CME Plans New Weather-Based Indexes
The Chicago Mercantile Exchange announced Thursday it has filed
for regulatory approval to offer exchange-traded, heating degree
day (HDD) and cooling degree day (CDD) futures and options
contracts. The CME said these indexes will help companies manage
weather-related financial risks. A start date will be set after
Commodity Futures Trading Commission (CFTC) approval.
The indexes will cover selected cities, including: Atlanta;
Chicago; Cincinnati; Dallas; New York; Philadelphia; Portland, OR;
Tucson; and other population centers with significant weather
related risks. A CME spokesman said the proposal leaves the door
open for the addition of more cities.
The CME will settle the contracts to the CME HDD or CDD index as
calculated by Earth Satellite Corp. HDD and CDD futures will be
sized at $100 times the index. The listed contract months will
include all 12 consecutive calendar months, and the minimum tick
size of 1.00 HDD or CDD index point will equal $100. They will
trade electronically on the GLOBEXr2 system from 3:30 p.m. to 3:15
p.m. the following business day.
"CME heating degree day and cooling degree day futures and
options contracts will attract new participants to a growing
market, where weather affects an estimated $2 trillion of the $9
trillion U.S. economy." CME Chairman Scott Gordon said. "Just as
our Eurodollar futures and options have grown in tandem with the
OTC interest rate swaps market and provide swap dealers the market
to manage their risk, HDD and CDD futures will complement the OTC
market in weather-related risk and will grow with that exciting new
HDD and CDD swaps and options already trade actively on the
over-the-counter (OTC) market. Gordon said the CME's HDD and CDD
futures and options will provide the weather derivatives market
greater transparency and virtually eliminate counter-party risk
through the guarantees of the CME's Clearing House.
"Opposed to the OTC deals being made out there right now, people
will know the prices of this new futures contract, and will be able
to track it with the ease of following any other futures contract,"
said CME spokesman Bill Burks.
A Consumers Energy spokesman expressed pessimism about the
success of the new product. "Basically, this is a type of weather
insurance. We've spent a long time investigating derivative
products like this to see if they would benefit our customers, and
we haven't gone for one yet. I don't think we'll go for this one
either. If the weather makes it hard to sell gas, we have other
options that help our revenues. It may be good for small and
mid-sized energy companies, but it doesn't fit what we want." John
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