Options on Futures:
The Exercise andAssignment ProcessIntroduction
CME Clearing employs two methods for assigning option
exercises: random and pro rata. The pro rata method,
described on page 5, applies to all options listed on NYMEX
and COMEX and to Flexible Options on CBOT Treasury Noteand Bond futures. The random method, described on page 3,
applies to all options listed on CME and CBOT (excluding
Flexible Options on CBOT Treasury Note and Bond futures).

This note describes the exercise and assignment process forthe options on futures that trade on the CME Group
designated contract markets — Chicago Board of Trade(CBOT), Chicago Mercantile Exchange (CME), Commodity
Exchange (COMEX), and New York Mercantile Exchange(NYMEX). In all instances CME Clearing is responsible forpairing the long position holders who exercise their options
with short position holders.

Preliminaries
Option Series

Clearing Member Firms

An option series denotes a specific option type (put or call)with a specified expiry date, a given strike price, and with agiven exercise style (either American, which is exercisable atany time prior to expiry, or European, which is exercisable at
expiry only), which references a particular underlying futurescontract. The exercise and assignment process is applied
separately to each option series for which a long position
holder has declared intent to exercise, or which is in the moneyat its expiration.

Option exercise and assignment always occurs between
member firms of the CME Clearing House, acting as agents fortheir account holders who are the ultimate owners of long or
short positions in the option series. It does not occur directly
between account holders themselves. Neither the identities of
the account holders who own the options being exercised nor
the category of origin of the account holders (“customer” or“house”) exert any influence on the assignment process.
Options on Futures: The Exercise and Assignment Process
Importantly, CME Clearing’s rules require that any clearing
member firm that has been assigned to take an option
exercise must be fair and impartial in designating which of its
accounts holding short positions in the option will take theexercise assignment. (For more, see “The Role of the Clearing
Member Firm” on page 7.)2

Random Assignment
Random Pairing of Exercisers and Assignees

EXHIBIT 1

Random assignment is so called because it entails sequential
random draws on both sides of the process — long open
interest being taken to exercise, and short open interest towhich exercises will be assigned.

CLEARING
MEMBER
FIRM

SHORT
OPEN
INTERESTLONG OPEN
INTERESTLONG OPTIONSDECLARED FOR
EXERCISE

10,0001,000

B10,0002,000

C10,000500

D10,000E

10,00010

50,0003,510

A

Option Exercisers: CME Clearing begins by drawing randomly
from a discrete uniform distribution defined across the option
exerciser pool, i.e., all individual contracts in the pool of longopen interest for a given option series which have been
declared for exercise. Each option in the exerciser pool has
equal probability of being drawn, irrespective of any otherconsiderations — regardless of the clearing member firm atwhich the option is held, or the length of time for which theaccount holder making exercise has held the long position in
the option series, or the origin of the account holders(customer or house), etc.

20,000Y

10,000Z

20,000TOTAL

50,000CME Clearing randomly picks one option from the exerciserpool. Each of the 3,510 options being taken to exercise isequally likely to be chosen. Assume the first draw is an option
held at clearing member Firm C.

Option Assignees: After an option has been drawn from theexerciser pool, CME Clearing draws randomly from a discrete
uniform distribution defined across all individual contracts inthe option’s pool of short open interest. Here too, each option
contract in the short open interest pool has equal probabilityof being chosen, irrespective of other considerations —regardless of the clearing member firm at which it is held, or
the origin of the account in which it is held, or the size or
vintage of the short position of which it may be part, etc.

CME Clearing then randomly draws one contract from the
50,000 in the short open interest pool. Each option is equally
likely to be selected. Assume the first draw is an option held atclearing member Firm Z.
This process is repeated 3,509 more times. As Exhibit 2
illustrates, at the conclusion each of the 3,510 options being
exercised has been assigned to a clearing member firm holding
short open interest— in this example 1,617 to Firm A, 928 to Y,
and 965 to Z.

Example: Early Exercise
Consider an option series that permits American-style exercise
prior to expiry. Assume that on some day before the option
expiration date, open interest is 50,000 contracts. Long open
interest is held at five clearing member firms — A, B, C, D,
and E — each with 10,000 contracts. Short open interest isheld at three clearing member firms — A and Z with 20,000
contracts each, and Y with 10,000 contracts.

