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The rules apply to user-defined options strategies and user defined covered options strategies as described below.

To create a UDS security definition, there are two levels of validation:

  1. Message validation - proposed UDS instrument is validly constructed.
  2. Market State - market state allows creation of the UDS.

Message Validation

Security Definition Request or Message validation occurs at both the Session Layer and Business Layer.

Session Layer

CME Group customers use the iLink Security Definition Request (tag 35-MsgType=c) message to create a UDS on the CME Globex platform. The iLink Security Definition Request message requires a repeating group of user-populated tags for instruments included in the UDS.

CME Globex validates all required tags; the message is rejected if a required tag:

  • is not included
  • is empty
  • contains spaces
  • exceeds the character limit

In certain cases when an iLink Security Definition Request (tag 35-MsgType=c) message is submitted with erroneous content or structure, the CME Globex platform will reject the message with a Business-Level Reject. In such an instance, tag 380-BusinessRejectReason will contain the reason for the rejection.

Business Layer

The following restrictions apply to all options strategies—CME Globex will reject an iLink Security Definition Request (tag 35-MsgType=c) message that:

  • Defines the same option instrument as both a Buy and a Sell; all instances of the given option must have the same side.
  • Duplicates another user-defined options strategy.

Important

If an iLink Security Definition Request (tag 35-MsgType=c) is rejected as "Contract is invalid" due to an existing, identical strategy instrument definition sent in tag 107-SecurityDesc. It is strongly recommended that the client system reload all market data Security Definition (tag 35-MsgType=d) messages from the Replay channel.

  • Defines a leg ratio in other than the lowest ratio terms. For example, a Security Definition Request message for a Butterfly spread must be submitted with tag 623-LegRatioQty defined in each respective repeating group as 1:2:1.
  • Exceeds a total of 26 or 40 instruments as follows:

A UDS constructed from available exchange-listed options outrights only can contain a maximum of 26 outright instruments.

A recursive UDS can contain a maximum of 40 options outright instruments.

Examples for 26 Instrument Maximum Calculation
  • A user-defined exchange recognized Call Butterfly counts as three instruments toward the twenty-six instrument limit.

    If the same instrument (identical strike, call/put, expiration) appears in more than one strategy, it is counted in EACH strategy in which it appears regardless of ratio quantities.
  • Covereds can have up to 25 futures legs.

CME Globex does not count the leg ratio toward the 26 instrument maximum. Using the example of the butterfly strategy, even though the butterfly is constructed as Buy 1, Sell 2, Buy 1, the butterfly counts as three legs towards the 26-leg limit, not 4.

Spread GTD Validation

For a UDS, a GTD order qualifier for an iLink New Order (tag 35-MsgType=D) or a Order Cancel/Replace Request (tag 35-MsgType=G) message cannot have a date later than the earliest expiring leg of the strategy.

Market State Validation

The iLink Security Definition Request (tag 35-MsgType=c) message is only accepted during the Pre-Open, Open and No Cancel market states as indicated by the market data Security Status (tag 35-MsgType=f) message.

Options instruments defined in the iLink Security Definition Request (tag 35-MsgType=c) message are valid only during the Open market state.

A UDS instrument either expires with the earliest expiration of its component leg instruments or at the end of the trading session, as specified in tag 200-MaturityMonthYear of the Security Definition (tag 35-MsgType=d) message.

UDS Covered Validation

The iLink Security Definition Request (tag 35-MsgType=c) message is used to define a combination of option or options strategy instruments, futures instrument(s), future side(s) and delta value(s) to create Covered instruments on CME Globex.

All UDS contracts are defined from the buy side.

Covered Security Definition Request Message Repeating Groups

The iLink Security Definition Request message requires a repeating group of user-populated tags for each option and future instrument comprising the Covered instrument. Repeating groups are blocks of tags that define the outright option or options strategy and the future or futures covering the option instrument.

An iLink Security Definition Request message defining a Covered can only contain one repeating group for an outright option or options strategy. Covereds can be defined with a maximum of 25 futures instruments within the CME Group defined range of the 26 instrument maximum for Covered instruments (i.e., a Covered instrument with 25 futures must have one option outright leg), for example:

Covered Butterfly Spread UD:U$:CBO 0306123410 consists of:

  • Leg 1 GE:BOU9 C958 963
  • Leg 2 GEU9

The following three tags have different processing rules for the option repeating group and the future repeating group as indicated in the message specification.

