CIRCULAR 13/154. Transition of ICE Brent to a new expiry calendar: Implementation Details and Frequently Asked Questions

Transcription

1 CIRCULAR 13/ November 2013 Category: Trading Appendices: Appendix A: Revised ICE Brent Expiry Calendar (Effective from settlement on Implementation Date) Appendix B: Frequently Asked Questions Appendices C, D, E and F (Separate Attachments): Examples of price file and Clearing Member report output for cash adjustment Summary of content: Transition of ICE Brent to a month-ahead expiry calendar from March 2016: Additional details and Frequently Asked Questions Transition of ICE Brent to a new expiry calendar: Implementation Details and Frequently Asked Questions Members are advised that, further to Circular 13/140 dated 17 October 2013, announcing implementation of a new expiry calendar for ICE Brent futures and options and related derivative contracts from March 2016, the purpose of this Circular is to set out additional detail in relation to those implementation measures by ICE Futures Europe ( the Exchange ) and ICE Clear Europe ( the Clearing House ) on 06 December 2013 ( the Implementation Date ) and subsequently. As announced in Circular 13/140, the Exchange will change the expiry dates for ICE Brent futures and options and related derivative contracts (the Brent Contracts ) to a month-ahead expiry calendar for March 2016 and later contract months, with effect from the Implementation Date ; and through the Clearing House to make a compensatory cash adjustment on the working day following the Implementation Date (09 December 2013). This will apply to the Brent Contracts offered for trading by the Exchange. New Expiry Calendar An updated ICE Brent Expiry Calendar (which will be implemented following settlement on the Implementation Date for ICE Brent futures and options) is included as an Appendix to this Circular. The Expiry Calendar for contract months up to and including February 2016 will remain unchanged. The Expiry Calendar for March 2016 and later contract months ( the Affected Months ) will be revised to reflect a month-ahead physical basis. ICE Brent futures and options and related derivative contracts in respect of the Affected Months will be considered by the Exchange to be on the existing expiry calendar basis until and including settlement on the Implementation Date, and will be cash adjusted accordingly. Brent Contracts transacted after Implementation Date will be on the revised expiry calendar. Market participants wishing to transact Brent Contracts on the new expiry basis prior to Implementation Date may transact using equivalent ICE Brent NX instruments as available. Positions in the Affected Months of ICE Brent NX instruments still open after Implementation Date will be migrated without adjustment to ICE Brent equivalents (which will then be reflective of the same expiry calendar). NX contracts in expiry months so converted will thereafter no longer be available for trading on the Exchange. Cash adjustment process and test run ICE Brent futures and options and related derivative contracts for Affected Months will be settled as normal on the Implementation Date, on the basis of settlement prices reflecting the existing expiry calendar. Company Registration No

2 For more information please contact: Mike Davis +44 (0) Deborah Pratt +44 (0) Jean-Luc Amos +44 (0) Jeff Barbuto Julius Foo The Clearing House will implement cash adjustment payments via a cash adjustment made to Clearing Members during the business day after the Implementation Date (Monday 9 December 2013). Details and examples of the process are laid out in Circular 13/140: The Clearing House will issue to Clearing Members, reports detailing the cash adjustment for each position held in the clearing system. The cash adjustment factor will be rounded to the nearest cent and can be derived from these reports and the publically available price file. This information will also be made available during the Clearing Member test run conducted by the Exchange and Clearing House which is scheduled for 11 November 2013, using the settlements from 8 November 2013 (and December/December spread values on average from 04 November to 08 November inclusive). As on the Implementation Date itself, the test run will use settlements from five trading sessions including the test Implementation Date for the calculation of example cash adjustments, so that Members and customers may reconcile their own calculations with ICE cash adjustment results as appropriate. The Implementation Process itself will use December/December futures spread settlements from the five trading sessions of 02 December to 06 December 2013 inclusive. Price reports of cash adjustment factors will be made available by the Exchange and Clearing House for the test runs and for the actual implementation, more details of which are available in the Frequently Asked Questions ( FAQ ) included as an Appendix to this Circular. The Exchange and Clearing House will announce details of the test run, which is scheduled for 11 November ICE Brent NX positions ICE Brent NX futures and options contracts and related derivative contracts with respect to the March 2016 contract month onwards will be unavailable for trade after the Implementation Date. The Exchange will engage directly with any affected market participants holding nearerdated NX positions in the light of these proposals. Comments or questions on any aspect of this Circular should be addressed to ICE staff named in the margin of this Circular. Questions which have already been raised, or which give further detail around implementation processes by the Exchange and Clearing House are addressed in the FAQ attachment which follows this Circular. Company Registration No

