FundApps now supports OTC contract monitoring within our Position Limits service. Regulations such as FINRA 2360, MiFID II, and the CFTC rules each have their own standards for OTC contract monitoring.

Please note that exchange-imposed position limits do not extend to OTC contracts.

These standards are largely based on the principle of economic equivalence, where OTC contracts with materially similar characteristics to their exchange-listed counterparts are economically equivalent and are, therefore, treated comparably under the position limit rules. However, there are different requirements regarding contract aggregation.

FINRA Rule 2360 establishes position limit standards for exchange-listed and OTC equity options. Specifically, standardised equity options (those cleared by the Options Clearing Corporation and traded on an exchange) must not be aggregated with conventional equity options(those traded OTC), even if they are economically equivalent. For more information, please refer to the legislation.

MiFID II brings certain OTC contracts into the scope of position limits if they are deemed economically equivalent to their exchange-listed counterpart. A contract is considered to be economically equivalent if the OTC contract shares the same underlying commodity and delivery location, and whether it demonstrates the same economic characteristics as its exchange-listed counterpart. Any OTC contracts meeting these criteria must be aggregated together with their exchange-listed counterparts for position limit monitoring. For more information, please refer to Article 57 and RTS 21.

Under the CFTC’s “Final Rule”, position limits are extended to economically equivalent OTC contracts. Specifically, an OTC contract is considered economically equivalent if it shares “identical material” terms and conditions with a “Referenced Contract.” Referenced Contracts include the 25 Core Referenced Futures Contracts (CRFCs) as well as any other futures and options on futures tied to the same underlying commodity. As a result, OTC contracts that meet these criteria must be aggregated with their economically equivalent “Referenced Contracts” for position limit monitoring. For more information, please refer to the “Final Rule”.

The “referenced contract” definition adopted in § 150.1 will include “economically equivalent swaps,” meaning any economically equivalent swap is subject to Federal position limits. Thus, a swap that is deemed economically equivalent would be required to be added to, and could be netted against, as applicable, an entity's other referenced contracts in the same commodity for the purpose of determining one's aggregate positions for Federal position limits.

Section 1.2 of the SFC Guidance Note on Position Limits states that the Securities and Futures (Contracts Limits and Reportable Positions) Rules were made by the SFC under Section 35(1) of the SFO to prescribe limits and reportable positions applicable to futures contracts and stock options contracts traded on the recognised exchange company.

Similarly, the related Conclusions on the proposed changes to the Rules state that:

"These Rules apply to futures contracts and stock options contracts that are traded through the facilities of a recognised exchange company in accordance with the rules of the recognised exchange company."

Accordingly, the position-limit regime applies to exchange-traded futures and stock options contracts. While the SFC may consider OTC exposures when assessing applications to exceed position limits or when making supervisory enquiries, OTC transactions are not included in the standard calculation of position limits under the Rules.

FundApps is unable to support the identification or matching of economically equivalent OTC contracts, and as such, clients will need to manually determine whether their OTC contract is economically equivalent to their exchange-listed counterparts.

In order to send these positions across, clients must upload the OTC contract with the following:

The rest should be set up as per the contract specification of the OTC contract.