User Defined Spread Types and Characteristics

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.

All UDS contracts are defined from the buy side perspective (i.e. buying the spread) with the exceptions of the exchange-recognized options spread types:

Jelly Roll (JR)

Iron Butterfly (IB)

Iron Condor (IC)

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.

The order entry iLink Security Definition (tag 35-MsgType=d) message and the market data Security Definition (tag 35-MsgType=d) message are significantly different. CME Group strongly recommends using the TCP order entry iLink Security Definition (tag 35-MsgType=d) as an acknowledgment, and the market data Security Definition (tag 35-MsgType=d) REPLAY message as the instrument definition.

Procedure to Create an Exchange Recognized UDS

Client system submits an iLink Security Definition Request (tag 35-MsgType=c) message.
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.

If a client system submits a valid Security Definition Request in a non-open state, the RFQ will not be generated. Also:

The implied book will not be generated, as it is sent only during market open state.
The client system must send the RFQ request after the market transitions to open.

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

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.
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
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.
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.
The client system submits an iLink New Order (tag 35-MsgType=D) message for the newly created unrecognized spread type.
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).

Recursive UDS

A recursive spread is a UDS that contains at least 1 which is an existing user defined spread. Only one level of recursion is allowed (i.e., a UDS cannot contain a UDS that contains a UDS).

A UDS constructed from available exchange-listed outrights only can contain a maximum of 40 outright instruments.

A recursive UDS can contain a maximum of 40 outright instruments.

The following is an example of a recursive spread:

Side	Quantity	Leg
Buy	1	OZQF0 P9818
Sell	2	OZQF0 P9812
Buy	1	UD:FO: BO 0506960673

See UDS - Recursive Spread Type Display Name.

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.

Delta Definition

Delta measures the rate of change of an option premium with respect to a price change in the underlying futures contract. Delta is a measure of price sensitivity at any given moment. Not all options move point-for-point with their underlying futures contracts. If a futures contract moves .50 points and the option only moves .25 points, its delta is 50%; i.e., the option is only 50% as sensitive to the movement of underlying futures contract. The delta will change as an option moves from out-of-the money to at-the-money to in-the-money, approaching 100%. Deltas range from 0% to 100%. The delta of the underlying futures contract is 100%.

Covered Attributes

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

A covered spread expires at the end of the trading session in which it has been created.

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.

In response to:

New Order (tag 35-MsgType=D)
Cancel Replace (tag 35-MsgType=G)

Execution Report (tag 35-MsgType=8), tag 103-OrdRejReason =

Tag 58-Text

2115

Order quantity is outside of the allowable range'Quantity: <Requested Quantity> Max: <Maximum configured for contract> Min: <Minimum configured for contract>’

7613

Disclosed quantity cannot be smaller than the minimum quantity 'Disclosed: <Requested Quantity> Min: <Minimum configured for contract>’

In response to:

Mass Quote (tag 35-MsgType=i)
Quote Request (tag 35-MsgType=R)

Quote Acknowledgment (tag 35-MsgType=b), tag 368-QuoteEntryRejectReason =

Tag 58-Text

7112

Quote exceeds limit.

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

A client system submits an iLink Security Definition Request (tag 35-MsgType=c) message.
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
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.

The auto-generated Quote request type is limited to the standard Quote Request (i.e., does not support side, quantity or indicative).

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

Tag 167-SecurityType is not required for the following message types submitted on or against a Covered Instrument:

New Order (tag 35-MSgType=D)
Cancel (tag 35-MsgType=F)
Cancel/Replace (tag 35-MsgType=G)
Order Status (tag 35-MsgType=H)
Mass Quote (tag 35-MsgType=i)
New Order Cross (tag 35-MsgType=s)

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

Obtain the market data Security Definition (tag 35-MsgType=d) message for the outright future using the value from tag 602-LegSecurityID of the Covered UDS Security Definition.This value maps to tag 48-SecurityID of the Security Definition of the outright future.
Multiply the value from tag 9787-DisplayConversionFactor of the outright future Security Definition with tag 566-LegPrice of the Covered UDS Security Definition.
Apply that value to the price sent in the iLink 2 Execution Report - Fill Notice to display the futures leg price properly.

No market data Incremental Refresh (tag 35-MsgType=X) message is sent for the future leg.

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.

UDS: Covereds for Natural Gas Derivatives
Product	iLink: tag 1151-Security Group MDP 3.0: tag 6937-Asset	Contract Size	Multiplier for UDS: Covered Futures Allocation
Henry Hub Penultimate futures	NPG	2,500 mmBtu	--
Natural Gas options (American)	ON	10,000 mmBtu	4
Natural Gas weekly options (American)	ON1-ON5	10,000 mmBtu	4
Natural Gas options (European)	LNE	10,000 mmBtu	4
Natural Gas financial weekly options	LN1-LN5	10,000 mmBtu	4
Natural Gas (Henry Hub) daily options	KDB	10,000 mmBtu	4
Natural Gas short-term options	U01-U31	10,000 mmBtu	4
Natural Gas (Henry Hub) last-day financial options	AE7	10,000 mmBtu	4

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.