OneChicago is a joint venture of OneChicago is the market for Single Stock Futures in the U.S.
OneChicago Overview Innovative Products Over 425 single stock futures ETF futures: DIAMONDS®,XLE,XLF,XLU, XLV 1 SSFcontract = 100 shares of underlying stock 1 ETF Future contract = 1000 shares of underlying stock,DIA contract=100 shares Fully Electronic State of the art technology using the CBOEdirect® match engine Access to OneChicago from CBOEdirect or GLOBEX® CBOEdirect supports FIX and CMi APIs Structured for Liquidity Lead Market Maker System* Continuous two-sided markets and fast fills* WYSIWYG “What you see is what you get” quotes and execution Open and Transparent Markets Membership not required to trade Bid/Offer transparency and market depth Anonymity In US, Trade from securities or futures accounts *For products listed on with an * no LMM will be responsible for making continuous two-side marketswww.OneChicago.com
No uptick rule for short selling – can sell short on a downtick Sell XYZ short, run risk of buy-in (lose control of stock and forced to buy back at undetermined price) Sell short SSF on XYZ (Oct, Nov, Dec, or Mar) and defer buy-in risk thru expiration date Or Roll position to further out SSF cycle Single Stock Futures: Market Innovation Advantages
Financing Benefits of Long SSFs versus Long Stock (Stock borrow) Long 100 shares of stock at $40.00 per share (25% Maintenance Margin / 75% Leverage ) and expected holding period of 60 days. Financing Cost = % Leverage to Finance * stock price * shares * (Broker borrow rate /365 * holding period ). = 75% * $40.00 * 100 * ( 10% /365 * 60 ) = $49.31 Compare to: Long 1 SSF contract (100 shares of stock) at $40.33 per contract (20% Margin long or short) and expected holding period of 60 days. SSF price = stock price * ( 1 + ( implied borrow rate/365 * holding period ) ) – pre-expiry dividend amount = $40.00 * ( 1 + (5% / 365 * 60 ) ) – 0 = $40.33 Implied Financing Cost = ( SSF price – stock price ) * shares ( 1 SSF = 100 shares of stock ) = ( $ $40.00 ) * 100 = $33.00 However interest is often earned on the SSF margin Interest Earned = ( Margin requirement * SSF price ) * shares * ( Broker Interest/365 * holding period ) = ( 20% * ) * 100 * ( 2% / 365 * 60 ) = $2.65 Total SSF Financing Cost = SSF Implied Finance Cost + Interest Earned = $ $2.65 = $30.35 Therefore Savings = Stock Financing Cost – SSF Total Finance Cost = $ $ = $ (a 61% benefit) All Transaction costs not included
Financing Benefits of Short SSFs versus Short Stock (stock loan) Short 100 shares of stock at $40.00 per share ( 30% Maintenance Margin) and expected holding period of 60 days. Normally most Brokers don’t pay interest on short stock proceeds, however interest is earned on the short stock margin amount. Interest Earned = % Margin * stock price * shares * ( Broker interest / 365 * holding period ) = 30% * $ * 100 * ( 2% / 365 * 60 ) = $ 3.95 Compare to : Short 1 SSF contract ( 100 shares of stock ) at $ per contract ( 20% Margin long or short) and expected holding period of 60 days. SSF price = stock price * ( 1 + ( implied loan rate / 365 * holding period ) ) – pre-expiry dividend amount = $ * ( 1 + ( 3% / 365 * 60 ) ) – 0 = $ Implied loan rate = ( SSF price- stock price ) * shares ( 1 SSF = 100 shares of stock ) = ( $ $ ) * 100 = $ However interest is often earned on the SSF margin Interest Earned = ( Margin requirement * SSF price ) * shares * ( Broker interest / 365 * holding period ) = ( 20% * $ ) * 100 * ( 2% / 365 * 60 ) = $ 2.64 Total SSF = SSF implied loan rate + Interest Earned Receipts = $ $ 2.64 = $ Therefore: Increased Income = Total SSF Receipts – Stock Interest Earned = $ $ 3.95 = $ ( a 573% benefit ) All Transaction costs not included
Rho Interest Rate Risk Equity Options Options Strategies with stock as a hedge,who controls the Rate on your Stock part of the Strategy? What happens when Rate changes occur? Single Stock Futures,Single Interest Rate for the Fixed term of that expiration Cycle.
