- What are price limits and how do they function?
- How are price limits calculated?
- When do price limits reset?
- Why do price limits change?
- What are expanded price limits?
- Are all contract months subject to price limits?
- Do Grain and Oilseed options contracts have price limits?
- Where can I find the current daily price limits?
- On expiration day of an option what value is used for auto exercise if the underlying future settles at limit?
1. What are price limits and how do they function?
CME Group has several measures in place to ensure that our markets continue to work in an efficient and orderly manner during volatile market conditions. By establishing price fluctuation limits specific to each product, the Exchange can help restrict a market from moving too far or too fast in a specific period of time.
Grain and Oilseed price limits determine how far a futures trading price can move away from the prior day’s settlement. A futures contract cannot trade at a price more than the initial price limit above or below the previous day’s settlement price. Price limits are in place for trading on CME Globex and for submission for clearing via CME ClearPort.
2. How are price limits calculated?
Twice a year, prior to the resetting of price limits, daily futures settlement prices for each product are collected and averaged over a 45-day period, as stipulated in each product’s rulebook chapter. The average of those prices is multiplied by a specific percentage to get the effective price limit for the next six months.
There are different percentages depending on the product. For example, Corn is multiplied by 7%. These percentages were established by looking at historical daily percentage price changes by product to capture, on average, daily price movements 99 percent of the time. Second, some contracts round their price limits, while others do not.
It is important to consult each product’s rulebook chapter, linked in the bi-annual SER, to understand the specific rules around each product’s price limits.
3. When do price limits reset?
In the case of Grain and Oilseed futures, price limits are updated twice a year. Price limits for each product are reset for the first trade date in May and the first trade date in November.
4. Why do price limits change?
The variable price mechanism was put in place to allow price limits to increase when futures prices are high and retract when futures prices fall. The variable price mechanism is flexible, transparent, and market based.
5. What are expanded price limits?
Generally, expanded limits for grain and oilseed contracts are triggered when any contract month within the first five to eight (depending on the contract) listed non-spot contracts settle at limit. Expanded price limits are approximately 50 percent higher than daily price limits and remain in place until no futures contracts settle at limit.
Triggering of expanded limits in one Soybean Complex (Soybean, Soybean Meal, and Soybean Oil) futures triggers expanded limits in the others; triggering of expanded limits in either Chicago Wheat futures or KC HRW Wheat futures triggers expanded limits in the other.
See SER-9151 and SER-9081 for details on changes to CBOT grains and oilseeds price limits.
6. Are all contract months subject to price limits?
Spot month contracts are not subject to price limits. In Grain and Oilseed contracts, price limits are removed on the business day prior to first notice day of an expiring contract month.
Additionally, trade at settlement (TAS) can trade at limit prices plus or minus the TAS trading range.
7. Do Grain and Oilseed options contracts have price limits?
Options contracts are not subject to price limits.
8. Where can I find the current daily price limits?
The Exchange displays daily price limits here. In addition, the Exchange publishes an SER twice per year with the new price limits – in April for new price limits that go into effect in May and in October for new price limits that go into effect in November. Please subscribe to the SER distribution if you would like to receive these notifications.
9. On expiration day of an option what value is used for auto exercise if the underlying future settles at limit?
Final expiration of an option will always use the official settlement value of the future for auto exercise even if the settlement value is at limit and synthetic futures are trading at a different value. Contrary instructions can be used to exercise or abandon an auto exercised option.
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.
