Amendments to CBOT Rule 588. H (Globex Non-Reviewable Trading Ranges) for the New CBOT Treasury Bond and Note Futures Calendar Spreads

Effective Sunday, May 17, 2015 for trade date Monday, May 18, 2015, and pending all relevant Commodity Futures Trading Commission regulatory review periods, the Board of Trade of the City of Chicago, Inc. (“CBOT” or the “Exchange”) will make amendments to CBOT Rule 588.H (Globex Non-Reviewable Trading Ranges) that are applicable to the following contracts:

Background

The Exchange developed a U.S. Treasury Bond futures calendar spread with a non-standard ratio of 3:2 for the recent February/March 2015 rollover from the March 2015 to the June 2015 contracts.  The U.S. Treasury Bond futures calendar spread with a 3:2 ratio provided an electronic trading solution via CME Globex for customers with difficulty transferring positions with the standard 1:1 calendar spreads due to an unprecedented transition in risk exposures.

Two-thirds of the T-bond March-June 2015 rollover took place via the non-standard 3:2 ratio spread for the U.S. Treasury Bond futures. This provided a template for developing alternate, non-standard ratio Treasury futures calendar spreads for the balance of the Treasury futures complex that has quarterly rollover activity.  Following the prior rollover period, the Exchange identified demand from certain customers for regular listings of an alternate Treasury futures calendar spread with non-standard ratios on Globex.  These spreads with non-standard ratios are intended to offer a means to rollover positions in a manner that is closer to risk neutral than the standard spreads with 1:1 ratios.  Going forward, the Exchange plans to list these non-standard spreads during the Treasury futures rollover months: February, May, August, and November.

Conventions for Treasury Futures Ratio Calendar Spreads on Globex

Non-Standard Spread Ratios in Globex Notices

The new spread ratios will be available in the applicable weekly CME Globex Notices for the current and forthcoming rollover periods.  These ratios are subject to change quarterly based upon an assessment of the Treasury bonds and notes that each of the Treasury futures are tracking.  Please refer to the most recent Globex Notice for the current ratios.

Non-Standard Spread Ratios-Listing Convention

The difference in duration of the nearby and second quarterly Treasury futures contract months typically creates “tails” to manage for each quarterly rollover.  The new spread ratios will be determined with the intent to minimize the “tails” associated with rolling Treasury futures positions from one contract to the next.

The spread ratios will be established based upon forward DV01s (dollar value of basis point changes) of the cheapest-to-deliver (CTD) notes or bonds prior to the listing of these spreads.  Please note that the appropriate hedge ratios are subject to change due to changes in market values and/or a switch in the CTD status to a different bond or note.  The maximum number of contracts on either spread leg is limited to 99 contracts.  Spreads with “tails” of 1% or less will have a ratio of 99:98 or 98:99.  In this instance, the leg with the lower DV01 will have the larger number of contracts, 99.

Non-Standard Spread Ratios-Pricing Convention

The new, non-standard Treasury calendar spreads will apply the same pricing convention that was used for the non-standard 3:2 U.S. Treasury Bond futures calendar spread.  The non-standard ratio spreads will be quoted in terms of weighted price difference:

First Quarterly=Number of Contracts (Front Leg) Multiplied By Leg Price (Front Leg)

Second Quarterly=Number of Contracts (Back Leg) Multiplied By Leg Price (Back Leg)

Spread Price=First Quarterly Minus Second Quarterly

The pricing convention makes changes in the non-standard spreads a multiple of the standard spreads dependent on the number of contracts in the larger leg of the spread.

Comparisons to Conventional, Standard Ratio (1:1) Treasury Calendar Spreads

The non-standard ratio Treasury futures calendar spreads will be similar to the standard 1:1 calendar spreads in terms of its minimum trading increment (equal to ¼ of 1/32^nd of a price point), its trade-matching algorithm, and its functionality.  Therefore, all of these spreads will utilize the “K” Algorithm on Globex.  2-Yr. (ZTX), 5-Yr (ZFX), and 10-Yr (ZNX) T-Note futures will have an allocation mix of 20% First In First Out (FIFO)/80% Pro-Rata.  T-Bond (ZBX) and Ultra T-Bond (UBX) will have the 100% Pro-Rata allocation mix that their standard ratio spreads do. Similar to the standard Treasury futures calendar spreads, the non-standard ratio Treasury futures calendar spreads will not utilize implied pricing, and they will not be eligible for block trades.

Access Manager

Due to the complexity and unconventional pricing of the non-standard ratio spreads, CME Group will assist Clearing Firms in risk management of executing these spreads on Globex by deploying Access Manager.  This Globex risk management tool is commonly referred to as the Deliverable Swap Futures (DSF) Access Manager because it was initially developed for the purpose of limiting participation in the expiring DSF contracts during the last seven calendar days.  Similarly, Globex accounts at Clearing Firm will be blocked from entering buy or sell orders in the non-standard ratio Treasury futures calendar spreads unless they have been positively permissioned by their Clearing Firm (i.e. whitelisted).  The Access Manager will be deployed for the entire duration of the period that the non-standard spreads are available for trading, and not limited to the last 5 trading days.

If an unauthorized account submits an order, Globex will send a Session Level Reject (tag 35-MsgType=3) message and the accompanying text explanation (tag 58-Text = this account is prevented from trading this physically delivered contract 150 days before the last trading day).  The Access Manager will appear as a tab on the Risk Management Tools page and be available to all current GC2 Risk Admins.

Maximum Order Quantity

Currently, standard Treasury futures calendar spreads with a 1:1 ratio have a maximum order quantity of 29,999.  The new, non-standard ratio Treasury futures calendar spreads will have much smaller maximum order quantities such that the number of legs allocated is consistent for the standard and non-standard spreads.  For example, the maximum order quantity for the June 2015-September 2015 spreads will be 299 because each of these spreads will result in 197 contracts (197=99+98).  Therefore, one maximum order quantity non-standard spread of 299 would produce 58,903 contracts compared to 59,998 (59,998=29,999*2 legs) for the maximum standard spreads.  Please note that these maximum order quantities will be reviewed each quarter and are subject to change based upon current ratios.  Customers should refer to Globex notices during the rollover months for the current ratios and maximum order quantities for the non-standard Treasury calendar spreads.

Non-Reviewable Range

To properly reflect the difference in pricing conventions between standard and non-standard ratio Treasury calendar spreads, effective on trade date Monday, May 18, 2015, the Exchange will amend CBOT Rule 588.H (“Globex Non-Reviewable Trading Ranges”) to include the new Treasury futures calendar spreads with non-standard ratios.

The non-reviewable ranges of the non-standard ratios are consistent with the standard ratio 1:1 spreads which have a non-reviewable range of 5 ticks (1.25/32nds).  The non-reviewable ranges for the non-standard ratio primarily differ from the standard ratio spreads as their prices are weighted by the number of contracts on each leg.  As a result, the non-reviewable ranges for the non-standard ratio Treasury futures calendar spreads will reflect 5 ticks multiplied by the larger number of contracts on the two legs of the calendar spread.

Appendix A provides CBOT Rule 588.H in blackline format.

Questions regarding this notice may be directed to:

Agha Mirza                                +1 212 299 2833                      Agha.Mirza@cmegroup.com

David Reif                                +1 312 648 3839                       David.Reif@cmegroup.com

Ted Carey                                 +1 312 930 8554                     Ted.Carey@cmegroup.com

Appendix A

Amendments to CBOT Rule 588.H. Globex Non-Reviewable Trading Ranges

(Additions are underlined)