Covered Trades Involving Quarter Tick Eligible Months in CME Eurodollar Options

In May 2007, CME announced an expansion in the number of Eurodollar options contract months eligible to trade in quarter tick price increments.  The change allowed for trading in quarter ticks in outrights and spreads in the first two quarterly and first two serial expirations in circumstances where the premium of the outright or net differential of the spread was at or below 5 ticks.  The announcement clarified that covered trades involving quarter tick eligible options would be allowed only at the prevailing futures price and delta value.  This Advisory Notice provides additional clarification concerning this requirement.  A copy of Rule 452A01.C. appears on page 2.

At the time the quantity and price of a covered options bid or offer is initially represented to the market in an expanded quarter tick eligible option as described above, the price of the futures leg must be at or within the current futures bid/ask price available on CME Globex.  However, if such bid or offer is not immediately accepted in its entirety and the futures move, the balance of the bid or offer may continue to be worked at the initially represented price until such time that it is accepted or canceled.  Prior to the time the bid or offer is accepted or canceled, other covered bids and offers may also be represented to either join or trade against the bid or offer currently working in the market.  A member who represents a bid or an offer that fails to comply with these pricing parameters may be charged with a violation of CME Rule 514 (“Trading Infractions”).

The following questions and answers illustrate the application of the information set forth above.  For each example, presume that a covered order is entered into the market with a futures price of 23 when the bid/ask on CME Globex is 22/23.  Subsequently, the futures price moves to a bid/ask of 21/22.

1.       Question:  May a broker continue to work the order at a futures price of 23 after the market has moved to 21/22?

Answer:  Yes.

2.       Question:  A broker is continuing to work the order at a futures price of 23 after the futures have turned 21/22.  May a new order be entered into the market with futures priced at 23?

            Answer:  Yes, to either join the market of the initial order or to trade against that market.

3.       Question:  If the broker fills the covered order with futures priced at 23 and no other bids or offers remain in the market with futures priced at 23, may a new order be entered with futures priced at 23 if the futures are 21/22?

Answer:  No.  The futures component of the new order would have to be priced at or within the current bid/ask represented on CME Globex.

CME Rule 452A01.C. (“Options on Three-month Eurodollar Futures – Option Characteristics – Minimum Fluctuations”)

The price of an option shall be quoted in IMM Index points, except as provided in Rule 584 (GLOBEX Volatility Quotes).  Each .01 IMM Index point (1 basis point) shall represent $25, except for 5 Year bundle options as specified in Paragraph 3.  For example, a quote of 0.35 represents an option price of $875 (35 basis points x $25).

1.     Contract Month Whose Underlying Futures Contract is the Nearest Expiring Futures Contract Month

The minimum fluctuation shall be .0025 IMM Index point (also known as one-quarter tick).

2.     All Other Contract Months

The minimum fluctuation shall be .005 IMM Index point (also known as one–half tick).  Trades may also occur at a price of .0025 IMM Index point ($6.25, also known as one-quarter tick), whether or not such trades result in the liquidation of positions for both parties to the trade.

Further, for options expiring in the nearest or second nearest March quarterly or the nearest or second nearest non-March quarterly contract months trading at a premium of no more than .05 IMM Index points, or spread and combination trades at a net premium of no more than .05 IMM Index points and consisting of options contracts involving the nearest and/or second nearest non-March quarterly months and/or the nearest and/or second nearest March quarterly months only, the options in the combination may trade in increments of .0025 IMM index points. 

For the purpose of Rule 813.–Settlement Prices, the minimum fluctuation shall be .0025 IMM Index point ($6.25, also known as one–quarter tick)

3.     5-Year Bundle Options

The minimum fluctuation shall be .005 IMM Index point ($250, also known as one-half tick).

4.     MidCurve Options

The minimum fluctuation shall be .005 IMM Index point ($12.50, also known as one-half tick).  Trades may also occur at a price of .0025 IMM Index point ($6.25, also known as one-quarter tick), whether or not such trades result in the liquidation of positions for both parties to the trade.

For the purpose of Rule 813—Settlement Prices, the minimum fluctuation shall be .0025 IMM Index point ($6.25, also known as one-quarter tick).

If options are quoted in volatility terms, the minimum fluctuations shall be 0.05 percent.

Questions concerning this Advisory Notice may be directed to:

Jeff Kilinski, Director, Interest Rate Products and Services, 312.648.3817

Kathleen Zaino, Associate Director, Market Regulation, 312.435.3577

Jennifer Baum, Associate Director, Market Regulation, 312.341.3124