This topic provides an overview of the types of User Defined Spreads which can be created and the message submission process for each type of UDS. For UDS message-level validation rules, see: UDS - Validation and Messaging Rules.

Exchange-Recognized UDS

If the spread requested by the user is identified as one of the CME Globex standard futures spread or options spread types, that instrument will be created, assigned the recognized spread type code, and its availability disseminated to the market with the market data Security Definition (35=d) message.

If the spread requested by the user is not identified as an exchange recognized spread type, the instrument is created exactly as the user requested, designated 'generic' spread type code (GN), and a notice of instrument availability disseminated to the market.

Procedure to Create an Exchange Recognized UDS

1. Client system submits an iLink Security Definition Request (tag 35-MsgType=c) message.
2. If the iLink Security Definition Request (tag 35-MsgType=c) message is accepted, CME Globex sends the client system an iLink Security Definition (tag 35-MsgType=d) message with tag 323-SecurityResponseType=2 (accept).

Accepted

3. After accepting the iLink Security Definition Request (tag 35-MsgType=c) message and the creation of the options spread instrument, CME Globex broadcasts a market data Security Definition (tag 35-MsgType=d) message containing the tag 55-Symbol and tag 48-SecurityID code of the new instrument. The market data Security Definition (tag 35-MsgType=d) message contains the spread type code in tag 762-SecuritySubType.

4. CME Globex also broadcasts a market data Quote Request (tag 35-MsgType=R) message for the options spread immediately following the market data Security Definition (tag 35-MsgType=d) message.

5. The client system submits an iLink 2 New Order message for the newly created unrecognized spread type.

6. CME Globex sends an Execution Report - New Order Acknowledgment (tag 35-MsgType=8, tag 39-OrdStatus=0) for the new order.

 Rejected

• If rejected, for example, due to a Paused or Closed market or because the options spread instrument already exists, the iLink Security Definition (tag 35-MsgType=d) message will contain tag 323-SecurityResponseTyp=5, Reject and the reject reason in tag 58-Text. No market data Security Definition (tag 35-MsgType=d) message is broadcast.
• If rejected due to invalid message format or content, the client system will receive an iLink Business Level Reject (tag 35-MsgType=j).

Example

In the following example, the user submits two vertical spreads in the iLink Security Definition Request message to create a user-defined Butterfly options spread. The iLink Security Definition Request (tag 35-MsgType=c) is submitted via iLink. The resulting market data Security Definition (tag 35-MsgType=d) message is broadcast over the appropriate Market Data Platform channel.

Generic UDS

If the spread requested by the user is not identified as a CME Globex exchange recognized spread type, the instrument will be created exactly as the user requested, designated 'generic' (GN), and instrument availability disseminated to the market with the market data Security Definition (35=d) message.

Procedure to Create a Generic UDS

1. Client system submits an iLink Security Definition Request (tag 35-MsgType=c) message containing one or more user-defined options spreads and one or more option outrights or unrecognized option spreads.

2. If the iLink Security Definition Request (tag 35-MsgType=c) message is accepted, CME Globex sends the client system an iLink Security Definition (tag 35-MsgType=d) message with tag 323-SecurityResponseType=2, Accept.

   Accepted

3. After accepting the iLink Security Definition Request (tag 35-MsgType=c) message and the creation of the options spread instrument, CME Globex broadcasts a market data Security Definition (tag 35-MsgType=d) message containing the tag 55-Symbol and tag 48-SecurityID code of the new instrument. The market data Security Definition (tag 35-MsgType=d) message contains the spread type code in tag 762-SecuritySubType.
4. CME Globex also broadcasts a market data Quote Request (tag 35-MsgType=R) message for the options spread immediately following the market data Security Definition (tag 35-MsgType=d) message.
5. The client system submits an iLink New Order (tag 35-MsgType=D) message for the newly created unrecognized spread type.
6. CME Globex sends an Execution Report - New Order Acknowledgment (tag 35-MsgType=8, tag 39-OrdStatus=0) for the new order.
    
   Rejected

• If rejected, for example, due to a Paused or Closed market or because the options spread instrument already exists, the iLink Security Definition (tag 35-MsgType=d) message will contain tag 323-SecurityResponseType=5 (reject) and the reject reason in tag 58-Text. No market data Security Definition (tag 35-MsgType=d) message is broadcast.
• If rejected due to invalid message format or content, the client system will receive an iLink Business Level Reject (tag 35-MsgType=j).