To submit a Covered with multiple options legs, the legs must be submitted as an options strategy instrument in a single options repeating group. CME Globex will reject an iLink Security Definition Request containing multiple options repeating groups.

The following table lists the option-specific repeating group tags used to generate a unique Covered Security Definition.
The (→) symbol designates repeating groups within the message.

Covered Outright Example - Repeating Group Tags and Sample Values

The following example shows the repeating group tags and sample values required to define a Covered outright option.

Tag

Repeating Group

Description

Sample Value

→600-LegSymbol

Option

Outright option instrument group

ZE

→620-LegSecurityDesc

 

Outright option

GEH2 C9650

→624-LegSide

 

Must = 1 (Buy)

1

→600-LegSymbol

Future

Future instrument group

GE

→620-LegSecurityDesc

 

Covering future contract

GEH2

→566-LegPrice

 

Covering future price

9600

→1017-LegOptionDelta

 

Leg delta

0.30

Covered Strategy Example - Repeating Group Tags and Sample Values

The following example shows the repeating group tags and sample values required to define a Covered options strategy.

Tag

Repeating Group

Description

Sample Value

→600-LegSymbol

Option

Option strategy instrument group

E$

→620-LegSecurityDesc

 

Option strategy instrument

GE:HOH2Z6C947

→624-LegSide

 

Must = 1 (Buy)

1

→600-LegSymbol

Future

Future instrument group

GE

→620-SecurityDesc

 

Covering future instrument

GEH2

→566-LegPrice

 

Covering future price

9475

→624-LegSide

 

Covering future side

2

→1017-LegOptionDelta

 

Leg delta

0.35

→600-LegSymbol

Future

Future instrument group

GE

→620-SecurityDesc

 

Covering future instrument

GEH2

→624-LegSide

 

Covering future side

1

→566-LegPrice

 

Covering future price

9550

→1017-LegOptionDelta

 

Leg Delta

0.25

For an outright option or options strategy, tag 624-LegSide is required and must be set to '1' (Buy). An iLink Security Definition request message submitted with tag 624-LegSide set to '2' for an outright or options strategy will be rejected.

Market State Validation

The iLink Security Definition Request message is accepted during the Pre-Open, No-Cancel, and Open market states only.

Options instruments defined in the iLink Security Definition Request (tag 35-MsgType=c) message are tradable only during the Open market state for that option instrument and instrument group.

Business Layer Validation

A proposed Covered instrument must adhere to the following rules:

  • When the options instrument is a strategy and the strategy has only one expiration, then only one Covering future is accepted.
  • When the options instrument is a strategy in which the options deliver into two or more different futures, then the customer can submit one covering future or two different covering futures.
  • No covering future may be specified in the iLink Security Definition Request more than once.
  • The message can contain up to 25 futures repeating groups.

In cases when an iLink message is submitted with erroneous content or structure, the CME Globex platform will reject the message with a Business Level Reject message. In such an instance, tag 380-BusinessRejectReason will contain the reason for the rejection.

If an iLink New Order message sent on a Covered instrument is rejected with a Business Level Reject message and the client system subsequently submits an Order Status Request message for the rejected New Order, The Execution Report - Order Status Request Acknowledgment (tag 35-MsgType=8) message will contain a value of 'N/A' in tag 55-Symbol.

Security Definition Acknowledgment

The iLink Security Definition message is sent by CME Globex in response to an iLink Security Definition Request (tag 35-MsgType=c) message.

If the iLink Security Definition Request message is accepted, the CME Globex platform will process the instrument combination in the iLink Security Definition Request message to generate a unique Covered instrument and send a Covered Security Definition (tag 35-MsgType=d) message to the client system with tag 323-SecurityResponseType=2 (Accepted with revisions).

If the Security Definition Request message is rejected, the Security Definition message will contain tag 323-SecurityResponseType=5 (Reject) and tag 58-Text containing the reason (e.g. "Error creating contract: Contract is invalid: 'UD:U$:CVT 0311250005' is identical to 'UD:U$:CVT 0311250004'') for the reject.

