Ultra 10-Year U.S. Treasury Note Futures

The introduction of Ultra 10-Year T-Note futures is expected to provide at least three benefits to users.In response to market participant demand for a futures contract that enables hedging and spreading at the 10-year maturity point on the Treasury yield curve, the Exchange has announced the introduction of Ultra 10-Year U.S. Treasury Note futures and companion options.  These contracts will be listed for trading Monday, January 11, 2016, pending certification of terms and conditions with the Commodity Futures Trading Commission and completion of all regulatory review periods.  

Ultra 10-Year Note Futures:  What’s Deliverable

Ultra 10-Year T-Note futures will be fulfilled by physical delivery of original-issue 10-year Treasury notes with remaining terms to maturity between 9 years 5 months and 10 years.  For practical purposes, delivery-eligible CUSIPs for any given contract delivery month will be limited to the three most recently issued 10-year Treasury notes:  the on-the-run, the old, and the double-old.   This ensures simultaneously that the contract will be a close proxy for forward-starting cash 10-year Treasury note exposures, and that it will adhere to the established, familiar structure and pricing conventions of the CBOT Treasury futures complex.

At the prevailing pace of issuance of 10-year Treasury notes, the aggregate face value of the three CUSIPs eligible for delivery into an expiring Ultra 10-Year T-Note contract typically will be around $177 bln.  This signifies ample deliverable supply, especially given that only a minuscule fraction of open interest in expiring Treasury futures – historically, around 3.5 percent – tends to go to delivery.  (For instance, the historical median volume of expiring 10-Year Treasury Note (TY) futures taken to delivery is approximately 16,000 contracts, or $1.6 bln of face value of deliverable grade Treasury notes.) 

Because Treasury futures contracts that go to delivery tend to be fulfilled by delivery of the corresponding cheapest-to-deliver (CTD) note or bond issue, it is instructive to consider the supply of the futures contract’s CTD issue, rather than the face value of the entire deliverable supply.

With market yields well under 6 percent (the yield level that the Exchange uses to standardize conversion factors for determination of Treasury futures delivery invoice prices), the CTD issue for an expiring Ultra 10-Year T-Note contract is likely to be the double-old 10-year note.  Given that 10-year note issues are routinely sized around $66 bln, this would make the CTD for the Ultra 10-Year T-Note contract the largest CUSIP eligible for delivery into any CBOT Treasury Note or Bond future.   Exhibit 1 illustrates by comparison of face values of CUSIPs that are currently CTD for Treasury futures for March 2016 delivery.

Exhibit 1

Exhibit 1 CBOT Treasury Note and Bond Futures – Projected Sizes of CTD Issues for Mar 2016 Contracts

Differences Matter

Because the Ultra 10-Year T-Note contract is likely to track price dynamics at around the 9-1/2 year point on the Treasury yield curve, it should provide a strong complement to other members of the Treasury Note and Bond futures suite.   To see this, consider that the flagship 10-Year T-Note (TY) futures contract currently tracks price dynamics at roughly the 7-year term-to-maturity point, while the Classic Bond (US) futures reflects price movements at around 20 years.

For a full appreciation of the distinctions, the key point of comparison is the dollar value of price change in the futures contract in response to a move of one basis point per annum in the level of market yields (ie, the dollar value of a basis point, or DV01).  As a general rule, the greater the differential between DV01s for adjacent pairs of Treasury Note and Bond futures, the less suitable they are as substitutes for one another.

Exhibit 2 exemplifies these differences via comparison of DV01s of adjacent Treasury futures for March 2016 delivery.  The TY futures DV01 is 63% greater than the DV01 for 5-Year Note (FV) futures, while the DV01 of the Ultra Bond (UB) contract is 21% larger than the US futures contact’s DV01.  In this context, the estimated DV01 of the new Ultra 10-Year T-Note future is approximately 44% greater than TY’s DV01, while the US contract DV01 is projected to be 88% greater than the Ultra 10-Year T-Note contract DV01.  

Exhibit 2

Proportional Differences in Futures DV01s, March 2016 Delivery Months

Contract Pairs: FV:TY US:UB TY:Ultra 10Y Ultra 10Y:US
%Δ DV01: 63% 21% 44% 88%

Advantages

The introduction of Ultra 10-Year T-Note futures is expected to provide at least three benefits to users.

Improved Treasury Yield Curve Trading

It will permit significant new opportunities in spread trading across the Treasury yield curve.  On launch, the exchange will enable a full suite of spreads and combinations on the CME Globex electronic trading platform, including exchange-defined intra-commodity calendar spreads, Treasury yield curve spreads against established members of the Treasury futures suite, and swap spreads versus CBOT 10-Year Interest Rate Swap futures for physical delivery. 

Improved Cash-Futures Spreading

Because the CUSIPs eligible for delivery into an Ultra 10-Year T-Note futures contract are all proximate to the 10-year point on the Treasury yield curve, the contract is apt to be both an effective hedge and a handy proxy for 10-Year Treasury yield exposure.  This attribute, in turn, should enhance market participants’ ability both to hedge and to synthesize neighboring cash or swap exposures at the 10-year term to maturity.

