OTC Instruments
StoneX Markets LLC (“SXM”) utilizes four main categories of OTC instruments listed below in order from basic to most advanced.
LOOKALIKE OPTIONS AND SWAPS
Lookalike Options and Swaps are also known as Plain Vanilla Options or Swaps and are SXM’s most basic OTC product.
“Lookalikes” contain the same hedge and optionality features as their exchange-traded equivalent so far as contract specifications of strike price, contract size and expiration date.
The exception to their similarities is with settlement and clearing style. All OTC instruments utilize a financial/cash settlement and are traded bilaterally while exchange listed products utilize a physical delivery or financial settlement style and centrally clear all counterparty risk.
EFRP (Exchange for Related Position), also known as EOO, EFR and EFS trades, are able to translate all Lookalike Options and Swaps to the exchange-trade equivalent futures contract.
Due to the difference in settlement styles, OTC vs Exchange traded products are not fungible with regard to P&L statements and do not offset each other’s positions. However, credit financing on margin offered by IFM for all our OTC products does help in offsetting the issue of P&L fungibility. In instances where a client obtains credit financing, the client will pay for any premium of the trade, but the margin requirement is covered.
CUSTOMIZABLE OPTIONS
Customizable Options are Lookalike Options with the additional benefit of customizable strike price, contract size and expiration date.
While the customizability allows this product to rein in a better hedge for the customer, it does limit the Customized Options optionality from being fungible with the exchange.
Due to this lack of fungibility, Customized Options cannot be translated to an exchange-traded equivalent unless and until the option expires to a swap. The swap can then be translated into an exchange-traded equivalent futures position.
EXOTIC OPTIONS
StoneX Markets utilizes the Exotic Options of Asian, Digital and Barrier options. Because the exchange does not have anything similar to these products, the options are not fungible with an exchange-traded option. However, as with all of our OTC Instruments, credit financing is available to offset margin costs and if the option expires into a swap an EFRP can translate the swap to a corresponding exchange-traded futures position.
Asian options determine payout by figuring the average of the underlying price over a pre-set period of time. Example, an average of the futures settlement each Friday for a month.
Digital options also known as Binary or All-Or-Nothing options pay the owner a fixed amount if the market settles at a predetermined level. On the reverse, if it does not settle at that level, the owner receives zero.
Barrier options also known as “knock out/knock in” “down-and-out/down-and-in” or “up-and-out/up-and-in” are based on the market touching a pre-determined level where the option is either activated (knocked-in) or deactivated (knocked-out).
STUCTURED PRODUCTS/ACCUMULATORS
Structured Products/Accumulators allow a Customer to “accumulate” short swaps above the current market or long swaps below the current market so long as the market stays within specified range. This range is decided upon by the Broker/Customer with the range limitations typically being marked by an accumulation level on one end and a barrier level on the other end.
The level of accumulation is better than the current market and represents the price of where the swaps are to be accumulated.
The barrier level is at a worse level than the current market and if touched the structure “knocks out.” At that point, the Customer will cease accumulating swaps at the accumulation level. All swaps obtained prior to the knock out are retained by the customer.
The Customer, in return for being able to accumulate better than the current market, assumes the risk of these two features of potential double up and/or knock-out. Most of our Accumulators contain at least one of these features.
All Structured Products combine some or all of the previously mentioned OTC products into one-line item and are always done in strips of the Customer’s incremental choice (weekly/daily).
Due to the complexity of these structures, the options are unable to be transferred to the exchange. However, once the structures accumulate swaps, the swaps are able to be EFRP’d to a corresponding exchange-traded future.
FEATURES OF STRUCTURED PRODUCTS
The following features are what assist in composing the width of the accumulator’s range.
The more aggressive a feature, the wider the parameter of the structure available. This risk allows the customer to accumulate at further improved levels or set the barrier at levels farther away from the current market.
Typically, our customers prefer to put a Structured Product trade on for zero-cost up front.
Double Up: Weekly or Euro
The Double Up and Accumulation level are typically at the same price. In the event that the market is beyond the accumulation level, the customer acquires two times the notional value at the accumulation level. Keep in mind that the customer may have already benefited from accumulating better than the market prior to this double up. The two types of Double Up:
Euro Double-Up Euro Double Up also requires the customer to acquire two times the notional amount of swaps if the market settles at expiration beyond the Double Up/Accumulation level. This allows the customer to avoid a double up throughout the duration of the Accumulator, but may double the full quantity at expiration.
Weekly Double Up Weekly Double Up requires a customer to acquire two times the weekly notional amount of swaps for only the weeks that the market settles beyond the accumulation level.
Barrier/ Knock Out/ Knock In
Based on a predetermined level, this feature will either Knock Out or Knock In once this level is touched. If an Accumulator Knocks out, the Customer keeps all swaps previously accumulated
Range / Trigger
With the Range feature the barrier/knock-out has been replaced with a trigger. The customer receives a swap at the accumulation level every week except for the weeks that the market settles beyond the trigger. Unlike a typical knock out/ barrier where the structure knocks out for good, the range only knocks out on that specific week where the market is beyond the trigger level, exempting swap accumulation only in that week. If the following week the market returns within the range, the customer again is able to accumulate swaps.
Guaranteed Quantity
This feature guarantees the balance of the notional quantity generally at the initial board level price despite a knock out. The guaranteed level is able to be customized.
Strips
This feature is utilized throughout all SXM OTC products, with the exception of Lookalike Options and Swaps. Structured Products always utilize a Strip feature. The value is in them being traded as a series over a customizable period of time and interval expiration; most often daily or weekly. Because they are traded as a package they are able to be priced at 65-75% the cost of typical exchangetraded options.
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DISCLAIMER Trading over-the-counter and exchange-traded derivatives is not suitable for all investors and involves substantial risk. StoneX Markets, LLC (“SXM”), a subsidiary of StoneX Group Inc., is a member of the National Futures Association and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. Any recipient of this material who wishes to express an interest in trading with SXM must first prequalify as an ECP, independently determine that derivatives are suitable for them and be accepted as a customer of SXM. Trading over-the-counter (“OTC”) products or “swaps” involves substantial risk of loss. This is not an offer to buy or sell any derivative. This material does not constitute investment research and does not take into account the particular investment objectives, financial situations, or needs of individual clients or recipients of this material. You are directed to seek independent investment and tax advice in connection with derivatives trading. 2024 StoneX Group Inc. All rights reserved. |
