CME Group Interest Rate Options

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1 CME Group Interest Rate Options January 2018 Dave Reif Interest Rate Business Line Management cmegroup.com

2 Interest Rate Options Overview Strong electronic growth has expanded access and transparency, enabling new users and liquidity providers to participate, increasing the overall size of the market. Record ADV of 2.1 million contracts/day in 2017, +17% YoY Electronic ADV of 1.05 million contracts/day, +49% YoY Record 49% of Interest Rate options traded electronically on CME Globex in 2017 Open Interest reached a record 53 million contracts on 12/14/17 2,500,000 Interest Rate Options Yearly ADV 60% Average Daily Volume 2,000,000 1,500,000 1,000, ,000 50% 40% 30% 20% 10% % Electronic Electronic ADV Non Electronic % Electronic 0% 2

3 Treasury Options Volume Trends Treasury options ADV was a record 748K contracts/day in 2017, +30% YoY Electronic ADV of 591K per day, 79% of total Treasury options volume Weekly Treasury options averaged a record 131,000 contracts/day, +43% YoY Over 2.25 million Wednesday Treasury options traded in less than 6 months 700, ,000 Treasury Options Average Daily Volume Electronic Non-Electronic 500, , , , ,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q

4 Treasury Options Recent Product Enhancements Electronic inter-commodity spreads increase efficiency of executing curve strategies New Globex functionality give customers the ability to trade Inter-Commodity options spreads as strategies with ratios Tradable across all Tenors except for spreads containing 2 year options Electronic trading of cabinet prices provides more precision on low-delta options The Globex supported cabinet value in Treasury options is no longer Cab 1 5-Year Note Options tradable value is CAB 4 or $4.00. All Other Treasury Options tradable value is CAB 7 or $7.00 Offers the Flexibility to trade at approximately ½ the dollar amount of a full tick Expanded strike price granularity creates new opportunities for short-dated options In March 2016, the strike increment granularity was narrowed, enabling additional trading opportunities Affects the spot-month (nearest month or quarter) as well as all the weeklies For those expirations, increment is ¼ point in 10Yr and Ultra10Yr, ½ point in Bond and Ultra bond Launch of the Ultra 10-Year Options expands coverage of the yield curve Marketplace has widely adopted the Ultra 10-Year Futures, with open interest over 530K and Q ADV of 140K Weekly (Wed and Fri), monthly, and quarterly options available, market makers streaming electronic liquidity, block fees reduced to match pit fees through January 1 Launch of Wednesday Weekly Expirations Building on the success of Friday Weeklies, Wednesday Weekly options allow you to further refine your trading strategies, particularly around FOMC meetings. cmegroup.com/wto 4

5 Eurodollar Options Product Update Activity Trends Record ADV of 1.37M, with a record 456K contracts traded daily on CME Globex (33% of volume) Multi-legged strategies accounted for over 86% of ED options volume on CME Globex 43% increase in overnight trading with ADV of 115K Why Now? Offer margin efficiencies relative to OTC products (both cleared and uncleared) Expanded Listings: 71 different expirations now available - A fifth quarterly expiration added to Eurodollar Midcurves options effective 1/8/18 - Long Blue Quarterlies with expirations out over 3.5 years - Blue (weeklies, serials & quarterlies), Gold, and Purple Mid Curves (serials & quarterlies) - Expanded serial listings from 2 months to 4 months 1,000, ,000 0 Eurodollar Options Non-Electronic ADV Electronic ADV Electronic % Dec-20 2-Year Mid-Curves Sep-20 Long Green Eurodollar Jun-20 Options 4 Quarterly Expirations Mar-20 Dec-19 Sep-19 Jun-19 5 Quarterly/4 Serial 2 Weekly Expirations 1-Year Mid-Curves 5 Quarterly/4 Serial 2 Weekly Expirations Mar-19 Dec-18 Eurodollar Options Sep-18 Jun Quarterly/4 Serial Mar-18 Expirations Mar- 18 Jun- 18 Sep- 18 Dec- 18 Options with 2 Years until expiration Long Red Eurodollar Options 4 Quarterly Expirations Mar- 19 Jun- 19 Sep- 19 Dec- 19 Options Expiration Mar- 20 Jun- 20 Sep- 20 Dec % 30% 25% 20% 15% 10% 5% 0% 5

