ICE Clear Option Exercise Document

ICE Clear Europe Ltd

Option Exercise/Abandonment Guidance Document

v.1.0

(Which Option Contracts does this relate to?)

Which Option Contracts does this relate to?

Option TRS Code

ICE Brent Crude B

ICE Gasoil G

ICE Richards Bay Coal AFR

ICE Rotterdam Coal ATW

ICE Newcastle Coal NCF

ICE WTI T

ICE MISO Cinergy MCG

ICE Mid C Mini Peak MDF

ICE PJM WM Mini Peak PMI

ICE SP-15 DA Mini SPY

Contents

1. Process Overview Page 1 - 5 2. Manually Exercising an Option in TRS Pages 6 - 11 3. Manually Amending the Auto-Exercise Parameters in TRS Pages 12 – 16 4. Deleting a manual Exercise request Pages 17 – 23

(Process Overview) 1

Process Overview

The purpose of this document is to clarify the process involved in amending the Auto- Exercise Parameters in TRS (Screen 15) and the manual exercise of options in the Exercise Notification (screen 17).These functions are used on the relevant options (see earlier list) last trade date where a Clearing Member requires an “In the money” (ITM) long option (dictated by the option reference price) to be abandoned or the manual exercise of an out of the money option (dictated by the option reference price). These requests are normally advised/required very close to the exercise deadline so a solid understanding of the procedure is required by all Clearing Members.

(Process Overview)

Disclaimer

•  NYSE.Euronext provide Clearing Members with access to the Trade Registration System (“TRS ”) within which Clearing Members are able to process the exercise/abandonment of option contracts on the markets operated by IntercontinentalExchange, Inc. and ICE Futures Europe.

•  This guidance document is provided by ICE Clear Europe Limited to assist Clearing Members, and their Representatives, in relation to their use of the exercise/abandonment functionality in TRS. In providing this guidance document ICE Clear Europe Limited does not make any representations or warranties, express or implied, including, without limitation, implied warranties of fitness for a particular purpose in relation to the exercise/abandonment functionality in TRS. No oral or written information or advice given by ICE Clear Europe Limited, including the contents of this document ,in relation to the exercise/abandonment functionality in TRS shall create a warranty and neither a Clearing Member, nor a Clearing Member’s Representative, may rely upon such information or advice.

•  Neither ICE Clear Europe Limited, nor any of its officers, employees, agents, or licensors shall be liable in any way to any Clearing Member or a Clearing Member’s Representative, to any other person or entity for any losses, damages, costs or expenses, including, but not limited to, loss of profits, loss of use or direct, indirect, incidental or consequential damages, even if they were foreseen, foreseeable, known or otherwise arising from:

a) any faults with the option exercise/abandonment functionality in TRS, however those faults may arise; or, b) the suspension, termination or inability to access or use the option exercise/abandonment functionality in TRS, or any

inaccuracies or omissions in any information provided, however such suspension, termination, inability to access, inaccuracy or omission may arise; or,

c) any other cause in connection with the furnishing, performance, maintenance or use of or inability to use all or any part of the option exercise/abandonment functionality in TRS; or,

d) any losses resulting from unauthorised access, alteration, or any other misuse of the option exercise/abandonment functionality in TRS.

2


Key Points

•  These processes only relate to the option contracts listed at the beginning of this document.

•  Amending the Auto-Exercise Parameters ONLY affects ITM positions against the reference price, it will not move an out of the money (OTM) position ITM.

•  Amending the Auto-Exercise Parameters to abandon a Call option will also affect all current ITM Put positions (and vice versa)

•  OTM Positions that Clearing Members require exercised can be done manually on the TRS 17 Screen

•  If a Clearing Member requires a partial abandonment on their ITM position they must remember to manually exercise the balance that they do require to be exercised, after adjusting the parameters, to prevent that instrument from being automatically exercised.


Basic Concepts

•  In order for a Call Option to be considered “In the money” ,by TRS, its exercise price (strike) must be below the option reference price published by ICE.

•  In order for a Put Option to be considered “In the money” ,by TRS, its exercise price (strike) must be above the option reference price published by ICE.

•  Some ICE Futures Europe options expire into futures contracts ,that are continuing to trade, and do not expire until a future date. In these cases, an option can be in/out of the money according to the option reference price (which is what the expiry process is based on) but their exercise can become undesirable based on the price movement of the underlying future. This means that the period of underlying futures trading between the release of the reference price and the option exercise deadline is extremely important to monitor in order to try to anticipate exercise/abandon requests from clients/traders.

•  The Auto-Exercise Parameters are defaulted to the minimum price movement of the contract in question (i.e.1c for Brent and 25c for Gasoil) but can be altered by Clearing Members to abandon long positions that would normally be automatically exercised.

