portfolio that a single security may comprise and still be eligible for a diversified LVR,

A(3)(c) computing C=

A(3)(d) for each of the JV' securities NR_n ■ where n' = JV', JV'- 1...1 , re-compute the diversified value D_n • as:

(ii) for

A(3)(e) labelling the set of restricted securities as RS, and

A(3)(f> if f ∑ D,,,S, e RS ] > MaxR∑D,, :

for each of the JV Diversified securities D '„ where n = N, JV- 1...1 : (i) If S_n <£ RS , retain D_n.

(ii) If S_n e RS , replace D_n with R_n such that

I=I i=l MaxR

R₁, = D_n x

∑D^S. e RS l -MaxR

;=1

N where ∑ D₁,, S₁ e RS is the sum of the diversified market value of the r=l

Restricted Securities.

Typically the person using the method and process of the present invention will be an investor, or person associated with the investor and their portfolio such as an investment advisor, stockbroker, accountant or a financial institution having an interest in the portfolio. This would include, for example, the lending institution providing the margin loan.

In a particularly preferred embodiment the person can access data generated by the present invention through a wired or wireless communications network such as the Internet or Bluetooth. Typically such access would be subject to normal login security restrictions to prevent unauthorised access to information regarding the investor and their investor portfolio. This could be achieved for example, by use of any commonly available software authentication module. Preferably, the steps of the present invention are automatically carried out in real-time. Furthermore, preferably each investor's investment portfolio is automatically monitored in real-time to enable the lending institution to make available the maximum security value to the borrower, based on the level of diversification of the portfolio, whilst at the same time minimising the risk to the lending institution.

One of the advantages of the present invention is that it enables a lending institution to offer higher security values and a significantly larger range of approved securities for assets that are held in a diversified portfolio.

Monitoring the investment portfolio involves making a series of computations to determine the market value and composition of the portfolio, and the application of two separate LVRs to ensure that the maximum security value is made available to the borrower. The two LVRs applied are a diversified LVR, and a standard LVR. On completion of these computations, any additional security value available to the borrower is automatically applied to their investment portfolio. Margin Call

Should the calculated maximum security value of the portfolio fall beneath the minimum security value required to secure the loan the borrower will become subject to a margin call. The borrower has many options for margin loan clearance including depositing funds into the margin loan account, contributing additional approved securities or selling all or part of the portfolio. Selling part of the portfolio will of course reduce the amount of leverage available to the borrower once the call for margin loan clearance has been remedied.

Should the borrower opt to sell part of their portfolio to clear the margin call, the present invention further provides a method for minimisation of the amount of security holdings that must be sold to clear the margin call. Specifically, where the portfolio includes more than 1/MaxP securities the method includes the step of selling individual security holdings that are higher than the maximum value for diversification down to the minimum value for diversification, starting with the lowest LVR security. The exception to this rule is when the security has a diversified LVR that is equal to the standard LVR. If the call for margin loan clearance has still not been cleared by selling all of the lowest LVR securities, the maximum LVR security remaining is sold in the same manner. These steps are repeated until such time that only 1/MaxP securities remain in the portfolio. Once only 1/MaxP securities remain in the portfolio, the (1/MaxP - 1) security is sold. Where the portfolio has (1/MaxP - 1) or less securities in the portfolio, the lowest LVR security is sold first.

Brief Description of the Drawings

Preferred embodiments of the present invention are herein described by way of example, only with reference to the accompanying drawing wherein:

• Figure 1 is a block diagram of the system of the present invention,

• Figure 2 is a flow diagram of the process of the present invention,

• Figure 3 is a schematic depiction of preferred architecture of a system for performing the present invention, • Figure 4 is a flow diagram for a process of clearing a call for margin loan clearance according to the present invention by sale of portfolio assets, and

• Figure 5 is a diagrammatic depiction of warehousing of security flow. Figure 1

Figure 1 is a block diagram of the system of the present invention. The system 100, as shown in Figure 1, includes an investor computer 102, an investment advisor computer 104 and server 106 which communicate with each other via a communications network 112, such as one or more wired or wireless networks (e.g. 802.1 lb/g, Bluetooth, the Internet). The investor computer 102 may be a processor incorporated into a mobile phone, a public kiosk computer terminal, or a standard computer (e.g. that provided by IBM Corporation <http://www.ibm.com>) running a standard operating system (such as Microsoft Windows™, Unix, Linux or Apple OS X). The server 106 is a standard web server providing access to a network service (e.g. an online email service) to authenticated users.