3 Signed: Patrick Davis Company Secretary Company Registration No

4 Appendix A: Revised ICE Brent Expiry Calendar (Effective from settlement on Implementation Date) Contract Month Futures American-style Options Dec-13 14/11/ /11/2013 Jan-14 16/12/ /12/2013 Feb-14 16/01/ /01/2014 Mar-14 13/02/ /02/2014 Apr-14 14/03/ /03/2014 May-14 15/04/ /04/2014 Jun-14 15/05/ /05/2014 Jul-14 13/06/ /06/2014 Aug-14 16/07/ /07/2014 Sep-14 14/08/ /08/2014 Oct-14 15/09/ /09/2014 Nov-14 16/10/ /10/2014 Dec-14 13/11/ /11/2014 Jan-15 16/12/ /12/2014 Feb-15 15/01/ /01/2015 Mar-15 12/02/ /02/2015 Apr-15 16/03/ /03/2015 May-15 15/04/ /04/2015 Jun-15 14/05/ /05/2015 Jul-15 15/06/ /06/2015 Aug-15 16/07/ /07/2015 Sep-15 14/08/ /08/2015 Oct-15 15/09/ /09/2015 Nov-15 15/10/ /10/2015 Dec-15 13/11/ /11/2015 Jan-16 16/12/ /12/2015 Feb-16 14/01/ /01/2016 Mar-16 29/01/ /01/2016 Apr-16 29/02/ /02/2016 May-16 31/03/ /03/2016 Jun-16 29/04/ /04/2016 Jul-16 31/05/ /05/2016 Aug-16 30/06/ /06/2016 Sep-16 29/07/ /07/2016 Oct-16 31/08/ /08/2016 Nov-16 30/09/ /09/2016 Dec-16 31/10/ /10/2016 Jan-17 30/11/ /11/2016 Feb-17 29/12/ /12/2016 Company Registration No

5 Mar-17 31/01/ /01/2017 Apr-17 28/02/ /02/2017 May-17 31/03/ /03/2017 Jun-17 28/04/ /04/2017 Jul-17 31/05/ /05/2017 Aug-17 30/06/ /06/2017 Sep-17 31/07/ /07/2017 Oct-17 31/08/ /08/2017 Nov-17 29/09/ /09/2017 Dec-17 31/10/ /10/2017 Jan-18 30/11/ /11/2017 Feb-18 28/12/ /12/2017 Mar-18 31/01/ /01/2018 Apr-18 28/02/ /02/2018 May-18 29/03/ /03/2018 Jun-18 30/04/ /04/2018 Jul-18 31/05/ /05/2018 Aug-18 29/06/ /06/2018 Sep-18 31/07/ /07/2018 Oct-18 31/08/ /08/2018 Nov-18 28/09/ /09/2018 Dec-18 31/10/ /10/2018 Jan-19 30/11/ /11/2018 Feb-19 28/12/ /12/2018 Mar-19 31/01/ /01/2019 Apr-19 28/02/ /02/2019 May-19 29/03/ /03/2019 Jun-19 30/04/ /04/2019 Jul-19 31/05/ /05/2019 Aug-19 28/06/ /06/2019 Sep-19 31/07/ /07/2019 Oct-19 30/08/ /08/2019 Nov-19 30/09/ /09/2019 Dec-19 31/10/ /10/2019 Jan-20 29/11/ /11/2019 Feb-20 30/12/ /12/2019 Company Registration No