SSFs Advantages SSFs provide additional leverage and are a more capital efficient hedge than OTC positions Allowable SSF offsets reduce margins to 5% - 10% versus collateral of 10%-15% for swaps SSFs provide access to interest rates determined by the market, not the broker The SSF price has a built in interest rate – effectively making the same interest rate available to all market participants. In the cash equity world, brokers set individual rates for each trader which are usually higher than those implied by our SSF market. SSFs make it easier to short Don’t need to wait for an uptick. Don’t need to wait for stock to be located (Reg SHO). Enter Market at your price
SSFs Advantages SSF EFPs provide an opportunity for “Yield Enhancement Trades” Exposure to dividend and interest rate risk provide a better argument to the “arms length” status of the trade than fully notional swaps. Yield Enhancement of Dividend with relation to withholding tax per tax treaties. SSFs are a useful tool for managing P&L distribution A cash equity trade can get segmented into P&L and dividend income while a SSFs trade is purely P&L. AAA (OCC & CME ) Clearing significantly reduces counter-party related risk For Smaller/lower credit traders it may mean the removal of counter-party credit caps and the opportunity to trade more For larger firms, Default becomes less of an issue, opportunity to manage expectations of exposure AAA (OCC & CME ) Clearing is more operationally efficient than OTC position management Don’t need to negotiate ISDAs for each counter-party and position Don’t need to perform ongoing credit analysis and collateral management
OTC to On- Exchange all but eliminate counter-party risk Leverage, reducing or eliminating capital charge for stock holdings Reduce margin requirements (vs. 50%-100% Reg. T margin requirement for stock collateral) Ability to collateralize SSF margin with other than cash (like OTC swaps) Opportunity for improved financing Opportunity for competitive pricing in hard-to-borrow market Eliminate potential error or financial loss of unwind of hedge in swap Diversify yield enhancement (dividend) strategies, like OTC market SSFs (EFPs) v. OTC Swaps
Dividend Analysis : SSFs (dividend discounted) versus Long Stock (dividend income) Long 10,000 shares of stock XYZ at $ Dividend ex- date mm/dd/yy Dividend amount $.38 quarterly At Dividend ex-date: Stock price = $ $.38 (Dividend amount) = $ Stock P/ L : Loss= 10,000 shares * $.38 = $ 3, Dividend Income : += 10,000 shares * $.38 = $ 3, Withholding Tax = Dividend Amount * Applicable Tax Rate = $ * 15% = $ Net Dividend Income := $ 3, $ = $ 3, Compare to : Long 100 SSFs ( 1 contract = 100 shares of stock), expiration date mm/dd/yy Dividend ex- date mm/dd/yy Dividend amount $.38 quarterly Example trade period : 17 days to SSF expiration, 5% interest rate,1 day to dividend ex-date SSF price= Stock price * ( 1 + ( annualized interest rate * days to expiry / 365 ) ) – pre-expiry dividend amount = $ * ( 1 + ( 5% * 17 / 365 ) ) - $.38 = $ At Dividend ex- date : Stock price= $ $.38 ( Dividend amount ) 16 days to expiry= $ SSF price= $ * ( 1 + ( 5% * 16 / 365 ) ) – 0 = $ SSF P / L = 0 Dividend Income = 0 Withholding Tax= 0
High Yield Dividends EFP Strategy Shift Dividend Income to Position P/L Merck (MRK): $35.00 Ex-dividend: 3/01/06 Payout: $0.38 quarterly Yield: 4.34 Trade date: Feb. 28, 2006 OneChicago SSF MRK1C MAR06: $34.70 SSF price = cash price + cost to carry – dividend $34.70=$ *08– $0.38 By selling the stock position at $35.00 and buying the SSF MAR06 position at $34.70 via EFP trade, the dividend is now in the P/L of the position (stock and/or SSFs) *.08= $35.00 *(5% /365 * 17) Trading Strategies
Index Arbitrage- Long Stocks / Short Indexes (S&P 500) Banks & Associated trading arms -Capital Requirements (Haircut) -Dividends (Withholding) -Tax Treatments (Countries taxation treaties) -Deductions (Corporate structure) -Stock lending (Swap or Stock loan) -Collateral ( Currency & or Bonds) -OTC to On-Exchange
OneChicago Quote Vendors Belzberg Technologies Inc. (HYTS ) Bloomberg ComStock CQG, Inc. Data Transmission Network (DTN) eSignal FutureSource Delayed snapshot quotes and daily market summaries are available on OneChicago’s Web site at For real-time quotes, traders should inquire directly with their current vendor for subscription information, or contact one of the vendors listed below. Moneyline Telerate Reuters Thomson Financial – ILX Townsend Analytics TrackData Trade Station Technologies Subject to change. For complete list see OneChicago Web site