The investor computer 102 and investment advisor computer include communications modules 108 that (e.g. under the control of a user) generates request messages for sending to, and processes response messages received from, the authentication agent module 108 and the vendor server 106 via the network 112. The communications module 108 may be a web browser application running on the computer (e.g. Microsoft Internet Explorer™, Netscape Navigator, Mozilla Firefox or Apple Safari). The system is more accessible to users by not requiring special software to be installed in order for authentication to occur (in contrast to existing single sign-on services). The request/response messages generated by the system 100 may be in the Hypertext Transfer Protocol (HTTP) or any other communications protocol, such as a schema-based or XML data communications protocol), and these messages may be encrypted using a Secure Sockets Layer (SSL), Transport Layer Security (TLS) or other encryption mechanism (preferably using at least 128-bit encryption). The server 104 is a standard web server including an authentication agent module 110 and a first and second database 114 and 114' . The module 110 and database 114 are stored in the memory of the authentication server 104. The memory includes one or more physical data storage media (e.g. a hard disk), random access memory (RAM) and/or read-only memory (ROM). The authentication server 104 sends and receives request/response messages via the network 112. The database 114 may include a relational database (such as MyS QL<hτtρ .7/www.my sql. or g>), a symbol-delimited file and/or a hash table.

The processes performed by the communications module 108 are preferably implemented in software and executed by the investor computer 102 or investment advisor computer 104 and the server 106 respectively. Those skilled in the art will appreciate that the processes performed by the modules 108 and 108' can be executed, at least in part, by dedicated hardware circuits, e.g. Application Specific Integrated Circuits (ASICs) or Field- Programmable Gate Arrays (FPGAs).

An investor operates the investor computer 102 (or the investment advisor operates the investment advisor computer 104) to control the communications module 108 to send user login data to the server 106 for authenticating the user. An authentication agent module 110 processes the user login data and may automatic generation of a key identifier by a one-time password device (e.g. a RSA SecureID token, Vasco Digipass or ActivCard Token). Alternatively, the secondary identification data may include an identifier stored on a personal smart card, or one or more identifiers generated based on the user's bionietric attributes, e.g. by fingerprint readers or retinal scanners.

The authentication agent module 110 may be configure to perform additional processing (e.g. to perform a Completely Automated Public Turing testing process to tell Computers and Humans Apart (CAPTCHA) that involves generating challenge and receiving a response to the challenge to determine whether the response is from a human) that enables the module 110 to distinguish between authentication requests from human users and other types of requests, such as those generated automatically by a computer posing as users (similar to a Denial of Service attack). This minimises the processing of illegitimate requests that block legitimate user requests to authenticate with the module 110. After the user (102 or 104) has been authenticated by the authentication agent module 110, the user is able to access a range of modules 111. These may include, for example, a module relating to their margin lending account and portfolio details. In a preferred embodiment they can place trades via the Australian Stock Exchange, withdraw funds from their loan or model their position in a variety of simulated positions. Using a range of platforms the user is able to get a representation of the breakdown of their portfolio into its constituent parts, namely the diversified and standard portions including data setting out the percentage of each security in each portion and whether or not the security is restricted. The user is also able to see the current level of their loan balance in so far as it relates to their available security value, the funds they have available to trade with or withdraw, their current gearing ratio and credit limit as well as any personal information.

Different levels of authorisation may exist to limit access to certain modules. For example, an investment advisor may be authorised to access information in relation to the investor. The investment advisor may also be authorised to view more than one account (such as, for a number of different clients) .

Figure 2

Figure 2 is a flow diagram depicting the steps in the system and method of the present invention for automatically optimising a security value of an investor investment portfolio financed using a margin lending facility. The process begins at 500, typically when an investment adviser, investor, banker or the like logs into the relevant communications system and typically goes through an authentication process in order to communicate 510 with the relevant server.