To illustrate see the example overleaf…


On LTD for the Brent Options Clearing Member XXX is Long 10 lots of the Dec10 Brent 77.50 Calls and Long 10 lots of the 78.00 Puts…

Clr M Mem Trd C T A Month Strike Lots Adj Long Adj Shrt Adj Uncd XXX S XXX XXX B C S Dec-10 77.50 1 10 0 10 XXX S XXX XXX B P S Dec-10 78.00 1 10 0 10

The ICE Futures Europe exchange publish the Option reference price as $77.76 making both positions in the money.

However, the Dec10 futures continue to trade and the price falls to $77.45 making an exercise of the 77.50 Calls illogical. Clearing Member XXX has monitored this movement and now

wishes to abandon the previously ITM $77.50 calls and so a manual intervention is required. The Auto-Exercise Parameter determines by what margin a strike needs to be in the money in

order for the option to be automatically exercised. The 77.50 Calls are 26 ticks in the money so in order for TRS to abandon them Clearing

Member XXX must adjust their parameters from 1c to 27, therefore theoretically ensuring that only calls with strikes at or below 77.49 (in practice 77.00) will be automatically exercised

(77.76 – 0.27 = 77.49).

What is extremely important to note is that the above manual adjustment of the Auto-Exercise Parameters has also changed the Auto-Exercise Parameter for Puts, so that only

strikes at or above 78.03(77.76+ 0.27) will now be automatically exercised. This means that the 78.00 Puts will have to be manually exercised in the 17 screen.

It is therefore vital to check ALL previously in the money positions against the newly set Call and Put Auto-Exercise Parameter to establish whether you now need to

automatically exercise an option that would normally have been exercised automatically had you not amended the parameters.

6

Manually Exercising Options in TRS In TRS, Select option 17(Exercise Notifications) by either typing 17 or using the arrow keys to move to it, followed by the Enter key. An input box will appear just below option 20 on the Main menu.

(Manually Exercising an Option in TRS)

7

Type IN followed by the Enter key…


8

You will now be prompted to confirm you want to input an exercise, type Y followed by the Enter key…


9

You now need to enter the details of the option position you intend to exercise (see Description of required fields below) followed by Shift F6 to confirm. Note that to completely clear a field you can use Shift F3.

Trd = Your Member 3 Letter code (XXX)

Com = Contract (B) T = C (Call) or P (Put)

A = H/N/S (House/Non/Seg)

Expry = Month(OCT10)

Exer = Option Strike(8000)

Notiftn = Lots to Exercise(10)

You can type a relevant reference in the “Account ref” field if you require one but this is not a dependency for the exercise to be accepted


10

In this example, Member XXX has exercised 10 lots (ignore the “ghost” zero to the right of the 10) of the OCT10 80.00 Calls.


11

Once you have exercised the position you can check the instruction in the 17 screen by typing AS L=0 C=B( If Brent is the contract code for the option you are checking)

Once in this screen you can also edit (E) or Delete (D) the instruction by Typing E or D followed by the appropriate line number.(see pages…)

12

Manually amending the Auto-Exercise Parameters in TRS In TRS, Select option 15(Auto Exercise Instructions) by either typing 15 or using the arrow keys to move to it followed by the Enter key. An input box will appear just below option 20 on the menu screen:

(Manually Amending the Auto-Exercise Parameters in TRS)

13

Type C= followed by the TRS contract code of the product you wish to amend the Auto-Exercise Parameters for. In the below example C=B to adjust the parameters for Brent


14

This will bring up the default Auto-Exercise Parameters (Should be 1 as default in the “No. of ticks column” except for Gasoil which defaults to 25)


15

Identify the line number you need to amend and type it, followed by the Enter key. This will bring up the line to amend. Type Shift F3 to clear the field and input the amount of ticks required.


16

Hold the Shift key and type F6 to commit the change you have made. Once this has been done correctly the status on the right hand side of the screen will change to “OK”. Now type F11 to exit the screen. It is always a good check to re-enter the screen and check the amendment has been made correctly.

(Deleting a manual Exercise Request)

17

Deleting a manual Exercise

In TRS, Select option 17(Exercise Notifications) by either typing 17 or using the arrow keys to move to it followed by the Enter key. An input box will appear just below option 20 on the menu screen:


18

Type AS C=B (The contract you have just exercised a position in) followed by the Enter Key


19

The screen will now show all manual exercises in this product that have been input today.


20

To Delete the Exercise type D followed by the Enter key.


21

Now type the relevant line number followed by the Enter key.


22

You will now be prompted to Confirm if you want to delete the highlighted exercise, type Y followed by the Enter key.


23

The status (St) will now change from RN to DN to acknowledge the deletion. Type F11 to exit the screen back to the main menu.

(Contacts)

Contacts

For more information/Questions please contact…

Marc Thomas Deliveries Analyst, Operations +44 (0)20 7065 7629 [email protected]

Francois Lepart Head of Operations +44 (0)20 7065 7605 [email protected]

www.theice.com

ICE Clear Option Exercise Document

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