Single stock futures

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Designated Contract Market Regulation - Comment Letter - OneChicago - February 22, 2011

Swap Entities Regulation

Designated Contract Market Regulation

Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues - Comment Letters

A single stock futures (SSF) contract (or security futures contract) is a futures to buy or sell a single security or a narrow-based security index. When they were traded, the standard contract size was 100 shares of stock in the U.S. Unlike other futures contracts, single stock futures were taxed as a security, and the margins (or performance bonds) were higher than most futures because they were subject to federal margin regulations for equity derivatives. After OneChicago ceased operations in September 2020, SSFs were no longer offered in the U.S.

Non-U.S. Trading in SSFs

The U.S., compared to non-U.S. exchanges, was late to the table on the introduction of SSFs. Non-U.S. exchanges were successful in attracting business to these products than exchanges in the U.S.

In 2007, the most active trading in single stock futures took place on LIFFE, then a unit of NYSE Euronext, with a volume of 75 million "Universal Stock Futures" contracts traded.

By 2020, SSFs were traded on a number of exchanges: ASX (Australia), ~3 million contracts; Athens Derivative Exchange, ~9.5 million contracts; Bolsa de Valores de Colombia, ~162,000 contracts; Borsa Istanbul, ~1.2 billion contracts; Borsa Italiana, ~1.1 million contracts; BSE (India), ~34,000 contracts; Budapest Stock Exchange ~867,000 contracts; Eurex ~77.5 million contracts; Euronext, ~26.8 million contracts; Hong Kong Exchanges and Clearing, ~1.1 million contracts; ICE Futures Europe ~11.4 million contracts; JSE Securities Exchange (Johannesburg), ~16 million contracts; Korea Exchange, 1.1 billion contracts; MEFF, ~11 million contracts; Mexican Derivatives Exchange, ~31 thousand contracts; Moscow Exchange, 197.9 million contracts; Nasdaq Exchanges Nordic Markets, ~1.5 million contracts; National Stack Exchange of India, ~256.4 million contracts; and Singapore Exchange, ~2.7 million contracts.

SSFs in U.S.

In 2000, Nasdaq-LIFFE Markets (NQLX) became the first U.S. exchange created to trade single stock futures, but closed after several years of operation due to lack of support from Nasdaq. OneChicago, established in April 2001, was the last U.S. exchange to offer single stock futures, but ceased trading in September 2020.

Several other U.S. exchanges and ECNs had suggested that they would begin offering single stock futures, but never completed plans to do so.

In the U.S., the product is subject to the joint jurisdiction of the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC), unlike futures on broad-based indexesof securities that are regulated only by the CFTC. Single stock futures could be traded out of either a securities or a futures account.

Why SSFs Were Created in the U.S.

Futures exchanges, which began offering trading in highly successful stock index futures in the early 1980s, had in the late 1990s introduced smaller "E-mini" or "mini-sized" versions of larger index contracts, many of which were traded electronically alongside pit-traded index products. Clearly, there was a rush to market for new flavors of “broad-based” stock indexes. Futures exchanges were successful as the indexes began to gain prominence in institutional and retail circles and also because of the tax advantages of futures over securities.

The online trading revolution brought tremendous growth in the securities markets with the advent of attractive IPOs, and trading not only in the blue-chips but also in the tech stocks were particularly successful in the late 1990s. By 2000, the stock market bubble had burst, and securities and futures exchanges actively began to compete for customers by creating new products that mirrored each others' products. Single-stock futures (or "security futures" as they were known early on) were the next step in that metamorphosis.

Prior to the enactment of the Commodity Futures Modernization Act of 2000 (CFMA), exchanges were prohibited from offering futures on individual securities. The CFMA opened the door to trading in 2002.

Challenges

Several major stumbling blocks for single stock futures emerged as security and security options exchanges recognized the benefits that single stock futures might have over their existing products: a preferential tax treatment, the perception of less stringent regulation, and potentially lower margins for the single stock futures. A margin that was too "futures-like" in its lower-than-stock level, was thought by security options traders to be competitive to security options. Thus, an effort was made by CBOE, in particular, to convince regulators to make single-stock futures margins higher than other exchange-established futures margins, which normally vary between three - 15 percent based on market volatility. They were successful, as single stock futures margins were 20 percent of the underlying value of the futures contract. In a perhaps fiercely ironic move, the SEC and CFTC approved lowering the minimum margin level to 15% in November 2020, two months after the last futures exchange listing SSFs stopped trading on September 18, 2020.

Partnerships

In March 2006, online trading company Interactive Brokers Group LLC purchased a 40-percent stake in the company, and OneChicago focused on educating consumers to see single-stock futures as more than risk management. OneChicago CEO David Downey, who assumed the post in January 2007, said OneChicago encountered resistance from major banks which could bring their clients to the exchange. “The reason why single-stock futures have not taken off is because it directly competes with the profit centers of some of the most powerful people in America,” Downey said. From the beginning, he said, “the securities side of the world really saw this thing as a threat".

Downey said retail trading firms do not educate their customers about the benefits of single-stock futures for fear of losing commissions, but that he was not bothered. He provided few details, except that the exchange plans to launch a redesigned website that will include an attractive tool allowing potential investors to compare the cost of buying a stock with the cost of buying the equivalent single-stock futures.

Downey also said that OneChicago products are not just a hedging tool like a futures contract, but also a financing tool, like a security. Specifically, single-stock futures are a way to invest in securities at a lower interest rate than those that many retail investment banks offer. If investors want to borrow on margin, the interest rate is built into the price of a single-stock futures contract, so they end up paying a lower rate. While major investment brokerage firms charge up to 10-percent interest on margin loans, investors in single-stock futures pay closer to six percent.

The last trading day on the exchange occurred on September 18, 2020, when 99.4% of the open interest expired.

JLN Managed Futures Video: OneChicago's Mark Esposito

Mark Esposito of OneChicago Discusses Their NoDivRisk (“1D”) Single Stock Futures
Mark Esposito, a 25-year trading veteran on the floor of the Chicago Board Options Exchange (CBOE), was the managing director, business development at OneChicago. Former John Lothian News Editor-at-Large Doug Ashburn spoke with Esposito in 2012 about OneChicago’s NoDivRisk (“1D”) Single Stock Futures products and how commodity trading advisors and managed futures funds can use them.Watch at JohnLothianNews.com

John Lothian News Interview:Tom Regazzi

Single Minded: Tom Regazzi of UBS Finds a Niche with Single Stock Futures Interview
Single stock futures in the United States were launched in 2001, but are often forgotten since their big splash introduction twelve years ago on two exchanges. Quietly, however, single stock futures were growing nicely at OneChicago, the sole marketplace for the instrument. Through the first nine months of 2013, their volumes were up 49 percent, with 6.96 million contracts traded, topping total volumes posted in all of 2012.

This market has also caught the eye of UBS and Tom Regazzi, managing director at the firm’s Global Synthetic Equity department. In 2013 he spoke with JLN editor-in-chief Jim Kharouf about how UBS uses single stock futures and the potential for the product going forward.

See Also

• Green Trader Tax Resource Center
• SFO Magazine
• OneChicago
• Testimony of William J. Brodsky before Senate Banking Committee, Regarding The Options, Futures and Equities markets and Regulatory Environment, May 8, 2000
• How To Profit From Single-Stock Futures

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