Bourse de Montréal : Self-Certification - Settlement Price for Three-Month Canadian Bankers’ Acceptance Futures Contracts - Amendment of the Daily Settlement Price Procedures for Futures Contracts and Options on Futures Contracts

Request for Comments - Modifications to the contract specifications for the three-month Canadian Bankers' Acceptance Futures contract

Trading - Interest Rate Derivatives	Back-office - Options
Trading - Equity and Index Derivatives	Technology
Back-office - Futures			Regulation

CIRCULAR 013-16

January 28, 2016

SELF-CERTIFICATION

SETTLEMENT PRICE FOR THREE-MONTH CANADIAN BANKERS' ACCEPTANCE FUTURES CONTRACTS

AMENDMENT OF THE DAILY SETTLEMENT PRICE PROCEDURES FOR FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

The Rules and Policies Committee of Bourse de Montréal Inc. (the "Bourse") has approved amendments to the Daily Settlement Price Procedures for Futures Contracts and Options on Futures Contracts (the "Procedures") in order to update the procedures governing the daily settlement of Three-Month Canadian Bankers' Acceptance Futures contracts (BAX).

The attached amendments were self-certified in accordance with the self-certification process as defined in the Derivatives Act (CQLR, Chapter I-14.01). They will come into effect and be incorporated into the version of the Procedures of the Bourse on the Bourse's website (www.m-x.ca) after market close on February 26, 2016.

The amendments described in the present circular were published for public comments by the Bourse on April 8, 2015 (see Circular 035-15). Pursuant to the publication of this circular, the Bourse received comments. You will find attached the comments received and the responses from the Bourse.

For additional information, please contact Joanne Elkaim, Director, Interest Derivatives, at 514-871-7891or at [e-mail].

Jean-François Bertrand

Vice-President, Market Operations Services and Connectivity Financial Markets

Tour de la Bourse

P.O. Box 61, 800 Victoria Square, Montréal, Québec H4Z 1A9 Telephone: [phone]

Toll-free within Canada and the U.S.A.: 1 800 361-5353 Website: www.m-x.ca

DAILY SETTLEMENT PRICE PROCEDURES FOR FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS

1. RULE

   Article 6390 of the Rules of Bourse de Montréal Inc. (the Bourse) stipulates that:

   
   

   "The daily settlement price or the closing quotation are determined according to the procedures established by the Bourse for each derivative instrument."

   
   

2. SUMMARY

   
   

   FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS DAILY SETTLEMENT PRICES

   
   

   • These markets use the average price during the last minutes of trading, as specified for each instrument in the following procedures, so as to establish a single settlement price. These calculations are executed manually by market officials or, as the case may be, by an automated algorithm using pre-established guidelines for each product.

     
     

   • The prices at which block trades, Exchange for Physical (EFP), Exchange for Risk (EFR) or Substitution transactions are arranged shall not be used to establish the open, high, low or daily settlement price.

     
     

3. OBJECTIVES

   
   

   The objectives of establishing daily settlement prices are to:

   
   

   • Ensure a fair and orderly market close and pricing for approved participants so that they can properly mark-to-market their positions for margin calculations and back office processing, including the clearing and settlement of their transactions ;

     
     

   • Ensure that the Canadian Derivatives Clearing Corporation (CDCC) and all market participants are informed of the settlement prices.

   
   

4. DESCRIPTION

1. THREE-MONTH CANADIAN BANKERS' ACCEPTANCE FUTURES CONTRACTS (BAX)

   The daily settlement price procedure for the Three-Month Canadian Bankers' Acceptance Futures contract (BAX) is executed by a fully automated pricing algorithm which utilizes the parameters described in sections 4.1.1, 4.1.2 and 4.1.3 to ensure accuracy in the process.

   
   

   DEFINITIONS:

   
   

   "Regular orders": Orders routed by approved participants to the Montréal Exchange trading system.

   
   

   "Implied orders": Orders generated by the implied pricing algorithm (using regular orders) and registered in the order book by the trading engine.

