The Chicago Mercantile Exchange (CME) has reportedly doubled the special price fluctuation limits for all currency pairs and options, according to coverage by Reuters citing a notice yesterday sent to electronic traders from the CME, as it prepares for potential Brexit volatility today.
Abrupt changes in market prices can trigger circuit breakers such as when futures reach limit-up or limit-down, in an effort to deter price overreaction.
Finance Magnates has reported on a growing list of brokerages that have made changes to trading conditions tied to potential market volatility expected from the Brexit vote, as can be seen in a compiled list in a related post on our homepage as of writing.
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Special Price Fluctuations Limits
Towards the middle of last Month, the CME made a number of revisions to its Rule 589 with regard to Special Price Fluctuation Limits, including reclassifying 20 of its FX futures contracts from associated products to primary futures contracts. The changes were also made to related FX options contracts on currency futures in May.
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The reason for last month’s reclassification, according to the CME, was the potential for sudden price movements that would otherwise not trigger a 2-minute monitoring period and/or temporary trading halt if the changes had remained as associated products, in terms of special price fluctuation limits.
Range doubled on FX
As per the coverage by Reuters citing the doubling of the special price fluctuation limits for CME’s FX futures and options contracts ahead of the vote today, there should be more wiggle-room for price action so that circuit-breakers aren’t applied prematurely.
Otherwise, such halts could cause discrepancies between pricing futures with spot markets so the change appears to allow for more efficient price discovery if large degrees of volatility occur in underlying spot rates in the over-the-counter (OTC) markets.
Price discovery during Brexit
As certain traders and institutional investors will use futures in conjunction with other instruments and investment vehicles through the UK’s vote slated for later this afternoon local time, Intra-market arbitrage opportunities could become pronounced – even if for fleeting moments.
Reuters coverage added that CME Group reverted to regular trading hour special price fluctuation limits during non-US trading hours for all interest-rate futures, which will also allow for wider price ranges to be permitted before the special price limits are triggered.