CBOE to Revise Variance-Futures Pricing

Terry Flanagan

The CBOE Futures Exchange is revising its method of pricing S&P 500 variance futures.

The change, which the Chicago-based exchange company said is in response to requests from market participants including hedge funds, large proprietary traders and institutions, involves the timing of when CFE converts volatility points to futures prices.

When the product was launched last December, the exchange converted volatility points to futures prices during the trading session. Starting June 24, the conversion will be done after the close of the market so that quoting for variance futures will align more closely with OTC variance swaps, CFE Director of Business Development Michael Mollet told Markets Media.

The exchange anticipates that those who were active in S&P 500 variance futures before or who were ramping up for participation in the market will trade volatility in a new way with the revised contract.

“For the end-user firms, it will be more of a change in awareness than an operational switch, when trading gets underway next week,” Mollet said.

Those currently active in OTC variance swaps will find that variance futures offer another source of liquidity, he added.

The OTC variance market is estimated to trade $5 million to $10 million  notional daily vega, which measures an option’s sensitivity to changes in the volatility of the underlying asset. The initiative for CFE is to capture a portion of that business for the exchange-listed market while also attracting firms that haven’t participated in OTC markets historically. To that end, the exchange hopes to capitalize on synergies between VIX options, VIX futures, S&P 500 options and variance futures.

Additionally, enabling firms to avoid International Swaps and Derivatives Association agreements will be an attraction to the exchange-traded contract, according to CFE.

For now, CFE’s development efforts are concentrated on U.S. market participants. “As our hours and volumes expand, we will turn our attention to more international efforts,” Mollet said.

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