EXHIBIT 2TOTALINITIAL SHORTOPEN INTEREST
FIRMS EXERCISINGLONG OPEN
INTERESTFour of the five long clearing member firms declare early
exercises (in time to meet the daily deadline for option exercise
notification prescribed by CME Clearing). Exhibit 1 summarizes.

Short OpenInterest

FIRM YFIRM Z

20,00010,00020,000Assignments to
Short Open Interest

A

1,000

244

97

659

B

2,000

1,240

736

24

C

500

132

94

274

E

10

1

1

8

3,510

1,617

928

965

46,49018,383

9,072

19,035TOTAL EXERCISES/ASSIGNMENTS
FINAL SHORTOPEN INTEREST

3

50,000FIRM AExample: Exercise at Option Expiry

A corresponding number of options held in expiring shortpositions will get assigned even though the option series,
strictly speaking, has expired out of the money.

Suppose the situation is as shown in the first three columnsof Exhibit 1, but that the option series has reached its
expiration day.

Example: Expiration with Abandonment ofAutomatic Exercise

In-the-money: If the option expires in the money, and if CME
Clearing receives no timely counter-instructions from any clearing
member firms with long open interest, then it will take all longpositions to automatic exercise. The same matching procedure
as shown on page 3 will apply, except that the exerciser pool willcomprise all long open interest in the option series.

Suppose the option series expires in the money. Suppose
moreover that two long position owners — an account with5,000 contracts at Firm A, and an account with 750 contracts
at Firm E — indicate they would prefer to let their options
expire unexercised.
Firms A and E duly notify CME Clearing of these counterinstructions (prior to CME Clearing’s daily deadline for doingso). CME Clearing then withholds these 5,750 contracts fromautomatic exercise. Exhibit 3 depicts the balance of short andlong open interest that will figure in the automatic exercise andassignment process.

Contrary Instruction at Option Exercise: For most options,contract terms permit the long position holder of an
expiring in-the-money option to give “contrary
instruction” or “counter-instruction.” That is, CME
Clearing allows an interval during which a longposition holder in an expiring in-the-money option
may decline to exercise — typically from the contract’s
termination of trading until 6:00 p.m. Chicago time.

EXHIBIT 3
CLEARING
MEMBER
FIRM

There are exceptions however, including options on
foreign exchange futures, for example. In such
instances anyone holding a long position in an expiringin-the-money option at its termination of trading isrequired to exercise the option position.

A

Traders and brokers dealing in any option shouldfamiliarize themselves with that option’s terms andconditions, as defined in the pertinent Rulebook
chapter, as to whether the contract does or doesn’tallow contrary instruction.
All examples in this paper deal with options for whichcounter-instruction is permitted.

Out-of-the-money: Generally, if the option series expires out of
the money, longs have no reason to exercise. Nothing happens.
But from time to time there may be exceptions…

SHORT
OPEN
INTEREST

20,000LONG
OPEN
INTERESTLONG OPTIONSGOING TOAUTOMATIC
EXERCISE

10,0005,000

B10,00010,000C

10,00010,000D

10,00010,000E

10,0009,250

50,00044,250Y

10,000Z

20,000TOTAL

50,000From this point on, CME Clearing proceeds as on this page,
and page 3. It randomly selects one option from the exerciserpool, then randomly selects an option from the short open
interest pool to take assignment. It repeats this until all 44,250
long options being taken to exercise have been assigned.

Pin risk: Suppose the option series is about to expire out of themoney, but that it looks likely that the daily settlement price of
the underlying futures contract will be very close to the option
strike price. In this circumstance some long position holders
may elect to exercise, despite the option’s being out of themoney, simply because this guarantees they will get filled at
the option strike price in acquiring positions in the underlying
futures. Accordingly, these elected exercises will not go toautomatic non-exercise. Rather, CME Clearing will assign themin the same way as in Section 2.2.

The impact of the counter-instructions from Firms A and E isworth noting. Even though the option series has expired in themoney, the exercise assignment process will conclude with
5,750 randomly selected contracts in the short open interest
pool expiring unassigned.

4

Pro Rata Assignment
EXHIBIT 4

Pro Rata Pairing of Exercisers and Assignees

TOTAL

For each clearing member firm taking a long option position
to exercise, the pro rata method distributes that position
among all clearing members that hold short open interest,
deterministically and in proportion to each short clearing
firm’s share of the total short open interest.