6 Appendix B: Frequently Asked Questions Q1: Where can I see the new expiry dates for Brent contracts in March 2016 and later? The expiry calendar for ICE Brent, contract months March 2016 and onwards, will be the same as the former Brent NX expiry calendar for contracts of those maturities. You can find the full, revised expiry calendar for all contracts and dates as an Appendix to this Circular and here: A.csv version of the same file is also available by download at that address. Q2: Are you planning any test runs of the cash adjustment process to help market participants and clearers get aligned with your processes? If so, how many should we expect and what are the dates of those test runs? ICE Clear Europe ( the Clearing House ) will perform a test run of the calculation formulae and adjustment processes with Members ahead of the implementation date. This test will take place 11 November 2013, using the end of day positions and settlements from 8 November 2013 (and December/December spread values averaged from settlements of 04 November to 08 November inclusive) Q3: Can a cash adjustment report be made available for validating test run output as per planned timelines? The Clearing House plans to make price adjustment data available at two user levels, examples of which are in the Appendices to this Circular: 1) A price file ( BRENT_ADJUSTMENT_PRICES ) which covers prices and adjustment factors only (example below, with specimen figures only) will be made widely available to market participants (See Appendix F for larger example): COMMODITY_ CODE OPTION_TYPE CONTRACT_ PERIOD STRIKE_ PRICE OLD_ PRICE ADJUSTED_ PRICE B B B C B C B P B P ) In addition, for Clearing Members only, the following reports will be made available: i) XXX_POSITIONS_ADJUSTED (where xxx is the Member mnemonic) (Appendix C) Company Registration No

7 This file provides the cash adjustment amount at the position account level; and includes positions at the Trading Member (NCM) level. The report will also provide the prices and contract value factor used to calculate the cash adjustment Location: MFT/risk/notices ii) XXX_POSACCOUNT_ADJUSTED (Appendix D) This report provides the cash adjustment value aggregated at the position account level, including Trading Member (NCMs). Location: MFT/risk/notices iii) XXX_SETTLEMENT_ACCOUNT_ADJUSTED (Appendix E) This report provides the total cash adjustment aggregated at the settlement account level and represents the amounts that will appear on the MBCAA banking report. Location: MFT/risk/notices iv) GSCD The GSCD is an existing reference data file that contains all contract reference data such first and last trading day. The file produced after the EOD on the 06 th December will contain the adjusted expiry dates for the ICE Brent contracts. Location: MFT/pub/reference v) Cash Accounting Banking Report (MBCAA) This report will show the total cash adjustment that was posted to the respective settlement account. This report is available in a pdf and csv format. The report will be available after the EOD on Monday 09 December Location: ECS: Reports Tab or MFT/banking With the exception of the MBCAA report and the GSCD report, all other outputs will be available by 15:30 London time on Monday 09 December Elements of these may be shared by Clearing Members, as appropriate, with Non-Clearing Members. Customers of Clearing Members should contact their clearers directly for more information on onward processes and information on cash adjustments. Sample output/ templates of the reports that will be made available during the test run and for the actual cash adjustment are available as Appendices C to F inclusive of this Circular. Company Registration No