The user then registers investor data in a first database held on the server 520, the data including investor name, address, and other identifiers. The user then registers investment portfolio data 530 in a second server database, including details of a plurality of security holdings. Server software then calculates 540 a market value for the portfolio and portfolio composition data based on a level of diversification in the portfolio. The software specifically divides the portfolio into a diversified portion data and standard portion data:

From this the server generates 550 maximum security value data by application of a diversified LVR to the diversified portion data and a standard LVR to the standard portion data. This maximum security value data is then compared 560 to a predetermined minimum security value required to secure the margin loan. If the maximum security value is equal to or greater than the minimum security value 570, then the system continues to automatically recalculate the market value and composition data for the portfolio. If the minimum security value is greater than the maximum security value 580, then the system notifies the user that clearance of the margin loan is required. Figure 3

In a preferred embodiment the system depicted in Figure 1, operates at the server level under the architecture depicted in Figure 3.

Graphic User Interface (GUI) Layer

The GUI layer is designed as the final output layer and is what the user actually sees on their computer screen. It contains internet based displays such as E*TRADE Australia and bank internet links. For example when the system of the present invention is provided by a bank, the displays include internal bank system and customer facing (statements) displays. The GUI layer enables posting of basic requests to the GUI Instruction / Data Output Integration Layer and receives back the required formatted data and displays it to the user. GUI Instruction / Data Output Integration Layer

This layer is used to interpret information received from the GUI layer and convert it to data required for the data manipulation layer, and vice versa. It is an abstract layer which has no direct access into the databases and contains many rules and thus can be considered a Business Objects type layer. Data manipulation layer

The data manipulation layer receives information from the GUI Instruction / Data Output Integration Layer in the format which it requires and pushes it to the data access layer. Once received back, it is this layer which then manipulates the data into a valid valuation based around diversification rules which can be used by the GUI Instruction / Data Output Integration Layer.

Data Access Layer

The data access layer has been designed to access the stored information held in the database tables. It contains the Client Position engine which works out the client's loan positions and the Diversification Engine which computes the allocations of each security holding of the diversified or standard portions of the portfolio. This layer is the only part of the process which accesses the database table information. Architecture

The architecture of the implementation is around a client-server database model. The GUI is held on the client side of the model and is generally a Windows or Unix based GUI. In some instances the GUI is in fact an output (eg paper statements). The GUI Instruction / Data Output Integration Layer sends and receives the data via a network interface with the GUI. This layer is stored on the server side of the network as a series of objects and packages. The data manipulation layer and the data access layer are also stored on the server side and communication between the packages (and therefore the layers) is via procedure calls to the objects and packages they represent. Figure 4

Figure 4 is a flow diagram setting out a process for margin loan clearance according to the present invention by sale of portfolio assets.

This process includes the operation of 'put options' and 'bid/ask' spread. A put option is an option which gives a buyer the right, but not the obligation, to sell the underlying security at an agreed price at any time from the purchase of the put option until a predetermined expiry time. The buyer pays a premium for this right to the seller. If the buyer of the put option exercises their right to sell the security, the seller of the put option must purchase the security at the agreed price.

A bid/ask spread is the difference between the price quoted for selling the security on the market (referred to as the 'ask') and the price quoted to buy the security on the market (the 'bid'). The bid/ask spread is calculated as (ask - bid)/bid.

Figure 4 depicts the following process steps for clearing a margin call:

1. Rank the security from lowest LVR to highest.

2. Check bid/ ask spread of lowest ranked security. For securities with the same LVR, bid/ ask spread (lowest to highest) is to be the next attribute to rank on.

3. If bid/ ask spread is less than 10% (ie sufficiently small to not affect price too adversely), sell least of: amount required for margin loan clearance and total market value at a bid price up to 10% less than ask price.

4. If bid/ ask spread is greater than 10% (ie it will adversely affect price), move onto the next security in list. 5. If still in margin call, sell next security in list with appropriate bid/ ask spread. Repeat until clearance of the margin loan or until there are only securities covered by put options and illiquid securities

6. Rank put option securities by variance in market value to security value (ie effective LVR) as this may be different due to higher LVRs based on strike price for securities covered by put options.

