By Suzanne Cosgrove

In what many industry observers see as an inevitable shift, the CME Group is expected to revise its settlement procedures for agricultural futures early this spring, moving to incorporate both floor and electronic trade in the settlement calculation.

A CME spokesman said he had no comment on the proposed change in futures settlements, but an advisory notice on the revisions was circulated to members in December.

Chicago Board of Trade corn, soybeans, soybean oil and mean, oats, wheat and rough rice futures will be affected by the change, as will Chicago Mercantile Exchange live cattle, feeder cattle and lean hog futures.

The advisory stated that a transition to new settlement procedures is expected in March and April, pending Commodity Futures Trading Commission review. It did not indicate any changes in options trading settlements.

While the procedural changes will mark another step away from pit trading, it will not have a major impact on outright futures trades, traders say. Nearby contract months in wheat and rough rice already rely on Globex-based activity. More controversial is the impact of the changed on complex commodity spreads, which are actively traded on the floor of the Chicago Board of Trade.

Ag options were not mentioned in the CME advisory notice, but a change in options settlement procedures would be even more contentious than one in futures.

The commodity options pits generally are more heavily populated than the commodity futures pits, which traders say reflects more complex fills required by multiple options strikes and strategies.

Currently, “you can’t effectively work a spread in the options market” on a screen, says Sean McGillivray, a commodity trading advisor at Oregon-based brokerage Great Pacific Wealth Management. “When we’re doing our type of multi-leg spreads, we have to do it on the floor.”

Globex electronic trading overwhelmingly represents total contract volume at the CME, but daily open outcry volume still topped a million last month, according to CME data. In January, electronic volume averaged 9.5 million contracts per day, down 9 percent from January 2011. Open outcry volume averaged 1.3 million contracts per day, up 6 percent versus the year-ago period.

In the agricultural options, trade on the floor dominates the screen, “by a 2-to-1 margin,” notes broker Edward Van, interviewed in the CBOT corn options pit after the close on Friday.

On that day, Feb. 17, total options-only volume on Globex was 560,024 contracts, while options traded by open outcry totaled 1,228,062, according to the CME Group’s daily volume and open interest summary. Options-only commodity and alternative investment trade logged volume of 65,758 on Globex and 130,935 on the floor.

Settlement in financial-options products is multifaceted, but based on bid/ask quotes on Globex. For markets where no Globex data exists, such as in the longer-dated equity options, participants provide bid/ask data for previously determined “seed” strikes. Adjustments are made to incorporate relevant pit data.

Current settlement rules in agricultural options call for market participants to provide quotes in the exchange-designated seed strikes, which are used to generate the implied volatility skew. The skew is adjusted to the underlying futures settlement price.

“The [options] volume remains in the pits, so a screen settle may skew the markets at times,” said Matt Pierce, an analyst with GrainAnalyst.com, “but it’s coming no matter what we say.”

Further details on current CME settlement rules can be found at: http://www.cmegroup.com/market-data/files/CME_Group_Settlement_Procedures.pdf