CME Group has announced changes to the way it calculates the fixing prices for 13 of its dollar-based FX option contracts.
Currently CME calculates the fixing rate using three trades across its platforms in the one minute prior to 9am CT on a weighted basis. This is being increased to 20 trades from April 19, thanks to the broader and more substantive market data available.
The fixing is used by CME to determine whether or not expiring options contracts are in-the-money. The exchange’s clearing house automatically expires all in-the-money options and abandons those out-of-the-money, however FX markets often gyrate towards large expiries, meaning plenty of contracts hover on the cusp of being in- or out-of-the money at the 9amCT expiry.
The latest move means CME has reinforced the market data it uses to calculate the rate used to decide whether options are to be expired or abandoned, thus, theoretically at least, making it harder for any participant to manipulate the fixing rate as has been alleged in other processes such as the Vix contract expiry.
If 20 trades are not observable in the 60-second window, CME will take the midpoint of each bid and ask spread where available and average the resulting midpoints to calculate the fix, and if no trades are executed in the window, CME staff will calculate a synthetic futures price from quote vendor spot rates and the appropriate maturity forward points.
The currencies subject to the changes are all against the dollar, they are; GBP, CAD, JPY, CHF, AUD, MXN, NZD, ZAR. EUR, CZK, HUF, PLN and ILS.