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Association Management

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Options Symbology Initiative

The Options Symbology Initiative (OSI) is proceeding according to plan at the industry level, as the 5-character OPRA code currently used to describe options will be eliminated on February 12, 2010.

At the firm-level, all planning and remediation should now be COMPLETE, including:

• Applications impact analysis;
• Systems design and planning;
• Internal software development and testing

OCC Clearing Member firms should be in the midst of:

• Scripted industry testing with exchanges and the OCC;
• Testing with third party vendors of data and software services;
• Testing with clients;
• Testing internal applications.

Who’s Behind the Curtain?

Even firms that depend on vendor services for most of their trading and clearing functionality will need to address integration with upstream and downstream applications, and may be required to participate directly in some aspects of industry testing.

Don’t assume that there is not significant work to be done if you use a clearing firm, execution broker or transaction processing vendor. Dealers are still responsible for remediating the many internal processes that will be impacted by the OSI changes. For example, a typical firm that relies on a service bureau to handle back-office processing and a front-end technology vendor for order and execution management services, still has 40-60 high impact internal applications and files that need to be modified to accommodate the new options symbology.

Consider:

• all client facing applications
• consolidated account statements
• compliance reports
• financial controls

Don't forget:

• risk management and margining applications
• cross-product credit and risk exposure
• broker commissions capture and tracking
• quantitative models and cross-product trading programs

Has Reality Set In?

Contact Jordan & Jordan to learn about our 2-4 Week Assessment Program. We’ll let you know where you really stand, and set you on the critical path to completion.

Background: The Options Symbology Initiative (“OSI”)

The Options Symbology Initiative (“OSI”) is a comprehensive, industry-wide plan to replace the existing short-hand method of identifying exchange-listed options contracts with a description that explicitly states the underlying equity, whether it is a put or call option, the full expiration date, and the strike price expressed in decimals. Developed by a committee of industry representatives, the goal of the OSI is to create a naming convention for options series that is better able to support this rapidly growing and increasingly complex market.

The OSI is a multi-faceted plan that requires the cooperation and coordination of many entities including all exchanges where US options are traded (AMEX, BOX, CBOE, ISE, NASDAQ, NYSE/Arca, PHLX(NASDAQ)), the Options Clearing Corporation (OCC) where options are cleared, and other industry utilities including DTC and NSCC who service the community of options traders and their clients. At the same time, options traded on the Montréal Exchange (MX) and cleared through the Canadian Derivatives Clearing Corporation (CDCC) will become OSI compliant.

Options on futures that clear through the OCC including NYSE/LIFFE metals contracts will also be impacted with this initiative, although futures contracts will not be transitioned at this time.

Vendors who support the options markets with market data, trade order management systems, market making applications or back-office processing for example, must be well-prepared to facilitate their clients’ transition to the new methodology.

Most broker-dealers, hedge funds and other institutions that trade options can expect to feel the effects of the new symbology. Figure 1 illustrates, at a high-level, the array of systems across the US options trade lifecycle that are likely to be impacted by changes in symbology.

Figure 1. US Options Trade Lifecycle

Firms that depend on vendor services for certain aspects of the trade process will rely on their vendors to make the changes necessary to accommodate the new symbology; however, these firms still will need to address integration with upstream and downstream applications themselves. While each firm is different in terms of its internal systems and external interfaces, at a minimum, any process that relies on options trade and quote information, routes orders to an options exchange, interacts with the clearinghouse, or accesses a security master file for descriptive details, will warrant careful review. Be sure to consider: all display components; customer facing applications; multi-asset class, risk management and reporting systems; and computer to computer interfaces. The scope of the effort has been compared by many firms to Y2K, the Euro conversion, or decimalization.

WHY HAS THE INDUSTRY DETERMINED THESE CHANGES ARE NECESSARY?¹

The current processing method that has been in use for the past 25 years poses a number of limitations in today’s marketplace. The plan put forth by the Options Symbology Initiative Committee is intended to:

• Decrease the number of errors in the front, middle and back office processes
• Represent the vast majority of listed options contracts using the same symbol as the underlying security
• Reduce corporate action symbol conversions
• Eliminate wrap symbols
• Eliminate the need for the LEAPS rollover process
• Reduce the frequency of coordination among exchanges for symbol elections
• Support the growth in product listings through additional expiration events and more flexible strike price designations

At the same time, the OSI Committee determined that this initiative provides an opportunity to eliminate the use of fractional strike prices; thus, going forward only decimals will be represented.

HOW WILL OPTIONS SYMBOLOGY CHANGE?

