Credit Event Futures : The Merc Fights Back
Is a burrito a sandwich?
Are Credit Event Futures options? [of course they are...but,pour les besoins de la cause,they are binary credit default swap ]
The Chicago Board Options Exchange has thrown down a challenge to the Chicago Mercantile Exchange over the futures exchange’s plans to offer “credit event futures“, claiming that the products are options and fall outside the jurisdiction of the US futures regulator.
Here is the Merc response ,the part about “CME Credit Event Futures Are Not Options” is a pearl:
The Objectors [CBOE] point to the risk structure of CME’s proposed contract and conclude that it has the same characteristics as an option, noting in particular that participants holding a long position in the product assume limited or bounded risk. The Objectors do not point out, however, that options – while limiting the risk faced by the purchaser to the purchase price of the option – do not normally limit the purchaser’s profit potential. That is, the purchaser’s risk is limited to the price of the option while his upside potential – any exercise price above the strike price – is theoretically unlimited. Conversely, the seller of an option is subject to unlimited risk (i.e., a payout equivalent to the difference between the market price and the strike price) with profit potential limited to the price of the option.
I am all for the Merc Credit Event Futures,but frankly their definition is bizarre to say the least.Here is an option that’s not an option according to the Merc definition.
Related post : Credit Event Futures
CBOE letter to CFTC [05/12/2006]
Merc answer [11/12/2006]
…Finally, it is worth noting a point that CBOE fails to mention in either of its comment letters to the CFTC, which is that CBOE has itself submitted an application to the SEC for approval of a nearly identical contract referred to as a “Credit Default Option“.