7. Check bid/ ask spread of lowest ranked security covered by put options. As before for securities with the same effective LVR, bid/ ask spread is to be the next attribute to rank on. 8. If bid/ ask spread is less than 10% (ie sufficiently small to not affect price too adversely), sell security covered by put options in parcels of lot size (ie for a put option with a lot size of 1,000, sell only in parcels of 1,000), sell least of: amount required for clearance of the margin loan and total market value (note that it may be required to exercise the put option to get the required market value) at a bid price up to 10% less than ask price following this rule. (Note that securities with put options are unlikely to have bid/ ask spread issues.)

9. If bid/ ask spread is greater than 10% (ie it will adversely affect price), move onto the next security in list.

10. If still in margin call, and all that is left are securities with a large bid/ ask spread, then warehousing of security will be required. (Warehousing is described in detail with reference to Example 5.)

Figure 5

Figure 5 illustrates the warehousing of security flow, a feature that may be utilised when clearing a margin loan according to the process of the present invention. Where security has a bid/ ask spread of greater than 10%, then a sell order is to be placed on the security at 10% below ask price. This is repeated for all securities required to clear the margin loan (which at this stage may be all). The security is then monitored and the price reviewed hourly. An appointed committee is then responsible for deciding whether to sell at greater than 10% spread, or to stand in the market as is. Examples

The present invention will be further described with reference to the following non-limiting examples.

Example 1 Example 1 sets out a simple portfolio value determination of the type that would be included in the steps of the present invention.

For this example, the investor having the margin loan holds 5 securities and 1 managed fund.

The maximum percentage (MaxP) for any security is set at 25%. Hence the calculation comprises the following steps: 1) Calculate C = 1/MaxP = 1/0.25 = 4 2) Rank the Securities as follows:

Sl (ANZ securities) $30,000

S2 (BHP securities) $30,000

S3 (Other securities) $20,000

S4 (Other securities) $10,000

S5 (Other securities) $5,000

S6 (ING managed fund) $5,000

3) Securities ranked C and lower, i.e. securities ranged 4, 5 and 6, have their entire value added to the diversified portion of the portfolio's (ING managed fund) $5,000 S5 (Other Securities) $5,000

S4 (Other securities) $5,000

4) Other securities have their diversified value set in accordance with the formula set out above:

S3 (Other securities) (5,000 + 5,000 + 10,000)/(l/0.25 - 3) = $20,000 S2 (BHP securities) (5,000 + 5,000 + 10,000 + 20,000)/(l/0.25 - 2) = $20,000

Sl (ANZ securities) (5,000 + 5,000 + 10,000 + 20,000 + 20,000)7(1/0.25 - 1) = $20,000 5) Thus the portfolio value equals

Any excess, i.e. $20,000 becomes the standard portfolio value. Example 2 Example 2 illustrates the determination of a portfolio valuation in a portfolio that includes restricted securities.

Restricted securities generally have low liquidity hence a borrower may struggle to sell restricted securities except at a substantial discount. Accordingly, if the investment portfolio includes restricted securities, further computations are required to ensure that the restricted securities do not comprise more than a limited percentage (MaxR) of the total value of the portfolio. Typically, the limited percentage (MaxR) is set at around 50% or lower in order to optimise flexibility for the borrower whilst reducing the risk to the lending institution.

If the sum of the diversified value of restricted securities divided by the sum of the diversified value of the portfolio is greater than the limited percentage MaxR, then the diversified value of restricted securities is reduced. This reduction in the diversified value of the restricted securities (and hence the overall value of the diversified portion of the portfolio) can cause the value of a non-restricted security to breach the MaxP limit. As a result, the maximum diversified value of each non restricted security may need to be adjusted prior to this calculation. As in example 1, the borrower holds 5 securities (three of which are restricted securities) and 1 managed fund. The lending institution has set the limited percentage (MaxR) of the total value of the portfolio which may be comprised of restricted securities at no more than 50%. The restricted security calculation is performed on the diversified portfolio values (i.e. the steps detailed in Example 1 have already been performed such that no single security holding comprises more than MaxP - 25% of the portfolio). The securities include the following: Sl (ANZ securities) $20,000

