From: Bewick, Craig [CBewick@cme.com]
Sent: Friday, March 10, 2006 1:26 PM
To: Jim Goulding
Cc: Grannan, Larry
Subject: Eurodollar Settlement Procedure

Jim,

Please refer to the descriptions of the Eurodollar settlement procedure below.  Because these are cash settled, there is not physical delivery, but rather your position will be marked to the final settlement price on the last trading day.

 

Final Eurodollar Futures

Settlement Prices

Eurodollar futures settle to the London Interbank Offered Rate as determined by the 11:00 a.m. daily survey sponsored by the British Bankers’ Association (BBA). The BBA survey group currently consists of 16 banks, each of which submits its perception

of the interest rates currently available in the marketplace for deposits ranging in maturity from overnight to one year. From this 16-rate sample for each maturity, the four high and four low quotes are eliminated, and the arithmetic mean of the middle eight rates is computed. This average becomes the day’s LIBOR fixing for that maturity. These rates are published daily on Dow Jones Markets page 3750, Bloomberg page “BBAM” and Reuters page “LIBOR01.”

 

Because this survey is conducted on a daily basis at 11:00 a.m. London time, the survey results, and therefore the final settlement prices for the futures contracts, are determined before the opening of Regular Trading Hours in Chicago on the last trading day.

 

Consequently, there is no pit trading of the expiring futures and quarterly option contracts on expiration day. However, trading can take place on the last trading day up to the time of the BBA survey via the GLOBEX electronic trading platform and, for futures only, on the Singapore Exchange (SGX).

 

Example

If you were long at 95.00 and the final settlement price were 94.99, you would “owe” $25.00 per contract that you were long. 

 

The following excerpt is straight from the CME rulebook:

 

The final settlement price shall be 100 minus the British Bankers' Association Interest Settlement Rate for Three–Month Eurodollar Interbank Time Deposits, rounded to the nearest 1/10000th of a percentage point, on the second London bank business day immediately preceding the third Wednesday of the contract month.  (Decimal fractions ending in a five (5) are rounded up.  For example, an average rate of 8–21/32% — 8.65625% — would be rounded to 8.6563 and then subtracted from 100 to determine a final settlement price of 91.3437.)  (The 16 reference banks selected by the British Bankers' Association to provide offered rates are major participants in the London Eurodollar Market.)

45203.B.        Final Settlement[9]

Clearing members holding open positions in a Eurodollar futures contract at the time of termination of trading in that contract shall make payment to or receive payment from the Clearing House in accordance with normal variation performance bond procedures based on a settlement price equal to the final settlement price

 

I hope this helps explain the settlement process.  If you have further questions, please feel free to call me or my colleague Larry Grannan at 312.454.8312.

 

Thanks, Craig, 312.648.3839