How Do SPI Futures Contracts Settle

By Henry Jennings

We spend a lot of time talking SPI futures but seem to be oblivious to when and how these contracts expire and the mechanism for the settlement. Index Futures are cash settled.Very important consideration for the big banks that are arbitraging futures versus physical stocks. Important in that at expiry your hedge is cash not the underlying stock.

Here is the 2024 Calendar for SPI and Options Expiries.

Here is a quick guide to how futures settle prices are determined. On expiry day as you may be aware, the opening rotation takes longer to run through and we can see increased volumes.

• Determining the Cash Settlement Price of the SPI Futures Contract - The cash settlement price for ASX SPI (S&P/ASX 200) futures contracts is determined based on the S&P/ASX 200 index. Here's a detailed explanation of how this price is fixed:
• Final Settlement Date - The final settlement date is the third Thursday of the contract month. If that day is a public holiday, the final settlement occurs on the next business day.
• Special Opening Quotation (SOQ) - The cash settlement price is based on the Special Opening Quotation (SOQ) of the S&P/ASX 200 index on the final settlement date. The SOQ is calculated using the opening prices of the constituent stocks in the S&P/ASX 200 index.
• Opening Prices - The SOQ is the average of the opening prices of the stocks in the S&P/ASX 200 index. These prices are typically gathered over a period of time during the opening of the market on the final settlement date.
• Calculation Method - The ASX determines the SOQ by averaging the first traded price of each component stock in the S&P/ASX 200 index. If a stock does not open at the same time as the majority, its last traded price might be used until it opens.

Steps to Calculate the SOQ

• Collect Opening Prices - On the morning of the final settlement date, gather the opening prices of all constituent stocks of the S&P/ASX 200 index as they begin trading.
• Averaging Prices - Calculate the average of these opening prices to derive the SOQ. The precise method of averaging and any adjustments for stocks that do not open immediately are governed by ASX rules.
• Publishing the SOQ - The ASX publishes the SOQ, which serves as the official cash settlement price for expiring ASX SPI futures contracts.
• Importance of the SOQ - Transparency and Fairness - The use of opening prices to calculate the SOQ ensures that the settlement price is transparent and reflects the actual market conditions at the start of trading on the final settlement date.
• Avoiding Manipulation - By using the opening prices of a broad range of stocks within a short time frame, the methodology minimizes the potential for market manipulation.

Practical Example

Suppose it's the third Thursday of June (the final settlement date for June SPI futures). On this day:

• Market Opens: The ASX market opens, and the opening prices of all stocks in the S&P/ASX 200 index are recorded.
• SOQ Calculation: The ASX averages these opening prices to calculate the SOQ.
• Settlement Price: The calculated SOQ is published as the cash settlement price for the expiring ASX SPI futures contracts.

In summary, the cash settlement price for ASX SPI futures contracts is fixed using the Special Opening Quotation of the S&P/ASX 200 index on the final settlement date, based on the opening prices of the index's constituent stocks.