6 Options Volumes by Venue Eurodollar Options ADV by Venue (all numbers in 000's) Venue Q Q Q Q Q Q Q Q PIT 1, , Globex Globex RTH Globex ETH Blocks Total 1,520 1,043 1,052 1,301 1,611 1,464 1,066 1,336 Venue Q Q Q Q Q Q Q Q PIT 69% 67% 66% 62% 63% 56% 55% 59% Globex 23% 25% 23% 25% 27% 33% 40% 36% Globex RTH 16% 18% 18% 18% 19% 26% 31% 27% Globex ETH 7% 6% 5% 8% 8% 8% 9% 9% Blocks 9% 9% 11% 12% 10% 11% 5% 5% Total 100% 100% 100% 100% 100% 100% 100% 100% RTH represents 7:00am to 4:00pm, ETH represents the hours outside that window Treasury Options ADV by Venue (all numbers in 000's) Venue Q Q Q Q Q Q Q Q PIT Globex Globex RTH Globex ETH Blocks Total Venue Q Q Q Q Q Q Q Q PIT 30% 29% 25% 25% 22% 18% 18% 18% Globex 69% 69% 73% 72% 76% 80% 80% 80% Globex RTH 54% 54% 59% 54% 62% 64% 65% 63% Globex ETH 15% 15% 13% 18% 13% 16% 15% 17% Blocks 1% 2% 2% 2% 2% 2% 1% 1% Total 100% 100% 100% 100% 100% 100% 100% 100% RTH represents 7:00am to 4:00pm, ETH represents the hours outside that window 6

7 Committed Cross (C-Cross) Overview For a full description of committed cross The submission of an RFC in a C-Cross market immediately triggers a Pre-Cross state and related messages, including an RFQ. - The pre-cross period will be 5 seconds for all financial options. This waiting period is enforced by CME Globex upon submission, meaning that a manual RFQ is no longer required prior to submission of the cross order. - This pre-cross period doesn t prevent any market participants from entering orders or trading. - Related messages at the start of pre-cross period indicate that a cross is going to take place in the specific instrument. This provides an opportunity for market participants to populate the order book with their best prices. - Price and Size are not disclosed to the market and the C-Cross cannot be canceled during the pre-cross period Following the pre-cross period, the C-Cross matching process will occur on CME Globex without any additional order entry required by the submitting broker. 1. If eligible, a Better Price Match (BPM) allocation will match a percentage of the cross order, provided the following price improvement conditions are met: The BPM percentage is 35% for Interest Rate Options. The C-Cross price betters the current market upon entry, and the C-Cross price is equal to or better than the current market at end of the pre-cross period when the cross takes place 2. Following the application of BPM percentage (when applicable) the remainder of the cross will interact with resting orders in the market before any remaining quantity matches between the cross orders. 3. If BPM eligibility conditions are not met, or if the product s BPM percentage is configured at 0%, the cross will interact with resting orders in the market before any remaining part of the cross orders match with each other. 7

8 Committed Cross Examples with BPM configured to 35% Each example assumes cross is 500 price = 7 MARKET BEFORE C-CROSS SUBMITTED MARKET AFTER PRE-CROSS PERIOD MATCHING ON CROSS NOTES Cross Bid entirely filled, Cross offer not filled. Example ,000 x 2, ,000 x 2,000 Cross Bid will match with 7 offer currently in the market, Cross offer will get 0. Remaining cross offer will be left working or cancelled per submitter s instruction RFC didn t better the market price, so it doesn t receive BPM. Cross bid (offer) will face the current market first. Cross Bid entirely filled, cross offer receives 200 Example x x 300 Cross Bid will entirely fill, 300 with market then 200 with cross offer. Cross offer will receive 200. Remaining 300 cross offer will be left working or cancelled per submitter s instruction RFC didn t better the market price so it doesn t receive BPM. Cross bid will face the market first then any remaining will cross. Example ,000 x 2, ,000 x 5,000 Both cross bid and cross offer will entirely match and receive 500 contracts Cross price of 7 remained best price at time of cross. Example ,000 x 2, ,000 x 1,000 Cross Bid entirely filled, Cross offer gets 175 contracts. Both Cross Bid and ask will receive 35% of the cross.(175 contracts). Bid will then match with the book 7 offer and be entirely filled. Remaining cross 325 offer will be left working or cancelled per submitter s instruction Cross is eligible for 35% BPM because it bettered the market when the RFC was submitted and is better or equal than market at close of the pre-cross state. Following the BPM% the cross will face the market before any remainder of the cross matches. Example ,000 x 2, ,000 x 100 Cross Bid entirely filled, Cross offer gets 400 contracts. Both Cross bid and ask will receive 35% of the cross. (175 contracts). The Cross bid will then buy 100 contracts from the market. The remaining 225 on the cross bid will then match with the cross offer. Remaining 100 cross offer will be left working or cancelled per submitter s instruction Cross is eligible for 35% BPM because it bettered the market when the RFC was submitted and is better or equal than market at close of the pre-cross state. Following the BPM % the cross faces the market, Following this step the remaining smaller quantity on the cross matched. Example ,000 x 2, ,000 x 2,000 Cross Offer gets filled entirely at 8 with the market. Cross Bid does not get any fill. Cross offer of 500 contracts will match entirely with current market bid at better price of 8. Remaining cross 7 bid will be left working or cancelled per submitter s instruction Cross is ineligible for the BPM. Two criteria need to be met to be eligible for 35 % BPM. The C-Cross price betters the current market upon entry, and the C-Cross price is equal to or better than the current market at end of the pre-cross period. In this example the cross price was worse than the current market following the pre-cross period. 8