52 (BHP securities) (restricted) $20,000

53 (Other securities) (restricted) $20,000

54 (Other securities) (restricted) $ 10,000

55 (Other securities) $5,000 S6 (ING managed fund) $5,000

The relevant steps according to the present invention are as follows:

1) Calculate C = 1/MaxNR = 1/(0.25/(1-0.5)) = 2

2) Rank non restricted securities

Sl (ANZ securities) $20,000 S5 (Other securities) $5,000

S6 (ING managed fund) $5,000

3) Securities ranked C and lower, i.e. securities ranged 2 and 3 retain their actual value:

55 (Other securities) $5,000

56 (ING managed fund) $5,000 4) Other securities are reduced to the maximum diversified value in accordance with the formula set out above (using MaxNR):

Sl (ANZ security) (5,000 + 5,000)/(l/0.5 - 1) = $10,000 Non restricted securities:

S 1 (ANZ securities) $ 10,000 S5 (Other securities) $5,000

S6 (ING managed fund) $5,000 5) Σ(A11 Restricted) = $50,000 2) Σ(A11 Portfolio) = $70,000 3) Reduce securities to restricted market value as follows: Rl (ANZ securities) $10,000

R2 (BHP securities) (restricted) $8,000

R3 (Other securities) (restricted) $8,000

R4 (Other securities) (restricted) $4,000

R5 (Other securities) $5,000

R6 (ING managed fund) $5 ,000

4) Thus the portfolio value equals:

It is envisaged that the above diversification and non restricted/ restricted security calculations will be computed in real-time using an online electronic broking system such as the E*TRADE Australia service, provided by ETRADE Australia Securities Limited. This will enable borrowers to trade online in real-time without having to wait for authorisation from the lending institution before completing online trades. Example 3

Example 3 sets out an example of a portfolio valuation as applied to a portfolio including options.

As in example 1, the borrower holds 5 securities (one of which is partially covered by a margin loan clearance option, and two of which are restricted) and 1 managed fund. The maximum percentage (MaxP) for any security is set at 25%, and the max percentage for the sum of all restricted securities (MaxR) is set at 50%. The securities held are as follows:

51 (ANZ securities) $20,000

52 (BHP securities) $20,000 S3 (Other securities) - Restricted $20,000

54 (Other securities) - Restricted $ 10,000

55 (Other securities) $5,000

56 (ING managed fund) $5,000 01 (Option covering $ 15,000 ANZ) $ 1 ,000 According to the method of the present invention the following steps are carried out.

1) ANZ $15,000 and Ol $1,000 are allocated to standard valuation Portfolio left to allocate to Diversified Valuation is

52 (BHP securities) $20,000

53 (Other securities) - Restricted $20,000 S4 (Other securities) - Restricted $ 10,000

55 (Other securities) $5,000

56 (ING managed fund) $5,000 Sl (ANZ securities) $5,000

2) The portfolio allocated to the Diversified Valuation is then passed through the steps as per example 1 and the following Diversified Portfolio is returned

R2 (BHP securities) $12,500

R3 (Other securities) (restricted) $12,500

R4 (Other securities) (restricted) $ 10,000

R5 (Other securities) $5,000 R6 (ING managed fund) $5,000

Rl (ANZ securities) $5,000 5) The overall Portfolio Value therefore equals:

It is to be understood that various additions, alterations and/or modifications may be made to the parts previously described without departing from the ambit of the invention.

Future patent applications may be filed in Australia or overseas on the basis of or claiming priority from the present application. It is to be understood that the following provisional claims are provided by way of example only, and are not intended to limit the scope of what may be claimed in any such future application. Features may be added to or omitted from the provisional claims at a later date so as to further define or re-define the invention or inventions.

The word 'comprising' and forms of the word 'comprising' as used in this description and in the claims does not limit the invention claimed to exclude any variants or additions.

Modifications and improvements to the invention will be readily apparent to those skilled in the art. Such modifications and improvements are intended to be within the scope of this invention.

