E-mini S&P/BMV IPC futures provide a new way to access Mexican equity performance at CME Group. The contract is eligible for derived blocks in accordance to Rule 526 and can be transitioned into E-mini S&P/BMV IPC futures from alternative index vehicles, such as ETFs, cash baskets or OTC derivative products, investors can use the following methods:
- Engaging in an Exchange for Related Positions (EFRPs).
- Using Basis Trade at Index Close (BTIC) functionality.
- Using the quarterly roll/calendar spread.
1. Using Exchange for Related Positions (EFRPs) to move a cash position into IPC futures
A client who has an exposure to the S&P/BMV IPC Index via OTC derivatives, ETFs/ETNs or cash baskets may use the Exchange for Related Positions (EFRP) mechanism to transition into the E-mini S&P/BMV IPC futures.
Rules related to Exchange for Related Positions are governed by Rule 538. It states acceptable related positions to the EFRP transaction are highly correlated stock baskets that represent at least 50% of the underlying index by weight or includes at least 50% of the stocks in the underlying index, as well as ETFs or ETNs that track the index underlying that tracks the E-mini S&P/BMV IPC Index or another highly correlated index.
What is an EFRP?
An EFRP (Exchange for Related Position) is the simultaneous exchange of a futures contract for a corresponding physical or OTC position meeting the exchange requirements.
An Exchange for Physical (“EFP”) is a type of EFRP that allows investors to convert between futures and ETFs, ETNs (Exchange Traded Note) or baskets of the underlying index constituent stocks that tracks the S&P/BMV IPC Index at a single price. One party is the buyer of the futures and seller of physical shares, ETFs/ETNs or OTC positions, and the other is the seller of the futures and buyer of the physical shares, ETFs/ETNs or OTC positions.
Pricing of an EFP is quoted in terms of the basis between the price of the futures contract and the level of the underlying index, similar to a basis trade at index close, or BTIC, explained in the next section.
Further information on the EFRP mechanism is set forth in the Market Regulation Advisory Notice on EFRPs.[1]
2. Using Basis Trade at Index Close (BTIC) functionality
Using BTIC (Basis Trade at Index Close) functionality at CME Group means a client can transition their position to E-mini S&P/BMV IPC futures at a “known basis” to the respective official cash indices’ close.
Assume the equity index basis is +300 on the E-mini S&P/BMV IPC futures. During the trading day prior to the cash close, the customer agrees to buy the BTIC at a price of +300.
Once the official cash index price for that day are determined, the client will receive a price confirmation for the BTIC transaction. The resultant trade on the E-mini S&P/BMV IPC futures will be the cash index price + the traded BTIC price agreed to earlier in the day.
For example, if the official closing price was 56,000 for the S&P/BMV IPC Index, the BTIC trade would result in IPC contracts cleared at 56,300 (56,000 + traded basis of +300).
If the client was holding a cash basket, they can also use BTIC executed as through the central limit order book (CLOB) or as a block to transition from cash to futures by buying the BTIC and selling the cash basket the closing index price.
Visit Basis trade at Index Close (BTIC) to find out more about BTIC transactions.
3. Using the quarterly roll/calendar spread
Assume the client’s current position is long 200 OTC swap units of S&P/BMV IPC and the client would like to transition to the E-mini S&P/BMV IPC futures contract (Clearing code: IPC) using a calendar spread.
If the S&P/BMV IPC Index price is 56,000, the OTC position with a one multiplier would equate to a notional of MXN 11.2mm (cash price (56,000) * multiplier (1) * OTC units (200). The E-mini S&P/BMV IPC futures have the same price and currency but different multipliers in this case. Thus, to maintain the same notional of MXN 11.2mm, the investor will need to trade 40 contracts of the IPC (MXN 11.2mm/(price (56,000) * multiplier (5)) in this example. If the price or currency were different, additional steps would need to be taken to ensure an equivalent notional to transition.
An investor that is currently long 200 OTC units of S&P/BMV IPC can use the “roll” to transition their position to the E-mini S&P/BMV IPC futures. This can be done by trading the roll in the S&P/BMV IPC Sep/Dec calendar spread and expiring the equivalent OTC units of S&P/BMV IPC at the third Friday quarterly closing price.
Outside of this simple example, other factors to consider in transitioning your risk is the currency and multiplier. View the contract specs for the E-mini S&P/BMV IPC futures contract.
Footnote: An Exchange for Related Position (“EFRP”) transaction involves a privately negotiated off-exchange execution of an Exchange futures or options contract and, on the opposite side of the market, the simultaneous execution of an equivalent quantity of the cash product, by-product, related product, or OTC derivative instrument corresponding to the asset underlying the Exchange contract.
All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only. The views in this report reflect solely those of the author and not necessarily those of CME Group or its affiliated institutions. This report and the information herein should not be considered investment advice or the results of actual market experience.
