SOFR Futures Packs and Bundles

Packs and bundles are trade execution strategies that will be familiar to many users of CME Three-Month SOFR futures. A pack or bundle is not a distinct product; rather they are intra-market combination strategies in which multiple futures – one each from a sequence of contracts with consecutive quarterly delivery months – are transacted via a single order.

• A pack comprises four consecutive quarterly contracts. A pack combination may comprise any sequence of four quarterlies along the term structure of futures delivery months listed for trading. By far the most popular packs, however, are those defined by their respective yearly color codes: e.g., futures for the nearest four forward-starting quarterly delivery months are known as the white pack, the fifth through eight nearest quarterlies are called the red pack, and so on for greens, blues, golds, and beyond.
• A bundle is similar, except that it spans integer multiples of four contracts: e.g., a two-year bundle contains one each of contracts for eight sequential quarterly delivery months, a three-year bundle contains one each of 12 sequential quarterlies, and a 5-year bundle comprises one each of 20 sequential quarterlies.

The daily settlement prices for a position resulting from a pack or bundle trade are simply the daily settlement prices for each of the individual contracts comprised within the pack or bundle. Thus, buying (or selling) contracts via a pack or bundle combination results in the same risk exposure as if the same contracts were bought (or sold) individually.

The price of a SOFR pack or bundle is quoted as the arithmetic average of the price levels of its constituent futures contracts.

The minimum price increment for any SOFR pack or bundle will be 0.0025 IMM Index points, i.e., 0.25 basis points per annum of SOFR pack or bundle interest rate exposure. For example, below are some valid price and rate increments for P&Bs:

Consider the set of four contracts in the SOFR pack shown in Example 1 below. Arithmetic averages of bid and offered prices among the pack components appear in the row below the list of outright contracts. In this example, neither the average of the bid prices nor the average of offered prices sum to valid pack or bundle prices, based on the minimum price increment.

SOFR Futures packs and bundles trade in a distinct central limit order book, separate and apart from the order book for their component contracts. Prices are neither implied into, nor out of, the pack or bundle order books to the order books for individual futures contracts. This means that while the average of bids or offers in a pack or bundle can be, but often is not, a multiple of 0.25, the quoted price will always be a multiple of 0.25 and can, as is the case in our example, be higher (or lower) than a price that would be implied by the average.

Best bid/offered prices in the CME Globex electronic trading platform’s central limit order book for the pack could appear as shown in the bold SR3:AB 01Y Z2 row. It’s important to note that individual leg prices will be assigned to be economically equivalent to these traded values and may not match the last observed individual leg prices – more on this further below.

As soon as a SOFR pack or bundle is transacted, CME Globex will assign prices to each of its constituent contracts. To see how this works, consider an example where the pack introduced in Example 1 trades at a price of 97.145. Assignment of leg prices to the four constituent SOFR contracts starts with CME Globex evaluating each of the four futures at their respective last daily settlement prices, rounded¹ to the nearest valid half-tick increment. Assume these rounded settlement prices are as shown in Example 2: 97.175, 97.165, 97.140, and 97.110.

One advantage of anchoring off daily settlement prices when calculating the individual contract is that, if the pack or bundle matches partially throughout the trading day, the calculated leg fill prices for the same pack, traded at the same price, will be identical. Alternatively stated, any given pack traded at the same price on the same day will have identically assigned leg prices.

Continuing with the example, the total budget of a pack (or bundle) is the aggregate of individual leg prices to be allocated among the four (or more) component SOFR contracts, in this case: 4 x 97.145 = 388.60. Compare with the four SOFR contracts valued at their respective latest rounded daily settlement prices, the total number of price points to which they sum is: 97.175 + 97.165 + 97.140 + 97.110 = 388.59.

The sum of the rounded settle prices is smaller than the budget of pack price points by 0.01 price points. CME Globex is thus prompted to adjust two of the four component futures prices by the contract minimum price increment (0.005 price points, or ½ basis point). As Example 2 illustrates, the adjustment is applied to each of the two SOFR contracts with the most remote delivery dates. When the sum of adjusted daily settlement prices, shown in the rightmost column, is equal to the budget of pack price points, the price assignment process concludes with each contract booked at its leg assigned price.

Source: CME Group

More generally, the prices of component contracts in any pack or bundle combination are assigned in a similar fashion, with all adjustments to futures contract settle prices distributed as equally as possible in contract minimum price increments, and with adjustments that are largest in absolute magnitude allocated to the component contracts for the most distant delivery months.

A third example, involving a bundle this time, may illuminate further:

Source: CME Group

Note that while the adjustments to the rounded daily leg settle prices are distributed as uniformly as possible, they do not exactly match the change on day, which often has more gradual change along the yield curve. As such, leg assigned prices may not perfectly match to their last traded price; the average of the leg assigned price, however, will be identical to the pack or bundle price.

Packs and bundles have daily settlement prices that are used as a reference in the next trading period to calculate the change on day. These daily settlement prices are not used for clearing purposes. Once traded, each leg is settled vs. the daily settlement price for that leg. As we saw in the early part of this note, the average of the previous day’s settlement prices for any pack or bundle can calculate to a non-valid tick price. As a result, when a pack is trading at a change of day of (for example) +2bp, that does not imply that each leg of the trade will also be +2bp to its own leg settlement price from the previous day.

For more information on SOFR products, visit cmegroup.com/sofr

1. The daily settlement price is a marker calculated every trading date, against which variation margins can be calculated and assessed. CME Group publishes the full procedures of how it calculates the daily settle prices for its products on its website. In short, for SOFR, a mixture of observing the volume-weighted market activity that takes place during the last minute before 2:00 p.m. CT and observing the posted bid/ask prices of outright and spread contracts are used to determine daily settlement prices. Any component contracts that settle in tick increments smaller than one half bp (0.005) will have their prices rounded up to the nearest valid half-bp increment for the purposes of these calculations.