Automatic Exercise of Single Stock Options Functionality conceptualization
INFORMAÇÃO INTERNA AGENDA
CONTEXT
GENERAL CHARACTERISTICS
BUSINESS MODEL
INFORMAÇÃO INTERNA Automatic Exercice of Single Stock Options
Context and General Characteristics
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
CONTEXT
Goals Benchmark
The world’s leading Exchanges already have Automatic Reduce operational risk, by ensuring that all all in-the- Exercise for Options on Single Stock money options are exercised automatically by B3 at the expiration date, avoiding processing mistakes. • Eurex Exchange • Borsa Italiana
Scalability of options trading by significantly reducing the • NYSE: The New York Stock Exchange • ASX: Australian Securities Exchange
operational control currently needed in manual exercise. • Cboe Global Markets • Moscow Exchange
• JSE: Johannesburg Stock Exchange • Hong Kong Stock Exchange
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
TIMELINE
Opening strikes with the First maturity with the Kick-off new features automatic exercise
2018 December 2019 May 2021
November 2019 3rd quarter 2020
Regulators Approval End of the operational development
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
PREMISES
Maturity day on the 3th Friday of the month
Reference price of the exercise from Closing Call
Possibility of Contrary Exercise after market closing
Possibility of Trading on maturity day
Settlement in T+2 from Friday (maturity day)
Price tunnel for Contrary Exercise
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Descriptions
Contrary Exercise • Request to • Exercise an At-the/Out-of-the money option, or • Give up an In-the-Money option.
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Contract Changes Current Features New Features
• Expiration date • Expiration date ✓ 3rd Monday of the expiration month. If there is no trading ✓ 3rd Friday of the expiration month. If there is no trading session on that date, the session on the date, the expiration shall occur on the day expiration shall occur on the day preceding a trading session. immediately following the last trading session. • Last trading day • Last trading day ✓ 3rd Friday of the expiration month. If there is no trading session on that date, the ✓ Last business day prior to expiration date. expiration shall occur on the day preceding a trading session.
• Exercise • Exercise ✓ Upon request of the position holder; ✓ On expiration date, options are automaticaly exercised by B3 in line with the ✓ Out-of-the-Money options may also be exercised if the following conditions: underlying is close to the strike price, upon authorization by o For call options, if the reference price is higher than the strike; B3. o For put options, if the reference price is lower than the strike; o If a demand isn’t received for the contrary exercise not to be exercised when it is an ITM option; o When OTM option or ATM option receives a Contrary Exercise request to be exercised and the underlying is within the price tunnel or under B3 analysis.
• Contrary Exercise ✓ Request to Exercise an Out-of-the money option or give up an In-the-Money option.
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
MODEL
Contrary Exercise + CE Validation Screen with clients updated positions (possibility via messaging) Manual Exercise CE Exercise Price Tunnel Trading Equities After Market
3 PM 4 PM 5 PM 5:45 PM 6:30 PM 7 PM 7:30 PM 8:30 PM
Automatic Exercised options Exercise release Updated Position files Options Allocation Equities allocation
• Trading on maturity day allowed until 4 PM • Automatic Exercise between CE and the After-Market
• 5 PM end of options allocation and position transference • 30 minutes for the Contrary Exercise. The exercise of Options will only be possible if within the price tunnel or under B3 analyses • 1 hour for allocation after market closing. Possibility of trading/allocation in the master account and final allocation by • 30 minutes of After-Market the end of the day • Options expiry in the third Friday of the month
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
MODEL
May 2021 Expiration date Series with expiration date until April 2021 shall be Series with expiration date from May 2021 shall be traded with current features and “Programmed Exercise” traded with new features and “Automatic Excercise”
The contracts will not coexist
INFORMAÇÃO INTERNA Automatic Exercice of Single Stock Options
Business Model: Allocation
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Trade Management flows and rules
• On the expiration date, it will be possible to capture and allocate options trades and manual exercise trades until the specified deadline (16h / 17h);
• The allocation and give-up rules will remain the same. After the allocation deadline, all pending allocations will be automatically allocated to the participant error account;
• After this step, we will perform the capture of automatic exercise trades;
• The exercise trades are already allocated in the trade capture. Therefore, there will be no reallocation or give-up rejection process. Only is permitted the custodian indication if the original option position is uncovered;
• The allocation deadline will remain as T+1;
• The layout of all allocation messages and files will not change. The allocation reconciliation process will remain the same.
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Position Management flows and rules
• There will be no change in the life cycle of the option positions until the expiration date;
• On the expiration date, the Position Management system will enable the manual exercise to be performed until the previously defined deadline (16h). The options may also be traded or transferred in the same period mentioned above, changing the position to be considered for the automatic exercise;
• After the deadline, the PM system will send to the Trade system all positions that will be exercisable. The position considered will be the current position, in other words we will consider the initial position plus or minus all allocations, transfers, and manual exercises that occurred until the previous deadline;
• We will send to all participants that can be exercised a BVBG.017 file with the same layout already adopted today. The EOD file will not change. The layout of all messages and position files will not change.
INFORMAÇÃO INTERNA Automatic Exercice of Single Stock Options
Business Model: Flow
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Holder and Issuer positions propagation before Automatic Exercise
• Will occur at the maturity date after position allocations
• Will be informed only holder and issuer positions that will participate of Automatic Exercise
• Will be propagated through an existing message, same of acknolodgment of a Manual Exercise: PositionMaintenanceReport (35=AM)
• These messages will be sent only to Default Link of that position or to Trading Participant (when the position does not have a Default Link) in their respective default sessions
• Catalogue with new domains for this message will be informed later by B3
• There will be a screen at ePuma to visualize these positions
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Contrary Exercise requests flow
• the registration and cancellation requests of Contrary Exercise will be allowed through an already existing message, the same that is sent to request a Manual Exercise: PositionMaintenanceRequest (35=AL)
• Requests will be accepted only when sent by Default Link of that position or by Trading Participant (when the position does not have a Default Link) in the interval determined by B3
• Will be validated against another acceptance criteria, such as the integrity of the request, verifying limits, the existence of that position or a previous request (when it is a cancellation request)
• After the registration or cancellation request of a Contrary Exercise has been processed, the acceptance or rejection will be instantly informed through an already existing message, the same as the acknowledgment of a Manual Exercise request: PositionMaintenanceReport (35=AM)
• When the request is executed/concluded, the execution will be informed through the same message
• Catalogue with new domains for these messages will be informed later by B3
• There will be a screen at ePuma to send Contrary Exercise requests
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
Contrary Exercise requests flow
Allowed Contrary Exercises types (before Automatic Exercise):
• Registration request to not exercise ITM (in-the-money) positions
• Registration request to exercise ATM (at-the-money) and OTM (out-the-money) positions
• Cancellation request of a previously accepted Contrary Exercise
→ All the requests will be valid only for the same day
INFORMAÇÃO INTERNA Automatic Exercise of Single Stock Options
“Scheduled Options Exercise” functionality desativation
• The “Automatic Exercise” functionality conflicts with “Scheduled Options Exercise” functionality, resulting in the deactivation of functionality “Scheduled Options Exercise” for Options series that will be created for “Automatic Exercise” functionality
• B3 could anticipate, at its own discretion, the “Scheduled Options Exercise” functionality deactivation with an announcement in advance
INFORMAÇÃO INTERNA INFORMAÇÃO INTERNA