If an iLink Security Definition Request (tag 35-MsgType=c) is rejected as 'Contract is invalid' due to an already existing identical Covered instrument definition, it is strongly recommended that the client system reload all Security Definition messages.

The repeating groups in the Security Definition message are arranged in the following order:

  1. Outright option or options strategy
  2. Future (earlier expiration)
  3. Future (latest expiration – when applicable)

Covered UDS Trade Notification

When a Covered instrument trades, CME Globex sends Execution Reports for the Covered instrument and each leg of the Covered instrument to the trade counterparties and broadcasts resulting market data messages.

Covered Trade Market Data

CME Globex will not broadcast the price for a Covered futures leg for a Covered trade. Customers can obtain futures price information from the market data Security Definition message for the Covered instrument.

Tag 167-SecurityType will not be included in Execution Reports for the Covered instrument, but will contain 'OPT' or 'FUT' in the Execution Report for each leg comprising the Covered instrument.

Execution Report - Fill Exception

In some cases it will be possible that no Execution Report – Fill is received for the future repeating group of a Covered instrument if rounding rules result in no futures.

Covered UDS Trade Futures Allocation

At trade execution of a Covered options instrument, futures allocation is determined according to variables defined in the instrument as follows:

Quantity

During the match process for orders on Covered instruments, CME Globex determines the Covering future quantity by multiplying the outright option or options strategy quantity by the absolute value of delta (change in option premium given a unit change in the underlying futures price) defined in tag 1017-LegOptionDelta, then rounding according to the rules specific to incoming and resting orders.

Important

CME Globex does not validate accuracy of delta values for user-defined Covered instruments. The client system must manage the total value of all deltas defined for the Covered instrument.

Side

CME Globex determines future Buy/Sell assignment according to the value specified in tag 624-LegSide (1 = buy 2 = sell) in the iLink Security Definition Request (tag 35-MsgType=c) message specified in the table.

Future Buy/Sell Assignment

Future Repeating Group
Tag 624 LegSide Value     

Covering Future Match Determination

1 = Buy

Future bought by Covered instrument buying party or

 

Future sold by Covered instrument selling party

2 = Sell

Future sold by Covered instrument buying party or

 

Future bought by Covered instrument selling party

Warning

While CME Globex does not factor the sign of delta in Covered futures allocation, CME Globex only accepts a non-zero, positive delta value in tag 1017-LegOptionDelta. An iLink Security Definition Request (tag 35-MsgType=c) message submitted with a negative delta value will be rejected.

Valid values for tag 1017-LegOptionDelta are as follows:

  • Strategies - For a Covered options strategy instrument, CME Globex validates tag 1017-LegOptionDelta for a value between +0.01 and +40.00.

  • Outrights - For a Covered outright option instrument, CME Globex validates tag 1017-LegOptionDelta for a value between +0.01 and +1.00.

An at-the-money outright call option will have a delta of 0.50 and an at-the-money outright put option will have a delta value of -0.50.

Price

CME Globex validates that the future price specified in the Covered Security Definition Request is at a valid tick as defined in the Security Definition (tag 35-MsgType=d) message and performs a price reasonability check to ensure that the price is within a CME-specified number of ticks above or below the future's settlement price.

Important

For an options strategy covered with 2 futures, the client system must ensure correct assignment of covering future side for each expiration; CME Globex does not validate future(s) repeating group vs. option repeating group.

Covered UDS Futures Leg Assignment Examples

For Covered instrument trades, futures leg assignment occurs simultaneously with the trade execution. Futures allocations are determined by the cumulative delta future allocations of the resting order. Please note that in certain circumstances it may be possible for a resting order for a Covered instrument to receive zero futures.

The futures leg delta calculation is continuous through the lifetime of the order. A future leg will be allocated anytime the accumulated delta value reaches or exceeds 0.5.

The steps for calculating delta futures allocated per trade are shown below:

  1. For each trade, the delta is calculated as a standard delta hedge.
  2. The calculated delta is cumulative for each aggressor trade on a resting Covereds order.
  3. For each trade, a futures leg is allocated only when the cumulative delta crosses a .5 threshold.
    • For example, a futures leg would be allocated for trades where the cumulative delta value equals or exceeds .5 ... 1.5 ... 2.5 ... 3.5 ....