Claims

The claims defining the invention are as follows:

1. An automated method of optimising a security value of an investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the method including the steps of:

B applying a diversified loan-to-value ratio (LVR) to the diversified portion of the portfolio and a standard LVR to the standard portion of the portfolio to calculate a maximum security value, and

2. A method according to claim 1 which includes the further steps of, AAA registering details of the investor in a first database, and

AA registering details of the investment portfolio associated with the investor in a second database, including information relating to the plurality of security holdings.

3. A method according to claim 1 or claim 2 wherein step A is carried out according to the following steps:

1

A(b) computing C = where MaxP is the greatest percentage of the portfolio

MaxP that a single security may comprise and still be eligible for a diversified LVR,

A(c) for each of the N securities S_n where n = N, N-I ...1, computing the diversified value of the security D_n as:

A(C)(I) For n = [N, C], D_n = S_n , and A(c)(ii) For n = [C - l,l] , D_n

4. A method according to claim 1 or claim 2 wherein the portfolio includes cash and options and step C includes:

A(I) apportioning securities by,

A(l)(a) allocating all eligible securities to the diversified valuation,

A(I )(b) allocating all remaining non eligible securities to the standard variation, then

A(2) determining the market value and composition of the portfolio by,

A(2)(a) ranking each of N securities from Si (greatest value) to S_N (least value),

1

A(2)(b) computing C = where MaxP is the greatest percentage of the

MaxP . portfolio that a single security may comprise and still be eligible for a diversified LVR,

A(2)(c) for each of the N securities S_n where n = N, N- 1...1 , computing the diversified value of the security D_n as:

(i) For AI = [N, C], D_n = S_n , and

(ii) For n = [C - l,l] , D_n

5. A method according to claim 1 or claim 2 wherein the portfolio includes restricted securities and the method includes the steps of:

A(3) For each of the N' diversified non-restricted securities Ni?:

A(3)(a) ranking each of N' securities from NRj (greatest value) to ^~NR_N- (least value), MaxP

A(3)(b) computing MaxNR = where MaxNR is the greatest

1

A(3)(c) computing C=

MaxNR

A(3)(d) for each of the N' securities NR_n • where n' = N', N'- 1...1 , re-compute the diversified value D_n- as:

(i) foτ n'= [N',C], D_n, = D_n ,

(ii) for ri= [C-1.1], D_n, = min

A(3)(e) labelling the set of restricted securities as RS,

:

for each of the N diversified securities D '„ where n = N, N- 1...1 : (i) if S_n £ RS, retain D_n-,

(ii) if S_n e RS , replace D_n with R_n such that

where ∑D_ι,,S_ι e RS is the sum of the diversified market value of

;=1 the restricted securities.

6. A method according to any one of claims 1 to 5, wherein if the margin loan requires clearing and the portfolio includes more than 1/MaxP securities, the method includes the further steps of:

D selling individual securities until the loan is cleared, the securities being sold in the following order:

D(I) securities that are higher than the maximum value for diversification down to the minimum value for diversification starting with the lowest LVR security, then

D(2) lowest LVR securities up to the highest LVR security holdings until only 1/MaxP securities remain in the portfolio, then

D(3) l/(MaxP-l) securities.

7. A method according to any one of claims 1 to 6, wherein if the margin loan requires clearing and the portfolio includes only l/(MaxP-l) or less securities, the method includes the further step of:

E selling the lowest LVR security first.

8. A system for automatically optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the system comprising,

(1) a server, and

(2) one or more user terminals located in or more user locations, wherein the server,

A determines a market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion,

B applies a diversified LVR to the diversified portion of the portfolio and a standard LVR to the standard portion of the portfolio to calculate a maximum security value, and

9. A system according to claim 8 which includes the further steps of, AAA registering details of the investor in a first database, and

AA registering details of the investment portfolio associated with the investor in a second database, including information relating to the plurality of security holdings,

10. A system according to claim 8 or claim 9 wherein the server carries out the following steps:

A(a) ranking each of N securities from Si (greatest value) to S_N (least value),

1

A(b) computing C = where MaxP is the greatest percentage of the portfolio

_. MaxP that a single security may comprise and still be eligible for a diversified LVR,