Increased Relative-Value Opportunities

The introduction of a nearly true 10-year Treasury note future will equip market participants to implement relative-value trade opportunities in conjunction with 10-year sovereign yield benchmarks for G10 nations or for various emerging market countries.  Exhibit 4 illustrates the estimated similarity in notional duration of Ultra 10-Year T-Note futures versus futures on 10-year German bunds, UK gilts, and Canadian government debt.

Exhibit 3

Comparison of Mar-16 Contract Duration

Contracts: Bund Gilt Canada Ultra 10-Year
Mar-16 Duration: 9.279 8.863 8.532 8.875

Extensive Margin Offsets

As of the launch of the Ultra 10-Year contract, there will be immediate cash efficiencies offered by margin offsets to position accounts that contain interest rate products. The exchange has evaluated the risk profile interactions between the Ultra 10-Y­ear contract and Treasury futures, short term interest rate, and deliverable swap futures complexes, and will apply the appropriate levels of margin offsets where applicable.  Additionally, the Ultra 10-Year contract will be made available for portfolio margining, in order to capture the potential capital efficiencies afforded by offsetting the risk between the Ultra 10-Year and cleared OTC interest rate swaps.

For More Information

The latest information can be found at cmegroup.com/ultra10

Contract Specifications

Ultra 10-Year U.S. Treasury Note Futures*

(All times of day are Chicago time, unless otherwise noted.)

Trading Unit

One (1) U.S. Treasury note having a face value at maturity of $100,000 or multiples thereof.

Deliverable Grade

Original issue 10-Year Treasury notes with not less than 9 years 5 months and not more than 10 years of remaining term to maturity from first day of futures delivery month.

Contract Size

$1,000 per point ($100,000 per contract)

Price Basis

Points and fractions of points, with par on the basis of 100 points.  For example, 91-16 represents 91 and 16/32, 91-17 represents 91 and 17/32, and 91-18 represents 91 and 18/32.

Minimum Price Increment

Outright transactions:  ½ of 1/32nd point ($15.625 per contract).

Calendar spreads:  ¼ of 1/32nd point ($7.8125 per contract).

Delivery Months

Nearest 3 months in the March-June-September-December quarterly cycle.

Last Trading Day

Seventh business day preceding the last business day of the delivery month.  Trading in expiring contracts terminates at 12:01 pm on the last trading day.
Last Delivery Day

Last business day of the delivery month.

Delivery Method

Physical delivery by Federal Reserve book-entry wire transfer system.

The delivery invoice price equals the futures contract settlement price times a conversion factor, plus accrued interest.  The conversion factor is the price of $1 par value of the delivered note to yield 6 percent per annum.

Block Trade Thresholds and Reporting Requirements 

RTH           5,000+ contracts       

ETH            2,500+ contracts      

ATH            1,250+ contracts

Block trades executed during Regular Trading Hours (RTH) must be reported to the Exchange by the seller within 5 minutes of transaction. Block trades executed during European Trading Hours (ETH) or Asian Trading Hours (ATH) must be reported to the Exchange by the seller within 15 minutes of transaction.

Trading Hours and Venue 

CME Globex:  5pm to 4pm, Sun-Fri.

CME ClearPort:  5pm to 4pm, Sun-Fri.

Ultra 10-Year U.S. Treasury Note futures will trade on, and according to the rules of, the Chicago Board of Trade.

Trade Match Algorithms

Outright transactions:  F -- FIFO

Calendar spreads:  K -- Split FIFO/Pro Rata, with 20% FIFO and 80% Pro Rata

Ticker Symbol

TN

*These contracts will be listed with, and subject to, the rules and regulations of the CBOT, pending certification of contract terms and conditions with the CFTC and completion of all applicable regulatory review periods. 

Quarterly Options and Serial Options on Ultra 10-Year U.S. Treasury Note Futures*

(All times of day are Chicago time, unless otherwise noted.)

Contract Size

One (1) Ultra 10-Year U.S Treasury Note Future (TBD).

Contract Months

Option expirations in the first three consecutive months (two Serial option expirations and one Quarterly option expiration) plus Quarterly option expirations in the next two months in the March Quarterly cycle (March, June, September, December).  Serial options will exercise into futures for delivery in the March Quarterly month next following the option expiration month.  Quarterly options will exercise into futures contracts for delivery in the same month as the option expiration month.
Minimum Trade Increment

1/64th of one point ($15.625 per contract), rounded to the nearest cent per contract.

For cabinet transactions only, option prices may range from $1.00 to $15.00, in $1.00 increments per option contract.

Strike Price Interval

Strike prices will be listed in increments of one-half of one point. The minimum strike price range will include the strike price closest to the most recent futures daily settlement price (ATM) plus the next fifty consecutive strike prices above ATM and the next fifty consecutive strike prices below ATM.

