MSCI Index Derivatives: Final settlement in the event of market disruptions: Test scenario in simulation for the December expiry

1.  Introduction

Since March 2019, a procedure has been used in the event of market disruptions in MSCI derivatives, which provides that final settlement prices can also be corrected retrospectively if individual markets are not tradable on the last trading day. This subsequent correction was initially limited to 5 weekdays.

MSCI index derivatives: Specification of procedure to determine the final settlement price in the event of market disruptions

In accordance with an adjustment by index provider MSCI and in coordination with the derivatives exchanges offering regional MSCI index derivatives, this period has been extended from 5 to 15 weekdays (whereby only Mondays till Fridays are considered). 

MSCI Unexpected Market Closure Indexes Methodology

With this extension to 15 weekdays, Eurex wants to establish a new procedure, which can be used in addition to the existing one. This new procedure will first be tested in simulation and can then also be used productively. However, Eurex will decide based on the circumstances of the market disruption if the new procedure will be used. The new procedure will not be used in the event of a market disruption, that can clearly be determined to last no longer than two weekdays. In this case, the current procedure with cash adjustments will still be used. In addition, the new procedure is only considered for standardized monthly expirations of MSCI futures and options, but not for daily futures or additional contract variants (Flex contracts).

This new procedure is based on the possibility of reflecting a "postponement of expiry" – as referred to in the rulebooks of Eurex in several steps:

1)  New expiries will be generated on the last trading day for all MSCI index derivatives (Futures and/or Options) with open interest in the first standard expiration (15 weekdays later)

2)  On the original final settlement date, all positions affected by this market disruption will be rebooked (booking in/out) to the new expiries (with last trading day and final settlement day each 15 weekdays later)
3)  If the market disruption is resolved after less than 15 weekdays, the contracts that are still open would be settled

This can achieve several advantages:

• Higher probability of an adequate solution within the extended period
• Retention of positions still subject to valuation adjustments in the Eurex Clearing System and thus retention of margins
• Extension of the tradability of the products until the final settlement price is available
• This is accompanied by the opportunity to reduce positions and risks
• Possibility to liquidate positions in case of a Member default

2.  Required action

Clearing Participants are recommended to fully analyze the potential effects on their internal systems and procedures.

3.  Details of the initiative

Testing activities in Simulation

Please find below a summary of actions on Market Disruption impacted products FMWB and OMWB. For the simulation event, the scope of the disruption will be the December 2024 expiry and contracts thereof.

The following test scenario will be offered in simulation and the testing will focus on the main trading and clearing systems and associated reports:

On the last trade date 19 December 2024*

On 23 December 2024*

* Please note that not all weekdays are batch days in the simulation environment, therefore the dates shown here slightly differ from the production environment.

On 7 January 2025

Background:
The market segment for MSCI index derivatives has grown significantly in recent years. In particular, the number of open positions on certain Asian indices (MSCI EM Asia, China, India, Japan, Taiwan) has risen sharply. With these indices, there is an increased risk that individual markets will be temporarily untradable due to market disruptions, for example during the Pacific typhoon season. In addition, geopolitical tensions have emerged in recent years, leading market participants to advocate extending the adjustment period beyond 5 weekdays. Such an extension not only increases the likelihood that the market disruption will end within the period but also gives the index provider the opportunity for further consultation on the index membership of individual countries.

Unless the context requires otherwise, terms used and not otherwise defined in this circular shall have the meaning ascribed to them in the Clearing Conditions or FCM Clearing Conditions of Eurex Clearing AG, as applicable.

Further information