A(cχi) For n = [N,C], D_n = S₁₁ , mά

A(c)(ii) For n = [C - l,l] , D_n

11. A system according to claim 8 or claim 9 wherein the portfolio includes cash and options and the server carries out the following steps:

A(I) apportioning securities by,

A(l)(a) allocating all eligible securities to the diversified valuation,

A(l)(b) allocating all remaining non eligible securities to the standard variation, then

A(2) determining the market value and composition of the portfolio by, A(2)(a) ranking each of N securities from Si (greatest value) to S_N (least value),

1

A(2)(b) computing C = where MaxP is the greatest percentage of the

MaxP portfolio that a single security may comprise and still be eligible for a diversified LVR, A(2)(c) for each of the N securities S_n where n = N, N- 1...1 , computing the diversified value of the security D_n as:

(i) For « = [N, C] ₅ Z),, = S_n , and

(ii) For n = [C - l,l] , D_n = mmim ι=n+\

'« » 1

— n

MaxP

12. A method according to claim 8 or claim 9 wherein the portfolio includes restricted securities and the system carries out the steps of:

A(3) For each of the N' diversified non-restricted securities Ni?:

A(3)(a) ranking each of Ν' securities from NRl (greatest value) to ΝRΝ' (least value),

A(3)(b) computing MaxNR where MaxNR is the greatest

percentage of the non-restricted section of the portfolio that a single security may comprise and still be eligible for a diversified LVR,

1

A(3)(c) computing C -[^■-

MaxNR

A(3)(d) for each of the N' securities NR_n> where n' = N', N'-l ...1 , re-compute the diversified value D_n > as:

(i) for n'= [N', C], D_n, = D_n ,

(ii) for

A(3)(e) labelling the set of restricted securities as RS,

A(3)(f) if (∑A.,S, 6 RS] > :

for each of the N diversified securities D '„ where n = N, N-I ...1 : (i) if S_n <£ RS , retain D_n ■ (ii) if S_n s RS, replace D_n with R_n such that

where '⁼¹ is the sum of the diversified market value of the restricted securities.

13. A system according to any one of claims 8 to 12, wherein if the margin loan requires clearing and the portfolio includes more than 1/MaxP securities, the system performs the further steps of:

D selling individual securities until the loan is cleared, the securities being sold in the following order,

D(3) l/(MaxP-l) securities.

14. A system according to any one of claims 8 to 13, wherein if the margin loan requires clearing and the portfolio includes only l/(MaxP-l) or less securities, the server carries out the further steps of:

E selling the lowest LVR security first.

15. A method for automatically optimising a security value of an investor investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the method comprising:

A communicating to one or more remote user terminals, a determined market value and composition of the portfolio based on a level of diversification in the portfolio, the composition of the portfolio including a diversified portion and a standard portion, B communicating a maximum security value to the one or more remote user terminals, the maximum security value calculated based on application of a diversified LVR to the diversified portion of the portfolio and a standard LVR to the standard portion of the portfolio, and

C communicating to the one or more remote user terminals advice as to whether the margin loan requires clearing, the advice being based on a comparison of the maximum security value calculated against a minimum security value required to secure the margin loan.

16. A method according to claim 15 including the further steps of, .

AAA communicating investor registration details from one or more user locations for recordal in a first database, and

AA communicating details of the investment portfolio associated with the investor from one or more user locations for recordal in a second database, the details including information relating to the plurality of security holdings.

17. A method according to claim 15 or claim 16 wherein the market value and composition of the portfolio is determined according to the following steps:

A(a) ranking each of N securities from Sj (greatest value) to S^ (least value),

1

A(b) computing C = where MctxP is the greatest percentage of the portfolio

A(cXi) For n = [N, C], D_n = S_n , and

A(c)(ii) For n

18. A method according to claim 5 or claim 16 wherein the market value and composition of a portfolio comprising cash and options is determined according to the following steps:

A(I) apportioning securities by, A(l)(a) allocating all eligible securities to the diversified valuation,

A(l)(b) allocating all remaining non eligible securities to the standard valuation, then

A(2) determining the market value and composition of the portfolio by,

1

A(2)(b) computing C = where MaxP is the greatest percentage of the

MaxP portfolio that a single security may comprise and still be eligible for a diversified LVR,