The following examples show how futures are allocated in various resting and aggressor order situations each time the .5 threshold is crossed.

Example 1 - Covered Strategy, Delta = 0.3, All Orders at Same Price Point

Resting Order

Aggressor Order

Delta Futures Allocation per Order

Buy 70

 

 

 

Sell 1

1 x 0.3 =  0.3, 0.3 + 0.0* =  0.3 = 0

 

Sell 1

1 x 0.3 =  0.3, 0.3 + 0.3 = 0.6 = 1

 

Sell 1

1 x 0.3 =  0.3, 0.3 + 0.6 = 0.9 = 0

 

Sell 1

1 x 0.3 =  0.3, 0.3 + 0.9 = 1.2 = 0

 

Sell 1

1 x 0.3 =  0.3, 0.3 + 1.2 = 1.5 = 1

 

Sell 1

1 x 0.3 =  0.3, 0.3 + 1.5 = 1.8 = 0

* - The value is 0 because there is no previous delta value for the first aggressor.

Example 2 - Covered Strategy with 2 Futures at Different Deltas, Fut1: Delta = 0.3, Fut2: Delta = 0.5

Resting Order

Aggressor Order

Delta Futures Allocation per Order

Buy 70

 

 

 

Sell 1

Fut1:1 x 0.3 = 0.3, 0.3 + 0.0* = 0.3 =  0

Fut2:1 x 0.5 = 0.5, 0.5 + 0.0*=  0.5 = 1

 

Sell 1

Fut1:1 x 0.3 = 0.3, 0.3 + 0.3 = 0.6 =  1

Fut2:1 x 0.5 = 0.5, 0.5 + 0.5 = 1 =  0

 

Sell 1

Fut1:1 x 0.3 = 0.3, 0.3 + 0.6 = 0.9 =  0

Fut2:1 x 0.5 = 0.5, 0.5 + 1 = 1.5 =  1

 

Sell 1

Fut1:1 x 0.3 = 0.3, 0.3 + 0.9 = 1.2 =  0

Fut2:1 x 0.5 = 0.5, 0.5 + 1.5 = 2 =  0

 

Sell 1

Fut1:1 x 0.3 = 0.3, 0.3 + 1.2 = 1.5 =  1

Fut2:1 x 0.5 = 0.5, 0.5 + 2 = 2.5 = 1

 

Sell 1

Fut1:1 x 0.3 = 0.3, 0.3 + 1.5 = 1.8 =  0

Fut2:1 x 0.5 = 0.5, 0.5 + 2.5 = 3 =  0

* - The value is 0 because there is no previous delta value for the first aggressor.

Example 3 - Covered Strategy, Delta = 0.3, Aggressor Becomes Resting, All Orders at Same Price Point

Resting Order

Aggressor Order

Delta Futures Allocation per Order

Buy 5

 

 

 

Sell 10

5a x 0.3 = 1.5, 1.5 + 0.0* = 1.5 = 2

Sell 5

 

 

 

Buy 1

1 x 0.3 = 0.3, 0.3 + 1.5b = 1.8 = 0

 

Buy 1

1 x 0.3 = 0.3, 0.3 + 1.8 = 2.1 = 0

 

Buy 1

1 x 0.3 = 0.3, 0.3 + 2.1 = 2.4 = 0

 

Buy 1

1 x 0.3 = 0.3, 0.3 + 2.4 = 2.7 = 1

* - The value is 0 because there is no previous delta value for the first aggressor.
a - The aggressor order matched 5 with the resting order.
b - An order that arrived as an aggressor but remains as a resting order should be tracked as a resting order.

In Flight Mitigation and Delta Neutrality

If a client system has In Flight Mitigation (IFM) = ON, the following scenario can occur in which the Covered minimum quantity is allowed to be less for the replacing order than that defined in the market data Security Definition.

IF a client performs a cancel-replace for a resting covered,

AND a partial fill occurs during the Cancel/Replace process,

THEN the Covered order is allowed to be cancelled and replaced with an order having less than the minimum quantity required for delta neutrality.