As a provisionally registered swap dealer, Commodity Futures Trading Commission (“CFTC”) rules require Cargill, Incorporated to provide a pre-trade mid-market mark (“MMM”) to certain counterparties either orally or in writing prior to entering into a transaction. As required by CFTC Regulation § 23.431, the pre-trade MMM must not be adjusted for credit reserve, hedging, funding, liquidity, profit or any other costs or adjustments. The MMM may not reflect the level at which we would hedge your transaction and it is not necessarily indicative of a price at which we would enter into or be willing to close out similar positions. We accept no liability with regard to any use on your part of the MMM for purposes of accounting, forecasting or any other analysis whether losses or damages are direct, indirect, incidental or consequential, even if we are advised of their possibility.
For most swaps (e.g., plain vanilla swaps), the MMM is based on our view of the mid-point between the bid and the offer for the swap at the relevant time. In determining the mid-point, we take into account a variety of factors, including the current bid and offer of the relevant underlying markets, correlated differential markets, other observable market inputs when available and estimates when observable market inputs are not available. We may use assumptions in determining pre-trade MMM based on current market conditions (including volatility), in any case, as applicable for the relevant swap. Based on these inputs, the MMM we disclose to you represents either the difference between the mid-point and your swap price or solely the mid-point itself. When the MMM is disclosed as the difference between the mid-point and your swap price, the value is also discounted using interpolated rates. For swaps expiring within one year, Chicago Mercantile Exchange Inc. (“CME”) Term Secured Overnight Financing Rates (“SOFR”) Reference Rates are used for interpolation. For swaps expiring greater than one year, CME Three-Month SOFR Futures are used for interpolation.
For structured swap transactions, the MMM is prepared by discounting future cashflows of the swap to arrive at a current value. For each underlying commodity, spot and forward curves, variance ratio and volatility levels are determined on the basis of observable market inputs when available and on the basis of estimates when observable market inputs are not available. These spot and forward curves, variance ratio and volatility levels are used to estimate future cashflows that are not certain (for example floating interest rates or options). In some cases, we may use a published or proprietary model to determine the expected value of future cashflows. These estimated cashflows, along with future cashflows that are known with certainty, are then discounted to their present value using discount factors derived from relevant market inputs (SOFR Term Reference Rates or Three-Month SOFR Futures as described above).
In the case of illiquid markets, the MMM may be based on a two-way or one-way market provided by a liquidity provider (which may include business groups within Cargill that are active in physical markets).
For swaps executed electronically through the “Create Contract” process a similar MMM methodology is used. The MMM we disclose to you is derived from the value of the swap using the underlying futures price displayed on the “View Quotes” page as the mid-point. The “View Quotes” page displays multiple quotes based on different underlying futures price levels for the swap. The user must select the quote that most reflects the current underlying futures level for the price and MMM of their swap.
In our sole discretion, we may use a variety of methodologies and assumptions to prepare the estimated cashflows described above, including without limitation, utilizing Black-Scholes and other mathematical pricing models. Some model inputs may be calculated using a related market and historical relationships between the related market and underlying market of the swap. In our sole discretion, we may vary the inputs used in such simulations and modeling, and we are under no obligation to disclose to you the proprietary or confidential methodology used or the inputs thereto; however, we will notify you if we have changed any of our calculation methodologies or assumptions in any material manner. Please note that the MMM calculated by us and reported to you may differ from the value that may be provided by other swap dealers or that may be recorded on our books or any value used by us for the purpose of calculating margin, which may take into consideration other factors and aspects other than those used to calculate the MMM.
As required by CFTC regulations, we will give you a daily mark for the swap (“Daily Mark”), which will be based on the estimated mid-point for each business day for the duration of the swap.
Please note that we may also elect to provide you with an unwind valuation mark for certain agriculture structured swaps (the “Unwind Mark”). The Unwind Mark is subject to our revenue recognition policy. According to our policy, the revenue for certain agriculture structured swaps is estimated at the time of execution with final estimated revenue determined upon market settlement on the trade date; 10% of the estimated revenue is amortized into the value of your transaction on the trade date and the remaining 90% of the estimated revenue is amortized evenly over the next 59 calendar days. Where applicable, CRM will calculate margin based on the daily Unwind Mark.
Over-The-Counter (OTC) Product Descriptions:
Cargill Financial Services Europe Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) in the United Kingdom (firm Number 485326). For the European Economic Area (“EEA”), this information is directed at clients (actual or potential) who meet the definition of a Professional Client or an Eligible Counterparty under the Markets in Financial Instruments Directive (“MiFID”), and any products or services described in this information which fall within the scope of MiFID are only available to such clients. Please refer to the Initial Disclosure Letter provided upon on-boarding for all regulatory disclosures pursuant to our activity. Below is a description of the most common products. Risks associated with tailored products is sent systematically with pricing.
As a provisionally registered swap dealer, Commodity Futures Trading Commission (“CFTC”) rules require Cargill, Incorporated to provide the material characteristics of a particular swap, including the terms related to the operation of the swap. Below is a description of common products. Risks associated with tailored products and material economic terms of a particular swap is sent with pricing.
If you buy a swap and the floating price is above the fixed price on calculation date/expiration date, the Swap Dealer will owe you. If the floating price is below the fixed price on calculation/expiration date, you will owe the Swap Dealer.
If you sell a swap and the floating price is above the fixed price on calculation/expiration date, you will owe the Swap Dealer. If the floating price is below the fixed price on calculation/expiration date, the Swap Dealer will owe you.
If you buy an OTC call option and the floating price is above the strike price on calculation/expiration date, the Swap Dealer will owe you. If the floating price is at or below the strike price on calculation/expiration date, the option expires worthless.
If you sell an OTC call option and the floating price is above the strike price on calculation/expiration date, you will owe the Swap Dealer. If the floating price is at or below the strike price on calculation/expiration date, the option expires worthless.
If you buy an OTC put option and the floating price is at or above the strike price on calculation/expiration date, the option expires worthless. If the floating price is below the strike price on calculation/expiration date, the Swap Dealer will owe you.
If you sell an OTC put option and the floating price is at or above the strike price on calculation/expiration date, the option expires worthless. If the floating price is below the strike price on calculation/expiration date, you will owe the Swap Dealer.
Comprised of a swap and a vanilla option, please see above descriptions as applicable.
Comprised of two vanilla options, please see above descriptions as applicable.
Comprised of three vanilla options. Before expiration you are exposed to the net option values. At calculation/expiration date you have the following exposures:
· Producer Three-Way Collar with long put spread: You are exposed to unlimited upside risk above the call option strike price. Downside profits are limited to the difference between the short and long put option strike prices.
· Producer Three-Way Collar with short call spread: You are exposed to limited upside risk between the short call and the long call. Downside profits are made below the long put option strike.
· Consumer Three-Way Collar with long call spread: You are exposed to unlimited downside risk below the short put option strike price. Upside profits are limited to the difference between the short and long call option strike prices.
· Consumer Three-Way Collar with short put spread: You are exposed to limited downside risk equal to the difference between the short put and long put. Upside profits are made above the long call strike.
Please note, the floating price may be a spot price for a specified commodity, the price for a specified nearest futures contracts for a commodity, an average price of such spot prices or futures contracts prices calculated over a period, or other as specified in transaction specific documentation.
For options and option structures where the payment(s) of premium is deferred until expiration, the premium due will be included in the monthly calculation/expiration.