Embedded Option Type

Question:

1. There are different industry interpretations for reporting EQ auto callable swaps^5 for purposes of reporting #86, depending on what each firm’s interpretation of what that option is: 
   1. MDET: because they interpret that the product reaches a certain level/barrier and then calls automatically on a mandatory basis
   2. OTHR: all other interpretations
2. We believe there are cases where one option may have both mandatory (MDET) and early termination (OPET) provisions applicable. The Tech Specs do not specifically call out that #86 allows reporting of multiple values for one trade. A SDR’s functionality does not plan to support multiple values for #86. Therefore, where one option may have both MDET and OPET provisions applicable, or for swaps which have more than one embedded option type, the industry plan to report as OTHR for #86.

^5 EQ Auto callable swaps are typically:

• a long term swap on a basket (e.g. 8 yrs).
• established product in the market (particularly in relation to French PEAs).
• there are “observation” points at one or more points over the life of the swap (e.g. 4y and 6y) where if an index is above a certain level, the swap auto calls i.e. it automatically terminates at accrued value

CFTC Feedback:

1. CFTC staff explained that it was challenging for them to offer allowable values for #86 that captured each and every single situation. They understand that reporting of #86 may be dependent on the firm trading the product and the firm’s interpretation, and that firms may have different interpretations from one another.
2. CFTC staff acknowledged that multiple values are not permitted for #86; if no other value is a precise fit, use OTHR.