INITIAL SHORTOPEN INTEREST
FIRMS EXERCISINGLONG OPEN
INTEREST

50,000
Short OpenInterest

FIRM A

FIRM YFIRM Z

20,00010,00020,000Assignments to
Short Open Interest

Example: Early Exercise

A

1,000

400

200

400

ExapReturn to Exhibit 1, which shows open interest holdings
and exercises in an American-style option series on some dayprior to expiration. Assume that the pro rata method applies,
rather than the random method.

B

2,000

800

400

800

C

500

200

100

200

E

10

4

2

4

3,510

1,404

702

1,404

46,49018,596

9,298

18,596TOTAL EXERCISES/ASSIGNMENTS

EXHIBIT 1
CLEARING
MEMBERFIRM

LONG OPEN
INTERESTLONG OPTIONSDECLARED FOR
EXERCISE

10,0001,000

B10,0002,000

C10,000500

D10,000E

10,00010

50,000

3,510

A

SHORT
OPEN
INTEREST

20,000Y

10,000Z

20,000TOTAL

50,000

FINAL SHORTOPEN INTEREST

Because pro rata assignment is deterministic there can be one
and only one outcome, shown in Exhibit 4. This clearly differsfrom the random assignment method, for which the result
shown in Exhibit 2 is one of a multitude of possible random
outcomes.

Assignments of the 3,510 option exercises will be distributed
proportionally across all three clearing member firms that holdshort open interest. Firms A and Z each represent 20,000
contracts of the 50,000 total, so each receives 40 percent of
assignments from each of the clearing member firms making
exercise. Firm Y accounts for 10,000 of the 50,000 total, so itgets 20 percent of exercise assignments. Exhibit 4 summarizes.

5

Example: Exercise at Option Expiry

EXHIBIT 3 (AGAIN)

Exercise at option expiry. In automatic assignment at option
expiry, the pro rata method works in the same fashion as inassignments of early exercises. As with the random assignment
method, the only difference is that the scope of application
extends to the entire long open interest pool.

CLEARING
MEMBER
FIRM

SHORT
OPEN
INTERESTA

Even for the resolutely deterministic pro rata process, however,assignments at option expiry may produce surprises in at least
two ways.
Pin risk: As on page 4, if the option series is about to expire a
smidgen out of the money, some long position holders may
elect to exercise simply because they will be guaranteed ofobtaining a position in the underlying futures at the option
strike price. These elected exercises will not pass throughautomatic non-assignment, but will be assigned instead
according to the pro rata method.
To see this, assume that the option series exemplified on
page 5 is about to expire slightly out of the money, with 50,000
open interest. As before, clearing member Firms A and Z hold
20,000 each of short open interest, and Firm Y holds theremaining 10,000.

LONG
OPEN
INTEREST

20,000LONG OPTIONSGOING TOAUTOMATIC
EXERCISE

10,0005,000

B10,00010,000C

10,00010,000D

10,00010,000E

10,0009,250

50,00044,250Y

10,000Z

20,000TOTAL

50,000Assume Firms A and E have duly and timely notified CME
Clearing of their respective counter-instructions: Accounts with5,000 contracts at Firm A and 750 contracts at Firm E wish
their options to expire unexercised. CME Clearing accordingly
withholds these 5,750 contracts from automatic exercise andapplies pro rata assignment to the remaining 44,250 of longopen interest. Exhibit 5 shows the only possible outcome.

• If all long position holders carry their positions through thetermination of trading in the option series, then CME
Clearing’s automatic assignment process will apply uniformly:
The option series has expired out of the money, so no
assignments will be made.

Given the deterministic nature of pro rata assignment, Firms A
and Z each will receive 17,700 assignments. Each will haveaccount holders who own short positions totaling 2,300
contracts who will not get assigned. Similarly, Firm Y will
receive only 8,850 assignments to distribute among its
accounts who own short positions totaling 10,000 contracts.

• If instead the holder of, say, a 10-contract long position at
firm B elects to exercise, then Firm B will duly inform CME
Clearing. These contracts will be withheld from automatic
non-assignment and will be assigned pro rata to the threefirms with short open interest: 4 each to Firms A and Z, and 2
to firm Y.

EXHIBIT 5TOTAL

Abandonment of Automatic Exercise: Recall that long position
holders reserve the right to decline automatic exercise, even if
the option series they own has expired in the money. To see
what this means for pro rata matching, let’s revisit the example
in Exhibit 3.

