Clearing Process for Futures-Style Options - October 12, 2015

On October 12, 2015, and pending all relevant CFTC regulatory review periods, CME will introduce futures-style options, at the request of market participants in certain asset classes.  The initial contract will be product code BZO, a futures-style option on NYMEX Brent Crude Oil futures.

Currently, all options traded and cleared at CME Clearing and CME Clearing Europe are premium-style, also called equity-style, meaning that the option premium is calculated at the original trade price, and is recognized in a settlement cycle on the day the trade clears.  (If the trade clears prior to the cutoff time for inclusion in the intraday settlement cycle, the premium amount is included in that intraday cycle, and if not it is included in the end-of-day cycle.)  Thereafter, as long as the trade remains open, the current market value of the option is subtracted in the case of long options and added in the case of short options in order to determine the total performance bond (“initial margin”) requirement.

Futures-style options, by contrast, behave in a manner similar to that of a deliverable futures contract.    At the onset of the trade, initial margin is collected; however,   the current market value of the option is not added or subtracted as is the case with premium style options.  Every open position is marked to market, and the resulting settlement variation (“variation margin”, “VM”) amounts are netted together with other such amounts in determining the net pay/collect amount.    The premium amount is recognized on the day the option position is removed, whether by exercise, assignment, or expiration without exercise or assignment.

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