(i) For « = [N, C], D_n = S_n , and

(ii) For n = [C - l,l] , D_n = min J=IH-I

S_n,- 1

— n

MaxP

19. A method according to claim 15 or claim 16 wherein the market value and composition of a portfolio including restricted securities is determined according to the following steps:

A(3) For each of the N' diversified non-restricted securities Ni?:

A(3)(a) ranking each of N' securities from NRj (greatest value) to ΝR^> (least value) ,

MaxP

A(3)(b) computing MaxNR = where MaxNR is the greatest

1

A(3)(c) computing C=

MaxNR

A(3)(d) for each of the N' securities NR_n > where n' = N', N'- 1...1 , re-compute the diversified value D_n ■ as:

(i) for n'= [N', C], D_n, = D_n ,

A(3)(e) labelling the set of restricted securities as RS,

A(3)(f) if D, :

for each of the N diversified securities D '„ where n = N, JV- 1...1 : (i) if S_n <£ RS , retain O_n;

RS

(U) if * , replace Dn with Rn such that

∑D_r,S, e RS where ^;=1 is the sum of the diversified market value of the restricted securities.

20. A system for automatically optimising a security value of an investment portfolio financed using a margin lending facility, the investment portfolio including a plurality of security holdings at least some of which comprise a diversified portion of the portfolio, the system including a processor configured for:

B generating maximum security value data by application of a diversified LVR to the diversified portion data and a standard LVR to the standard portion data, and generating data regarding clearance of the margin loan by comparison of the maximum security value data against data relating to the minimum security value required to secure the margin loan.

21. A system according to claim 20, wherein the processor is further configured for:

AAA registering in a first database, investor data received from one or more remote user locations, and

AA registering in a second database, investment portfolio data associated with the investor and received from one or more remote user locations, the data including information relating to the plurality of security holdings.

22. A method according to claim 20 or claim 21 wherein the data of step C is determined according to the following steps:

A(b) computing C = where MaxP is the greatest percentage of the portfolio

I MaxP I that a single security may comprise and still be eligible for a diversified LVR,

A(c)(i) For n = [N, C], D_n = S_n , and

N

A(c)(ii) For n = [C -l,l], D_n = min S₁₁,-

- -n

MaxP

23. A method according to claim 20 or claim 21 wherein the portfolio includes cash and options and the data of step C is determined according to the following steps,

A(I) apportioning securities by,

A(I )(a) allocating all eligible securities to the diversified valuation,

A(2) determining the market value and composition of the portfolio by,

A(2)(a) ranking each of N securities from Sj (greatest value) to S_N (least value),

1

A(2)(b) computing C = where MaxP is the greatest percentage of the

. MaxP portfolio that a single security may comprise and still be eligible for a diversified LVR, A(2)(c) for each of the N securities S_n where n = N, N- 1...1 , computing the diversified value of the security D_n as:

(i) For n = [N, C], D_n = S_n , and

(ii) For H = [C -I₅I], D_n = m mim !=»+!

^Jn > 1

— n

MaxP

24. A method according to claim 20 or claim 21 wherein the portfolio includes restricted securities and the method includes data generated by the steps of:

A(3) For each of the N' diversified non-restricted securities Ni?:

A(3)(a) ranking each of N' securities from NRj (greatest value) to ΝRjy (least value) ,

MaxP

A(3)(b) computing MaxNR = where MaxNR is the greatest

1

A(3)(c) computing C =

MaxNR '

A(3)(d) for each of the N' securities NR_n> where n' = N', N'-l ...1, re-compute the diversified value D_n > as:

(i) for n'= [N',C], D_n, = D_n ,

(ii) for

A(3)(e) labelling the set of restricted securities as RS,

A(3)(f) if [ J D₁. , S₁ e RS ] > MaxR x∑D,, :

for each of the N diversified securities D '„ where n = N, N-I ...1 : (i) if S₁₁ Z RS , retain O_n-, (ϋ) if S_n e RS , replace D_n with R_n such that

N

∑D,,S, e XS where ⁽⁼¹ is the sum of the diversified market value of the restricted securities.