UDS - User Defined & Inter-Group Strategies

The user-defined strategies (UDS) facility allows participants to create customized option strategies based on their individual risk management needs. Inter-group strategies (IGS) combine instruments from different groups in the trading engine. These strategies allow the component instruments (or legs) to trade simultaneously, and only simultaneously, in a single transaction.

CGF / CGB Inter-Group Strategies

The Inter-Group Strategy (IGS) functionality enables the execution of spread trades between different futures contracts like the 5-year Government of Canada Bond Futures (CGF) vs. the 10-year Government of Canada Bond Futures (CGB) in a single transaction. Participants wishing to transact this spread are able to do so at a predefined ratio of 2x CGF - 1x CGB, thereby greatly reducing execution risk inherent to this trade.

The spread is listed quarterly by the MX's Market Operations Department (MOD) using the SOLA Inter-Group Strategy tool as each quarterly contract commences trading. Should a participant wish to trade the spread using a different ratio, the desired ratio strategy can be created by the MOD. Leg ratios can only be expressed as whole integers.

In addition, the MX's implied pricing algorithm allows outright CGF and CGB quotes to imply orders in the CGF-CGB spread book, and quotes in the CGF-CGB spread book to imply into the respective outright order books. Orders submitted into the spread market are then filled subject to corresponding spread orders in the book, or when orders in the outright CGF and CGB markets both match the defined spread in terms of differential and quantity.

Example of a CGF/CGB strategy

Suppose a participant wishes to execute a strategy to buy 40 CGFM20 contracts and simultaneously sell 20 CGBM20 contracts.

Given the total quantity on each leg, the IGS functionality will reduce these quantities by using the highest common denominator. This breaks down to +2 CGFM20 and -1 CGBM20 when each leg is divided by 20 (the highest common denominator).

This IGS is listed in the following format: 2CGFM20-1CGBM20
The price of this strategy will be
= (Listed leg1 ratio x Leg1 price) + (Listed leg2 ratio x Leg2 price)
= (+2 x 124.45) + (-1 x 141.62)
= 107.28

This means that if the participant is buying the strategy, he/she is buying CGFM20 and selling CGBM20 as per the listed ratios in the strategy. For every one strategy the participant buys, he/she will be buying 2 CGFM20 and selling 1 CGBM20. To execute the total quantities (40 and 20) on each leg, the participant will have to enter a quantity of 20 strategies.

The information contained in this document is for information purposes only and shall not be construed as legally binding. This document is a summary of the product's specifications which are set forth in the Rules of Bourse de Montréal Inc. ("Rules of the Bourse"). While Bourse de Montréal Inc. endeavors to keep this document up to date, it does not guarantee that it is complete or accurate. In the event of discrepancies between the information contained in this document and the Rules of the Bourse, the latter shall prevail. The Rules of the Bourse must be consulted in all cases concerning products' specifications.