1. When is the U.S. Equity Index-based settlement cycle expected to shorten?

In 2023, the SEC finalized rules to shorten the equity settlement cycle with a transition date of May 28, 2024. The industry-related playbook can be found here.


2. How are the CME Group AIR TRF futures impacted by accelerated settlement?

CME Group released a Special Executive Report (SER) available here.

Adjusted Interest Rate S&P 500 Total Return Index Futures

CME 357B

ASR

Adjusted Interest Rate Russell 1000 Total Return Index Futures

CME 372

ARR

Adjusted Interest Rate Russell 2000 Total Return Index Futures

CME 373

A2R

Adjusted Interest Rate Nasdaq-100 Total Return Index Futures

CME 374

AQR

Adjusted Interest Rate Dow Jones Industrial Average Total Return Index Futures

CBOT 33

ADR

Only CME and CBOT U.S. Equity Index-based futures contracts are impacted. That is, there is NO impact to the CME Group Adjusted Interest Rate FTSE 100 Total Return Declared Divided Index futures contract.

CME and CBOT rules stipulate the calculation of the accrued financing, as well as the financing spread adjustment, based on the DTCC cash equity market settlement cycle. As such, the change to the cash market settlement cycle from T+2 to T+1 will dictate the calculation.


3. Will there be any additional Equity product changes?

The transition to T+1 Settlement only applies to equities listed and traded in the United States. As a result, only the five (5) AIR TRFs based on U.S. indexes are impacted: S&P 500, Nasdaq-100, Russell 1000, Russell 2000 and DJIA. Further, the change to T+1 has no bearing on any other futures and options on futures at CME Group, in that the VM and IM procedure themselves are not impacted.


4. Will this broadly impact CME Clearing’s margin processes?

These changes are specific to the SEC settlement process. CME Clearing already uses multiple daily timelines pertaining to different processes and products. CME Clearing runs both intra-day and end-of-day margin processes. CME Clearing is supportive of the equity industry move to shorten the settlement cycle. Shorter cycles reduce counterparty risk, enhance risk-based margining and reinforce the need for capital efficiencies to manage liquid risk. Read about all the clearing cycles CME Clearing manages in this Advisory Notice.

The one place CME will make changes is on the AIR TRFs whitepaper for US indices. We have an AIR TRF on the FTSE 100 but that index will not be impacted by the SEC’s accelerated settlement process. The daily and final settlement price calculations rely on the same accrued financing and financing spread adjustment calculation that governs the AIR TRFs. Note that the change in the AF and FSA calculation does not impact the timing of CME Clearing's VM and IM procedures.


5. Where can I read more about the AIR TRF model?

The model to AIR TRF is described in detail in the Adjusted Interest Rate (AIR) Total Return Futures Explained article.


6. Can you describe in detail what is changing in the AIR model?

The price of an AIR TRF contract is determined by the following, using the S&P 500 Total Return Index as an example:

Post a move to t+1, CME Group will implement the below calculations:

1. Daily financing formula will change in terms of the financing days input calculation to[(t)+1 settlement days] – [(t-1) +1 settlement days]. This will be effective from May 29 onwards but will also have an impact on May 28.

a. For May 28 specifically the formula will be a mixture of settlement dates [(t)+1 settlement days] – [(t-1) +2 settlement days]. This means for May 28 there will be zero accrued financing.

i. Note the business day before May 28 is actually May 24 due to the Memorial Day holiday on May 27.

ii. May 28 (+1) and May 24 (+2) both result in the same day of May 29; hence zero accrued financing will be realized for May 28.

2.For the FSA component’s calculation the time to expiry term within the calculation will be amended to  = [(T+ 1 settlement days) – (t + 1 settlement days)].   

a. We will start applying this new pay off logic from May 28 onwards (inclusive) in terms of the product pay off.

b. Any trades prior to May 28 will be calculated using the time to expiry defined by[(T+ 2 settlement days) – (t + 2 settlement days)] / 360 even if their maturity date is beyond May 28, 2024.


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.

CME Group is the world’s leading derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

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