INITIAL SHORTOPEN INTEREST
FIRMS EXERCISINGLONG OPEN
INTEREST

6

50,000
Short OpenInterest

FIRM A

FIRM YFIRM Z

20,00010,00020,000Assignments to Short OpenInterest

A

5,000

2,000

1,000

2,000

B

10,000

4,000

2,000

4,000

C

10,000

4,000

2,000

4,000

D

10,000

4,000

2,000

4,000

E

9,250

3,700

1,850

3,700

TOTAL EXERCISES/ASSIGNMENTS

44,25017,7008,850

17,700

FINAL SHORTOPEN INTEREST

46,490

2,300

1,150

2,300

The Role Of The Clearing Member Firm
Fair and Equitable Allocation of Assignments

Only CME Clearing can match exercisers
and assignees

In view of the preceding examples, it is worth emphasizing that
option exercises and assignments take place between member
firms of CME Clearing, not between the ultimate owners of longand short option positions. Once CME Clearing has matched
exercisers and assignees, any clearing member firm designatedas an assignee is responsible for determining how it allocatesamong its accounts the option exercises assigned to it.

Nothing prevents a single clearing member firm from
representing both sides of an option exercise. In Exhibit 2 on
page 3, for example, accounts holding long positions with Firm
A seek to exercise a total of 1,000 options, while Firm A
simultaneously holds account positions with short open interest
totaling 20,000 contracts. Despite this, Firm A cannot
unilaterally assign its 1,000 exercisers to its own short open
interest holders. CME Clearing holds sole authority for making
assignments of option exercises to short clearing member firms.

The Exchange requires this allocation to be fair and equitable.
Specifically, Rule 955 in Chapter 9 of the CME Rulebook
mandates that:In Firm A’s case, the outcome of CME Clearing’s random
matching process is such that 244 of Firm A’s option exercises
are among the total 1,617 exercises that were randomly
assigned to its portion of short open interest.

“A. Each clearing member shall adopt written procedures
pursuant to which it shall allocate option exercise notices
in a fair and non-preferential manner.
B. Upon notification from the Clearing House of assignmentof an exercise notice, the clearing member shall promptly
notify the option grantor to whom the notice has been
allocated.”

Having received this exercise assignment, Firm A is required todemonstrate fairness and equitability in the means by which it
allocates these 1,617 exercises — including the 244 from amongits own portion of long open interest — among the 20,000
contracts of short open interest that it holds.

ExampleRecall in Exhibit 2 on page 3 that Firm Y has been randomly
assigned by CME Clearing to accept 928 option exercises:
97 from Firm A, 736 from B, 94 from C, and 1 from E. Firm Y’scustomer and/or house accounts hold a total of 10,000
contracts of short open interest in the option series. Firm Y’s
method for allocating the 928 exercises among these short
open interest holders must be demonstrably fair and impartial.

7

Timetables For Option Exercise and Assignment
This page provides information about online resources from CME Group where you can find current information related to options
exercise and assignment procedures.

Clearing Transaction Timeline Tool

Contrary Options Exercise Instructions

CME Group provides detailed information regarding thedeadlines for notification and processing of options exercise
and assignments as part of the Clearing Transaction Timeline
tool posted on our website at https://www.cmegroup.com/
clearing/operations-and-deliveries/transaction-timelines.html

This page on the CME Group website provides information on
the processing of options contracts that allow “contrary
instructions” — the ability for a customer to instruct theirclearing firm to exercise an out-of-the money option or,alternatively, to abandon an in-themoney option —instructions that appear to be “contrary” to the action an
option holder would typically take.

View details about the availability of products for trading or
clearing based on the platform being used: CME Globex or
CME ClearPort. You may also download trading hours data forrequested dates and products.

Here you can access:• Summary reports of contrary options instructions submitted
by the clearing firms (actual exercise and assignment process
is run later in the evening Chicago time, and results madeavailable to the clearing firms)• List of options available at CME Group exchanges that allow
contrary instructions• Submission deadlines clearing firms must adhere to for all
contrary options exercise and abandonment instructions
https://www.cmegroup.com/clearing/contrary-option-exerciseinstructions.html

For more information on Clearing in CME Group markets, visit cmegroup.com/clearing

8cmegroup.com
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