For equity options, index options, yield-based options, short-dated options, flex options and foreign currency options, a new Symbology Key which consists of a combination of data fields which when concatenated total 21 characters/bytes will replace the current configuration of the OPRA codes and fractional strike price values. The Symbology Key will rely primarily on the root symbol of the underlying stock to provide consistency between the option and its related equity security. The Symbology Key will contain explicit expiration dates and decimal strike price values to eliminate the need for confusing alpha codes and the roll-over process. Calls and puts will also be designated in a straightforward manner, with an indicator of “C” or “P”. The new configuration for the Symbology Key is provided in Figure 2.

Figure 2. OSI Symbology Key

Symbol	Year	Month	Day	Call/Put	Strike Dollar	Strike Decimal
6 bytes2	2 bytes	2 bytes3	2 bytes	1 byte4	5 bytes5	3 bytes

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¹Extracted from a document prepared for informational purposes by the Options Clearing Corporation, Sept. 2007.
²OPRA will support a five character symbol in all message formats.
³OPRA will continue to use the one character alpha code to represent both the month and call/put indicator in all data transmissions.
⁴The call/put indicator is combined with the month code in all OPRA message formats.
⁵OPRA will support a total of six positions and a decimal indicator (total seven bytes).

WHEN WILL OPTIONS SYMBOLOGY CHANGES BE IMPLEMENTED?

To allow broker dealers, institutions and vendors sufficient time to prepare for the new symbology, the US options exchanges, OPRA and utilities have all published specifications detailing the modifications they are making to various fields and record layouts, messages and report formats, as well as their schedules for testing, incremental transitional changes and full implementation. The OCC and options exchanges are now sending and receiving OSI compliant messages in production and test environments.

Scripted industry testing is in progress. Mandatory cutover to the new symbology is planned for February 2010. Symbol consolidation will be phased in over a period of months after the initial conversion.

WHAT IS NEEDED FOR YOUR FIRM TO BE READY?

If your firm is an OCC clearing member, the Chief Information Officer or Options Principal of your organization will be required to “CERTIFY” that the firm is “prepared to transact business with OCC on February 12, 2010 in a manner that is OSI Compliant,” that is, “all applications, systems, programs, files, data bases or functionalities will perform correctly utilizing the full OSI key.”

The OCC has distributed a letter for signature by the CIO of each member firm that attests to the following:

• ALL SYSTEMS within your organization have been analyzed to determine if they are OSI compliant.
• Updates, repairs and replacements have been performed where necessary to render systems OSI compliant.
• Successful testing has ensured that all systems are OSI compliant.
• Where you are reliant on vendors - your firm has taken steps to ensure that third party service providers are also OSI compliant.

Participation in scripted industry testing is MANDATORY for OCC clearing members. Your CIO must certify that the following has been achieved through testing either directly or by proxy:

• Completed all test procedures using systems where OSI processing has been implemented.
• Executed all scripted test cases for all products which your organization is approved to clear transactions through OCC.
• Tested all scripted post-trade submissions for all products which your organization is approved to clear transactions through OCC.
• Sent all inbound transmissions to OCC.
• Received all outbound transmissions from OCC.
• Processed all data sent by OCC in an internal environment that is OSI compliant.
• Incorporated data integrity verification procedures and ensured the integrity of all data used in the testing.

HOW CAN JORDAN & JORDAN HELP?

Each firm should now have completed an impact analysis, have a complete remediation plan, and a test plan. At a time when internal resources are SHORT, and the list of critical application changes is LONG, here’s what Jordan & Jordan can do for your firm:

• Conduct a 2-4 week assessment of your firm’s OSI remediation progress and adequacy of plans. We’ll let you know where you stand, and set you on the critical path to completion.
• Liaison with your vendors to understand their remediation, testing and deployment plans.
• Create a coordinated test plan that considers internal unit and component testing as well as vendor plans and industry tests scheduled through January 2010.
• Provide experienced, disciplined project management resources to ensure a smooth transition for your options processes to the new symbology.
• Provide ongoing guidance regarding programming and testing milestones required to meet the transitional changes dictated by each of the exchanges and utilities involved in the OSI.

Jordan & Jordan’s OSI expertise leverages our knowledge of OSI activities at the exchanges and in the vendor community, as well as our experience in addressing OSI issues directly with our broker dealer clients. Our participation in all industry OSI conference calls and meetings will keep you informed and up-to-date without the investment of your staff and resources.

Please contact Mary Lou Von Kaenel at 212-652-4483, or e-mail marylou@jandj.com for more information.