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"The Consumer Price Index is one of the most widely anticipated economic indicators, and no exchange-traded product currently exists on this market-moving government statistic," said CME Chairman Terry Duffy. "We are pleased to give our customers the opportunity to trade this important economic indicator."
"Inflation-based securities have been growing in Europe, while the market in these products is now beginning to develop in the United States," said CME President and Chief Executive Officer Jim McNulty. "An exchange-traded CPI futures contract will complement products currently traded in the over-the-counter (OTC) market."
"We are introducing this product as a risk management tool for the U.S. inflation-indexed bond market, which, in August 2003, had a total outstanding dollar value of about $150 billion and represented approximately 6 percent of the U.S. Treasury securities market, according to our research," said Craig Donohue, who will become CEO on Jan. 1, 2004. "In addition, these new CPI futures contracts will enable market participants to augment their positions in CPI-based inflation swaps or synthetically replicate an inflation-indexed security."
CME's CPI futures contract represents the annualized inflation rate on a notional value of $1 million. Similar to the pricing of CME Eurodollar futures, CME CPI futures will be quoted as 100 minus the annualized percentage inflation rate in a three-month period based on CPI-U, non-seasonally adjusted. For example, if the inflation rate is 3 percent, the contract is quote as 97.00 (100.00 - 3.00). CPI-U is published by the Bureau of Labor Statistics of the U.S. Department of Labor.
Trading will take place on CME's GLOBEX® electronic trading platform on Sunday from 5:30 p.m. to 4:00 p.m. (Central time) the following business day, and on Monday through Thursday from 5:00 p.m. to 4:00 p.m. the following day.
The minimum price fluctuation, or tick size, will be 0.005 index points equal to $12.50 per contract. CME will list for trading 12 consecutive contract months in the March quarterly cycle. The last trading day for CME CPI futures will be at 7:00 a.m. on the day the CPI announcement is made in the contract month, or 7:00 a.m. on the first business day following the contract month if the announcement is postponed beyond the contract month. The contracts will be cash settled.
The Consumer Price Index for All Urban Consumers for the U.S. City Average for All Items (CPI-U) is published monthly by the Bureau of Labor Statistics. The data is reported on either a seasonally adjusted, or not seasonally adjusted, basis. The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services, and is a widely followed gauge of U.S. inflation.
Potential users of CME CPI futures include holders of Inflation-Indexed Treasury Notes (TIPS), who by acquiring long positions in CPI futures could isolate nominal interest rates in these products. Investors in regular dollar-denominated corporate debt issues or conventional U.S. Treasury notes could create synthetic inflation-indexed securities by initiating a short position in the CPI futures coupled with their long cash position. Traders in the expanding over-the-counter U.S. dollar inflation-indexed swap market could buy CPI futures as a hedge if they are "receiving inflation" in a swap or, conversely, sell CPI futures if they are "paying inflation" in an OTC swap - similar to the way participants in the interest rate swap market hedge their transactions using strips of consecutive Eurodollar futures.
Chicago Mercantile Exchange Inc. (www.cme.com) is the largest futures exchange in the United States. As an international marketplace, CME brings together buyers and sellers on its trading floors and GLOBEX® electronic trading platform. CME offers futures and options on futures primarily in four product areas: interest rates, stock indexes, foreign exchange and commodities. The exchange moved about $1.5 billion per day in settlement payments in the first half of 2003 and managed $29.1 billion in collateral deposits at June 30, 2003. CME is a wholly owned subsidiary of Chicago Mercantile Exchange Holdings Inc. (NYSE: CME), which is part of the Russell 1000® Index.
