CME has developed a proprietary algorithm that compresses offsetting positions across multiple participant portfolios, while adhering to a set of risk constraints provided by the participant. In order to maintain the risk profile of the original portfolio, in terms of Greeks (delta, gamma, vega) and net option value, new onset positions are introduced.
From a participant perspective, the resultant compressed portfolio will maintain a similar risk profile to the originally submitted portfolio but will contain significantly fewer positions. Given that this is a multilateral service, if any participant rejects the compression results, the run will be canceled and no compression will take place. In the event this occurs, CME will remove the rejecting participant and attempt to reschedule the compression cycle.
To be eligible to participate in a multilateral compression cycle, the participant must satisfy the eligibility criteria established by CME. Additionally, participants will be required to sign a compression service agreement and obtain FCM approval.
Currently, multilateral compression will be available for options on S&P 500 and E-mini S&P 500 Index futures. The associated option product codes are:
E-mini S&P 500: ES, E1A, E1C, E2A, E2C, E3A, E3C, E4A, E4C, E5A, E5C, EW, EW1, EW2, EW3, EW4
S&P 500: SP, S1A, S1C, S2A, S2C, S3A, S3C, S4A, S4C, S5A, S5C, EV, EV1, EV2, EV3, EV4
CME plans to run multi-lateral compression service once a month, after the quarterly or serial options expire. This frequency is designed to minimize the impact on exercise and assignment, but the frequency can be increased as needed and warranted by customer demand.
CME will routinely provide updates related to the equity option multi-lateral compression offering. These updates will include the dates of upcoming cycles and any changes to the operational requirements needed to participate. Additionally, as with any new service or offering, CME will look to provide participants with information and observations to help participants benefit from the new multi-lateral compression service for equity index options. If you would like to receive updates on the equity index options complex at CME, including updates on multi-lateral compression, please register at cmegroup.com/equityoptions.
CME will apply a $0.05 fee assessed on each contract added or reduced as a result of a multilateral compression process.