FAQ: Used Cooking Oil (UCO) and Used Cooking Oil Methyl Ester (UCOME) Futures

  • 19 Aug 2020
  • By CME Group
  • Topics: Energy

1. What products are being launched and when?

NYMEX is launching four (4) futures contracts on Used Cooking Oil (UCO) and Used Cooking Oil Methyl Ester (UCOME) on August 17, 2020. The contract size is 100 metric tons and quoted in US dollars and cents per metric ton. The first contract month available for trading and clearing is September 2020. These new futures contracts extend our ESG and renewables offering outside North America and should attract interest from both energy and agricultural customers (existing and new).

UCO T1 CIF ARA Excluding Duty (PRIMA) Futures  UCE
UCO T1 CIF ARA Excluding Duty (PRIMA) vs Low Sulphur Gasoil Futures USG
UCOME Biodiesel (RED Compliant) FOB ARA (Argus) vs Low Sulphur Gasoil Futures UCS
UCOME Biodiesel (RED Compliant) FOB ARA (Argus) Futures  UCR

2. What are the benefits of trading UCO and UCOME futures?

As the European energy markets continue to evolve and decarbonize, there is a greater focus on renewable road transport fuels. The European Renewable Energy Directives (phase I and II), covering the period 2010 to 2030, have been focused on increasing the volume of renewable fuels in the energy mix. From January 2021, the renewable content in biodiesel must be 14%, up from the current 10%, and there is an increasing focus on waste oils as part of this strategy. For this reason, products like UCO are coming more into focus. Biodiesel blenders are using greater quantities in European products, and UCO is also being used in larger quantities in greener diesel products ‒ such as hydrotreated vegetable oil (HVO). These changes are creating the demand for risk-based hedging tools to manage a greater exposure to these emerging renewable fuels.

Basis spreads between UCO and UCOME against Low Sulphur Gasoil futures can be managed using specifically-designed futures contracts.

3. What is the regulatory jurisdiction of the UCO and UCOME futures contracts?

The contracts are listed in the US by NYMEX and cleared in the US by CME Clearing. The regulator is the CFTC.

4. What are the underlying reference prices?

The contracts are based on a UCO CIF ARA price assessment by PRIMA Markets and a UCOME FOB ARA assessment by Argus Media. Additionally, two spread based futures contracts against Low Sulphur Gasoil will also be listed.

5. What is the PRIMA Markets CIF ARA UCO assessment?

The price assessment excludes duty and is a European import price. The reference to T1 implies that it is an assessment with the duty excluded. Imports are typically received from Asia, but the US and Argentina are a growing source of supply. UCO is sold to “waste oil” collectors for export to international markets. UCO is also sold into the European biodiesel sector, where it is blended with methyl ester to become UCOME. Pure UCO is also used by so-called biorefineries for production of hydrotreated vegetable oil (UCO with hydrogen added) to produce a high-quality green diesel. The PRIMA UCO T1 Non EU UCO CIF ARA price reference code is  is PR00001.

6. What is the Argus Media FOB ARA UCOME assessment?

It is an assessment for European biodiesel. The feedstock for this is UCO, and the blenders add a product called methyl ester to make biodiesel. The Argus assessment for UCOME is based on both domestic supply of UCO and imported volumes from the Americas and Asia. As the focus in the biodiesel market moves away from agricultural feedstocks such as rapeseed (RME) and other fatty acids (FAME 0), interest is expected to grow in waste oil-based biofuels. UCO looks set to be one of the big feedstock choices over time, as countries look to achieve their overall renewable energy targets. Used Cooking Oil is high in greenhouse gas (GHG) savings, and therefore, countries such as Germany like to use it to meet their overall national targets.  The Argus Media UCOME Biodiesel price reference code is PA0024895.

7. How is the final settlement price (the floating price) of the futures contract calculated?

The final settlement price for each contract month is equal to the arithmetic average of the UCOME and/or UCO price assessments from Argus Media or PRIMA markets for each day that it is determined during the contract month. In the case of the futures that are based on the spread between UCOME and/or UCO and Low Sulphur Gasoil, the same principle applies with the floating price being determined over the average of the month using the UCOME or UCO minus the Low Sulphur Gasoil price.

8. How does CME Group settle futures on a daily basis?

CME Group will collate prices from the brokers and provide daily settlement prices for the futures where there is open interest.

9. Are there price limits?

No, there are no price limits.

10. How can the futures contracts be traded?

The futures contracts are available for trading on the CME Globex electronic trading platform and for submission as a block trade for clearing via CME ClearPort.

11. The futures contract is available to trade as a block. How does it work?

Subject to certain requirements being met such as minimum trade size, the futures contract can be privately negotiated via the brokers as a block trade and submitted into CME ClearPort for clearing.

There are minimum quantity and reporting time requirements. The minimum block trade size is five contracts, and trades need to be reported by the broker onto ClearPort within 15 minutes of execution. Firms need to be classified as an Eligible Contract Participant (ECP) in order to be able to engage in block trades. The definition of Eligible Contract Participant (ECP) can be found in Section 1a(18) of the Commodity Exchange Act.

12. What are the hours for block trade entry into CME ClearPort for clearing?

Trades may be entered into CME ClearPort from 5 p.m. Central Time (CT) Sunday to 4:00 p.m. Friday CT, with a 60-minute pause each day from 4 p.m. to 5 p.m. CT.

13. What are the position limits?

The UCOME Biodiesel (RED Compliant) FOB ARA (Argus) futures will have a spot month limit of 450 contracts. Single Month Accountability Level and All Month Accountability Level are both set at 3,000 contracts. The UCO T1 CIF ARA Excluding Duty (PRIMA) futures will have a spot month limit of 225 lots. Single Month Accountability Level and All Month Accountability Level are both set at 1,500 contracts.

14. What is the listing schedule?

Monthly contacts will be listed for 18 consecutive months for the UCOME Biodiesel (RED Compliant) FOB ARA (Argus) futures and 12 consecutive months for the UCO T1 CIF ARA Excluding Duty (PRIMA) futures.  A new monthly contract will be added following the termination of trading in the front month contract.

15. I am a bona-fide hedger and I need to exceed position limits. Can I apply for a hedge exemption?

Yes, you can apply for a hedge exemption. Market participants may be eligible to receive an exemption from position limits in accordance with Rule 559 based on having bona fide hedging positions (as defined by CFTC Regulation §1.3(z)(1)), risk management positions, and/or arbitrage and spread positions. To obtain an exemption application or for further information on the exemption application process, please contact us at NYHedgeprogram@cmegroup.com.

16. What are the margin levels?

Margin levels (outrights and offsets) are constantly under review and will be updated and listed on the product specification pages on www.cmegroup.com.

17. How do I start trading and clearing this contract?

There are various ways you can begin trading these contracts depending on your situation, but we have outlined the simplest and most straightforward process below:

Contact biofuel@cmegroup.com or any of the inter-dealer brokers (IDBs) that service this market, and they will guide you along.

Step 1: Register on CME Clearport
Step 2: Appoint an inter-dealer broker (IDB) that services this market
Step 3: Request your CME Group Clearing firm to permission your chosen IDB for trade submission

Visit our website for more information on getting set up to trade the contract on CME Globex and/or as a block trade on CME ClearPort.

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