8 Q4: Will we be able to validate ICE s option volatility surfaces prior to the Implementation Date? Our options settlement team plans to make information available on volatility smiles being used in the run up to and throughout the implementation process. In addition, market participants will be able to make market data available to our team via the Quoted Settlement Price ( QSP ) facility for options. This process is a price submission facility for market participants related to settlements. Q5: How will that work - what is the procedure for QSPs to contribute to option settlement data for the Implementation? Our options settlement team has a defined process (template, distribution list for incoming s, etc) for contributions for forward marks/quotes to use in conjunction with market data from the Exchange (bids/offers/trades). As a practical matter, our market price data flows through to the Brent American options inputs and that surface then feeds down to the European and Average Price Option (APO) surfaces. Please contact OTCCurve@theice.com and copy MarketSettlements@theice.com if you would like to learn more about providing QSPs. Additionally these submissions should start ahead of the change over date to help minimise any large shifts not attributable to methodology change. Q6: In relation to the cash adjustment, our understanding is that we cannot determine the exact adjustment amount before the transition. Is this correct? That is correct. The cash adjustment will be individually calculated during the test runs, and will be estimated for some classes of instrument, but a final definitive figure for all ICE contracts will not be available until the Implementation Date. We will also not know how much open interest the ICE-cleared adjustment will be applied to before the Implementation Date. Q7: For the American options adjustment (using Cash Adjustment Methodology: M2 as described in Circular 13/140 dated 17 October 2013): we have been told that the volatility input used in Black s formula for the revaluation will be using a sticky delta approach, based on the data of the revalued contract month. Can you confirm, and if it is the case, Can you specify what delta pillars you will use, and what interpolation/extrapolation methods for other deltas? Although conceptually closest to the sticky delta approach, it may be more complete to say that it moves it in terms of log moneyness, meaning that, at a certain strike, it will not have the exact same volatility because the underlying futures price will not be exactly the same. If, for example, Brent December 2016 was at $100, and the futures were changing from $100 to $100.10, volatility at the $100 strike would be slightly different at the shifted underlying price. At The Money example: Assume Brent at a price of $100.00, then the strike of $ has a volatility of 28.00% and the $ strike has a volatility of 28.15%. Thus, if Brent s price shifted to $ the $ strike would now have a volatility of 28.00%. Non At the Money example: Assume Brent at a price of $100.00, strike $ has a volatility of 30.00%. If Brent s price shifted to $110.00, the $ strike would have a volatility of 30.00%. This is because the $110 strike is originally 10% higher than the $100 futures price, so once you adjust the Company Registration No

9 futures price to $110 and pick a strike that is 10% higher than the $110 future, the equivalent strike would be the $ strike. Q8: In relation to European Options adjustment (Cash Adjustment Methodology: M2): can you confirm you will use the same implied volatility surfaces? Yes, it will use the same volatility surface as the American-style option - however it does use a different version of the Black model. Code instrument BUL (the European), is a European option that is margined equity style and uses Black 76 equity style (non-margined model). Q9: Average Price Options (APOs) (Cash Adjustment Methodology: M4): do you have available the relevant formula that will be used for the revaluation? They correspond to blending the relevant Brent American Option volatilities. For example - if the number of business days in the average period (which is the number of business days in the expiry month of the first line swap, the underlying of the Average Price Option ( APO ) is 20 days, the number of business days until first future leg's expiry in its expiration month is 12 days, then leg1's volatility at log-moneyness K is 10%, and leg2's volatility at log-moneyness K is 20%, thus the APO's volatility at log-moneyness K will be calculated as: 10% * (12/20) + 20% * (8/20) = 14% (N.B. This is included at the back of Appendix B attached to the Announcement Circular) Q10: a) Can you indicate what volatility you will use, following the same example, based on the data with future=$100? Assume Brent at a price of $100.00, strike $ has a volatility of 28.00% and the $ strike has a volatility of 28.15%. Thus, if Brent s price shifted to $ the $ strike would have a volatility of 28.00%. b) For the non-margined model, how do you calculate the discount factors, and based on what rates? We take the on-the-run Overnight Index Swap rates, bootstrap and interpolate them to give us an interest rate curve which is used for the option discounting. Note: On-the-run tenors are standard tenors that are regularly quoted for bonds, interest rates, and other financial instruments. Examples are: 1Month from spot, 3Months from spot, 1Year from spot Bootstrapping is the procedure for calculating zero coupon rates along the curve. (it s a way of using the interest rates at the dates you have and interpolating them throughout the curve you need) Company Registration No

