CME to Change FX Option Expiry Process

CME Group says it will change the exercise and assignment
rules for all options on FX futures contracts.

Pending CFTC sign off, on March 24, CME will amend how it
handles options that end up precisely at the money on expiry. Currently, CME options
that are at least one tick in or out of the-money at expiration are
automatically exercised or assigned, and if the final underlying price happens
to occur exactly at a strike price, both calls and puts at that strike are also
expired without exercise. CME refers to this rule as “at the money is out of
the money.”

With the proposed change, a call option that ends up exactly
at-the-money will be exercised or assigned. An exactly at-the-money put option
will be expired unexercised or unassigned. At-the-money calls will now be
treated as in-the-money and exercised whereas at-the-money puts are treated as
out-of-the-money and abandoned.

“This change is being made at the request of market
participants employing risk-neutral “conversion” and “reversal” strategies,”
says CME in a customer advisory notice. “It will ensure that the strategy
remains risk-free even if the final underlying price happens to be exactly at
the option’s strike price, and will enhance liquidity as expiration approaches.”

The change applies to all CME options on FX futures, including
American and European-style quarterly, serial, monthly and weekly expirations. The
Merc says that contrary instructions (out-of-the- money exercises or
in-the-money abandonments) are not allowed for any of these options and adds “it
is possible that the change will be applied to options on futures in other
asset classes in the future”.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

 

Colin Lambert

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