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 market."

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 Norris

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