Example

In this example, the user combines a spread with an exchange recognized option outright and creates a CME Globex unrecognized spread type (GN).

Covered UDS

The term Covered denotes a User Defined instrument created by combining one outright option or options spread with one or more 'covering' outright futures instruments and a user-defined value for each futures leg which determines the quantity of futures allocation at trade.

Covered Attributes

• The total number of legs in the Covered instrument cannot exceed 40, up to 39 of which may be futures instruments.

• All products available for Covered construction are listed at: http://www.cmegroup.com/product-codes-listing/.
• All listed outright futures instruments are available as a covering future.

A Covered instrument is created at the client request subject to CME Globex validation of the proposed instrument.

Delta

When customers request the creation of a covered, CME Globex validates the proposed delta by performing a 'delta reasonability' check. During the match process for orders on Covered instruments, CME Globex determines the Covering future quantity by multiplying the outright option or option spread quantity by the absolute value of delta and then rounding according to the rules specific to incoming and resting orders.

Delta Neutrality

To ensure delta neutrality on covered options, CME Globex rejects iLink 2 New Order, Cancel/Replace, and iLink 2 Mass Quote messages violating the minimum quantity value sent in tag 562-MinTradeVol of the market data Security Definition (tag 35-MsgType=d) message.

Expiration

A Covered instrument either expires with the earliest expiration of its component leg instruments or at the end of the trading session.

Valid Instruments

All listed CME Group outright options and options spreads are available for creating Covered spreads, and all listed outright futures contracts are available as a Covering future.

Both CME Globex exchange recognized and unrecognized spread types may be Covered.

The diagram below shows the message sequence for Covered instrument creation and notification of market participants of Covered instrument availability.

Example

Procedure to a Submit Covered UDS

1. A client system submits an iLink Security Definition Request (tag 35-MsgType=c) message.
2. If the iLink Security Definition Request (tag 35-MsgType=c) message is accepted, CME Globex sends the customer system an iLink Security Definition (tag 35-MsgType=d) message with tag 323-SecurityResponseType=2 (accept).
   
   Accepted
3. After accepting the iLink Security Definition Request (tag 35-MsgType=c) message and the creation of the Covered instrument, CME Globex broadcasts a market data Security Definition (tag 35-MsgType=d) message containing the Instrument Code and tag 48-SecurityID for the new Covered instrument.

• CME Globex will also broadcast a market data Quote Request (tag 35-MsgType=R) message for the new Covered instrument immediately following the market data Security Definition (tag 35-MsgType=d) message.

4. A market participant submits an order or quote against the Covered instrument.

5. If the Covered instrument is traded, CME Globex transmits the corresponding iLink 2 Execution Report - Fill Notice and market data messages.

To obtain displayed leg price Security Definitions (tag 35 - MsgType=d) of both the covered UDS and corresponding outright future must be used. Multiply LegPrice (Tag566) of the covered UDS with DisplayConversionFactor (Tag9787) of the corresponding outright future.

Rejected

• If rejected, for example, due to a Paused or Closed market or because the Covered instrument already exists, the iLink Security Definition (tag 35-MsgType=d) message will contain tag 323-SecurityResponseType=5 (reject) and the reject reason in tag 58-Text. No market data Security Definition (tag 35- MsgType=d) message will be broadcast.
• If rejected due to invalid message format or content, the client system will receive an iLink Business Level Reject (tag 35-MsgType=j) message.

Futures Allocation with Varying Contract Sizes across Futures and Options Instruments

This example shows how, in the case of a UDS: Covered where the contract size of the options instrument differs from that of the futures instrument, CME Globex allocates the futures quantity for a trade.

Using Natural Gas options (contract size = 2500 mmBtu) covered by Henry Hub Penultimate futures (contract size = 10,000 mmBtu), the following shows how CME Globex handles the contract size differences.

Example

Customer creates a UDS: Covered with a Natural Gas option (European) LNE leg covered by a Henry Hub Penultimate future NPG leg and a customer-submitted delta value of 0.40.

• The futures allocation quantity would be 1.60
• Futures allocation quantity = customer-submitted delta value * (option contract size/future contract size)
• Futures allocation quantity = 0.40(10,000/2,500 mmBtu)

A UDS: Covered trade of 100 LNE options would be allocated 160 NPG covering futures.