Is the Use of Patents Promoting the Creation of New Types of Securities? October 3-4, 2008 - PowerPoint PPT Presentation

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Is the Use of Patents Promoting the Creation of New Types of Securities? October 3-4, 2008

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... a list of new types of securities for the past 25 years; ... Mortgage-Backed Securities (MBS) and Asset Backed Securities (ABS) = credit risk transferring; ... – PowerPoint PPT presentation

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Title: Is the Use of Patents Promoting the Creation of New Types of Securities? October 3-4, 2008


1
Is the Use of Patents Promoting the Creation of
New Types of Securities?October 3-4, 2008
  • Stefania Fusco
  • JSD Candidate
  • Stanford Law School

2
Reason for Investigating This Issue
  • Patents grants of legal monopoly
  • Patents gt market inefficiencies reduction of
    public domain
  • Justification for granting patents they foster
    innovation
  • ISSUE gt if patents do not produce (additional)
    innovation there is no reason to grant them
  • Specifically, if after State Street there has not
    been an increase in the level of innovation of
    securities there is no reason to create
    proprietary rights on them.

3
Methodology
  • Step 1 create a list of new types of securities
    for the past 25 years
  • Step 2 find patents and patent applications for
    securities
  • Step 3 analysis of the findings.

4
Step 1 Creation of a List of New Types of
Securities
  • First issue
  • Finding a benchmark to identify innovative
    types of securities
  • () most innovations in this field are
    evolutionary adaptations of prior products ()
    almost nothing is completely new and the degree
    of newness or novelty is inherently subjective.
    Tufano 2002

5
How Innovative Types of Securities Can Be
Identified?
  • From a patent perspective a new type of security
    should be
  • New gt it performs a new financial function or an
    existing financial function but in an enhanced
    way
  • Useful gt marketable it has a definable price
    and risk
  • Nonobvious gt no simply packaging
  • Talk about this with experts in the field
  • Financial innovations can be described in
    mathematical terms
  • Financial Function gt Mathematical Function
  • THEREFORE the mathematical models used to
    calculate price and risk of securities changes
    when the security under consideration performs a
    new or improved financial function.

6
Example 1 Transition from MBS ABS to CDO
  • Mortgage-Backed Securities (MBS) and Asset Backed
    Securities (ABS) gt credit risk transferring
  • Change built-in credit support
  • Collateralized Debt Obligation (CDO) gt enhanced
    credit risk transferring and prepayment risk
    hedging.

7
Example 2 CDS
  • Credit Default Swaps (CDS) gt provide insurance
    against the risk of default of a specific
    company
  • No direct predecessor can be identified.

8
A Few Considerations
  • Problem
  • this method has still a subjective component
  • Benefits
  • It is linked to the performance of new financial
    function
  • It provides objectivity to the analysis
  • It operates systematically across the entire
    securities population.

9
Results
  • Creation of a preliminary list of types of
    securities which emerged over the past 25 years
    gt 123 types of securities have been identified
  • From the preliminary list 66 types of securities
    have been selected as innovative.

10
Distribution of Innovative Types of Securities
between 1980 - 2007
11
Step 2 Find Patents and Patent Applications for
Securities
  • Implied
  • Reviewing the patents issued and the patent
    applications submitted after 1998 which were
    assigned to subclasses 35, 36R and 37 of the
    general class 705
  • Searching the USPTO database based on keywords.

12
Findings 1
  • No diversionary drafting
  • Most of the claimed inventions represented
    categories of financial innovations other than
    securities such as
  • Risk management (investment, strategies, pension
    funds and mutual funds, etc.)
  • Banking (transactions, billing, payments, etc.)
  • Financial Information Systems (software,
    e-commerce, data, etc.)
  • Financing (loans, leasing, mortgages, etc.)
  • Asset Evaluation (equity, real estate, interest
    rates, etc.)

13
Findings 2 Number of Patents and Patent
Applications
(a) Number of patents reviewed 1985
(b) Number of patent applications reviewed 5921
(c) Number of patents on securities found 18
(d) Number of patent applications on securities found 132
(e) Number of patents on new securities found 7
(f) Number of patent applications on new securities found 38
Ratio (c)/(a) 0.91
Ratio (d)/(a) 2.23
Ratio (e)/(c) 38.89
Ratio (f)/(d) 28.79
14
Distribution of Patents Applications on
Securities Between 1998 - 2008
15
Step 3 Analysis of the Findings
  • No specific trend in the creation of innovative
    types of securities
  • No increase in innovation after 1998
  • After initial fascination for patent
    protection, innovators appear to have lost
    interest.

16
Conclusion
  • At this time, no entirely conclusive
    determination is possible
  • However, it is still of great significance that
    the number of patent applications has decreased
    whereas the rate of innovation has remained
    constant
  • More investigation is required gt interviews with
    market participants.

17
Next gt Second Possible Research Question
  • How and why the financial sector has been
    successful at innovating, absent a significant
    role for the patent system?
  • Need to conduct interviews with market
    participants.

18
Preliminary Interviews With MSCI-Barras Employees
  • MSCI-Barra
  • leading provider of investment decision support
    tools to investment institution worldwide
  • Products gt mostly indices, portfolio risk and
    performance analytics for use in managing equity,
    fixed income and multi asset class portfolios
  • Barra models and risk and return portfolio
    analytics set the industry standard in financial
    risk management for the worlds largest asset
    management firms

19
People Interviewed at MSCI-Barra
  • Product Managers
  • Quantitative Analysts
  • Researchers
  • Software Engineers.

20
Four Preliminary Findings
  1. Nobody knew about the possibility of patenting
    their innovations except for the person who
    worked in the research department
  2. They see patent as a non necessary complication
    gt there are other ways to recoup RD expenditure
    (consistent with Tufano 1990) RD expenditure
    is low and returns are high
  3. They did not like the idea of having to disclose
    gt they want to stay ahead of the learning curve
    (consistent with Herrera and Schroth 2003)
  4. They did not like the idea of creating illiquid
    securities gt a certain amount of imitation is
    good because it helps the security to became
    widespread and known by investors (consistent
    with Herrera and Schroth 2003).

21
  • The End

22
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