By Graham Roberts

This article discusses the high level approach to closeouts, the key functionality available in Endur, and the main challenges encountered in implementing closeouts to meet all the business needs.

Closeouts Benefits

“Closeouts” occur on an Exchange where an offsetting Future (or Option) position in the same contract is closed out to leave a lower number of open trades. There are several implications of closing out deals within the client’s trading system which may be beneficial:

• PnL : PnL is realised at the time that an offsetting trade is entered, rather than waiting until the expiration of the contract
  
• Broker Statements : The broker/exchange position and statement can be matched, and therefore reconciled
  
• Live Trades : The number of live trades in the system can be reduced, therefore improving performance
  

   

Endur contains standard features to close out futures, and is quite flexible in the implementation of these

• Standard scripts available for different closeout logic types
  
• Custom closeout logic can be implemented, including netting across portfolio if required
  

Challenges

However there are some challenges with Futures closeouts in Endur

• PnL : Once a trade is in closeout status it is no longer included in many simulations, treated similarly to mature trades as the trade is no longer “live”
  
  • This can improve performance
    
  • However it also has some implications on how to carry the LtD PnL forward if a client is using PnL Detail :
    
    • Trades with Tran Status Closeout are no longer carried forward in PnL Detail.
      
    • PnL Detail does not capture the “Closeout PnL” . Instead the Realised Closeout P&L LTD simulation result captures this.
      

       

• Unwinding : It’s also worth noting that once trades are closed out in Endur, if there is an issue with the closeout process it can be difficult to unwind – therefore attempting to match Exchange logic with real closeouts in Endur can lead to increased production support issues
  

There are also business reasons why futures closeouts can be quite tricky to implement in Endur to meet all the business needs

• Portfolio Limitation: The Endur Standard Closeout Process is on trades within the same portfolio. This is a sensible limitation from a FO PnL and Position Management point of view. However Accounting and Back Office may require a Customised Closeout Process across portfolios, in order to match the Exchange closeout rules (for reconciliation of the broker statement) and to show realised PnL when positions have closed out.  If you take an example where a position has entirely closed out but is for a contract settling several years in the future, this delay in realisation of PnL can be significant.
  

One possible solution roadmap that would meet both ‘conflicting’ portfolio level requirements would be to apply a Closeout to trades within portfolio (to meet Front Office needs and improve performance), but to create a UDSR / report which ignores the closeouts and recalculates the closeout from the original position according to the exchange rules (and therefore closing out across portfolio for downstream reporting purposes). As the trades are not actually closed out in Endur, this means incorrect closeout caused by trade data issues (for example trade date errors, cascade strike price errors) can often be resolved easily and the report re-run, without having to actually unwind closeouts.

Closeout Logic for Brokers/Exchanges

It’s worth noting at this point that whichever closeout solution is chosen, attempting to mirror the Exchange rules exactly also has challenges, as:

• Each Broker/Exchange can have different closeout logic
  
• Multiple types of closeout logic may need to be supported, for example FIFO, LIFO, Low Buy/High Sell, Intraday, Instruct (where the clearer is instructed as to which trades to close out on a monthly basis at the time of expiry)
  
• Even FIFO (First In First Out) logic can be calculated with slight nuances between brokers/Exchanges, for example trades booked on the same trade date might be closed out based on lowest price, or earliest trade time of the trade booked on the Exchange (not necessarily corresponding to the time that the trade entered the trading system):
  
• If there are multiple traders trading the same contract, the Exchange may be closing out positions across trades in multiple portfolios
  
• Contract need to be matched exactly : for example ensuring all trade dates and expiry dates are in alignment with the exchange
  
• Cascade rules need to be considered : for example the cascade may be netted across portfolio prior to closing out, which again may not be in alignment with Front Office requirements to retain the portfolio positions.
  

Summary

In summary, implementing closeouts can be a difficult task to ensure the requirements of all areas are met, particularly in a business where trades are booked in multiple portfolios, and when embarking on a closeout solution (or indeed when deciding how to set up the portfolio structure) it is important to consider each of these angles to provide a solution which works business wide.