To optimize our strike offering to be more reflective of customer trading needs, CME Group is introducing a new, two-step strike increment process that will add more granularity where needed yet result in a reduction of the total number of strikes being listed across our offering.
The current strike listing rules have remained unchanged for a considerable length of time, and it has become clear that the listing rules needed to be adjusted to reflect current volatility and exchange rate levels. For example, a .0050 strike increment for a currency with an exchange rate of .7500 is significantly larger proportionally than at an exchange rate of 1.1500 (6.7% versus 4%). Our current rules applied one increment across all FX options pairs for greater simplicity, but this has resulted in the listing of too many strike prices that are not relevant to current trading conditions, but which take up quoting resources for market participants. This more efficient approach is designed to increase the focus of liquidity provision while providing a more relevant array of strikes for investors.
The new strike listing rule in select FX pairs will come into effect over a period of time, beginning with changes to the EUR/GBP on January 27, changes to AUD/USD and CAD/USD will follow on March 11, and changes to other pairs will be announced shortly.
Over the last few years, we have seen relatively large moves in FX exchange rates and in volatility. Over this time these market dynamics and participants’ risk management needs have also evolved to a point where the legacy single strike increment approach is no longer optimal.
CME Group received extensive feedback from market participants requesting higher strike granularity in near the money strikes of shorter dated instruments, while also pointing out that out-of-the-money strikes (OTM) in longer date instruments could have larger increments. As a result, CME Group is introducing a variable increment approach that will provide more relevant choices, create greater trading opportunities, yet also result in the elimination of nearly 40% of the strikes outstanding, resulting in less screen congestion and bandwidth usage.
The table below provides a synopsis of the difference between the old and the new strike listing rules:
The tables below show potential CAD/USD options strikes under the new rule. The example assumes that 0.7550 is the ATM at the close of the previous trading session.
Also, when transitioning between the two strike increments, the system will add the nearest rounded strike that is divisible by the new increment and go from there (e.g. in the back serials example below 0.7050, the next step is the first value divisible by 100, which is 0.7000, see yellow highlights)
The new listing process will apply to all contracts beginning on each FX pairs effective date. It should be noted that the new listing process will only add instruments that are not currently listed, it will not remove existing strikes, whether these strikes have open interest or not.
Yes, at the discretion of the Exchange, participants may request that a strike(s) be added to the range to the extent it fits the listing increment rule for that particular FX pair and instrument.
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