4 - derivatives trading

what is a flex option

a flexible exchange option

what can you do with a flex option

customise key option terms on exchange

what are the key terms u can customise

exercise price

option style

expiry

what does EFP transaction stand for

exchange for physical transaction

what is an EFP transaction

off market transaction swapping OTC or cash position with a futures position

what does EFS stand for

exchange for swaps

what is an efs transaction

off market transaction swapping OTC swap with a series of futures contracts

eg. swapping FRAs for STIRs

exchange traded vs OTC:

contract terms

X: standardised

OTC: flexible/negotiable

exchange traded vs OTC:

delivery

X: standardised

OTC: negotiable

exchange traded vs OTC:

liquidity

X: excellent (bc exchanges need to make money)

OTC: can be limited (not always tho)

exchange traded vs OTC:

financial integrity

X: CCP

OTC: by ref to credit rating

exchange traded vs OTC:

margin

X: required

OTC: not usually required

exchange traded vs OTC:

documentation

X: standardised

OTC: one-off + more complex

exchange traded vs OTC:

regulation

X: stringent

OTC: EMIR + similar legislation has increased regulation

exchange traded vs OTC:

price quotes

X: highly transparent

OTC: limited

exchange traded vs OTC:

transaction costs

X: low

OTC: more expensive

two other terms for open outcry trading

pit trading

ring trading

which exchange coined the term pit trading

LIFFE, because their trading floor was organised into different pits

who coined the term ring trading

LME

which exchanges still do open outcry trading

chicago

LME

how is LME trading organised

4 ring sessions per day

each metal trades for 5 minutes within a ring

which type of metals are mainly traded

mainly base metals

how long is the trading day on LME

24 hour inter office trading

what is LME select

like SETs:

• order driven

• price time priority

which platform is used for derivatives online

ICE trading platform —> also arranged like SETs and LME select

3 categories of exchange member

brokers

dealers

broker-dealers

3 categories of clearing member

GCM

NCM

iCM

GCM

general clearing member:

• own trades

• client trades

• other exchange members’ trades

NCM

non-clearing member: (eg. locals —> self traders)

• “give up” their trades to be cleared by a GCM on the GCM’s account

ICM

individual clearing members:

• own trades

• client trades

what is a CM

clearing member

what is a TM

trading member