Options on JGB Futures
Offsetting and exercise
Update : Mar. 08, 2011
An option on JGB Futures grants a buyer of the option the right - but not the obligation - to exercise, while a seller owes an unconditional obligation to respond whenever the buyer may choose to exercise. The buyer may choose to close out his long position by reselling, instead of exercising, the option. Likewise, the seller may terminate his obligation by repurchasing an identical option.
Having effected a transaction for offsetting purposes, either for a customer's account or for a proprietary account, a Trading Participant must report such a transaction to TSE by 5:00 pm. Such reporting is made electronically through the CORES-FOP (Computer-assisted Order Routing and Execution System for Futures and Options). TSE then subtracts the reported amount of contract(s) from the Trading Participant's open long and/or short positions.
Exercise and Assignment
a. Notice of Exercise
Options on JGB Futures are "American" type options, giving a buyer the right to exercise at any time prior to expiration. Trading Participants must give TSE notice to exercise through CORES-FOP no later than 5:00 pm, while a customer must give the Trading Participant an exercise instruction by 4:00 pm on the day of exercise.
b. Assignment
Having received notice of exercise from a Trading Participant, TSE assigns it by a random lottery of the universe of Trading Participants carrying short positions. TSE then subtracts the exercised option(s) both from the exercising Trading Participant's open long positions and from the assigned Trading Participant's open short positions. Receiving an assignment, Trading Participants follow their own pre-established fair procedures to determine whether to retain the assignment or pass it on to a customer.
c. Expiration and Automatic Exercise
Unless otherwise instructed, all in-the-money options at expiration are automatically exercised. All unexercised options on JGB Futures expire at 5:00 pm on the last trading day, or the last business day of the month prior to its contract month.
d. Settlement of Exercise
After an option is exercised, a futures position is established for the buyer (long if the option is call, and short if the option is put) and the seller (short if the option is call and long, if the option is put) at the exercise price on the day of exercise.
| Call Option Buyer(holder) : long JGB Futures position Seller(writer): short JGB Futures position Put Option Buyer(holder): short JGB Futures position Seller(writer): long JGB Futures position |
After exercise, customers and Trading Participants may use their newly established JGB Futures positions to offset existing JGB Futures positions, provided the Trading Participant notifies TSE through CORES-F by no later than 8:30 am on the day after the day of exercise.