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Q1
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How are settlement prices determined on the last business day of each month?
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A1
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Settlement prices for domestic stock index futures and options are
determined on the basis of their fair value, i.e., by reference to the closing cash index value
plus finance charges less anticipated dividends. Because the final cash index value may not be
known for several minutes past the cash close, the cash index component of the calculation will be
surveyed at 3:15 p.m. (Chicago time) and settlements will be made available shortly thereafter. As
is the practice with other Exchange products, fair values will be determined through a survey of
market participants.
That survey will be conducted by Exchange staff. Settlement prices will be made
available shortly after sampling the 3:15 p.m. (Chicago time) cash index values. CME® stock index
futures and options will close at 3:15 p.m. (Chicago time) on the last business day of each month
when FV settlement procedures are employed. This is fifteen (15) minutes past the normal cash
equity market close at 3:00 p.m. (Chicago time).
Regular settlement procedures will be observed on all other trading days apart from
the last business day of each month. |
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Q2
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How will settlements be determined if the cash index value is unavailable at 3:15 p.m.
(Chicago time)?
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A2
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In the event that the cash value of any index affected by these procedures is
unavailable at 3:15 p.m. (Chicago time), due to a mechanical failure of quotation services, settlement values will be determined
as follows...
- The cash index value sampled for use as the basis of the fair value calculation
shall be based upon the next available live quotation of the index prior to 3:20 p.m.
(Chicago time).
- If a live cash index value does not become available prior to 3:20 p.m. (Chicago
time), the cash index value sampled for use at the basis of the fair value calculation shall be
based on the most recent live quotation that was posted subsequent to 3:00 p.m. (Chicago)
time.
- If a live cash index value was not posted subsequent to 3:00 p.m. (Chicago
time), then regular settlement procedures shall be applied to the market so affected.
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Q3
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What products are affected by this procedure?
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A3
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All domestic stock index futures and options are affected by this
procedure. That includes the S&P 500®, E-mini
TM
S&P 500, NASDAQ-100®, E-mini NASDAQ-100, S&P/Citigroup 500 Growth Index, S&P 500
/Citigroup Value Index, the S&P MidCap 400
TM
, the Russell 2000®, E-mini Russell 2000 and FORTUNE e-50® markets. While the Nikkei® 225
will not be settled with use of this procedure, it will nonetheless be closed at 3:15 p.m. (Chicago
time) in sync with other stock index markets on the last day of the month. |
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Q4
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What is meant by the term "fair value"?
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A4
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Fair value represents the level at which futures theoretically should
be priced in relation to cash index values in the absence of transaction costs – albeit not where
they necessarily will trade. It represents a value at which arbitrageurs should find no opportunity
in buying or selling the cash/futures basis. It is typically calculated as a function of the cash
or spot index value plus financing charges (often determined as a function of 3-month LIBOR rates)
less any dividends that would accrue with the purchase and carry of all index constituents until
the final futures settlement date. |
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Q5
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Why has this procedure been implemented?
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A5
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Stock index products on the Exchange normally close and settle fifteen
minutes after the daily close of trading in cash equities. The cash/futures basis may be affected
to the extent that futures may fluctuate – sometimes sharply – during those final fifteen minutes.
As such, this may become a difficulty for institutional traders practicing coordinated cash/futures
strategies. Still, the opportunity to lay off equity market exposure during those fifteen minutes
subsequent to the cash close has proven quite beneficial.
The use of FV settlement procedures is intended
to address this so-called "tracking error" while still permitting trade to continue for fifteen
minutes past the 3:00 p.m. cash close. Conceptually, the fair value settlement is determined
when the cash market closes at 3:00 p.m., since any new information following 3:00 p.m. will not
affect the closing price of the stocks and the indexes. However, information or events
subsequent to the cash close may still impact futures prices. Market participants should be
aware of the possibility that futures may trade at prices apart from fair value settlement prices
between 3;00 p.m. and the close of the market at 3:15 p.m. on days on which FV settlement
procedures are applied.
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Q6
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What are the trading hours on days when FV settlement procedures are applied?
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A6
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Consistent with normal practices, Regular Trading Hours (RTH) for
stock index futures and options shall be conducted from 8:30 a.m. to 3:15 p.m. (Chicago time) on
the last day of each month – unless notified otherwise because of a holiday. As such, this
procedure will permit trading to continue for fifteen minutes past the normal 3:00 p.m. (Chicago
time) cash close while ensuring that settlements will be tied to cash values. This will be
followed, after a brief delay, by a three-minute post-settlement session. |
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Q7
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How will options be settled on days when FV settlement procedures are applied?
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A7
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Options on futures settlement values shall be established on the basis
of the adjusted fair value futures settlements on days when FV settlement procedures are employed.
This is conceptually similar to the procedures normally used to identify daily settlement prices
for away-from-the-money options or options which simply did not trade near the close. |
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Q8
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How will Market-on-Close (MOC) orders be handled on days when FV settlement procedures are
applied?
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A8
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Market-on-Close (MOC) orders shall be handled in the typical fashion
on days when FV settlement procedures are applied. In other words, an MOC order becomes a market
order to be filled at prevailing prices during the last thirty seconds of the trading session,
i.e., between 3:14:30 and 3:15:00. The filled price may or may not resemble the settlement
price. |
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Q9
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How will the post-close session be conducted on days when FV settlement procedures are
applied?
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A9
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Trading shall be permitted during the post-close session on days when
FV settlement procedures are applied at prices within the 3:14:30-3:15:00 closing range – per
normal practices. Note that these prices may depart from the fair-value settlement price. |
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