Options Symbology Initiative

Understanding OSI

Thanks to the Options Symbology Initiative (OSI), on February 12th 2010 the traditional system of how options quotes are being displayed become officially obsolete. Options symbols will no longer be represented by a string of letters and instead will be written out.

The Options Symbology Initiative was an undertaking by an industry consortium headed by the Option Clearing Corporation (OCC). The consortium collaborated to address limitations in the 25 year old conventional method of identifying US / Canadian listed options contracts during back-office processing.

The new plan replaces the five-character symbols with a 21-character descriptor that explains the underlying option. It successfully, intended to match options symbols with the underlying security symbol, in order to reduce corporate action symbol conversions, eliminate the need for wrap symbols and the LEAPS rollover process, reducing errors in back-office processes while providing more flexibility in new product development.

Background

The Options Symbology Initiative (“OSI”) is a comprehensive multi-faceted, industry-wide plan to replace the existing short-hand method of listing options contracts. 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.

Changes Initiative:

For over 25 years, broker dealers, option exchanges, option clearing corporation(OCC), market data providers, back offices that support option trading have met the challenge of identifying option contracts using 3 to 5 letter symbols.

The OCC Board of Directors asked OCC staff in 2005 to work with industry representatives in defining a reasonable time frame to eliminate the use of OPRA codes in the listed options markets.

Beginning in 2006, working groups comprised of brokers, exchanges, clearing houses and vendors were formed in order to represent each of the U.S. and Canadian securities industries in a multi-year effort to develop a revised data format for representing listed option symbols.

Traditional Way [OPRA Code]

OPRA is a short-hand method of identifying exchange-listed options contracts, using letters to serve as options symbols is confusing and nearly impossible to interpret off hand (unless you are a pro of course).

Traditional way of representing options was typically a five alpha-character representation; the first 1-3 characters are used to identify the option's listing underlying security and the remaining 2 letters are used to identify the expiration month, call/put indicator and strike price expressed in decimals.

“ABC XY”, in which the letters “ABC” identify the company as the underlying stock, and the “X” (for those who know how to de-code the Symbology) denotes that this is a Call option expiring on April 17 2010, with the “Y” denoting that the strike price of the option is $125.00.

Example:
A Motorola October 2009 7.00 CALL is represented as:
MOT JJ
Where:
Root Symbol = MOT
Month Code = J (October Call)
Price Code = J (7.00 Strike Price Code)

Modern Way [OSI FORMAT]

A 21 characters Symbology Key will replace the current 5-character OPRA codes and fractional strike price values. The 21-character OSI identifier comprises six data elements arranged in logical order, each with a defined field size.

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 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 Options Symbology key will consist of the following components:

Option Root Symbol is the underlying equity ticker symbol for the contract. The security symbol will have a maximum of 6 characters and may contain digits. If the Symbol is less than 6 characters, spaces are suffixed to equal the six character length.

Expiration Date of option security is reflected in the format YYMMDD.

Call/Put Indicator is a single character code “C” for Call and “P” for Put.

Strike Price will have a maximum of 8 characters with leading/trailing 0s, but without decimal point.

Examples:

IMPACTED Areas

Effected market participants:

• Broker-Dealers, hedge funds and other institutions that trade options.
• All US /Canadian exchanges where options are traded e.g. AMEX, BOX, CBOE, ISE, NASDAQ, NYSE/Arca, PHLX(NASDAQ), MX.
• Option Clearing Corporations like OCC and CDCC where options are cleared.
• Other industry utilities including DTC and NSCC who service the community of options traders and their clients.
• Vendors who support the options markets with market data, trade order management systems, market making applications.
• Back-office processing to facilitate their clients’ transition to the new Symbology.

Impact on Banking Instruments:

The table below lists the product classifications of the US and Canadian exchange listed options which are impacted by the OSI.

System Impact:

• All client facing applications
• Consolidated account statements
• Compliance reports
• Financial controls
• Multi-asset class
• Rporting systems
• Computer to computer interfaces

Process Impact:

• Risk Management and Margining Applications
• Coss-product Credit and Risk exposure
• Broker commissions capture and tracking
• Quantitative models and cross-product trading programs

Major Milestones:

The industry effort has been organized into two phases:

Phase-1: Conversion Phase in which the OPRA code format will be dropped and the 21-character record layout employed to include the expiration day and decimal strike price. This phase was completed on February 12, 2010.

On Feb 17, 2010, the OCC announced that the Industry wide conversion of 5-character OPRA code to new OSI format on Feb 12, 2010 had been successfully accomplished and that firms, clearing members, exchanges and the OCC were all using the new OSI key. Before the conversion, all the OCC's clearing members certified they had completed the scripted industry testing that took place from Sept 2009 through Jan 2010.

Now, if a firm is an OCC clearing member, the CIO of the firm will be required to “CERTIFY” that the firm is “prepared to transact business with OCC in a manner that is OSI Compliant, utilizing the full OSI key.”

While the mandated conversion date for Canadian options is identical to that of the US (i.e., Feb 12th, 2010), the conversion of Canadian options was accelerated and completed by Interactive Broker (IB) in September 2009.

Phase-2: Consolidation Phase during which LEAPS, wrap, FLEX, short-dated, non-standard delivery contracts and those with corporate actions will have their symbols consolidated to that of the underlying (e.g. MSQ to MSFT). This phase took place over the 5 weekends starting March 12th, 2010 and ending May 14th, 2010.

During this consolidation phase Good-till-Canceled (GTC) and Good-till-Date (GTD) orders were canceled for all the option classes which were scheduled to consolidate on the Sunday of each consolidation milestone cycle. Customers had optionally, re-entered those cancelled orders utilizing the post consolidation symbol on effective date open (Monday).

Consolidation exception contracts include binary and CDO options, options having a 5 character underlying as well as options having unique settlement terms (e.g., settle on open).

Benefits in New-Era

Option Symbology Initiatives (OSI) effort was intended to provide the following benefits:

• 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 are represented

My 2 cents ....

The OSI was a plan to overhaul the existing method of identifying exchange-listed options contracts to decrease the current limitations in today's marketplace.

Conversion of option symbols into the base underlying symbol to create consistency required lots of cooperation and coordination industry wide.

The scope of the overall effort has been compared by many firms to Y2K, the Euro conversion, or decimalization. Nevertheless, all the participating firms across US and Canada did a commendable job to take this challenge and complete this initiative in the given time frame.