CME Currency Fixing Price Methodology

On Sunday, April 3, 2005, on CME® Globex® and on Monday, April 4, 2005, on the CME Upper Trading Floor, CME begins trading CME European-style foreign exchange (FX) options. European-style options by definition are exercised only at expiration. These new options will be exercised at expiration based upon the “CME currency fixing price,” which is a volume-weighted average price for the nearby currency futures contract released as soon as practicable after 9:00 a.m. Central time (10:00 a.m. Eastern time). CME calculates & publishes the “fixing prices” daily for its two European-style FX options, but on option expiration days (usually Fridays), it is used to exercise in-the-money CME Euro FX and CME Japanese Yen European-style options.

The methodology for calculating the CME currency fixing price is composed of several “tiers” and is consistently applied to each nearby currency futures contract underlying the European-style option. Depending upon the pricing history unique to each currency futures contract, the resulting CME currency fixing price calculations can be based on varying tiers. For example, the British pound and Swiss franc CME currency fixing prices might be based on Tier 2 (when listed for trading at a future date), but the Euro FX and Japanese yen fixings might be based only on Tier 1 on the same day. The “fixing prices” are rounded to the nearest whole (one-point) tick as defined by the respective contract’s Price Increment rule.

Tier 1	Take the two-minute average of sale (trade) prices, weighted by volume where available, from 8:58 to 9:00 a.m. Central time on the day of determination of the CME currency fixing price.
Tier 2	If no sales (trades) occurred during the two-minute interval noted above, take the midpoint of each bid & ask spread where available and average the resulting midpoints over the two-minute interval. However, when looking at each bid / ask spread, if it is wider than a specified number of points (inputted variable, e.g., 3 points for Euro and Japanese yen, 4 points for British pound, etc.), then ignore that average bid & ask pair in the calculation.
Tier 3	If no sales (trades) and no bid and ask prices occurred during the two-minute interval, then take the five-minute average of sale (trade) prices, weighted by volume where available, from 8:55 to 9:00 a.m. Central time.
Tier 4	If no sales (trades) occurred during the five-minute interval noted above, take the midpoint of each bid & ask spread where available and average the resulting midpoints over the five-minute interval. However, when looking at each bid / ask spread, if it is wider than a specified number of points (inputted variable, e.g., 3 points for Euro and Japanese yen, 4 points for British pound, etc.), then ignore that average bid & ask pair in the calculation.
Tier 5	If no sales (trades) and no bid and ask prices occurred during the five-minute interval, then Exchange staff shall take into consideration any other information it deems appropriate to determine the CME currency fixing price for that day. This information may include, but is not limited to the following, and the procedures to determine the information may be performed in any order by Exchange staff: (1) repeat the steps described in Tiers 3 or 4 at ever increasing five-minute increments (e.g., intervals of 10, 15, 20, etc. minutes) until data is obtained; (2) derive synthetic futures prices from quote vendor spot rates and appropriate maturity forward points; and (3) set the CME currency fixing price using any other information or method deemed appropriate.

Knowledge of the forced exercise of all in-the-money options combined with automatic forced abandonment of all at- and out-of-the-money options enable the Clearing House, clearing firms and their customers to predict shortly after 9:00 a.m. Central time on Friday, which expiring FX options positions will be assigned futures positions. Therefore, customers/clearing firms will know to hedge or trade out of the newly assigned futures positions at a time when the futures and OTC markets are open and trading. Since the OTC FX options market also values its expiring options at 9:00 a.m. Central time each day, OTC market participants can look at their combined OTC options, futures and European-style futures options books at the same time and make appropriate trading decisions. This compatibility makes CME European-style FX options appealing to OTC FX options traders.