   
   

   "Minimum Threshold": The applicable threshold for BAX will be:

   • 150 contracts for the first four quarterly contract months ("whites");

   • 100 contracts for quarterly contract months 5 to 8 ("reds"); and

   • 50 contracts for quarterly contract months 9 to 12 ("greens").

1. IDENTIFICATION OF THE FRONT QUARTERLY CONTRACT MONTH

   
   

   The automated daily settlement pricing algorithm identifies the front quarterly contract month from the first two quarterly contract months. The front quarterly contract month is the one, among the first two quarterly contract months, that has the largest open interest and the required market information. In the absence of both these criteria together, then the front quarterly contract month shall be determined by market officials based on available market information.

   
   

2. ALGORITHM UTILIZED FOR THE DETERMINATION OF THE DAILY SETTLEMENT PRICE OF THE FRONT QUARTERLY CONTRACT MONTH

   
   

   Once the front quarterly contract month has been identified, the automated daily settlement price algorithm will determine the settlement price of the front quarterly contract month according to the following priorities: first, it will use the last three minute weighted average price of cumulated trades that meet the Minimum Threshold, during the last three minute prior to 3:00pm, or prior to 1:00pm on early closing days, amounting to at least 50 contracts on that contract month; if no such average price is available, it will then use the last 30 minute weighted average price of cumulated trades prior to 3:00pm, or prior to 1:00pm on early closing days, for a total equal to the Minimum Threshold amounting to at least 50 contracts on that contract month for a period not exceeding the last 30 minutes prior to 3:00pm, or prior to 1:00pm on early closing days. Trades resulting from both regular and implied orders will be used in the process. If no such average price is yet available, then the least variation between the bid or offer price that is not as a result of implied orders and the previous day settlement price will be used.

   
   

   The settlement price must be within the bid/offer price of the individual contract provided that the bid or offer meets the Minimum Threshold of volumes required.

   All volumes and orders on a spread will be weighted at 50% relative to the orders and volumes on individual contracts, whereas a butterfly spread will be weighted at 25% relative to the orders and volumes on individual contracts.

   Once the daily settlement price for the front quarterly contract month has been established, it will be verified against the booked orders and if there is a better outright bid or offer that is not as a result of implied orders, the latter will take precedence over the daily settlement price calculated as described in the paragraph above.

   
   

3. PROCEDURE FOR THE DETERMINATION OF THE DAILY SETTLEMENT PRICE OF THE REMAINING BAX CONTRACT MONTHS

   
   

   Upon completion of the aforementioned steps, the automated daily pricing algorithm will then establish the settlement prices for all other BAX contract months sequentially. The daily settlement prices of all other BAX contract months will be based first on the last three minute outright market (resulting from regular and implied orders) prior to 3:00pm, or prior to 1:00pm on early closing days, and strategy combination traded weighted average or, if no weighted average price can be determined in this manner, the least variation between the bid or offer for booked orders.

   
   

   The settlement price must be within the bid/offer price of the individual contract provided that the bid or offer meets the Minimum Threshold of volumes required.

   All volumes and orders on a spread will be weighted at 50% relative to the orders and volumes on individual contracts, whereas a butterfly spread will be weighted at 25% relative to the orders and volumes on individual contracts.

   
   

4. ANCILLARY PROCEDURE

In the absence of any required items to apply the aforementioned procedure, market officials will establish the settlement price based on available market information. They may also disregard any event (trade, bid or offer) which occurs close to 3:00pm, or close to 1:00pm on early closing days, and which is not compatible with a given settlement price.

In this situation, market officials will keep a record of the criteria used to establish the settlement price.

4.2 FUTURES CONTRACTS ON S&P/TSX INDICESAND ON THE FTSE EMERGING MARKETS INDEX

The settlement price shall be the weighted average of all trades during the closing range. The closing range is defined as the last minute of the trading session for all contract months. In the case of mini futures contracts on S&P/TSX indices, the settlement price shall be the same as the standard futures contracts on S&P/TSX indices when such standard futures contracts exist.