NGI The Weekly Gas Market Report
The Chicago Mercantile Exchange announced Thursday it has filedfor regulatory approval to offer exchange-traded, heating degreeday (HDD) and cooling degree day (CDD) futures and optionscontracts. The CME said these indexes will help companies manageweather-related financial risks. A start date will be set afterCommodity 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 weatherrelated risks. A CME spokesman said the proposal leaves the dooropen for the addition of more cities.
The CME will settle the contracts to the CME HDD or CDD index ascalculated by Earth Satellite Corp. HDD and CDD futures will besized at $100 times the index.The listed contract months willinclude all 12 consecutive calendar months, and the minimum ticksize of 1.00 HDD or CDD index point will equal $100. They willtrade electronically on the GLOBEXr2 system from 3:30 p.m. to 3:15p.m. the following business day.
“CME heating degree day and cooling degree day futures andoptions contracts will attract new participants to a growingmarket, where weather affects an estimated $2 trillion of the $9trillion U.S. economy.” CME Chairman Scott Gordon said. “Just asour Eurodollar futures and options have grown in tandem with theOTC interest rate swaps market and provide swap dealers the marketto manage their risk, HDD and CDD futures will complement the OTCmarket in weather-related risk and will grow with that exciting newmarket.”
HDD and CDD swaps and options already trade actively on theover-the-counter (OTC) market. Gordon said the CME’s HDD and CDDfutures and options will provide the weather derivatives marketgreater transparency and virtually eliminate counter-party riskthrough the guarantees of the CME’s Clearing House.
“Opposed to the OTC deals being made out there right now, peoplewill know the prices of this new futures contract, and will be ableto track it with the ease of following any other futures contract,”said CME spokesman Bill Burks.
A Consumers Energy spokesman expressed pessimism about thesuccess of the new product. “Basically, this is a type of weatherinsurance. We’ve spent a long time investigating derivativeproducts like this to see if they would benefit our customers, andwe haven’t gone for one yet. I don’t think we’ll go for this oneeither. If the weather makes it hard to sell gas, we have otheroptions that help our revenues. It may be good for small andmid-sized energy companies, but it doesn’t fit what we want.” JohnNorris
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