Last Trading Day

Options cease trading on the last Friday, which precedes by at least two business

days, the last business day of the month preceding the named option expiration month.

Expiration

Trading in expiring options shall cease on the last trading day at the close of the regular CME Globex trading session for the corresponding futures contract.  Unexercised options shall expire at 7pm on the last trading day.

Exercise Style

American Style: The buyer of an option may exercise the option on any business day prior to expiration by giving notice to CME Clearing by 6pm.  Options that expire in the money are automatically exercised after 6pm, unless CME Clearing has received contrary instructions.  Option exercise, whether voluntary or automatic, is determined in relation to the daily settlement price of the futures contract into which the options is exercisable.
Block Trade Thresholds and Reporting Requirements

RTH           7,500+ contracts       

ETH            3,750+ contracts      

ATH            1,875+ contracts

Block trades executed during Regular Trading Hours (RTH) must be reported to the Exchange by the seller within 5 minutes of transaction. Block trades executed during European Trading Hours (ETH) or Asian Trading Hours (ATH) must be reported to the Exchange by the seller within 15 minutes of transaction.                 

Trading Hours and Venue 

CME Globex:  5pm to 4pm, Sun-Fri.

Open Outcry:    7:20am to 2pm, Mon-Fri

Quarterly Options and Serial Options on Ultra 10-Year US Treasury Note futures will trade on, and according to the rules of, the Chicago Board of Trade.

Ticker Symbol

CME Globex:  OTN

Open Outcry: OTN

*These contracts will be listed with, and subject to, the rules and regulations of the CBOT, pending certification of contract terms and conditions with the CFTC and completion of all applicable regulatory review periods. 

Weekly Options on Ultra 10-Year U.S. Treasury Note Futures*

(All times of day are Chicago time, unless otherwise noted.)

Contract Size

One (1) Ultra 10-Year U.S Treasury Note Future (TBD).

Minimum Trade Increment

1/64th of one point ($15.625 per contract), rounded to the nearest cent per contract.

For cabinet transactions only, option prices may range from $1.00 to $15.00, in $1.00 increments per option contract.

Strike Price Interval

Strike prices will be listed in increments of one-half of one point. The minimum strike price range will include the strike price closest to the most recent futures daily settlement price (ATM) plus the next fifty consecutive strike prices above ATM and the next fifty consecutive strike prices below ATM.

Last Trading Day

Week 1 - 1st Friday of the month

Week 2 - 2nd Friday of the month

Week 3 - 3rd Friday of the month

Week 4 - 4th Friday of the month

Week 5 - 5th Friday of the month

A given Friday that is not also the last trading day of a Quarterly option or Serial option. If such Friday is the last trading day of a Quarterly option or a Serial option, then no Weekly option for expiration on such Friday will be listed for trading.

Expiration

Trading in expiring options shall cease on the last trading day at the close of the regular CME Globex trading session for the corresponding futures contract.  Unexercised options shall expire at 7pm on the last trading day.

Exercise Style

American Style: The buyer of an option may exercise the option on any business day prior to expiration by giving notice to CME Clearing by 6pm.  Options that expire in the money are automatically exercised after 6pm, unless CME Clearing has received contrary instructions.  Option exercise, whether voluntary or automatic, is determined in relation to the daily settlement price of the futures contract into which the options is exercisable.

Block Trade Thresholds and Reporting Requirements 

RTH           7,500+ contracts       

ETH            3,750+ contracts      

ATH            1,875+ contracts

Block trades executed during Regular Trading Hours (RTH) must be reported to the Exchange by the seller within 5 minutes of transaction. Block trades executed during European Trading Hours (ETH) or Asian Trading Hours (ATH) must be reported to the Exchange by the seller within 15 minutes of transaction.

           

Trading Hours and Venue 

CME Globex:  5pm to 4pm, Sun-Fri.

Open Outcry:    7:20am to 2pm, Mon-Fri

Weekly Options on Ultra 10-Year US Treasury Note futures will trade on, and according to the rules of, the Chicago Board of Trade.

Ticker Symbol

CME Globex:  TN1 – TN5

Open Outcry: TN1-TN5

*These contracts will be listed with, and subject to, the rules and regulations of the CBOT, pending certification of contract terms and conditions with the CFTC and completion of all applicable regulatory review periods. 

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. All references to options refer to options on futures.

Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)12  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.

Any research views expressed are those of the individual author and do not necessarily represent the views of the CME Group or its affiliates. 

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, Globex and Chicago Mercantile Exchange 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, Inc. NYMEX, New York Mercantile Exchange and ClearPort are registered trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of Commodity Exchange, Inc. KCBOT, KCBT and Kansas City Board of Trade are trademarks of The Board of Trade of Kansas City, Missouri, 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. 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 Exchange rules. Current rules should be consulted in all cases concerning contract specifications.

Copyright © 2016 CME Group. All rights reserved.

For More Information

The latest information can be
found at:
cmegroup.com/ultra10

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