9 Committed Cross and Bunched Orders Bunched orders may be used for Committed Cross Trades Bunched RFC Orders In those circumstances where order entry into Globex occurs via the submission of a Request for Cross ( RFC ) (an order which contains both the buy and the sell orders) pursuant to the requirements of Exchange Rule 539.C. ( Pre-Execution Communications Regarding Globex Trades ), a broker may bunch multiple market maker orders for the purpose of satisfying the terms of a single customer order and enter the bunched market maker orders using a suspense account. The suspense account may not be used to represent the customer side of the RFC order. Where a suspense account is used on the market maker side of the order, brokers must ensure that the market maker orders are documented in accordance with Rule 536.B.1. with specific market maker account identifiers on the order tickets. Brokers must obtain a suspense account from their clearing firm and may use that suspense account solely for purposes of entering the bunched market maker orders on one side of an RFC. Allocations to end-clients are required to be completed in the CME clearing system before the end of the clearing session for that trade date

10 Block Entry through CME Direct Enhanced Booking and Block Trade Features CME Direct offers integrated deal capture for blocks and complex strategies with streamlined deal tickets optimized for recently used customer accounts and trades. Fast booking: Instantly submit block trades or exchange for swaps (EFS) within the required reporting window. Pre-confirmation window: View pre-confirmation for trade entry, including CME ClearPort validation checks. Real-time block ticker: View customizable block data feeds displaying all block trades in real time. 10

11 Tools and Resources Options Heat Map Options Heat Map ED Options Heat Map Daily Options Updates Commitment of Trader Pace of the Roll Fed Watch Total Cost Analysis Rates Recap QuikStrike 11

12 Tools and Resources - QuikStrike This Week in Options: This tool provides current intraday and weekly rolling totals (from last trading day of prior week until today s most recent update). Vol2Vol Expected Range: Based on an expiration s most recent settlement information, this report displays various volume and open interest values (by strike) plotted on top of the current distribution for the most recent settlement volatility and days to expiration. Treasury Analytics: This tool is designed to show analytics for Treasury Products, including a list of securities that make up the deliverable basket, implied yields for the cheapest to deliver, and a conversion between strike prices and implied yields. Volatility Term Structure: Illustrates the volatility term structures allowing user to view volatilities across expirations, and compare them to one week prior. 12

13 New Webtools to Study Market Activity Expected Range Tool: Visual representation of volatility, shaded regions indicate the number of standard deviations that a given strike is from the ATM futures price Flexibility to chart either open interest, change in open interest, yesterday s volume, or intra-day volume Available for all major CME Group Options across asset classes (rates, FX, equities, and all commodities) 13

14 Cross-Asset Correlation Tool Correlation Tool: Correlation of daily log returns of 30-day constant maturity futures prices Correlation of 30-day constant maturity ATM implied volatilities Correlation of 20-day realized volatilities of 30-day constant maturity futures prices 14

15 Tools and Resources White Papers Greenwich Associates Total Cost Analysis (TCA) White Paper Based on conversations with over 40 market participants and the use of quantitative modeling, Greenwich Associates believes that, over the medium and long term, futures products will gain traction at the expense of more standardized cleared swaps CME Group also launched a Total Cost Analysis tool for customers to put in their own assumptions about liquidity and costs, to analyze resulting implications for TCA The New Treasury Market Paradigm Market commentators have observed that liquidity in Treasury futures has become comparable, if not superior, to liquidity in the cash Treasury securities market as demand for off-balance-sheet Treasury exposure continues to increase. This paper applies external sources to examine the evolution of liquidity in both cash and futures markets as well as other important factors such as settlement fails in cash Treasuries 15

16 Disclaimer Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are eligible contract participants (ECPs) within the meaning of section 1(a)18 of the Commodity Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. The Globe Logo, CME, Chicago Mercantile Exchange, and Globex are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX and CME Group rules. Current rules should be consulted in all cases concerning contract specifications.

17 Thank you

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