10 c) What formula do you apply that Asian volatility to? The same BUL model as for European Options, but using the average underlying future price as the future? The volatility from the Brent American-style options is blended to get the volatility (which is where the calculation below comes into play) which is then fed into the Curran approximation formula, which along with the underlying price of the first line, interest rates, and time to expiry generate the output. d) Can you give an example which is not at the money? Assume the futures price is $100, and the volatility at the $110 strike is 30.00%. Thus, if the futures price shifts to $110, the $121 strike will now have a volatility of 30.00%. 110/100 = 1.10 and if you multiply that 1.10 by the new futures price of $110, you get $121. This will work similarly for all strikes. Q11: What volatility will be used to recalculate the option value after the shift in price? As the underlying futures price is shifted by a certain amount then the volatility curve (i.e. volatility as a function of strike) will change as well. The most common approaches are either: 1. Floating smiles (also called sticky delta), where when the underlying futures price moves, the volatility curve moves along with it, in parallel to the strike axis (i.e. if June 16 moves from $100/bbl to $100.40/bbl, the new at-the-money ( ATM ) volatility will be exactly equal to the old one: just slide the whole curve along); 2. Sticky Strikes, where the volatility is a function of the strike and does not change when the underlying futures price is shifted; 3. A mixture of the two above. The Exchange is using overall 1.) Floating smile ( sticky delta ) approach, but this answer should be read in relation to the caveats and detail set out in the Question above. The initial options surfaces for the new expiry calendar will get their volatility surfaces from the prior Brent options at the settlement on Implementation Date. The Exchange anticipates receiving liquid market data on the basis of the existing expiry calendar, rather than the new one. Q12: As a trader, if I have bought a (March 2016 or later) future at a price of $100.00/bbl on the Implementation Date (6 December) and my profit / loss account (p/l) at settlement is based on a settlement that day of $100.50/bbl, I will presumably be showing a positive p/l of + 50cts/bbl. If that future is cash adjusted upwards by 5cts/bbl overnight between 6 December and 9 December as a result of expiry shift, and is trading at $100.60/bbl during the morning of 9 Dec, what figure will I have been margined on from the previous session, and what is my p/l at a price on Monday 9 December at $100.60/bbl? The position will be margined on the settlement close of $ as at close of business of 6 December, i.e. with a value for variation margin purposes of +50cts/bbl over the purchase price. The anchor price the next day will incorporate the cash adjustment upward revaluation of 5cts/bbl, so at a price of Company Registration No

11 $100.60/bbl, the updated p/l for the future with a new expiry calendar will be +60cts/bbl, although the purchaser will be cash adjusted by a negative 5cts/bbl. Thus his p/l will show +60cts/bbl, but his effective p/l will be only +55cts/bbl. Q13: If I am trading a December 15/December 16 spread, and am long, will I receive or have to pay a cash adjustment after 6 December? That depends on the shape of the Brent forward curve at settlement for the sessions of 2-6 December If the average spread between December 2015 and December 2016 is in backwardation (i.e. the spread is positive) then the December 2016 contract will be cash adjusted upward. However, the December 2015 contract lies before the first contract affected by the change to the expiry calendar, so will not be changed. As the December 2016 contract rises in value as a result of expiry date change, and carries a negative cash adjustment for long holders, the implied Dec 15/16 spread will narrow by the extent of the cash adjustment, and the long spread holder (who is effectively short the December 2016 leg will receive a cash adjustment accordingly of the same amount). The position will be margined on the adjusted settlement value reflected in the changed 2016 value relative to the unchanged December 2015 value. Q14: Will the settlement price on 6 December change? In the example above, would I hypothetically see a closing price on that Monday of $100.50/bbl or $100.55/bbl (5cts/bbl cash adjustment)? There will not be a second settlement on 6 December, although adjusted values will appear in the cash adjustment report made available by ICE Clear Europe. The closing price on Monday 9 December will be a reflection of the market price that day, although the expiry date change will have been made and the new expiry calendar will be in force for March 2016 and later Brent contracts. Q15: Will there be any fees levied by my clearer? Please address this question directly to your clearer. Q16: Will there be any fees levied by the Exchange? The Exchange will not levy any fees for the cash adjustment process or for the change in expiry calendar for ICE Brent contracts. Q17: Will Clearers or non clearing member firms ( NCMs ) see the amounts of the cash adjustments during the test runs? Clearing Members will receive individual position cash adjustment amounts and price adjusts from the Clearing House, as detailed above in Question 3. Non-Clearing Members ( NCMs ) should seek information on test cash adjustment amounts direct from their own clearer. The amounts will relate to the cash adjustments based on positions for the test date, rather than what is open on Implementation Date. Thus, the relevant positions are subject to change between the test date and Implementation Date. For the test date of Monday 11 November, the Clearing House will use positions at close of business on Friday 8 November. Therefore, test amounts will not be Company Registration No

12 the actual amounts posted to accounts on Implementation Date +1, as both reference settlement prices and positions are subject to change between the test date and Implementation Date. Company Registration No